"The Fed, Having Used Its Bazookas, Is Now Down To Firecrackers"

Tyler Durden's picture

Below is David Rosenberg's take on the current oversold market rip squeeze fest, and where we go from here:

Oversold equity markets are recovering to start off the week and defensive plays like core government bond markets are seeing some profit-taking in the process. US fiscal policymakers said all the right things at Friday's 70 minute meeting and investors are taking solace from early prospects that we won't fall off the cliff (President Obama said in an interview overnight in Bangkok that "I am confident we can get our fiscal situation dealt with"). Platitudes matter in a market seemingly on tenterhooks. Gifts matter too. The President gave John Boehner a bottle of Brunello di Montalcino as an early birthday present is a classic display of the horse trading that will take place to bring a short-term deal to fruition (see page 4 of today's FT). Mr Boehner would be well advised to split the vino with his GOP backbenchers who don't seem to share the President's view that he has a strong mandate to pursue higher top marginal tax rates on income and capital. Either way, austerity is coming our way, it's just a matter in what manner and by how much, and whether it becomes an orderly or disorderly process. The fiscal cliff is really a bit of a ruse in that respect, but the key here is that years of fiscal profligacy is coming to an end and the Fed at this point, having used its bazookas, is now down to firecrackers. The economic outlook as such is completely muddled and along with that the prospect for any turnaround in corporate earnings.

In the near-term, investors don't seem to be in a mood to take any chances in terms of facing a higher tax bite on their winnings— see Investors Rush to Beat Threat of Higher Taxes: Weighing on Markets on the front page of today's NYT (if left unchecked, the top rate on dividends will jump to 39.6% from 15% and capital gains go to 20% from 15%. And there is the additional 3.8% surcharge on most forms of investment income to help defray the costs of Obamacare). While we continue to favour income-equity, utilities are down 9.4% from the October highs and the telecom sector is down closer to 11%, so at the margin, there does seem to have been some effects from the expected tax shifts (ordinarily, these sectors would be outperforming based on the decline in bond yields over the past month, but this time around they have just performed in line with the market).

Moreover, the dividend-payers may have, at least for a short while, become victims of their own success as the S&P Dividend Aristocrats index, for example, hit an all-time high last month and have generated a net 164% return from the March 2009 lows and that compared to +117% for the overall market. The average yield in the investment grade corporate bond space, another area we have favoured, has been cut in half to 2.7% and have generated a decent 10% return year-to-date. There is a great article on page 8 of the FT today on the interest rate outlook and the most insightful comment came from the CIO of BlackRock (Rick Rieder), who said:

We have never seen in history the population ageing and living longer in such a fashion, not just in the U.S. but around the world, and that raises the question of how high growth can go.... we are in the midst of a major defeveraging in the entire developed world, which is going to continue in 2013 and 2014.

That led the writers of the column to conclude, rightfully in my view, that we are in for a "world of slow growth where demand for secure debt outstrips supply and keeps rates low for the foreseeable future." A portfolio manager at PIMCO (Mark Kiesel) also claims this (and I wouldn't argue the point, either):

If you look at the past 10 years, corporate bonds have had a higher return than equities with a third of the volatility investors are looking at earning 4-6 per cent from a diversified portfolio of corporate bonds and that's roughly what you will get from owning equities based on the outlook for earnings and the economy.

The direction and level of interest rates are much more important for income-equity than tax changes are— history is clear about that, despite the near-term disruption. At the same time, disinflation, a very accommodative Fed, superb corporate balance sheet fundamentals and tremendous liquidity all suggest that credit spread strategies will offer superior returns in the future, especially relative to cash which the Fed has already told you is going to be a losing strategy for the next three years in real after-tax terms.

One word we liked above is "diversification" which is more essential in a fat-tailed world where the range of outcomes is extremely wide compared to cycles in the past when the distribution curve was far thinner than is the case today. The more we are out of our comfort zone. the greater the need to have a diversified portfolio. And within that, the combination of disinflation, deleveraging and demographics — the market outlook in 3D — augurs for exposure to income strategies across the various asset classes. Cash flow is king in this sustained 0% short-term interest rate environment. If you like Treasuries, the price for safety is a lack of yield (though potential for capital gain), but the article on page C2 of today's WSJ reaffirms my view that we are potentially in for even lower yield activity ahead (see A Year-End Migration to Treasuries), which when all is said and done, will make corporate bonds and other spread product appear that much more alluring from a relative coupon perspective.

Meanwhile, in addition to eased fears over the fiscal cliff, there is some hope that a Cairo-led cease fire will occur in the Israel-Gaza flare-up and there is additional hope that the upcoming meeting among Eurozone financial officials will resolve the current spat with the IMF over Greece's debt targets. So with investor risk appetite whetted a bit, we have the European stock markets up more than 1%. Asia was up as well but by less, but the real hidden gem yet again was Japan with a 1.4% gain and this followed the 3% advance last week as other markets declined substantially. Japan is operating on its own set of dynamics and the fact that the yen has managed to embark on a weakening path is highly constructive for the country's large-cap exporters. The election on December 16th promises to usher in even more dramatic moves to weaken the yen and stimulate monetary policy — including a move to lift the BOJ's inflation target from 1% to 3%. As an aside, U.S. dollar/yen at 82 is widely viewed as the cut-off level for profitability among Japanese industrial companies — we are just about there. Domo!

In other markets, we see the U.S. dollar struggling as it tests the 100-day moving average. Gold is bid. The commodity-based currencies are faring better as well, as is sterling on the back of some better home price data that were released earlier today. If we do see some sort of market revival in the near-term, the one sector to keep an eye on is technology which has faltered significantly and badly lagged the old-economy machinery stocks during the recent setback (see Tech Sets Correction Course on page C1 of today's WSJ). Tech has slipped now for six weeks in a row, which is a strength we have not seen since 2008 (in addition to Apple, we have seen the likes of Google, IBM, Intel, and Dell all disappoint during the latest earnings reporting season). Margins have been squeezed and are now down to the lowest level in over two years (17% from 19% a year ago). No doubt earnings expectations are being trimmed — the flip-side of sitting on so much cash is reduced growth prospects — but the next question is the extent to which a bleak future is already more than priced in. After all, how many times in the past has the tech sector traded at a P/E discount (11.7x on year-out earnings forecasts) to the overall market (12.5x)?

One last word here on the fiscal cliff. Once we get past that issue, we will confront the inherent inability of the Democrats and the GOP to embark on any grand bargain to blaze the trail for true fiscal reforms. The U.S. has not had a rewrite of its tax code since 1986, which was the year Microsoft went public and a decade prior to Al Gore's invention of the Internet. The tax system is massively inefficient and leads to a gross misallocation of resources that impedes economic progress — rewarding conspicuous consumption at the expense of savings and investment. It is the lingering uncertainty over the road to meaningful fiscal reform that is really the mot cause of the angst — the fiscal cliff is really a side show because who doesn't know that we are going to have a Khrushchev moment?

Everyone at the White House and Congress is well versed about 1937-38. But it is what happens next that matters most for those that have to plan for the long-term — not just tax shifts around an end-of-year calendar date. To this end, have a look at the WSJ front page article today — Investment Fails off a Cliff: US Companies Cut Spending Plans Amid Fiscal and Economic Uncertainty. So I have some news for you: avoiding the fiscal cliff allows a very short window to catch a breath of relief. CEOs realize that averting the fiscal cliff will likely mean a quid pro quo for a slate of tax-code changes in the future and nobody is going to know for a long time how those changes are going to affect them. This is the exact opposite of what we had on our hands in 1980 when Ronald Reagan provided a framework of fiscal reform that ushered in sharply lower marginal tax rates, pledged to work with a Democratic House that was populated with "Reagan Democrats"... do "Obama Republicans" exist?), and the certainty and clarity over the fiscal policy roadmap the President ushered in was so powerful that this alone allowed the recovery and bull market to take hold fully four years before the tax shifts were legislated. This is how vital it is for the government to part the fiscal clouds as soon as possible — avoiding the fiscal cliff does not assure that.

What the country needs is a credible long-term fiscal plan. Only then will capital investment embark on a sustainable uptrend and take the rest of the economy with it. An economy reliant on such an unproductive asset as housing for its prosperity is not that comforting for those of us who believe that what provides a much more enduring IR is renewed growth in the nation's productive private sector capital stock. That begins with business spending.

In a U.S. holiday-shortened week (Happy Thanksgiving!), the noise around the fiscal cliff will take a back seat to an array of housing indicators, Bernanke's sermon tomorrow at the Economics Club of New York (12:15 PM) on the economy and how Black Friday (Thursday?) shopping goes. In Canada, Finance Minister Flaherty talks about the Canadian economic outlook at the Toronto Board of Trade on Thursday at 11:30 AM (as our American friends get ready for a day of Turkey, pumpkin pie and some NFL).

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francis_sawyer's picture

Would ya believe... A couple of Chinese poppers & some plastic bubble wrap?...


Maxwell Smart (Agent 86)

bigdumbnugly's picture


"...Used Its Bazookas, Is Now Down To Firecrackers"


my girlfriend chimed in and said she thoroiughly understands the premise



vast-dom's picture

kill savers suck their savings kill value make them slaves pump their houses make them sell cheap kill em twice bury em thrice.


fed = fraud

LMAOLORI's picture



The Fed isn't all that's killing people there's other vampires out there

Welfare government’s single largest budget item in FY 2011 at approx. $1.03 trillion



Treasury Secretary Geithner: Lift Debt Limit to Infinity


lakecity55's picture

The goal must be a UN-Agenda 21 control grid: worldwide Oligarch-Socialism.

Michaelwiseguy's picture

The Agenda21ers are being routed out and kicked out of our country. See Florida's actions against them.

This is why Huffington Post are always attacking Governor Rick Scott of my State of Florida.

Rick Scott, Agenda 21 and the United Nations

Florida Repeals Smart Growth Law


Jack Napier's picture

The Fed may be the means to destroy the middle class in the US, but they are certainly not the head of the hydra, just an appendage of it, like most all things that oppress us in the public view via shadowy strings. Hacking at the limbs isn't going to solve anything. If you want to kill the beast you have to exit the beast system. Sell your garbage paper assets for gold and silver. Be your own central bank. Stop giving them your money to use against you.

LMAOLORI's picture



That's the plan World Wide Communism where the elite's share the gains the rest of us the pain. Speaking of Oligarch's look who is still obama's go to guys his favorite banker and the oligarch of Omaha


Obama's Fiscal Cliff Chats Reportedly Extended To Buffett, JPMorgan's Dimon


cranky-old-geezer's picture



Either way, austerity is coming our way, it's just a matter in what manner and by how much, and whether it becomes an orderly or disorderly process.

Nope, no austerity coming. Bennie will print all the currency needed to keep funding govt debt, just like Draghi will print all the Euros needed to keep funding govt debt over there, and BOJ will print all the Yen neeeded to keep funding govt debt over there.

No way will any central bank cut off credit to the govt allowing them to exist. 

What IS coming is hyperinflation then currency collapse ...and it'll be very disorderly when it happens.

Chuck Walla's picture


We have never seen in history the population ageing and living longer in such a fashion, not just in the U.S. but around the world, and that raises the question of how high growth can go.... we are in the midst of a major defeveraging in the entire developed world, which is going to continue in 2013 and 2014.

Obamacare will take care of some of this problem right handily in a couple of years. As a good Fabian, Obama will clear the decks of unproductive old while stealing their wealth to buy more votes. 

FORWARD SOVIET! To Mom & Dad's funeral, state paid, of course.


archon's picture

LMAO @ "austerity"...  which in this case obviously means slowing down the rate of money printing...  like a fat lady having a Diet Coke with her Triple Whopper & french fries for "second lunch".

slaughterer's picture

Dear David: Doubling the "flow" of QE on Jan 1 2013 is not a "firecracker."

Kitler's picture

It's all a merely a warm-up act for Ben's neutron lisquidity bomb.

JLee2027's picture

Tripling the flow of QE won't change the ultimate outcome, so yes, it's a firecracker. "...full of sound and fury, Signifying nothing."

Segestan's picture

Has this author seen the faces of America and the west? What planet is he on?

walküre's picture

The author is not American. The last paragraph gives it away.

Poor Grogman's picture


"The Fed at this point, having used its bazookas, is now down to firecrackers."


What a complete load of shit.

The fed has nothing to begin with it just creates money out of thin air!

I never had bazookas firecrackers or anything else useful at all. The Fed will do whatever the hell it pleases, and moronic simplicity like this Author pretending that he can infer what the Fed can or cant do is just laughable.

The Fed may choose to modulate the flow of new funds to offset the natural deflationary tendency in whatever way it sees fit. It will do it behind a screen of smoke mirrors and  unpronounceable acronyms. It will try and effect a mild deflation while having to pretend it knows nothing about the cause of unexpectedly inflationary pockets which will constantly confound its efforts to re inflate its favorite two speculative bubbles.

This is how it is from now on. Central banks openly grasping the levers of power, totally independent of political consequences. Political parties towing the line or finding themselves "out of favor" with the central bankers. (how does austerity sound Mr president?).

The sheeple NEED that money because they have bills and mortgages to pay, and the central banks are the only ones who can feed  the debt ponzi to keep it satisfied for another week or two or three or four....

Skateboarder's picture

"That begins with business spending."

What make you of this tomfoolery?

John Law Lives's picture

+1 for using the word, tomfoolery.

Dr. Richard Head's picture

I believe hooliganisms would be appropriate, as well.

cbxer55's picture

No more brouhaha for you either. 

goat's picture

Buffoonery is in play.

walküre's picture

S&P off its pre-open manipulated highs. The selling continues.

Just like the Fed is down to firecrackers, the cabal is going for crumbs now. Whoever is left stupid enough to buy their pump deserves to be taken to the cleaners.

John Law Lives's picture

It's okay.  All is well.  Everything will be peachy keen.  "Turbo Tax" Timmy reportedly thinks the federal debt limit ceiling should be ELIMINATED:


Holy FUBAR!  How much more f'ed up can this get...

walküre's picture

Cool. If they eliminate the debt ceiling on US federal debt, then we can all eliminate our personal debt ceilings. Paper currency is finally reduced to what it truly represents. Funny money. I welcome Timmy's "thoughts"!

John Law Lives's picture

It is desperation.  There is no realistic chance we will see balanced budgets (or an economic growth rate that is even close to the rate of growth of debt) anytime soon (if ever).  This bureaucrat is just trying to eliminate the inconvenience of "checks and balances" so they can continue spending ourselves into oblivion.

100% goddam FUBAR.

walküre's picture

Current growth models are all obsolete in a peak commodity environment. We could grow all day and night long when oil was cheap and abundant.

It is time to redefine "growth" in general or even discuss the importance of growth. Do we need to grow forever to survive economically? If we reduce our oil or energy consumption, we are more efficient and we are also longer sustainable. That's positively impacting our ability to "grow". We could feed and house more people with less, the net benefit is still "growth". But it's not accounted as such, cannot be leveraged against and therein lies the problem.

Skateboarder's picture

DOJ is an arm of the executive branch, i.e no chex&balances. The judicial, hired by the executive, is also an arm of the executive, i.e. no chex&balances.

They're just enacting on the obvious reality, really. Why have a debt ceiling when we're not gonna honor it? It's like a smoker, trying to quit... after one more pack.

John Law Lives's picture

I, for one, would like to see a return to the old practice of tarring and feathering.  I would love to see Turbo Tax Timmy adorned in tar and feathers.  It could be a pay-per-view event with the proceeds going to pay down the debt...

Skateboarder's picture

I think pay-per-view sucks lemons, and I would gladly shell out $20 for that. Unfortunately, 16 trillion divided by 300 million is about 5 million and change per person. The only way Joe Average will see 5mil is if the Benecopter goes on duty.

Chuck Walla's picture

What did I miss here? The debt limit actually means something? Ha! Ha, Ha! I guffaw in your direction.


Rip van Wrinkle's picture

"Bernanke's sermon tomorrow at the Economics Club of New York (12:15 PM) on the econom...."


Stand by for gold and silver to take a bath around 12.14 PM

The Shootist's picture

I fondly remember the days when the mere sight of his trim beard sent real money soaring towards the splendor of the heavens.  =/

yogibear's picture

China and Russia know the way to take down the US is not through the military but through economic means.

Turn the US more and more socialistic, load the US down with debt and take away key industries.

Eventually the US economic system collapses under the weight of it's entitlements and debt. Using up it's wealth and reserve currency status. 

Eventually the US won't be able to afford it's military. Look at the former Soviet Union.



Nehweh Gahnin's picture

Yeah, it's the damned commies.

What year is this?

walküre's picture

I agree in principle, but I don't think that either the Chinese or Russians are responsbile for the take-down. The Russians learned their lessons earlier and the Chinese are profiteers of a greedy US oligarchy.

The US oligarchy or elite is eating their own children. That's what happens in the end stages of any society where corruption and fraud run amok.

LawsofPhysics's picture

My thoughts as well.  We are essentially the Soviet Union, sometime around 1987 maybe.  The outcome will be the same for us.

lakecity55's picture

...via the marxist Cloward-Piven Plan.

A people living under a lawful, representative Republic does NOT figure into the plans of TPTB.

Badabing's picture

What if the ruble was the reserve currency? Then do you think the USSR would have collapsed?

Diogenes's picture

The ruble was the reserve currency of the Soviet Union just like the dollar is the reserve currency of the west.

Banksters's picture

Austere policies will cause a deflationary collapse. If the banks and uber corps are the only well capitalized entities- see citigroup bailout, which is currently the case, it leaves the masses with only one good option, revolution!

TideFighter's picture

"The Fed, Having Used Its Bazookas, Is Now Down To Firecrackers"

Crickets...I only hear crickets.

Boilermaker's picture

That's one hell of a ladyfinger to jack the SPX up 26 handles and counting in less than 2 trading days.

walküre's picture

Friday ended 1359, Monday opened 1373. The rest is noise and theft. If they wanted to open at 1332 tomorrow, they could do that just as easy as opening at 1415. Either way, you're totally fucked trying to trade this bullshit.

Boilermaker's picture

Not if you get the script before the opening act.

walküre's picture

True. I must be on the wrong email subscription list.

Rustysilver's picture


Tthe Soviet Union was brought down by Chernobyl.  Also, see Japan in two year or less.

yogibear's picture

Disagree, Chernobyl was only a small part of the overall systematic problem. The Soviet system became more inefficient as time went on after it's revolution. Except for WWII and the nationalism it created it was a failed system. Afghanistan both demoralized and weakened the Soviet Union. It could also no longer economically support it's communist countries (Remember Poland broke away in the early 80's, Solidarity ) . Then others followed. Then people within it's regions demanded change,

The US burying itself in socialism/entitlements. Eventually entitlements eat up the entire US budget. Any politician talking against entitlements will be ousted. So only those offering more free stuff get elected. Self enforcing. Eventually bankrupting the US.