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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Mon, 05/20/2013 - 14:07 | 3581060 Zola
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!!!!

Mon, 05/20/2013 - 14:24 | 3581113 King_of_simpletons
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.

Mon, 05/20/2013 - 14:36 | 3581162 FL_Conservative
FL_Conservative's picture

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

Mon, 05/20/2013 - 14:38 | 3581180 ndotken
ndotken's picture

To QEnfinity and Beyond!!!!

Mon, 05/20/2013 - 14:58 | 3581254 pmbug
pmbug's picture

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

Mon, 05/20/2013 - 17:02 | 3581730 Hard1
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..."

Mon, 05/20/2013 - 14:36 | 3581166 espirit
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.

Mon, 05/20/2013 - 19:47 | 3582296 long-shorty
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.

Mon, 05/20/2013 - 14:39 | 3581184 fourchan
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.

Mon, 05/20/2013 - 15:13 | 3581284 ebworthen
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.

Mon, 05/20/2013 - 16:04 | 3581539 tango
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. 

Mon, 05/20/2013 - 16:31 | 3581630 ejmoosa
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

Tue, 05/21/2013 - 21:09 | 3586214 nevadan
nevadan's picture

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

Mon, 05/20/2013 - 14:06 | 3581063 babylon15
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*.

Mon, 05/20/2013 - 14:08 | 3581071 css1971
css1971's picture


Mon, 05/20/2013 - 14:13 | 3581088 insanelysane
insanelysane's picture

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

Mon, 05/20/2013 - 14:38 | 3581177 newworldorder
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.

Mon, 05/20/2013 - 16:24 | 3581608 resurger
resurger's picture


Mon, 05/20/2013 - 14:27 | 3581127 Cognitive Dissonance
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". 

Mon, 05/20/2013 - 14:06 | 3581064 Stoploss
Stoploss's picture

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


Mon, 05/20/2013 - 14:12 | 3581086 HelluvaEngineer
HelluvaEngineer's picture

Who the hell invited him, anyway?

Mon, 05/20/2013 - 15:23 | 3581356 Stoploss
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!!

Mon, 05/20/2013 - 14:39 | 3581183 CrashisOptimistic
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?

Mon, 05/20/2013 - 14:52 | 3581226 Chief Falling Knife
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).

Mon, 05/20/2013 - 14:08 | 3581068 Dollar Bill Hiccup
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 !

Mon, 05/20/2013 - 14:09 | 3581074 Cdad
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.  

Mon, 05/20/2013 - 14:22 | 3581112 oklaboy
oklaboy's picture

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

Mon, 05/20/2013 - 15:24 | 3581362 TheMeatTrapper
TheMeatTrapper's picture

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

Mon, 05/20/2013 - 14:10 | 3581079 ekm
ekm's picture

Yes, but oil did NOT slide

Mon, 05/20/2013 - 14:43 | 3581189 CrashisOptimistic
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.

Mon, 05/20/2013 - 14:11 | 3581082 Chief Falling Knife
Chief Falling Knife's picture

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

Mon, 05/20/2013 - 14:13 | 3581087 timbo_em
timbo_em's picture

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

Mon, 05/20/2013 - 14:16 | 3581093 GubbermintWorker
GubbermintWorker's picture

Ba Ba Ba Benny and the Jetsssssssssss!

Mon, 05/20/2013 - 14:18 | 3581098 LawsofPhysics
LawsofPhysics's picture

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

Mon, 05/20/2013 - 14:50 | 3581217 1C3-N1N3
1C3-N1N3's picture

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

Mon, 05/20/2013 - 14:20 | 3581103 dimitrir
dimitrir's picture

What is Paul Krugman take on this?

Mon, 05/20/2013 - 14:26 | 3581121 spine001
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...


Mon, 05/20/2013 - 14:52 | 3581224 css1971
css1971's picture

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

Mon, 05/20/2013 - 14:59 | 3581262 knukles
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

Mon, 05/20/2013 - 14:31 | 3581115 HD
HD's picture

Mon, 05/20/2013 - 14:34 | 3581155 Charles Nelson ...
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!

Mon, 05/20/2013 - 14:51 | 3581206 HD
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?


Mon, 05/20/2013 - 15:05 | 3581276 knukles
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

Mon, 05/20/2013 - 15:16 | 3581333 HD
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.


Mon, 05/20/2013 - 14:24 | 3581116 spine001
spine001's picture

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

Mon, 05/20/2013 - 14:24 | 3581118 jubber
jubber's picture

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

Mon, 05/20/2013 - 14:27 | 3581129 spine001
spine001's picture

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

Mon, 05/20/2013 - 14:35 | 3581158 Freedumb
Freedumb's picture

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

Mon, 05/20/2013 - 14:26 | 3581124 Cursive
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. 

Mon, 05/20/2013 - 14:41 | 3581186 monad
monad's picture

Congressman* James Traficant R OH

*Tinfoil hat optional

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