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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RebelDevil's picture

Yeah, how about fucking FINRA with their ARBITRARY miminum account balance of $2,000 for margin accounts!
I thought shorting was a way for the poor man to free himself from the feudalism, by putting up your savings on margin for the big drop! Well, FINRA fucked that up, didn't they, by discriminating against the poor man instead of just saying 150% of whatever amount!

Maybe this entire financial crisis is proving to us that "Once you lose everything, you're free to do anything."

Dr. Engali's picture

Well you know that's for your own protection. The 'little' people have to be kept down...er I meant to say "watched out for".

Tsar Pointless's picture

Everything except for the barbarous relic is being bid relentlessley since Europe closed.

Moar of the same.

spine001's picture

Funny thing is that all theze girations started when the Fed stated the obvious: that at some point they must stop or else... What does it say about the underlying stability of the system?

Donlast's picture

The bankers bank - the BIS - says the QEs should stop. What could be clearer and what else is there to say. 

ekm's picture

So Tyler, you agree with me now that Tapering Already Under Way since at least March?

SheepDog-One's picture

But can't all be well again? Can't we make stawks green? That's all we need.

Donlast's picture

The barbarous relic is the only collateral standing betwwen many governmnets and debt disaster. And we're suppose to believe it should be devalued against fiat/computer byte currencies? 

SheepDog-One's picture

World economy....or fake money system or whatever you want to call it is clearly in defib again. 

SAT 800's picture

"fake money system"; scans nicely. If we could just get people to use it; maybe as an abbreviation FMS; it could do some social engineering.

Yen Cross's picture

     The usd is starting to revert back to it's 'risk on' selloff profile. The Dow was down 250 and now 70 and the usd is selling off. Before Bernanke last week the usd was bought when the markets rallied.

     If(a big if) that's the case, then the risk currencies should rally if the markets continue to rally. (instead of being sold off on usd strength)

Bangin7GramRocks's picture

So.......it's not all over yet? I thought Bernanke realized last week that he ran out of invented money. That's pretty funny. He should just announce $200 billion per month just to fuck with people who say it can't be done. I really want a 2% 30 year mortgage and I think it's coming.

semperfi's picture

" i.e. Fed tapering already underway."

Nope. Wrong.  There will be no tapering.  There cannot be tapering. Tapering will not be permitted, cannot be permitted.  That's my bet anyway.  There is no tapering - FED still buying $85 billion debt per month.  The next move by FED, announced or unannounced, will be to INCREASE QE. 

Tapering will begin once the hyperinflationary blow off has occured.  That is the only way tapering will happen.

The only thing that has changed is perception - nothing more.

fijisailor's picture

It isn't all fixed yet.  For PMs still, good news is bad news and bad news is bad news. 

Jake88's picture

All the back stepping and confusion from the Fed says it all. These markets are fucked. If the Fed is in panic mode can the markets be long to follow.

Yen Cross's picture

     Today is a big POMO day. ($3 - 3.75 billion.)

semperfi's picture

The QE will continue until morale improves. 

SAT 800's picture

Yeah. That's about the size of it. What a world.

Petrus Romanus's picture

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

 

What horseshit that headline is! Just watched Zion's own Claiman(or however you spell it) on FOX talk to the original thief Fogle (of Vanguard) pump sunshine into the abyss. There is nothing wrong everything is fine! As the markets climb out of the basement based on nothing but ego and absence of anything approaching fundamental growth. What the FUCK is gowing on?! Don't the US markets, in at least some minimal way, need to reflect the foreign markets? The illusion is gone for the rest of us!!!!