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From A Twitter Hack To The Complete Evaporation Of All Market Liquidity In One Chart

Tyler Durden's picture


Presented with little comment aside to note that based on a tweet, the 'deeply liquid' US equity market collapsed instantaneously as all those liquidity-providing 'algos' jumped ship...

The lower pane shows the market depth disappearing courtesy of Nanex.


The S&P tested down to yesterday's close filling the gap perfectly...

The good news, if indeed this was merely a test for "the big one", is that everyone managed to sell ahead of everyone else. Right?


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Tue, 04/23/2013 - 13:27 | 3488996 FL_Conservative
FL_Conservative's picture

So that's what a bidless market would look like.  A total Baumgartner.  Hhhmmm...................

Tue, 04/23/2013 - 13:29 | 3489012 Stackers
Stackers's picture

Hacked Tweets now listed right under pressure cookers on the Weapons of Mass Destruction list.

Tue, 04/23/2013 - 13:32 | 3489043 FL_Conservative
FL_Conservative's picture

Can algos experience an adrenalin rush?   Looks like the post-rush "crash" settling in.  Whatever it takes. 

Tue, 04/23/2013 - 13:31 | 3489058 The Limerick King
The Limerick King's picture



The market was crashed by a tweet

The algos just cannot be beat

A simple display

Of rules gone astray

And how HFT algos cheat

Tue, 04/23/2013 - 13:35 | 3489084 redpill
redpill's picture

The fact that HFT is still allowed/encouraged is the perfect illustration of how the government is an eager partner with Wall Street in the ongoing to strategy to fuck everyone else over.

Tue, 04/23/2013 - 13:37 | 3489105 otto skorzeny
otto skorzeny's picture

just keep this bitch up til I'm cashed out of my 401Ks

Tue, 04/23/2013 - 13:50 | 3489190 redpill
redpill's picture

They should hack both the CNBC and Bloomberg accounts and have them simultaneously tweet that COMEX has defaulted.

Tue, 04/23/2013 - 13:52 | 3489195 doomandbloom
doomandbloom's picture


Tue, 04/23/2013 - 13:55 | 3489231 Ruffcut
Ruffcut's picture

Testing, testing... Is this mic on?

algo one reporting all is good.

Tue, 04/23/2013 - 13:57 | 3489241 francis_sawyer
francis_sawyer's picture

Well ~ It's a damn good thing that I opened up that TD Ameritrade account with the 'PATTERN RECOGNITION SOFTWARE', so I could set those limit orders & 'FIRE OFF THE TRADE' & profit, just at the right time [even though I was shanking 8 irons at the driving range when it all went down]...

Wed, 04/24/2013 - 01:41 | 3491757 StychoKiller
StychoKiller's picture

Bwahahaha, me and my killbot buddies are gonna kill all humans!

Make your time!

Tue, 04/23/2013 - 14:39 | 3489513 prains
prains's picture

can't wait until CNN runs some indepth analysis

Tue, 04/23/2013 - 13:56 | 3489210 Peter Pan
Peter Pan's picture


Tue, 04/23/2013 - 13:53 | 3489218 Peter Pan
Peter Pan's picture

Are you cashing out of one lot of paper for another form of paper or are you cashing out to buy gold?

Tue, 04/23/2013 - 14:03 | 3489298 zerozulu
zerozulu's picture

one of the two needs to be regulated, market or tweeter.

Tue, 04/23/2013 - 15:05 | 3489635 butchee
butchee's picture

401k=sheeple pen

Tue, 04/23/2013 - 13:38 | 3489111 FL_Conservative
FL_Conservative's picture

Got to get those campaign contributions from somewhere.  Certainly not going to get enough dough for re-election from the average citizen giving them $5-25.

Tue, 04/23/2013 - 13:43 | 3489138 ParkAveFlasher
ParkAveFlasher's picture

You typed "$", I think you meant "%", and that comes after the digits.

Every tax dollar is a campaign contribution, if every decision driving legislation is itself geared towards re-election.

Tue, 04/23/2013 - 13:44 | 3489153 MrBoompi
MrBoompi's picture

Exactly.  Reps need to collect an average of at least $2000 per day, weekends included, and Senators $6000.  Now you know why they don't even have the time to read the bills they sign.

Tue, 04/23/2013 - 13:46 | 3489170 NotApplicable
NotApplicable's picture

Well, it's not like they have ANY choice, now is it?

"Do as we say, and nobody gets hurt!"

Tue, 04/23/2013 - 13:35 | 3489095 THECOMINGDEPRESSION

Maybe it was true and there was an explosion..Can't believe everything the gov't says..Obama might have blew his top.

Tue, 04/23/2013 - 13:40 | 3489119 BLOTTO
BLOTTO's picture

Shit...Am i looking at seismograph?

Tue, 04/23/2013 - 13:55 | 3489217 Urban Redneck
Urban Redneck's picture

The middle one looks more like a school of piranhas that got spooked and vanished, but they be back and then sheeple will tread back to the water to drink too, after all, how dangerous can it be with so many fishes doing just fine... 

Tue, 04/23/2013 - 14:34 | 3489486 Ying-Yang
Ying-Yang's picture

Popped his cork? The big O?

Wed, 04/24/2013 - 01:44 | 3491760 StychoKiller
StychoKiller's picture

"Sand people are easily frightened, but they will return, and in greater numbers."

Tue, 04/23/2013 - 13:52 | 3489205 redpill
redpill's picture

@President_Obama  I ATE THE BONESSSSS

Tue, 04/23/2013 - 13:57 | 3489247 francis_sawyer
francis_sawyer's picture

Homes has eaten A LOT of bones in his time I imagine...

Tue, 04/23/2013 - 13:42 | 3489146 GernB
GernB's picture

BTFD, if you're fast enough.

Tue, 04/23/2013 - 13:46 | 3489160 Dr. Engali
Dr. Engali's picture

As usual your quick wit is amazing. I think you're in nigh frequency limerick mode.

Tue, 04/23/2013 - 13:50 | 3489197 BLOTTO
BLOTTO's picture

It would be very interesting to get the stats on who were the first ones out?

Tue, 04/23/2013 - 14:36 | 3489489 Ying-Yang
Ying-Yang's picture

There once was a Prez from Niger.......

Tue, 04/23/2013 - 15:40 | 3489788 The Limerick King
The Limerick King's picture

Thanks Doc!

Tue, 04/23/2013 - 13:34 | 3489091 brewing
brewing's picture

never given one of these out before - +1...

Tue, 04/23/2013 - 14:01 | 3489277 Bangin7GramRocks
Bangin7GramRocks's picture

And yet many of you still gamble every day in a rigged system. Should I post the number for Gamblers Anonymous?

Tue, 04/23/2013 - 13:46 | 3489168 THECOMINGDEPRESSION

I bet you 1 billion dollars... this was an INSIDE JOB

Tue, 04/23/2013 - 13:58 | 3489258 Ruffcut
Ruffcut's picture

betting is for suckers, they just showed why.

Tue, 04/23/2013 - 13:35 | 3489093 smlbizman
smlbizman's picture

how many joe six packs just had all thier stops taken sure they will cancel ALLLL transactions because of this...yea right that even made me laugh

Tue, 04/23/2013 - 13:44 | 3489156 Stoploss
Stoploss's picture

Sure has been a fucked up first quarter...


Hey!!  Only 14 more to go!!!

Tue, 04/23/2013 - 13:49 | 3489187 BlueStreet
BlueStreet's picture

TMZ is 'reporting' this same group as hacked twitter also:


We're told the group -- which claims responsibility for swatting RihannaDiddyRyan SeacrestJustin TimberlakeParis HiltonChris BrownTom Cruise and others -- contacted authorities through 911 and threatened to detonate 8 devices around the White House perimeter if President Obama does not declare war within 24 hours.

Tue, 04/23/2013 - 14:58 | 3489572 Jekyll_n_Hyde_Island
Jekyll_n_Hyde_Island's picture

Look at the first graph.  Backup call generator (algo) kicked in and recovered the market 80 points before floor traders ever had time to recover from the false news.

  Algos don't kill people, the people that write and implement algos kill people.

Tue, 04/23/2013 - 13:26 | 3488980 Mercury
Mercury's picture

If you were sitting in front of a machine you noticed that individual stocks didn't even have time to case anyone is still unclear on which part is the dog and which part is the tail.

Question is: who was standing there with a bucket?

Tue, 04/23/2013 - 13:29 | 3489015 THECOMINGDEPRESSION

..that cleared out about a billion or 10. stop losses all hit

Tue, 04/23/2013 - 13:46 | 3489172 Sudden Debt
Sudden Debt's picture

10 billion... plus expenses for that unplanned burial at sea which we'll have to cancel... so... about another 50 bucks give or take...

Tue, 04/23/2013 - 13:47 | 3489174 Frank N. Beans
Frank N. Beans's picture

they needed to raise a few bucks via commissions


Tue, 04/23/2013 - 13:48 | 3489183 NotApplicable
NotApplicable's picture

And to think, all ya gotta do is drain out all the liquidity first, and POOF! They're gone!

Tue, 04/23/2013 - 13:30 | 3489032 Cdad
Cdad's picture 90% of the daily liquiditeeeee is the Roach Motel [SPY] and various other compromised ETFs.

Nice market, Wall Street!  Can't wait to buy those fanta second collapses....

Wed, 04/24/2013 - 01:47 | 3491763 StychoKiller
StychoKiller's picture

Some nice wallpaper for youse...

Tue, 04/23/2013 - 13:33 | 3489057 A_Dog
A_Dog's picture

i am a dog

Tue, 04/23/2013 - 14:05 | 3489306 redux2redux
redux2redux's picture

But if you are not the lead dog, the view never changes...

Tue, 04/23/2013 - 13:39 | 3489109 malikai
malikai's picture

There were a few minutes to move on it. Anyway, I'd call it an opening salvo.

Tue, 04/23/2013 - 13:25 | 3488984 Keyser-Soze
Keyser-Soze's picture

Jesus H. Christ.

Tue, 04/23/2013 - 13:34 | 3489075 Fidel Sarcastro
Fidel Sarcastro's picture

Mini Flash Crash?

From liquid to DESERT sand in a microsecond. 

Tue, 04/23/2013 - 13:27 | 3488987 Cognitive Dissonance
Cognitive Dissonance's picture

White House (politicial) pressure cooker gone mad?  :)

Tue, 04/23/2013 - 13:30 | 3489039 akak
akak's picture

I would like to see the Watertown FBI and military stormtroopers forcing their way into 1600 Pennsylvania Blvd. at the point of many guns in a mandatory search for fugitives after an areawide "lockdown".

Tue, 04/23/2013 - 13:55 | 3489220 MichiganMilitiaMan
MichiganMilitiaMan's picture

Nope!  Just a pressure cooker market ready to explode.

Tue, 04/23/2013 - 13:25 | 3488990 maskone909
maskone909's picture

Prob time for short the s/p

Tue, 04/23/2013 - 13:26 | 3488999 ABG LINE
ABG LINE's picture

That shit is cool, yo!

Tue, 04/23/2013 - 13:27 | 3489003 El Hosel
El Hosel's picture

The Robots are Democrats....apparently

Tue, 04/23/2013 - 13:26 | 3489004 Comay Mierda
Comay Mierda's picture

i think i saw my gold twinkle a little bit

Tue, 04/23/2013 - 13:29 | 3489014 swissaustrian
swissaustrian's picture

Safe haven for you, right there.

Tue, 04/23/2013 - 13:28 | 3489006 Inthemix96
Inthemix96's picture

This is and is getting more surreal by the fucking day.

Stop the bus driver, I want off, I've had enough.

Tue, 04/23/2013 - 13:35 | 3489083 Peachfuzz
Peachfuzz's picture

"Buy the ticket, take the ride."

Tue, 04/23/2013 - 13:52 | 3489193 NotApplicable
NotApplicable's picture

"Wait a minute, who put me in the luggage compartment?"

Tue, 04/23/2013 - 13:55 | 3489232 MichiganMilitiaMan
MichiganMilitiaMan's picture

Get off the bus?  I kinda wanta see how all this ends.

Tue, 04/23/2013 - 14:03 | 3489288 Ruffcut
Ruffcut's picture

it will never end, and then you die

Tue, 04/23/2013 - 14:02 | 3489286 knukles
knukles's picture

You want off the bus driver or the bus?

Wed, 04/24/2013 - 01:51 | 3491768 StychoKiller
StychoKiller's picture

I googled "female bus driver" and this is one of the results...

Tue, 04/23/2013 - 13:27 | 3489010 navy62802
navy62802's picture


Tue, 04/23/2013 - 13:27 | 3489011 icanhasbailout
icanhasbailout's picture

test run

Tue, 04/23/2013 - 13:34 | 3489076 Thulsa Doom
Thulsa Doom's picture

Agreed. Something wicked this way comes.

Tue, 04/23/2013 - 13:28 | 3489013 Yen Cross
Yen Cross's picture

    Damn, I missed BTFD.

Tue, 04/23/2013 - 13:33 | 3489069 ForWhomTheTollBuilds
ForWhomTheTollBuilds's picture

Any trade that would benefit you will be reversed. 


Others will stand

Tue, 04/23/2013 - 13:33 | 3489071 konputa
konputa's picture

I shorted the cliff but I missed buying the dip I was laughing so hard. I should take the rest of the day off and enjoy a scotch.

Tue, 04/23/2013 - 13:30 | 3489016 ebworthen
ebworthen's picture

Had to have been those day traders online clicking the mouse really fast, could not have possibly been Skynet and the Terminators.

Tue, 04/23/2013 - 13:32 | 3489019 Dr. Engali
Dr. Engali's picture

Clearly this shows that the Internet is dangerous and must be regulated for your own safety. After all it's for the children.

Good timing for Cispa hitting the Senate

Tue, 04/23/2013 - 13:34 | 3489085 IridiumRebel
IridiumRebel's picture

Do you know what shortwave channel I should hit up after they shutdown the interwebs to instill my freedumz? 

Tue, 04/23/2013 - 13:50 | 3489194 Dagny Taggart
Tue, 04/23/2013 - 13:55 | 3489223 NotApplicable
NotApplicable's picture

I'd think when the SHTF the last thing you would want is a license. Might as well register all of your guns, while you're at it.

Tue, 04/23/2013 - 13:55 | 3489225 IridiumRebel
IridiumRebel's picture

ok, I got a Secrane, but HAM was an interest. This seals it. Thanx

Tue, 04/23/2013 - 13:39 | 3489108 Michael Victory
Michael Victory's picture

bravo dr. e.

Tue, 04/23/2013 - 13:38 | 3489116 spastic_colon
spastic_colon's picture

i upped you cuz you're exactly right....otherwise 1,000 red arrows cuz you're also right!

Tue, 04/23/2013 - 13:28 | 3489020 The Master
The Master's picture

Just a test before the Big Reset. Nothing to see here folks.

Tue, 04/23/2013 - 13:55 | 3489222 Keynesian Mess
Keynesian Mess's picture

"These [algos] are not the droids you're looking for"

Tue, 04/23/2013 - 13:29 | 3489023 Clowns on Acid
Clowns on Acid's picture

Nice test of market reaction by somebody...... Have to have a few test runs to tune up the algo before one sends the market into full retard.....

"Y'see boss, the Twitter sensitive algo I have written does work....we just made  $1M bucks in 2 minutes with just a simple hacked Tweet". This social media stuff is so cool"

Tue, 04/23/2013 - 13:29 | 3489028 EmmittFitzhume
EmmittFitzhume's picture

You gotta be a hacker if you want to get rich these days.

Tue, 04/23/2013 - 13:39 | 3489120 TeamDepends
TeamDepends's picture

Dang, guess there's no hope for us Luddites.

Tue, 04/23/2013 - 13:30 | 3489030 TomGa
TomGa's picture

The ability to crash markets with a single tweet means that they must be on a very sensitive Hair Twitter.

Tue, 04/23/2013 - 13:29 | 3489031 virgilcaine
virgilcaine's picture

Were going down... heheh

Tue, 04/23/2013 - 13:30 | 3489051 El Hosel
El Hosel's picture

"If a tweet falls on the market"...

Tue, 04/23/2013 - 13:31 | 3489038 The Dancer
The Dancer's picture

What market...what liquidity!!! It's all a sham!!!! Had better grab your pension and run like hell!!

Tue, 04/23/2013 - 13:30 | 3489040 Edward Fiatski
Edward Fiatski's picture


Tue, 04/23/2013 - 13:31 | 3489045 thismarketisrigged
thismarketisrigged's picture

if possible, can someone post a link of cnbc while this was happening? unfortunatley, i was out at the time so i missed the entire thing.


so pissed, sure enough thought averages are right where they left off.

Tue, 04/23/2013 - 13:31 | 3489053 Chief Falling Knife
Chief Falling Knife's picture

WTF just happened

Tue, 04/23/2013 - 13:31 | 3489054 The Fonz...befo...
The Fonz...before shark jump's picture

Rogue tweet

Tue, 04/23/2013 - 13:35 | 3489055 soopy
soopy's picture

All your tweet are belong to us, now.

Tue, 04/23/2013 - 13:34 | 3489062 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

Lots moved in sync, but some major and large markets were one, USDJPY and SPY for example, along with VXX in inverse of course. EURUSD, not so much.

This was an interesting view into the correlation algos universe. The algos sh-t their pants and then bought back quicker than you could change trousers.

If the so called "people" who are active in this market do not shake off their stupor and sell into the close, then its a sign that the frontal lobotimization is complete.

No one understands why this f--ing piece of garbage is up today anyway, except for the currency ramp around 6am ... and Europe celebrating Barroso. Yay!

Tue, 04/23/2013 - 13:42 | 3489133 otto skorzeny
otto skorzeny's picture

derp- some suckers bought some houses-derp

Tue, 04/23/2013 - 13:45 | 3489157 edb5s
edb5s's picture

SPY movement was small potatoes compared to VXX: from $19.08 up to $20.54 (7.65%) and then right back down again.  Incredible.

Tue, 04/23/2013 - 13:36 | 3489070 syntaxterror
syntaxterror's picture

The Obama regime to take control of at any second now for national security reasons.

Tue, 04/23/2013 - 13:34 | 3489073 Everybodys All ...
Everybodys All American's picture

This is how you get "Volume" in the stock market.  This at the end of the day will look like a breakout day to all the price and volume traders. Don't trust this market at all.

Tue, 04/23/2013 - 13:34 | 3489078 laomei
laomei's picture

Yep, it's basically all HFT now.  Any algo can crash it all at any time.  Not worth the time to bother trying to beat it... the casino's rigged and has been for a long time.

Tue, 04/23/2013 - 13:34 | 3489090 ZippyBananaPants
ZippyBananaPants's picture

I did a mini crap in my pants

Tue, 04/23/2013 - 13:36 | 3489101 El Hosel
El Hosel's picture

Damn, false alarm, Bears take it in the shorts again

Tue, 04/23/2013 - 13:35 | 3489094 NotAMathWhiz
NotAMathWhiz's picture

Kinda reminds me of the Pink Floyd album cover to the 'Dark Side of the Moon'.  Flashbacks are a bitch...

Tue, 04/23/2013 - 13:43 | 3489143 moonman
moonman's picture

Tue, 04/23/2013 - 13:35 | 3489096 slaughterer
slaughterer's picture

OK, what next?

Tue, 04/23/2013 - 13:37 | 3489097 Schmuck Raker
Schmuck Raker's picture


Tue, 04/23/2013 - 13:45 | 3489102 ebworthen
ebworthen's picture

What more proof do we need that these markets are being floated by high volume algo robots?

100 points off the DOW in two seconds?

We have no idea what the value of anything is anymore.

End QE and allow one trade every 60 minutes and let's see what true value really is.

Tue, 04/23/2013 - 13:38 | 3489103 bullet
bullet's picture

I knew it was fake instantly... explosions were not at golf course...

Tue, 04/23/2013 - 13:56 | 3489244 NotApplicable
NotApplicable's picture

Don't forget the gym. He's a baller, ya know.

Tue, 04/23/2013 - 13:36 | 3489104 ivana
ivana's picture

Knowing this corrupt system, I believe it is possible to purchase something like these flashcrashes to buy/sell before others. Of course , that service available only for banskers and their good friends - for goooood fee

Tue, 04/23/2013 - 13:39 | 3489115 Gypsyducks
Gypsyducks's picture

Who has two thumbs and sold the absolute lows in the CLM3 contract? 

Tue, 04/23/2013 - 13:41 | 3489127 Bear
Bear's picture

I don't understand ... if Obama was hit; why didn't the Market rocket up?

Tue, 04/23/2013 - 13:46 | 3489162 andrewp111
andrewp111's picture

Joe Biden

Tue, 04/23/2013 - 13:41 | 3489131 CDNX fan
CDNX fan's picture

These markets are so fucked it isn't even funny


Tue, 04/23/2013 - 13:42 | 3489132 youngman
youngman's picture

And they wonder why the retail investor is on the sidelines....this circus is to fun to watch...what a joke and now to hear the talking heads explain it

Tue, 04/23/2013 - 13:42 | 3489135 unwashedmass
unwashedmass's picture


if ever there were a reason to liquidate and buy gold/silver bullion and store it some place safe, this, this lit it up in neon. 

Tue, 04/23/2013 - 13:41 | 3489137 ebworthen
ebworthen's picture

No doubt the S.E.C. has their top people on it, just like the D.O.J.'s people going after Corzine.

Tue, 04/23/2013 - 13:43 | 3489147 Aztec Warrior
Aztec Warrior's picture

SEC has porn algo running on their machines

Tue, 04/23/2013 - 13:43 | 3489139 Aztec Warrior
Aztec Warrior's picture

Algorithm was coined after a Persian mathematician in Baghdad - time to bomb Iran, Iraq (again) and Uzbekistan's Khwarezm province

Tue, 04/23/2013 - 13:53 | 3489209 alien-IQ
alien-IQ's picture

I guess it's time to wage war against Al-Gebra?

Tue, 04/23/2013 - 13:44 | 3489148 Duke Dog
Duke Dog's picture

They may need to try a little harder to get those CISPA (read freedom) haters onboard the "Partiot" train. (/sarc), but actually probably not - everyone will line up to scream for more protection/security from those evil no-gooders, LMAO. jd.

Tue, 04/23/2013 - 13:45 | 3489154 alien-IQ
alien-IQ's picture

Note to ZH:

I weigh just a hair above 160. I really don't need to lose any weight...but if you guys keep posting all these puke inducing facts, I'm going to literally vaporize. I've got nothing left to puke...please stop before my shoes come out of my mouth.

Thank you.

Tue, 04/23/2013 - 13:47 | 3489166 PUD
PUD's picture




Tue, 04/23/2013 - 13:49 | 3489169 gwar5
gwar5's picture

 "It is my opinion that within the next year, or possibly two years, the dollar will lose its reserve currency status, and the US bond market will crash, taking the stock market with it. 

...I believe we are close to witnessing and living through some of the greatest and momentous changes in world economic history. It will be, historically, tantamount to those of us who fought and lived through World War II..."   -- Richard Russell, April 23, 2013


Tue, 04/23/2013 - 13:48 | 3489176 ronincap
ronincap's picture

Maybe Monica Lewinsky is back in the white house causing Obama to explode  :)

Tue, 04/23/2013 - 13:58 | 3489261 NotApplicable
NotApplicable's picture

Since when does he like girls?

Tue, 04/23/2013 - 13:47 | 3489177 ronincap
ronincap's picture

Maybe Monica Lewinsky is back in the white house causing Obama to explode  :)

Tue, 04/23/2013 - 13:48 | 3489180 polo007
polo007's picture

Since the global financial crisis, central banks around the world have been forced to take dramatic and unprecedented actions to stabilize markets and shore up faltering economies. As a result, a high degree of global monetary policy accommodation has been part of our economic landscape for years, and likely will remain so for some time.

That said, a wide variety of asset classes are beginning to show signs of disconnect from fundamental valuation underpinnings as a result of these policies, and it's increasingly clear that policy actions are starting to distort fixed-income markets in particular. Moreover, in the U.S., the Federal Reserve is unlikely to achieve its stated labor market goal of 6.5% unemployment any time soon, largely due to structural trends that hamper rapid employment recovery. Therefore, and perhaps ironically, the Fed's policy goals might be better served over the medium term if the central bank were to slowly begin reducing its quantitative easing program and allow interest rate markets to begin a process of normalization.

There is little question that in the aftermath of the financial crisis the Fed's zero-interest-rate policy, its alphabet soup of emergency liquidity programs and its early rounds of quantitative easing combined to help stave off an economic disaster much worse than that experienced. Also, in the absence of fiscal support due to political paralysis in Washington, the Fed's asset purchases have bolstered markets through the eurozone crisis and other troubles.

Nevertheless, we have now arrived at a point in which household debt levels in the U.S. are moving closer to historic norms, nominal gross domestic product is growing, household net worth has dramatically recovered from crisis lows, and corporate earnings and margins are strong. Further, the original site of financial crisis trouble, the housing sector, appears to be staging a legitimate rebound, and indeed median home price affordability has come back to its longer term, or 1981-2000, average. From this standpoint, the Fed's desire for a continued wealth effect might prove counterproductive, as it risks excessively distorting markets through asset price inflation and it hampers true price discovery mechanisms.

Fed policy has had a distorting effect on capital allocation decisions of all kinds at virtually every level of the economy, from corporate treasury departments and pension funds, which have either had to take greater risks to meet their return targets or risk facing negative returns after inflation in purportedly safe assets, to households attempting to save for future liabilities. Beyond capital flow distortions, I have long argued that Fed policy is having a significant impact on bond market supply-and-demand dynamics. This impact is most obvious in sectors such as U.S. agency mortgage-backed securities, where Fed purchasing in recent months has comprised between 40% and 60% of the gross issuance in that segment of the market, but dislocations can also be seen in a variety of other sectors. Generally speaking, demand for fixed-income assets has continued to be strong, but net supply remains relatively low, particularly when accounting for Fed purchases. Moreover, a greater degree of interest-rate risk has crept into commonly tracked bond market benchmarks, adding risks to portfolios in exchange for meager compensation.

Still, what is the ultimate payoff for the price of potentially distorted markets? Will the Fed's stated goal of improving labor market conditions be met as a result of its policies?

Unfortunately, I do not believe current policy will aid in resolving job market struggles more than at the margin. The U.S. labor market recovery suffers not merely from uncertainty, or from lack of sufficient aggregate demand, as contended by many, but rather it faces an array of structural headwinds that are likely to be overcome only in time. For example, most of the payroll gains witnessed since the beginning of the labor market recovery have come in sectors not directly affected by the financial crisis, whereas the sectors of the economy most directly disrupted have struggled to adjust to the new environment. And while the economy grows and labor markets slowly improve, the labor force should also expand at a clip that might keep the unemployment rate unusually high and the Fed accommodative for too long.

Tue, 04/23/2013 - 13:57 | 3489255 gwar5
gwar5's picture

"While it's nice for the FED to say that they have a mandate for price stability and low unemployment, it's really not the case at all. Of course, it's nice when those two things occur under policy by the FED, but the real mandate of the FED is to protect the banks. The FED is of the banks, by the banks, and for the banks, and if you understand that then you'll better understand what the FED is doing."      -- Jim Rickards, 2010

Tue, 04/23/2013 - 13:48 | 3489185 polo007
polo007's picture

The swollen Federal Reserve’s balance sheet won’t return to pre-crisis norms until 2022, according to projections published Tuesday by Kris Dawsey, a Goldman Sachs economist.

The forecast assumes the Fed isn’t likely to stop buying securities until well into 2014, resulting in a balance sheet well over $4 trillion.

Another key assumption is the Fed will shift its policy stance and rely mainly on “passive” portfolio runoff from maturities and pre-pays to shrink its balance sheet when the time comes, instead of outright sales.

The last exit strategy, published by the Fed in 2011, projected the central bank would sell mortgage-backed securities on its balance sheet over a period of 3 to 5 years.

Over the last few months, Fed Chief Ben Bernanke and other officials have begun suggesting a more passive approach to shrinking its balance sheet, in order to avoid adverse effects on market functioning.

This will result in a very slow normalization of the balance sheet, Dawsey said.

There will be essentially no natural runoff of Treasurys until 2016, and the mortgage-backed securities portfolio will mainly wind down due to pre-payments, he said.

The size of the mortgage-backed portfolio will decline at a rate of 13% per year, Goldman projected. This is slower than the rate of pre-payment seen in recent years, but a higher interest rate environment will mean fewer borrowers will be “in-the-money” on their prepayment options and refinancing activity will slow.

Total Dollar Amount of All U.S. Treasury and Mortgage-Backed Securities Held by the Federal Reserve:

Tue, 04/23/2013 - 13:49 | 3489188 polo007
polo007's picture

The Four Year Stock Market Cycle

Prior to last week's detour to discuss the gold market my April commentaries have been about Lindsay's long cycle and how that matches what we all normally think of as secular bull and bear markets. The second commentary in this series discussed finding the high in the current long cycle and the conclusion was that a high should be found between March and September of this year. Before going any further with Lindsay I want to spend this week to see if we can confirm this forecast using another common cycle approach (non-Lindsay), the four-year cycle.

The vertical lines on the historical chart of the Dow Industrial Average (below) represent the four year cycle. There are a few cycles which contract closer to three years and two which expand to five years but the overwhelming majority of cycles are four year cycles. There have been only two times in over 100 years that the cycle has contracted to two years and those are highlighted with red vertical lines. The final low in each two-year cycle is, coincidentally, a time when Lindsay's long cycle was experiencing a shift as well.

The solid green lines are the focus of this week's commentary. Notice that in these two instances the cycles have inverted. That is, instead of a cycle which extends from low to low, these cycles extend from a low to a high. What could have caused this inversion? During WWII the Fed became heavily involved in buying treasury bills for the first time. By 1946 the Fed had bought virtually every T-bill in existence in order to help keep interest rates low for the war effort. We all know of the Fed's recent efforts (QE to Infinity!) to jump start the economy by buying treasury debt. The final green vertical line on the chart shows that it has been four years since the last four year low and we are currently at a high. It is another sign that the market has reached a top.

Historical Chart of the Dow Jones Industrial Average:

Tue, 04/23/2013 - 14:02 | 3489292 gwar5
gwar5's picture

Ok stuff polo, but it's all old news been covered here at ZH long ago. Up arrow for enthusiasm!

Tue, 04/23/2013 - 13:52 | 3489196 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

Wait, so the market is just picking up where it left off? No memory for the algos? Or have makret participants become Stepford Wives ?

Tue, 04/23/2013 - 13:51 | 3489201 Quinvarius
Quinvarius's picture

Just a bad case of mudbutt after eating some ripe crawdaddies.  All good now except for the stain on the watertank. 

Tue, 04/23/2013 - 13:56 | 3489206 icanhasbailout
icanhasbailout's picture

Keep in mind we've been joking around here about sending fake news stories to get the HFTs to jump since the moment it became apparent that they were working off the news headlines. Once again life imitates ZH cynicism.


ah here we go I found it:

"makes me want to hack a news feed just to make the algos dance"


Tue, 04/23/2013 - 14:00 | 3489282 NotApplicable
NotApplicable's picture

They'll just blame ZH, then.

I think it's hilarious that an unconfirmed tweet is all it takes to break everything.

Tue, 04/23/2013 - 13:54 | 3489212 Smuckers
Smuckers's picture

Aaand it's go - BACK.

Tue, 04/23/2013 - 13:54 | 3489216 TomGa
TomGa's picture

What would have happened if a sufficient number of bad news tweets had been sent out in the span of a few seconds today  to cause circuit breakers to kick in?  Once you think about the possibilities, the implications are troubling.

Tue, 04/23/2013 - 14:17 | 3489375 css1971
css1971's picture

Interesting, the financial firms are reasonably secure, at least with their back end systems. Mainstream media firms...

I wonder if they realised they'd handed their trading platforms over to journalists when they started putting the hft systems in.

Tue, 04/23/2013 - 13:54 | 3489221 Frank N. Beans
Frank N. Beans's picture

i thought Bernanke got killed

false alarm

Tue, 04/23/2013 - 13:55 | 3489224 SandiaMan
SandiaMan's picture

Look over there its a drill.

Tue, 04/23/2013 - 13:57 | 3489246 vote_libertaria...
vote_libertarian_party's picture

You see where the volume dropped to zero on the chart...that is how many real people are trading.

Tue, 04/23/2013 - 17:26 | 3490269 Poor Grogman
Poor Grogman's picture

That one still left was Robotrader.

Tue, 04/23/2013 - 13:58 | 3489248 the not so migh...
the not so mighty maximiza's picture


Tue, 04/23/2013 - 14:00 | 3489279 Quinvarius
Quinvarius's picture

If you had made money on that, your trade would have been cancelled, like every other time the alogos screwed up.

Tue, 04/23/2013 - 13:57 | 3489256 assumptionblindness
assumptionblindness's picture

So, the entity that we always hear referred to as "The Market" is really nothing nore than a bunch of computer programs that read Twitter feeds?

That does it!  I have FINALLY lost confidence! /sarcasm off

Tue, 04/23/2013 - 13:58 | 3489264 ThisIsBob
ThisIsBob's picture

Gives new meaning to the phrase:  "Garbage in, garbage out."

Tue, 04/23/2013 - 13:59 | 3489266 akak
akak's picture


Do NOT follow this link or you will be banned from the site!