Market's 'Hall Pass' Is Gone: "Bad News Is No Longer Good News"

Tyler Durden's picture

It has seemed that the Fed's liquidity back stop has provided excuse after excuse for whatever macro-, micro-, or event-risk driven problems that market has faced. But now, as Morgan Stanley's Adam Parker notes, the big outcome from the earlier-than-expected start of tapering is that going forward, "bad economic news will be bad for markets." The market knows and most Fed governors know there are diminishing returns to QE’s efficacy, and we have shown it here. So, something new and massive would be required in order for poor economic news - should it surface - to be rewarded the way it has been for much of the past year."  What is more concerning to Parker is that diminishing returns to the existing QE are already an implicit form of tapering and if the Fed wanted to maintain its impact on the market, it would have to expand QE - i.e. Fed tapering already underway.


Via Morgan Stanley's Adam Parker,

We think the Fed is aware of the diminishing returns to QE, and in the face of stabilizing economic data, this led them to signal that they would begin to withdraw from the program. We have been saying for some time that “good economic news is good for markets and bad economic news is good for markets” or that the market had a “Hall Pass” until July. Well, we think the Hall Pass is over and that this regime changed last week. The big outcome from the earlier-than-expected start of tapering is that going forward, bad economic news will be bad for markets.

The market knows and most Fed governors know there are diminishing returns to QE’s efficacy. So, something new and massive would be required in order for poor economic news – should it surface – to be rewarded the way it has been for much of the past year. On the flip side, we don’t think we will remain in a prolonged environment where good news is punished. After all, the market has already become anticipatory of the coming tapering and ultimately the tightening a couple of years down the road.


The early response of the S&P 500 to QE showed a positive and significant correlation to weekly balance sheet changes. While no longer significant, this correlation remained positive until April 17, 2013. Recent correlations have been negative to flat.


This situation – a strong initial response, followed by weaker subsequent impact – is reminiscent of the diminishing returns we observed late in QE2. Perhaps even without tapering, the current program may soon be inadequate to further influence equity markets.

We think the Fed knows this, and hence, 2 months later, had to signal that they would begin to withdraw from the program. We have been saying for some time that “good economic news is good for markets and bad economic news is good for markets” and that this regime will change.

We think last week was a big deal, because now bad economic news will be bad for markets. The market knows and most Fed governors know there are diminishing returns to QE’s efficacy, and we have shown it here.

So, something new and massive would be required in order for poor economic news, if it surfaces, to be rewarded the way it has been for much of the past year.

Diminishing returns to the existing QE program complicate evaluation of the impact of tapering on equity market performance. Said differently, diminishing returns are already a form of Fed tapering, and the Fed should actually be expanding its QE if it wanted to maintain its impact on equity markets.

From the standpoint of the S&P, Fed tapering is already underway.


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Freeman Tilden's picture


Before book-credit became common, and in the times when commerce was effected through the circulation of hard money, the natural recourse of the projecting magician was the debasement of the metal coinage - every "clipping" in silver or gold content meaning, of course, a profit to the source of issue or a reduction in the debt. Gresham´s Law (that bad money drives out good money) dates from such a period. The law is absolutely correct in essence: for while it is true that a limited amount of debased money can be put into use alongside the good coinage, it is also true that the process of debasement is an accelerating one, just as is to a greater degree the issue of unredeemable paper; so those who quarrel with Gresham´s statement are merely indulging in a quibble.

But it must also be notet that when the currency measure is debased the effect of such an act really waits upon the general perception that a fraud has been committed. This is important to realize, for when inflation takes the form of the issue of bank credit or iredeemable paper, it likewise hold true. Much has been written about inflation, but in the statement of the case against this kind of financial assassination of the small capitalist, two vital facts are commonly neglected, and for want of a lucid statement in the first days of an inflationary program. These two facts are:

1. The vital prerequisite of an effective inflation, wich will result disastously to the creditor position, is the intent to falsify the true economic position of a nation, or to relieve the debtor at the expence of the creditor. Where there is no such intent, there may be a temporary inflation, not harmful, possibly benificial - and it will contract itself when is work is done.

2. Infaltion, whether of bank credit or of paper currency, cannot be effective until the larcenous purpose is generaly comprehended. This explains why in 1933 and 1934, in the United States, the credit base was enormously extended without any considerable effect upon trade or employment. The credit simply lay inert: business did not care to employ it normally, and there was not sufficient fear to induce its abnormal use. In this period 1933-34, in the United States, prices rose, but not because of inflation. A similar case is observed in all paper-money expansions. At first the money makes only a short turn and goes back into the banks. Prices do not immediately rise, because the fraudulent purpose is not understood.


A World in Debt, by Freeman Tilden 1935


Lets Buy The Dip's picture

Tilden, would be rolling in his mother effing grave if he saw what was happenign here in the real world. We are now run by crooks, and wesals in suits. A joke really. 

The weekly charts on the SPX here => looks like doggy doo doo on toast really.

This fed tapering is BS really, but had to happen. Think about the lies, and then more lies to cover up those lies. What a world in which we live. 

gjp's picture

yeah maybe, but for today looks like Slaugterer is going to be right, ramp to near green on both bonds and stocks while PMs continue to suck wind ...

101 years and counting's picture

anyone buying this dip will be slaughtered.  the article forgot to mention, that good economic news is even worse than bad news.  ie, a taper even sooner than expected.

James_Cole's picture

Dip buying has been going well since this morning. We might even close green, horray for capitalism, yay free markets!

Just don't fight it, let the free money flow into your account. 

Gringo Viejo's picture

America is a nation with an economy dependent on and controled by gangster finance. As such, we WILL be economically destroyed.
I take no pleasure in saying this. God help us.

fuu's picture

-66.66 and rising.


Groundhog Day's picture

"I was only kidding, trying to get a rise out you vanessa"

Austin Powers

Stoploss's picture

3 and 6 month auctions today, that's all. Magic Monday is back.

DeadFred's picture

Last Friday my crystal ball said today would end up about -4 on the S&P. This morning I figured I needed to get it degaussed yet again. Maybe I'll hold off on making that appointment. Exciting times later this week as it head off the cliff.

Edit at 4 PM: Dang, I wish I could find that Gypsy er <Nomadic Eastern European> fortune teller who sold me this thing!

xtop23's picture

Hrmmmm bad is now bad..... annnnd I've gone crosseyed.

"It's like I'm Han Solo, you're Chewbacca, and we're stuck in that fucked up bar!"

insanelysane's picture

It just means that bad news has been outlawed.  The Ministry of Plenty will over achieve every reporting cycle.  Rally on.

NotApplicable's picture

I'd say it means that hard times are now to be accepted as the current conventional wisdom.

The tell will be when/if the MSM starts dissing the false housing/economic recovery.

VonSalza's picture

shut up and print moar monies

underman's picture

Europe's closed.  Ramp it up!

orangegeek's picture
"Bad News Is No Longer Good News"


How can this be??   This is so wrong.

RebelDevil's picture

No, bullshit Tylers! Bad news truly is good news in the cyclical sense. As more people suffer, go hungry, or even go homeless through the on-going market crashes, more people will wake the fuck up and get angry, to the point where the people fight the "financial terrorists" to get their lives.
But we all know this is the great and global civil war.

kito's picture

fed is laughing, screams fire in a crowded theatre.......... watching everybody run around banging into each other looking for the exit sign..........then flips on the lights and screams "gotcha"...............back to you seats was only a drill........dow ramping towards green..............

fonzannoon's picture

It is, but is has been chopping lower for weeks. that seems to be the new normal. Treasury rallies look like they will continue to be sold and crude is just stiing there laughing. 

kito's picture

i dont see anything here more than......

a) how the markets will react when it gets real

b) a correction for now that was long overdue

the fed is still in control......his little ones threw a hissy fit when daddy threatened to lower the bottled formula ration.............nothing more than that......

fonzannoon's picture

you are so full of crap and you know it. If you TRULY felt that way you would be giving us your top picks. Cyclicals, Industrials etc.. Instead you quickly fall back on your cash scenario at the first sign of fear.

With that said, this has been a waay too orderly correction in stocks, and I also think it will be over soon. The trend will continue to be down for a while.

The bond market is finally rallying a bit. Lets see if people use it to dump more.

kito's picture

dang straight i fall back on my PHYSICAL cash scenario, and these past few weeks have justified the might as well ask a monkey about stock about as worthless as...well.....99% if all active fund managers!!!!..even if were going to invest in the market....i would buy an index fund......but im content for now.......although im sooooo close to some gold eagles......just in case............

fonzannoon's picture

just don't buy an etf this 3% correction has exposed them as a timebomb.

kito's picture

im not buying any etfs mutual funds etc.....the market is not my friend...............

kito's picture

you are soooo going to owe me a sammich......and im going to rub it in by demanding EXTRA olives and a cookie.........when i lost the sandwich bet with doc......he threw in the cookie and a drink..............sheesh......

fonzannoon's picture

everyone on here today is distraught to find out that the rigged market remains rigged.

I never said anything....ANYTHING....about a cookie.

kito's picture

chocolate of those big know....the ones that look so impressive they have them in their own separate case next to the register........ 

fonzannoon's picture

We should all be asset managers. All we have to do is state the obvious.

kito's picture

ha.....i liked the part where gundlach said to buy the most hated asset on the planet.....i swore he was going to say gold before i finished reading the sentence.......oh well..............

Dr. Engali's picture

jynx...sort owe me a ham sandwich.

kito's picture

lol...nice cookie this time :)

Dr. Engali's picture

I thought the number one hated asset class on the planet was gold. After all it's not backed by anything. Am I wrong about that?

Dr. Engali's picture

Hey when we made the bet I believe that you were the one who included" all the fixens" or something along those lines.

NotApplicable's picture

Kudos. The only thing you forgot was the line "We're doing this for your protection."

SheepDog-One's picture

They 'got someone'? Not me anyway.

ChaosEquilibrium's picture

BS.....Whoever just bought 300 billion in 10yr over past hour has RAMPED ALL EQUITY NOW a 'FLOOD into Treasury Safety' is NOW a Signal to BTFD in risk???

insanelysane's picture

Damn kids stole my pocket change and opened a trading account.  Either that or the London Whale is in a cubicle next to Kevin.

TrustWho's picture

Ye of little faith, Daddy Bernanke has unleashed the bots.

SheepDog-One's picture

Big deal, 70 months of this BS and nothings any what's another day going to get them?

Urban Roman's picture

The news was so bad, they had to prime the bots and launch 'em three hours early. 

In a couple more weeks, they will be launching the bots at 9:30 AM.

TrustWho's picture

Hey Dog, not true, the rich are richer and there are more poor. This has been the point and continues to be the point. Dollars still buy land, protection, servitude, and most importently, BUNGA, BUNGA. 

fonzannoon's picture

look at crude get crushed under these deflationary pressures.

Dr. Engali's picture

It's looking like they are trying to squeeze the shorts now.

ekm's picture

Margin calls on  leveraged long hedge funds in crude ---imminent


Same scenario as in 2008 - FTC probe


Oil at $15 in 6 months or less, IMO

kito's picture

ekm i love ya man.......but oil could never go that low unless the earth started moving out of orbit.......................

ekm's picture

likewise kito, but what I'm not saying that it's gonna stay ther forever

just for a very short time

Dr. Engali's picture

If you don't think that a bunch of weak handed shorts have jumped on this down tick you're crazy. How many people have been waiting to cash in on the big plunge only to get burned? Like I said. ...when this thing collapses nobody will make any money.