With Rehab Still Nowhere In Sight, Fed Floats a "First Step" Trial Balloon
Equity market volatility over the past two days is largely due to worries that the U.S. Federal Reserve will lessen its purchases of longer-dated Treasuries, thereby reducing the flow of fresh cash into the risk markets. ConvergEx's Nick Colas notes the analogy of stocks - and other investments - being “addicted” to Fed money holds some resonance (as we noted here most recently), given the pains of withdrawal we’re seeing ripple through equities worldwide since the FOMC minutes hit the tape. Then again, the fact that the US financial system is terminally hooked to zero-cost liquidity is well-known to our readers, since our initial profiling of this core problem nearly four years ago in "Bailoutspotting (Or The Search For The Great Financial Methadone Clinic)." Needless to say, so far nobody is actually doing any actual searching as the alternative is too painful for anyone to even contemplate.
Either way, it got Colas wondering: what are the methods and success rates of modern drug rehab programs? And what can they tell us about the potential pathways markets might travel on their road to recovery from that “Addiction” to monetary policy? Good news first: rehab works – people can and do change behaviors and dependencies. The bad news: any real rehab is likely years ago. And a word of caution: it takes time, needs to be flexible, and lapses happen. If the first step to recovery is admitting there is a problem, maybe the Fed just made that first, critical, admission. Or maybe it simply floated a trial balloon to see test how fast the S&P500 would drop upon the admission that the Fed does, in fact, have a problem, only to be talked up by the Fed's doves the next day.
Sadly, in the codependency between dealer and user, in this case the Fed and the market, it is most likely that as with the vast majority of cases of narcotic addiction, this one too will end in tragedy, and with the death of one, or more likely both participants.
From ConvergEx's Nick Colas: Rehab? No, No, No...
Every year over 1.5 million Americans go through some form of drug and alcohol abuse treatment, according to the last large survey done by the Substance Abuse and Mental Health Services Administration, an agency of the Federal government. Only about half – 47%, to be precise – complete their treatment. One quarter drop out, and the remaining 25% either transfer facilities or end treatment for some other reason. In general, the more intensive the treatment – inpatient hospital care, for example – the more successful the outcome. The length of treatment varies, as one might imagine, based on what addiction is being treated. Heroin and other opioids take over 150 days, but the median is anywhere from 90 – 121 days. Needless to say, these are long days for anyone who goes through them as well as the family and friends who support them.
Somewhere over the past few years, the serious term ‘Addiction’ has entered the lexicon of capital markets watchers as it relates to how central bank policies enable and distort the price of debt and equity securities. Essentially, the analogy is that markets have become dependent on both artificially low interest rates and the cash provided by liquidity programs such as “Quantitative Easing” in much the same way that a person can become addicted to a dangerous drug or alcohol. If you’ve ever seen addiction first hand, you know this is a spurious anthropomorphizing of financial markets. If you haven’t, well, just trust me.
But I get why market observers make the comparison – just consider the twitch in U.S. equity markets over the last two days. The release of the minutes from the Jan 29-30 Federal Open Market Committee meeting highlighted that ‘Many participants (members of the FOMC) also expressed some concerns about potential costs and risks arising from further asset purchases.’ There was also commentary to the effect that more QE could “Foster market behavior that could undermine financial stability.” The minutes go on to say that one participant argued for varying the amount of stimulus month-by-month, depending on incoming economic data. Pretty innocuous stuff, you might say, but it created the first significant market volatility of the year and took the CBOE VIX Index to a close today of over 15, its high for 2013.
“Withdrawal pains” are a part of drug and alcohol rehabilitation, and if one is so inclined to view market behavior through this lens then the last 2 days clearly resemble a market “Tell” that Fed liquidity is ingrained in equity market psychology. I would not put it past the Federal Reserve to have written the minutes in such a way as to tease out what response the capital markets would have to a proposed change in their asset purchasing plans. That is a common communication strategy in Washington, after all. It is called a “Trial balloon,” meant to gauge a reaction more than actually policy direction. I don’t think equity markets much like or even understand this approach. Too much of how the Street communicates is heavily regulated for the concept of a “Trial balloon” to be a common feature of the landscape.
If, however, the Fed is seriously thinking about changing its tack, then the “Addiction” paradigm does hold some information about how markets may react during what would be a very different world from the one many investors saw just a few days ago. A few points here:
- Drug and alcohol “Rehab” is essentially a medical and psychological treatment to change behavior. There are medications like methadone which treat heroin addicts and disulfiram for alcoholics, but any effective treatment also works on the mental processes which enabled the person to become addicted in the first place. No two cases are exactly the same, and the National Institutes of Health note in their online guide that, “Addiction is a complex but treatable disease.”
- Unhooking the capital markets from the Federal Reserve’s liquidity spigot is certainly easier than actual rehab, but the process is similar. Let’s not lose sight of why the Federal Reserve felt the need to pursue so many unconventional policies in the first place: the U.S. economy remains mired in a very slow climb out of a very big hole. Corporate profits have recovered to near-record levels, yes, but unemployment is still high and GDP growth remains near zero. Ordinarily that would have meant equity markets would apply a lackluster multiple to those high earnings, fearing a relapse to recession and declining corporate profitability. But with incremental liquidity and low interest rates, stock market valuations resemble something approaching a “Normal” mid-cycle recovery. Add to this the presumptive benefits of increased business confidence and consumer wealth effect, and you can see what the Fed had in mind.
- So here’s the “Rehab” – real investors have to take the place of the Federal Reserve and provide liquidity and buying power in equity markets. The tricky bit is that private investors using ‘Real’ capital have distinctly higher required rates of return than leveraged institutions which take advantage of low interest rates to opportunistically speculate on stocks. But the transition is not impossible, and the pathway is clear. And there is every possibility that those real investors will accept that challenge, once they know that the Fed really is clearing out. But we won’t know until they do.
- Treatment takes time. As mentioned above, the typical stay at an in-hospital program is measured in months. There are no shortcuts. The number one cause – by a wide margin – of a failed course of rehab is the patient quitting part way through.
I think this point is what troubles equity markets at the moment. No one knows how much time it will take to clear market psychology of the last few years’ presumption of a “Fed put” on stocks.
The other analog to recovery from addiction is the need for consistency. The NIH guidelines I mentioned above highlight the need for continuous monitoring of the patient because lapses back to drug and alcohol abuse occur frequently. Once the Fed decides to seriously cut back or eliminate its long-dated Treasury buying program, there’s really no going back. If you buy the notion that “Real” investors are waiting for the Federal Reserve to leave the scene before they step in, then it makes sense that they will want to be sure the market is cured of its “Addiction” before they return.
One final thought: as I read through this before pushing ‘Send,’ it strikes me just how difficult the transition to a less-aggressive Federal Reserve asset buying program will be for U.S. stocks. So much of the baseline assumptions for equities are anchored on a highly accommodative U.S. central bank that it is hard to imagine how this transition would work. But, as the saying goes, the first step to curing addiction is to admit you have a problem. And maybe that’s what the Fed just did.
(12 votes)
- advertisements -
»
- 12667 reads
- Printer-friendly version
- Send to friend
Similar Articles You Might Enjoy:
- Head Of The Fed's Trading Desk Speaks On Role Of Fed's "Interactions With Financial Markets"
- David Rosenberg Pulls A NYT, Will Start Charging For Content, Still Believes No QE3 Imminent
- Is A Dropping VIX Masking Rising "Fear" In Most Other Asset Classes... And Does Hedge Fund SPY Pair-Hedging Explain The Market Melt Up?
- QE3 Finds New Supporter In John Williams, Who Admits Fed Has No Magic Wand
- Is The Double Dip The Statistical Equivalent Of A Traffic Ticket? And Guess Which Sole Asset Class' Implied Vol Declined In The Past Month
I love it ;-)
They have nothing to lose as anyone in Rigby, Idaho is already on the terrorist watch list. Besides, public demand is so high, who needs the police business, but those gun dealers can forget about "protect and serve" response.
Good. I live down the road from Rigby. Does that mean the fucking Feds will stay the fuck out of my state? Good. CA., NY, and ILL. can have the Nanny Feds.
We don't need the "protect and serve" response. It's always late anyway.
and you can forget about your fat, bloated, gubbermint pension. Got kibbles and bits?
one must hit absolute zero... or in near death circles-- rock bottom, period! ask me? naught.
this frb will implode first before it admits to it's failings,... they're simply out of this world... perhaps all krugmanian martians
Tops take weeks or months, unless we crash....not likely.
Ben is retiring so a slow drift is likely
Hmmmm. The presumption is that the Fed minutes are truthful...or have they been manipulated?
There’s another aspect of this liquidity provided by the Fed: it is provided by using government securities as collateral. In other words, it is issued into circulation in exchange for government bonds surrendered by a private party – just as, 150 years ago, new paper currency was issued in exchange for gold.
In the second example, the paper held its value so long as the issuer held gold in reserve. In the first example, paper, or computer impulses, hold their value so long as the market believes US Treasury securities are collectible.
Are they collectible? Most market players assume that Treasury will be able to extort taxes from – that is, to cannibalize – future generations of American taxpayers to make good on the federal debt.
It leads to the question, “Does this society, that cannibalizes its children, deserve to survive?”
In my book, it does not. Forget the fact that such debt can neither be collected practically nor constitutionally… such a society does not deserve to survive.
So, what’s the solution?
We cannot rely on those who are addicted to their sets of pleasing lies to correct the problem… they will die or kill rather than admit error, or crime.
I suggest that we focus on saving ourselves. Let the self-blinded stumble off their cliffs, or meet their end by hunger or cold.
If we are to save ourselves, we also have to design and establish a better alternative, and protect ourselves, when the Pied Piper presents his invoice, from hordes of self-blinded with empty stomachs AND from death squads with lists of dissidents.
How is this to be done?
We can stumble around guided by the indoctrination shoved into our heads by media and education, governments and churches all dominated by criminal and useful-idiot classes… or we can learn lessons of the history of those men and eras that advanced the cause of man.
"They tried to make me go to rehab, but I won't go, go, go!!"
The Bernack
And coincidentally THAT singer ended with a THUD
I'm dying to see b b b Benny do the Winehouse
At the 2008 bottom, all the Fed had to say was, "We will support a 700 S&P floor for the next 10 years." Investors would have returned. We would not be at 1,500+ today, but we would have discovered market equilibrium by now.
As it stands today, we don't know the current market value of the S&P. We have a manipulated, liquidity-driven number of 1,515 that we understand is too high, leaving the only reason to buy at this level, the belief that the Fed will drive it even higher. This is not a convincing argument for most to get off the sidelines, especially with insider selling picking up.
Yes, and the same can be said for real estate, cars, tractors, bonds, washing machines..., essentially all durable goods, and even metals. When the Fed decided to screw up long term rates, they distorted all normal pricing, comparison, and feed-back mechanisms. The return to free markets won't be smooth or pretty.
+1
Distorted pricing and feedback is why businesses with cash are sitting on it.
I am beginning to wonder if there will ever be a return to anything resembling a free market until it all collapses.
The collapse itself will be the first manifestation of free markets.
Bottoms are by definition, experienced by the individual alone.
That virtual spiritual moment of clarity where it is recognized that "I cannot do this any more, the jig is up, I've lost all control and self esteem." And if lucky, will add "God, please help me.", for it is effectively a recognition that no temporal element can be of any aide to fill the hole in ones' soul... and never was.
You see, institutions have no soul.
Collectives may conclude that policies have been wrong or publicly "recognize" a time for a change in policy, but never experienc a true bottom, for they would thus conclude that their role is no longer necessary.
Within Central Bank space, a bottom would recognize the futility and waste, the very transitory nature of a fiat system.
The best can be hoped for is a policy change. Period.
Sorry to disappoint.
knukles wrote:
"Bottoms are by definition, experienced by the individual alone."
Yes, I would agree. A soul and a wish to right oneself is about the only way to find a way out. The Fed has neither. When WE hit bottom, wherever that is, then there is a chance to reset the system. And the whole process will not be pretty.
Aren't bottoms also experienced by the top? I mean, someone has to do the driving.
It all depends on who is doing the spanking when you hit bottom.
It's much better to be doing the spanking.
Get ready to do some spanking people.
I sense a bottom approaching.
The only thing keeping us from getting well is motherfucking sickness itself..........The fucking disease is in charge and hellbent on death.
Forward??
www.whitehouse.gov
US debt is $15.6 trillion and US unfunded liabilities are $122.84 trillion. The total is $138.44 trillion and rising at $8.2 trillion a year.
How can the Fed stop printing? US debt will shoot up as interest rates will rise as the Fed will no longer be purchasing 80% of US Treasuries. But this constant talk of stopping the printing gives pause to buyers of gold and oil and other commodities. It supports the dollar. So the Fed wins since inflation is managed while they print $85 billion a month. The Fed has its cake and eats it too.
This situation is untenable though and will end badly even as the Fed continues to lie about its true intentions.
All US markets have degenerated into fraud starting at the top - the Fed. When it gets serious, you have to lie. And it gets more serious everyday.
Drowning the headache at the local bar today and noticed the NASCAR race had empty stands. I hope the asleepsheeples took notice as well.. oh and other good news i received today is amerikan idle audience has tanked big time. harketh is that a slim glimmer of light?
Not sure what this means, but I have noticed that I am rarely the craziest anti-gov radical at the coffee shop or the local pub any more. People are getting pissed. That's a start.
+ 1
They're waking up, slowly, but apparently they are.
It is spreading. I'm a natural Conservative. Very much a Libertarian. I've noticed lately that increasingly other folks with the same bottom line desire for honesty and basic human decency have become more open to accepting that we've been played by the 'two party' system. The tough part for people to accept is that they've spent their entire lives being played for a fool. Admitting that you've been wrong is very painful but at some point STAYING wrong is far, far worse.
I'm not kidding here. I saw a "Who Is John Galt?" bumper sticker in a Federal agency parking garage. That always makes me wonder.
Yeah, greened you there Kaiser, I've niticed the same thing.
I tend bar one day a week at a local drinking hole, and it used to be tha political discussions would usually morph into some kind of a left, right argument, but lately the discussions are turning more to a "us" vs "them" type discourse.
Baby steps in the right direction -- it takes some time to admit that what you thought for so many years is all wrong.
We all have to keep planting seeds.
"Many Rivers To Cross" at the Dub Club
http://www.youtube.com/watch?v=Hd0-EjlnpwU
.
Jimmy Cliff - I can see clearly now
http://www.youtube.com/watch?v=gIqLsGT2wbQ
.
William Butler Yeats (1865-1939)
THE SECOND COMING
Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
Surely some revelation is at hand;
Surely the Second Coming is at hand.
The Second Coming! Hardly are those words out
When a vast image out of Spiritus Mundi
Troubles my sight: a waste of desert sand;
A shape with lion body and the head of a man,
A gaze blank and pitiless as the sun,
Is moving its slow thighs, while all about it
Wind shadows of the indignant desert birds.
The darkness drops again but now I know
That twenty centuries of stony sleep
Were vexed to nightmare by a rocking cradle,
And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?
.
http://www.youtube.com/watch?v=0XVlMvnLH2A
.
http://www.youtube.com/watch?v=spCq1dAiZ6g
.
Jimmy Cliff Live @ Marquee - Sitting In Limbo
http://www.youtube.com/watch?NR=1&v=EbYmXY13Jw0&feature=endscreen
.
Amy Winehouse - Rehab
http://www.youtube.com/watch?v=KUmZp8pR1uc
As my small business is on the down low and goin lower, I habitually come to ZH to find out why. Negative reinforcement maybe? We are all addicts to our needs. Some are just more destructive than others.
Off topic
Irish guy lodges claim against Irish bank for trading without a license, first banksters to get charged with criminal fraud !
http://www.youtube.com/watch?v=hjkrJDkdP2s
ANYONE can start a bank. All you need is about $300 million in seed money. We don' need no steenkeen LICENSE!
(Or am I thinking of a Hedge Fund?)
Neither or both, as you like it.
To wit: Goldman Sachs
A Bank in Name and Fed access only
A Hedge Fund in process
Regulated by neither banking nor securities masters, apparently.
"first banksters to get charged with criminal fraud!"
No, not the first.:
http://www.blacklistednews.com/Iran_to_Execute_4_Bankers_on_Fraud_Charge...
Monkey see, monkey do?
And, how well is that Iceland doing now too?
Everybody talks about the superficial this and that's, balds and bores. The true solution TO THE WORLD'S ECONOMIC DOWNFALL is right here in front of the everyone's face.
How to fix the vix and do what is right, is being shown to the world by the supposed bad guys in Iran that are dealing proper Justice to these enemies of the world. Line up ALL the lame stream media propagandists right next to them for most excellent pay-per-view entertainment!
wonderful---made my night--
It's not monetizing debt because the Fed is going to sell the bonds back.
Still laughable, When we're talking about the degree to which they can stop buying the bonds.
http://en.wikipedia.org/wiki/Less_Than_Zero_%28film%29
Can Helicopter Ben bring the U.S. out of this economic mess without going down the same path as Japan?Trouble is,he has to deal with Washington politicians and out of control spending and now they are bringing in the dreaded cutbacks.Corporations need to be able to bring offshore money back in tax free (trillions) if the money is going to be used to stimulate.There's a lot of risk in the "basement".If the Fedreal Government cuts back bigtime are Corporations going to step up to the plate?I haven't seen those types of tax incentives yet.And that brings up the next issue of tax reform.Gradually reducing income taxes and bringing in Value Added Taxes.IMO,gutting income tax would starve the big Government and literally kill it.A Value Added Tax (VAT) system or a Goods and Services Tax (GST) works great if you can eliminate all interest rates and go with a fee only based system.Tall order to get rid of corruption.Interest has always been the cause and the root of it.Imagine an economy with no interest rates.The United States used to have this a long,long time ago.It was the way of the original Thirteen Colonies.
Moar empty store fronts in the indoor mall today. A couplke of new ones down the road in the strip mall area.
'Green shoots' for the 'jobless recovery.' So where do these employees go after these stores close down? I feel sorry for them. At least they were giving work a try.
"I don’t think equity markets much like or even understand this approach."
Translation: Text-parsing, "Literal Louie" algos don't understand what a trial balloon is.
And me buying Gold and Silver is a way of telling my addiction riddled "family" that I won't be playing the game with them.
Doesn't the fed already own all the longer dated treasuries?
The base money supply blew up 10% in the last two months. Who cares what the Fed says? Only a CNBC guest speaker trades off of FOMC meeting minutes when the Fed is printing 85 billion a month. How are going to stop funding the government? How are they going stop bailing out Wall Street's "deleveraging" program? All that government spending and all the bad debt deleveraging will be funded with printed money a far as the eye can see.
Besides, ALL of their minutes contain these same statements. They always say, "we might have to stop". But they can't stop. It is not mathematically possible to stop. If anything they will need to increase government debt purchases.
The FED will stop monetizing when the market forces them to because they are not in control of the bond market. Case in point: In July 2012 the 30 year was at 2.5%. When QE3 was announced on September 13, 2012, rates were at 2.97%. When QE4 was announced on December 12, 2012, rates were at 2.9%. They now stand at about 3.2%. The bond market does respond to inflation and default risk. There is a tipping point where the balance sheet of the FED and USG get so big that tax receipts will no longer be able to service it. Of course the FED knows this and will ultimately act to preserve its existence.
I think it was 7-10% make it 3 years or more.
"– real investors have to take the place of the Federal Reserve and provide liquidity and buying power in equity markets. "
This is very true. But to do so we need to end debt based money(the fed) and restore productive investment by simply printing off the debt. I think any other course will fall short at this point. We need pure fiat based only on our level of productivity, both realized and potential.
"Yes, $237 BILLION was PRINTED for “recovering” European banks; atop the $85 BILLION the Fed prints each month for “quantitative easing”…"
Love,
Andy
AA is a microcosm of the struggle for existance and ends with a solution. That solution transcends spiritual, psychological and philosophical concepts because it arrives at the development of the individual from which morality leads to a more prosperous future. It is a clearing in the forest despite what goes on in everyday life.
Its free.
Truth is the key to getting better. Without it, there is no recovery. When "it" hapens.....I'll head down to Columbus Circle.
I’m not so sure. Addiction is mostly psychological, and not to be confused with physical dependency. You can also become addicted to specific behavior. There are people who take morphine for chronic pain who would experience severe physical withdrawal symptoms if they stopped using. But, they never become psychologically addicted to it or crave more than they need. On the other hand, working on Wall Street does seem to correlate highly with cocaine use, drinking, excessive gambling, sexual abuse, etc.
And who's the last person to ever spot someone is an addict? Answer: the addict.
http://www.medicalnewstoday.com/info/addiction/
Rehabilitation to what?
There must be a baseline first....
Interesting times we DO live in.