Stocks Slide Following Permadove Chuck Evans' Attempt At Math

Tyler Durden's picture

Moments ago, GETCO's rampathon algos did not like what they heard coming out of the mouth of the Fed's biggest permadove, Charles Evans.


That thing was math, and it was as follows:


Supposedly this was news to someone although it wasn't news to our readers who knew since September that not only will the Fed's balance sheet hit "a very large" $4 trillion by 2014, it would hit a "very larger" $5 trillion by 2015, when the Fed may realistically start abandoning QE.

Obviously it was the concern creeping in Evans voice at the size of this number, that forced various vacuum tubes to give up the day's gains.

To think: all the Fed had to do was engage in simple first grade math to show just how ludicrous its own policy is getting.

But wait, there's more.

Because for all the jawboning by the Fed, the reality is that even if it were to halt QE, the resulting plunge in stocks would force Bernanke, or Yellen, or satan forbid Geithner, to reactivate it post haste as it is the only weapon in the Fed's arsenal.

So here is some even more critical math. Since the Fed will most likely continue to monetize debt at some ungodly pace for the next 18 months or more, with or without tapering and brief intervals, what it will run up on is what we wrote about nearly a year ago: the exhaustion of monetizable bonds in the private market.

Indeed, as we explained back in September, at the current pace, the Fed would end up owning a ridiculous 65% of all TSYs in the 6Y-30Y bucket, meaning liquidity would be severely limited as a result of the Fed's endless bond monetizations in this most critical and formerly liquid of bond markets. Now when one assumes that the Fed may indeed reduce the amount of deficit funding it needs and thus forcing the Fed to buy even more bonds from the secondary market, this number rises to a mindblowing 70%!

For those who forgot, here is the math that matters:

In terms of outstandings, we expect the Fed to end up owning more than 33% of the total market by the end of 2014, which is also significant since many mortgage investors tend to reinvest paydowns. These investors would need to be persuaded to sell MBS to the Fed, which would require tighter spreads.


Treasuries: Fed will own a 45-50% in the long end in a year




Table 3 and Table 4 simulate the Treasury universe during the course of 2013 and 2014. Fed ownership across the 6y-30y portion Treasury curve is likely to reach about 50% by end of 2013 and an average of 65% by end of 2014. Given the current issuance schedule, we believe it is very likely that the Fed changes its purchase buckets through the next round of Treasury purchases. In particular, the Fed will begin to run out of issues in the 8y-10y bucket and will be forced to buy newly issued 10y notes should they choose to maintain the same distribution.

That's right: there is a possibility the Fed would end up owning over two-thirds of all Treasurys with a maturity over 6 years by the end of 2014, especially now that the US suddenly needs to issue less primary debt than expected previously.

Extrapolating further: 80% by 2015; 90%+ by 2016 and #Ref! by 2017 and onward.

And that, ladies and gents, is the real math that the Fed does not want to talk about.

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Zola's picture

That's nowhere near large enough. The fed is currently targeting aleph 0 . Then will come aleph 1 ,2... on to infinity and beyond!!!!

King_of_simpletons's picture

4T is nothing. Off you go to 10T and then on to 16T, unless the debt goes to 20T first.

T'is a race between Debt and Federal Reserve Balance sheet. Fed is playing catch up.

There is always Quadrillion after Trillion.

FL_Conservative's picture

Large, larger, largest.  What's a few trillion amongst friends?

ndotken's picture

To QEnfinity and Beyond!!!!

pmbug's picture

A trillion here, a trillion there, pretty soon you're talking real money.

Hard1's picture

FED just added the word largerest to the dictionary.  The first context in which it was used is "... growing still more the largerest reserve balance..."

espirit's picture

MACD on the $INDU looks to me like it's reached it's peak and about to roll over.  Not much room to rise...

Fwiw - Matrix metrics in Bizarro World.

long-shorty's picture

the market is never going to go down ever again.

In fact, I'm changing my username to long-longy at the nearest opportunity.

fourchan's picture

so we were free, then came the fed 1n 1915,

then they confiscated all our gold and silver replacing it with promissory notes,

then they made the demand notes unredeemable for anything,

then they devalued the worthless notes to millions of times of dilution,

then they sold all our gold to china. leaving us all debt slaves.


one day the words the fed and treason will be synonymous.

ebworthen's picture

1913, but you are right.

1913 was the first year of the personal Income Tax too.

Coincidence?  Nah.  The FED is treasonous now and has been since it's establishment.

What else but Treasonous do you call a non-governmental agency of bankers that punishes savers and the responsible while devaluing the currency and mis-allocating capital and resources to discourage investment in people and benefit banks?

FED = crooked cabal of concupiscent bankers.

tango's picture

As a coin collector let me correct you a tad.  Gold coins virtually disappeared after the Civil War, to be used for foreign exchange since it was seen as inviolable. Thus continued until WWII.  The government has frequently collected coins for the purpose of resizing coins to reflect a change in value.  In any case, no one considered it strange.  The public overwhemlingly preferred paper money due to ease of use.  Trust in the dollar was universal since any bankd would exchange paper for gold money at any time. 

ejmoosa's picture

If I ran the Fed, and I was gonna be that heavily invested in one single thing, I would have chosen gold instead of IOU's

nevadan's picture

But gold is not money....don'tcha know?

babylon15's picture

But, it gets worse.  You can unload a $2 trillion balance sheet over a reasonable time frame.  But how do you unwind a $5 trillion balance sheet?  Even at just $250 billion a year it would take 20 years.


We're looking at a 2035 Fed exit.  And that's if things go *well*.

insanelysane's picture

I don't see this becoming a problem until the balance sheet is 100% of GDP.

newworldorder's picture

None of this is a problem. It becomes problametic only if ;

-  US loses reserve currency status.

-  Loses fiath and belief by world wide investors in the "full faith and credit of the US government." US not able to pay interest on the debt.

-  A black swan event causes disruptions in world commerce, that the major powers cannot fix.

Cognitive Dissonance's picture

It's all just talk of winding down the Fed balance sheet. We're being psychologically eased into the new normal balance sheet......whatever that amount is when they say "now". 

Stoploss's picture

Yep, there's that fucking MATH showing up again to fuck everything up..........


HelluvaEngineer's picture

Who the hell invited him, anyway?

Stoploss's picture

Almost forgot.

For all of the "Don't fight the FED'ster's" out there, with a friend like MATH, who needs enemy's??

Math speaks when not spoken to, out of line, and very loudly, LOL!!

CrashisOptimistic's picture

"it would hit a "very larger" $5 trillion by 2015, when the Fed may realistically start abandoning QE."


Wait, what?  What is supposed to change by 2015 that makes it "realistically" the right time to stop QE?  What is the magic that happens in 2015?

Chief Falling Knife's picture

Presumably that's about when the BLS will be reporting 5.0-5.5% unemployment(no doubt with no real improvement in total labor force numbers), and potentially 3.5+% GDP 'growth'(with maybe a tiny bit of underlying number fudging.. but who'll notice.. or care).

Dollar Bill Hiccup's picture

Ha, that's why they MUST start buying stocks (openly), like the Bank of Israel.

Because they do not want to distort the BOND MARKET !

Cdad's picture

Math?  Who on Wall Street, or at the Eccles building, does math anymore?  I thought math had been outlawed?   

If doing math is the new trend, I would recommend folks start getting ready for...unpleasantness.  

oklaboy's picture

Math is irelevant.....resistance is futile.....sci fi meets reality

TheMeatTrapper's picture

This is the 'new math'. It works different. It's better. 

ekm's picture

Yes, but oil did NOT slide

CrashisOptimistic's picture

Oil, and I mean right and proper crude with 5.6 million BTUs in a barrel (not anemic condensate and NGLs like comes out of shale), traditionally increases its output from the ground when price goes up, because harder to access bubbles become profitable.

Well, that was the old normal.  In the new normal, when price goes up, you smash consumption because of the lack of slack now.  Raise price, lose consumption, people can't buy it.  If consumption is down, you don't drill those smaller bubbles, because by the time you get budget for them the price falls from the consumption fall. 

Hence, and this is very serious stuff, oil output from the ground is ceasing to show price response.  Raised price doesn't raise output.

Chief Falling Knife's picture

Everyone buying this 'dip' before Elevation Tuesday?  /sarc

timbo_em's picture

Quick, get Benny and the Inkjets back on stage!!

GubbermintWorker's picture

Ba Ba Ba Benny and the Jetsssssssssss!

LawsofPhysics's picture

Certainly there will be buyers for all those assets, it's not like they were marked to "fantasy"...   ...oh wait, nevermind.

1C3-N1N3's picture

In the absence of voluntary buyers we will see compulsory buyers. Many, many compulsory buyers.

dimitrir's picture

What is Paul Krugman take on this?

spine001's picture

Simple, that we have not learned the lessons of the last 30 years of economics. That we should also be increasing our budget deficit simultaneously with the FED's QE. When challenged about it already being way over 1 trillion a year, his answer is that it doesn't matter...


css1971's picture

Not nearly enough money has been printed. Double it. Triple it. It'll solve all the problems.

knukles's picture

You been reading way the fuck too much Krugman.  LOL
A buncha my CA liberal buds really and truly believe that crap.
If it don't work exceptionally well then tax, regulate, preempt, expropriate and redistribute the stuff.
And if it works great, has enough rich person fatty tissue in it to tax, regulate, preempt, expropriate and redistribute.

Land of Milk and Honey

HD's picture

Charles Nelson Reilly's picture

what stars.... the fucking asteroid that will be headed straight for our financial system?

so I guess Yellen who is basically Helicopter Ben but operating from a Super Stallion military chopper is gonna stop....yeah... sure dude!

HD's picture

Now, now, it's just speculation. I have no illusions that the Fed is ever going to stop printing - they have to stay at 0% until they simply can't anymore. I am suggesting - the Fed needs a politically acceptable excuse to keep upping QE - It's hard to convince people you need to print endlessly if everyday is a new all time high.

They MIGHT just crush the markets for a month or two just to rationalize "saving" them with even larger QE. Everyday could be a 5 billion Pomo - why not?


knukles's picture

You pessimists!

Yellen schmellen watermellin...

She ain't gonna get the job.  Timmah is your new money Lord
Timmah of the Fix It Again Fame
Timmah has the experience
Timmah he who paid not his due taxes
Timmah who has trouble tying his pajama bottoms
Timmah of the concerned, insecure looks
Timmah of the Center of the World Financial Stage

Just think how perfect he and John Kohn Kerry will look together on the Earth's Central Platform, Saving Mankind from Itself, Clueless and Lost ...

Captians of the Shit

HD's picture

From what I've read - Yellen is, get ready - "too dovish". Not that whoever gets it won't print like there is no tomorrow; all about optics - the policy will stay the same.


spine001's picture

Buying and leveraged at least 10 to 1 if not 70 to 1 as the European banks are!

jubber's picture

FFS we are now back positive! this is just total bollox

spine001's picture

there is no real price discovery, that is fu all the markets...

Freedumb's picture

But we're not WAY positive, so in this market that's kinda the same thing as being down

Cursive's picture

If you wear a tin foil hat, this was the plan all along.  The Fed/Banksters end up *owning* everything and our economy falls back to hoof-it-everywhere Medieval times.


* Problem for the "owners" is that things will become so bad, order will have to be restored by some kind of military authority and title will probably not survive the forthcoming mayhem. 

monad's picture

Congressman* James Traficant R OH

*Tinfoil hat optional