From Bust To Bubble, With No Recovery In Between?

Tyler Durden's picture

The gaps between markets (credit, equity, and volatility) and economic (macro- and micro-) reality have seldom been larger. What is just as concerning as this yawning chasm is the similarity of a number of activities to the 'bubble' in credit in 2007 - from record CLO issuance to covenant-lite loans resurgence. As Citi's Matt King notes, the past fortnight’s virtual melt-up in all things high yielding has been accompanied by a growing sense that markets are breaking out of the patterns of the past few years. In the near term, there is no reason in principle why the moves cannot go further; but unless more of the central bank stimulus finds its way through to the economy, this opens up the risk of sudden corrections as markets fall back to earth. How long will it take for that to occur, and for markets to become scared once again? It is hard to tell, and yet, as we have noted numerous times, we have been in this situation before. In 2009, the divergences took 6 months before stocks corrected, in 2011 it took 4 months, and in 2012 it took just 1 month. It's not different this time.


That 2007 Feeling...


Just a shame the real economy isn't...


and it seems unemployment doesn't matter anymore...


and nor do earnings...


but we've seen that before...


Via Citi's Matt King,

It Is Not Different This Time
The past fortnight’s virtual melt-up in all things high yielding has been accompanied by a growing sense that markets are breaking out of the patterns of the past few years. Euro headlines fail to shock spreads, advocates of austerity are in retreat, and “inflation-plus” targeting by central banks would seem to herald a new era of unprecedented stimulus. Does this give cause for chasing [performance] even at these levels? While it varies by asset class, we think the answer is still “no”.

In the near term, there is no reason in principle why the moves cannot go further. Credit has, if anything, been lagging the rally in govies.

In addition, we do know that central bank stimulus drives markets up, not only through a “portfolio” demand channel but also through a massive dampening in the supply available to private investors . The liquidity injection from the BoJ should at a minimum entirely offset any tapering we get from the Fed this year, and hence goes a long way toward justifying the rally in global markets:

And yet even allowing for this, the chart suggests that markets are getting a bit ahead of themselves. Flows to date from Japanese asset managers still show profit-taking on foreign investments, not increases. While we do anticipate some rebalancing towards foreign bonds over the next few months, bottom-up analysis suggests it is unlikely to exceed $50bn or so from the life insurers, most of that directed towards govies. Flows from pensions, banks and retail may in time add to that, but seem likely to be slower because of continued profit-taking on the depreciating yen.

Worse, the gap between market levels and economic reality has seldom been larger, and it seems to be taking ever more credit growth to produce the same growth in GDP.


Unless more of the central bank stimulus finds its way through to the economy, this opens up the risk of sudden corrections as markets fall back to earth. Markets may be right that the implementation of excessive austerity is bad news for growth, and hence for sovereign solvency. But not implementing austerity seems unlikely to lead them to fare any better — a realisation which seems yet to have dawned. How long will it take for that to occur, and for markets to become scared once again? It is hard to tell, and yet we have been in this situation before.

The chart below shows Citi’s European Economic Surprise Index plotted against iTraxx (European credit). Over the past few weeks, the economic data have plummeted relative to expectations, yet spreads have continued to tighten in. Similar divergences occurred at this point in each of the past three years; in every case, after a delay, spreads moved to follow the data. In 2009-10, the divergence lasted a good six months (Oct09-Apr10); in 2011 it took four months (Jan-May); in 2012 it took just one month.

The temptation is to say that something has changed, that we are immune to these problems, after the shocks to date which have failed to move spreads. But we doubt it. Tightening valuations and increasingly long investor positions ultimately create an obstacle larger than any individual news headline.

Most likely in the near term is markets just continue to follow the liquidity – and yet here too we think they are overestimating central banks’ largesse. Recent speeches suggest that the ECB, in particular, remains anxious that action on its part may lead to inaction on structural reforms elsewhere. Our economists expect a rate cut next week, but no major relaxation of collateral requirements just yet. Indeed, the opinion penned by the Bundesbank for Germany’s constitutional court, which leaked into the press this week, is a reminder of how the backstop on which the peripheral rally is predicated rests on remarkably shaky ground.

In general, and in peripherals in particular, we see nothing to suggest this time is different.

As we sit in an increasingly unstable equilibria...


...'normal' risks may have fallen but tail-risks haven't.


Charts: Citi

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FieldingMellish's picture

Harry Potter now works for the central banks... marketus levioso...

I am Jobe's picture

Vodoo Economics

Greatest Minds at work- Nothing to see here move along

Sheeples busy with weekend box office and catching up on Kardarshians


Kirk2NCC1701's picture

Tyler, the Recovery is there.  I can see it on the Marauder's Map.  It's just covered by the Invisibility Cloak.

disabledvet's picture

"and blah blee blah" too. To paraphrase Stalin "low interest rates creates a quality all it's own." the Fed has NOT nor CANNOT "create"a recovery. The best all that cheap money can do...even TRILLIONS of shift incentives. In other words "even if you're selling short you're still a buyer" and/or "you need a buyer." with Uncle Salami cranking out trillion dollar deficits "forever" it ain't him folks. They're full on "Super Freak" right now. The Banks on the other hand are sitting on an OCEAN of capital. The President has already has his first "aw shucks and gosh darn" moments with these Titans...and that was quickly followed by Boston and an annihilation in gold prices. "there is a point where prices get so low that a "recovery" is simply not the point anymore. Yeah...sure "equities correct 10 percent from here." in the meantime interest rates go "full on Japanese." these are already the lowest rate in the history of the USA. That includes the Great Depression! Simply put I don't recall all this Federal largesse that needed "paying for" back them. Hmmmm. "conundrum indeed" Chairman Greenspan.

AynRandFan's picture

Agreed.  Deflation is still in charge and will be for a long time.  The primary effect of QEternity has been to prop up food and fuel prices, thereby adding to the slowing economy.  Banks can't and won't lend so all that cash and credit just sits there, doing nothing productive.

Mr. Magniloquent's picture

Deflation is not in control. We are not witnessing money gaining share, we are witnessing the evaporation of artificial credit that did not genuinely exist. We are witnessing a major disturbance in fractional reserve banking. That is VERY different from deflation.

Whether our masters at the Federal Reserve are trembling at precieved threats of deflation, or are trying to support a broken system is anyone's guess. Regardless, their remedy is the same for either. This century, it's merely being carried out differently than in the 1930s. Instead of using price controls, which have obvious and well document effects that can be felt by all--they are just attempting to inflate prices. Average Joe understands the harm when The State commands him that he cannot press a suit for 14 cents, but does not understand why his money purchases less than before.

Further still, why should banks lend in this environment? Do you really think Joe-Blow's Sports Bar is going to have a ROI greater than inflation, let alone survive in an environment where discresionary spending is plummeting? Damn sure won't be able to loan money to a productive industry. Government regulations and taxation made sure industry vacated the USA's borders decades ago.

All that remains is speculative gambling. Correction: All that remains is speculative gambling in a rigged casino. Enjoy the punch sucker, it's flowing just for us.

yogibear's picture

Ever expanding US QE until a currency crisis occurs. 

Everyone knows Bernanke and the Fed cannot stop QE and buying debt with printed money.

The Fed can bluff all it wants about stopping it, everyone knows otherwise.

Bernanke and the Fed will end up increasing purchasing of US deb, otherwise game over sooner.

Bernanke , Evans, Dudley and Yellen have already said non-stop money printing.

Once the US dollar looses it's reserve status due to a currency crisis it's over.


Law97's picture

Ah, but even then it's not game over.  For now, they will keep this going as long as they can.  The current policy is transferring massive amounts of wealth to the top 1% and various government/Wall Street insiders.  So that part is going exactly according to plan.  They're guessing they can probably keep this up at least into 2014, maybe longer, before they proceed to the next phase pf their plan:  WWIII. 


Look at all major wars and they are orchestrated by the elites, frequently in concert with one another across "opposing" lines.  I'm sure this time is no different.  Step 1: massive wealth transfer to the elites.  Step 2: massive die-off among the other 99%.  Step 3: elites return to a depopulated utopia and buy anything and everything for $0.01 on the dollar.  Step 4: elites enjoy the good life for another century or so until the whole thing resets again several generations down the line. 

Ban KKiller's picture

70 year cycle? Are the resets coming faster?

CDNX fan's picture

"Ball in a bowl" - now that is a very fine graphic. Stimulus might backfire in a manner that torperdoes everything. Or is it simply cash being thrown overboard in an unconventional historic manner? Whereas it use to flee to gold, perhaps it is fleeing elsewhere (stocks)? $85 billion a month that is funding the equity markets from bond switches? Is the Fed (the banks' bank) buying torched toxic debt at par with the "deal" being that the Wall St./Euro banks must levitate equity? Or is that too fucking obvious?

Racer's picture

The only people suffering cuts are the poor, pensioners and children

autofixer's picture

Pension?  What's that?

Kirk2NCC1701's picture

"Gold still represents the ultimate form of payment in the world." - Alan Greenspan, former Chairman of the Federal Reserve.

Notwithstanding his other faults, what does Greenspan know -- compared to Bernanke and Krugman?  /s

IridiumRebel's picture

Just look at Euro unemployment. That piece of chart porn says it all.

yogibear's picture

Bernanke, Evans, Dudley and Yellen are printing their way to a currency crisis.

The loss in trust of the US dollar is already happening.

Soon enough the US looses the reserve currency status.

q99x2's picture

Unless more of the central bank stimulus finds its way through to the economy, this opens up the risk of sudden corrections as markets fall back to earth.

Horse Shit.

If you don't know by now that the FEDs market stabilizing software is the only thing that matters you never will.

Do you honestly believe that the corporations that run this country, and are above the law, are going to allow their stock values to decline?

It is very different this time.

Law97's picture

Yes, but they may decide to let it fall in a small correction to dispell the growing realization that the markets are, in fact, totally controlled. 


You'll notice that most observers are now openly saying that the Fed liquidity is what is pushing up the markets.  Read through the comments section of even a source such as the New York Times, and you'll see that just about everybody is saying that the markets are controlled and not in any way linked to fundamentals anymore.  This must be a danger signal to TPTB that they may be pushing things too far.  Once the idea that the markets are totally controlled becomes the norm, then they lose their power.  The emerpor has no clothes.  There still have to be at least some sizeable minority at the margins who still believe the markets are free for TPTB's control scheme to work. 


That's why I think there may be an orchestrated correction soon.  They have to keep that sizeable minority believing the markets are still free. 


I've never seen the level of mainstream acknowledgement that the markets are artificially controlled as I have seen starting in the last 6 months or so.  It's not just us tin-foil ZH's anymore.

AynRandFan's picture

Uh huh, earnings don't matter. Except they do.

CheapBastard's picture

Zero down houses and zero down cars (with 97 months to pay) and 1 Trillion in student loans plus a negative GDP is not really a recovery, is it?

ebworthen's picture

If the FED would get the hell out of the way and the rule-of-law enforced we woulnd't be in Bubble II.

Wait...I'm dreaming of a world that makes sense...nevermind.

AynRandFan's picture

What good is all that available credit to the private sector?  They don't want it, or need it, and even if they did the banks wouldnt lend it.

Stuck on Zero's picture

John Schoen, of CNBC, just laid all the blame on Congress for its attempts to cut spending:


cosmicinsight's picture

I wonder why the policy makers do not comprehend the mess their policies are generating.Either they are cocksure that their fix is working or else they fear that anything else would make it worse.

As among us folks the believers are oblivious and carry on as if nothing unusual.The disbelievers are confused by the purposeful hype that is always abuzz to obviate the signs of all that is far from normal.

1eyedman's picture

because, "in the end, were dead".  JM Keynes.   in other words, just keep it going while were around, and itll blow up in someone else's face.

Fuku Ben's picture

Interesting how my eyes read this "but no major relaxation of collateral requirements just yet"


but my mind translated it as this "but no major relaxation of colorectal requirements just yet"


Even my subconscious knows it is all shit

jtz5's picture

Saw "Olympus Has Fallen" tonight. Good movie, great line...

"How much does it cost Wall Street to buy a President these days?" Never a more truthful statement...from Hollywood, of all places.

akak's picture

I saw the movie too, and while it was a decent movie, as movies go, am I the only one who finds that more and more Hollywood movies subtly if unambiguously come across as pro-US military and pro-US government propaganda?  "Zero Dark Thirty" was just another recent example of this same phenomenon, but there have been many others as well in the last few years.

Just when did the Pentagon, the While House and the US State Department get into the movie business?

jtz5's picture

Yes, agree. It was a "good" movie purely for entertainment purposes. It could have been another in the "Die Hard" series.

Disenchanted's picture

re: "Just when did the Pentagon, the While House and the US State Department get into the movie business?"


Probably at least since WWII if not sooner. The argument could be made that Casablanca was a war propaganda movie(posing as a romance/chick flick), albeit a little more subtle than something like Zero Dark Thirty.

What do you think the 'newsreels' were that were shown in theatres in those days? Hell even Walt Disney teamed up with the Govt to propagandize with animation/cartoons...


Ever hear of this place?


Lookout Mountain Laboratory


Over its lifetime, the studio produced some 19,000 classified motion pictures - more than all the Hollywood studios combined (which I guess makes Laurel Canyon the real 'motion picture capital of the world'). Officially, the facility was run by the U.S. Air Force and did nothing more nefarious than process AEC footage of atomic and nuclear bomb tests. The studio, however, was clearly equipped to do far more than just process film. There are indications that Lookout Mountain Laboratory had an advanced research and development department that was on the cutting edge of new film technologies. Such technological advances as 3-D effects were apparently first developed at the Laurel Canyon site. And Hollywood luminaries like John Ford, Jimmy Stewart, Howard Hawks, Ronald Reagan, Bing Crosby, Walt Disney and Marilyn Monroe were given clearance to work at the facility on undisclosed projects. There is no indication that any of them ever spoke of their work at the clandestine studio.


The facility retained as many as 250 producers, directors, technicians, editors, animators, etc., both civilian and military, all with top security clearances - and all reporting to work in a secluded corner of Laurel Canyon. Accounts vary as to when the facility ceased operations. Some claim it was in 1969, while others say the installation remained in operation longer. In any event, by all accounts the secret bunker had been up and running for more than twenty years before Laurel Canyon's rebellious teen years, and it remained operational for the most turbulent of those years.


The existence of the facility remained unknown to the general public until the early 1990s, though it had long been rumored that the CIA operated a secret movie studio somewhere in or near Hollywood. Filmmaker Peter Kuran was the first to learn of its existence, through classified documents he obtained while researching his 1995 documentary, "Trinity and Beyond." And yet even today, some 15 years after its public disclosure, one would have trouble finding even a single mention of this secret military/intelligence facility anywhere in the 'conspiracy' literature.

Monedas's picture

Beware the Bern-Ankara axis .... AKA Bernanke .... affectionately ! Don't make me explain it .... it's just the first thing that popped into my head this morning ?

Monedas's picture

Bern over and grab your Ankers .... there .... fixed it !

venturen's picture

Heck lets cut out the middle man and guarantee all bank deals(and bonuses) so they can only profit and we can only lose!!! It would be simplier...then we wouldn't have to have these pesky crisises. 

moneybots's picture

"John Schoen, of CNBC, just laid all the blame on Congress for its attempts to cut spending:"


The blame lies with congress for supporting financial recklessness, not for attempting to cut spending.  Booms end in busts, no exceptions.

moneybots's picture

It is never different this time.  Create a bubble, it bursts.  They just keep trying to replace a burst bubble with another bubble.  The question is always one of timing.

polo007's picture

According to Bank of America Merrill Lynch:

Macro viewpoint

Easy in, easy out

- Review: The choppy slowdown continued into April, with better jobless claims but weak regional manufacturing surveys.

- Preview: The April employment report will be a good test of whether the March weakness was a fluke or a sign of sustained weakness. We look for a sub-consensus 125,000 increase.

- Hot topic: With persistently sub-2% inflation, the case for continued QE is building. When the Fed does finally head for the exit, the key question for investors is the same as it has been in the past: if inflation is low, it will be a soft landing; if inflation is high, buckle your seatbelts.

polo007's picture

According to Morgan Stanley:

Why Did the Fed Choose a 6.5% Threshold?

We found intriguing the suggestion by Chairman Bernanke that the Fed could – should the current thresholds not be sufficient – “lower even further” the threshold for the unemployment rate. The Chairman alluded to this ability after making reference to the Fed’s success at managing the market’s interest rate expectations. He suggested that the current threshold at 6.5% remained sufficient to “approximate what’s called the Optimal Control path of interest rates, that it seems to give a path of unemployment and inflation that’s about as good as we can get with the monetary policy tools that we have.”

How can we show that the 6.5% threshold was sufficient in December? Exhibit 1 shows the Optimal Control path for the funds rate that minimizes the deviations of inflation from 2% and the deviations of the unemployment rate from 6% – last updated in November 2002. The exhibit also shows the unemployment rate progression under that path. An important assumption in the Optimal Control analysis is that the public fully anticipates that the FOMC will follow this optimal plan. For the path of rates to be effective, the market must believe the Fed will follow the plan. The more transparent the Fed is regarding its intentions, the more likely it becomes that the Optimal Control path for the funds rate will achieve its goals.

Understanding why the Fed set the initial unemployment threshold at 6.5% will help you understand why they may change it in the future. Exhibit 1 shows that the unemployment rate will cross 6.5% around November 2015 given the Optimal Control path of rates. Under the framework, the first 25bp rate hike will occur in September 2016, or nine to ten months after the unemployment rate reaches 6.5%.

If the Fed had chosen 7.0% instead of 6.5% for the threshold, the unemployment rate would cross in March 2015. With a 7.0% threshold, the Fed would have a difficult time explaining why the Optimal Control liftoff was projected to take so long (almost 1 ½ years) after having seen substantial improvement in the labor market (assuming that reaching the threshold proxies for “substantial” improvement). In addition, the market may not have believed that either (1) a 7.0% unemployment rate would constitute “substantial improvement”, or (2) the Fed would be able to keep rates on hold for that long after the unemployment rate reached 7.0%.

If the Fed had chosen 6.0% – a more understandable threshold, given the SEP’s longer run central tendency range for the unemployment rate between 5.2~6.0% – the unemployment rate would reach the threshold in September 2016. In this case, with the Optimal Control funds rate projected to lift off in the same month, the market may have interpreted the “threshold” as a “trigger”. Given the Optimal Control analysis – which Chairman Bernanke and Vice Chair Yellen seem to favor – we can see why they chose 6.5% for the threshold in December 2012: they had to make sure the “buffer” between crossing the unemployment threshold and the start of rate hikes was neither too long, nor too short.

christiangustafson's picture

Six months, four months, one month ...

How about two weeks?  Just enough time for a terminal pattern to play out.