BNP: "The Bigger The Rally, The Worse The Sell-Off Will Be" And "When The Fed Tightens, Bad Stuff Happens"

Tyler Durden's picture


BNP's Paul Mortimer-Lee knocks it out of the park today with not one, not two, but pretty much all quotes in his latest note, "The Fed and QE: Hotel California?" A random sampling thereof (full note shortly).

From BNP

  • History tells us that when the Fed tightens, bad stuff happens. The bond sell-off this summer on the mere announcement of QE ‘tapering’ is a case in point.
  • Bonds will suffer when actual ‘tapering’ is announced. When it starts, we are likely to trade through the previous high for yields.
  • Equities may look fairly immune at first, but as QE buying fades and eventually stops, take care. Any equity sell-off will have a knock-on effect on bonds and the economy.
  • How large the effect on the markets will be will depend on how much the markets rally while QE is ‘on’. The bigger the rally, the worse the sell-off will be.


Our overall assessment is that when the Fed [ZH: again] decides to ‘taper’, there will be an adverse effect on markets. Bonds will suffer from a higher term premium and an upward revision of expectations about future levels of Fed funds. Equities are likely to suffer, too. How big the selloffs will be will depend on the circumstances – how robust the recovery looks, to what extent inflation remains quiescent and to what extent the current period of maintained QE leads to excess valuations in markets. Those markets that sold off most during the ‘taper tantrum’ tended to be those markets that had rallied most in previous months.

Clearly, this is one of the disadvantages of QE – one of its purposes is to distort markets. When QE ends, those distortions begin to unwind. Because of the disequilibria in financial markets under QE, relative valuations, as well as valuations of the risk-free asset, are distorted. Markets may go through considerable gyrations as they try to find the “right” constellation of equilibrium prices. It is possible that sufficiently vigorous reactions could adversely affect the economy.

It may be difficult to foresee all the effects of ending QE. After all, except with relatively brief breaks, the Fed has been using its balance sheet to stimulate the economy since 2009. Markets and the economy have gotten used to it. Will there be unexpected effects when QE ends? Seems like a good bet. What they will be is more difficult to say.


In the 1977 Eagles song, Hotel California, a luxury hotel appears inviting and offers a tired traveller comforting relief from his journey. It turns out to be something of a nightmare, however, and he finds that "you can check out anytime you like, but you can never leave".

Does that sound a little bit like QE and the Fed? The FOMC signalled its intention to check out of QE at its June meeting, but by September, it found it could not leave.

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Wed, 10/30/2013 - 10:55 | 4104690 hugovanderbubble
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Agree with BNP

Wed, 10/30/2013 - 10:58 | 4104704 insanelysane
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This article is completely silly.  The underlying economy is strong.  The FED isn't the reason the markets are at all time highs.

- Stevie "over lying" Liesman

Wed, 10/30/2013 - 11:03 | 4104723 LawsofPhysics
LawsofPhysics's picture 85 billion per month quickly becomes 180 billion per month.

I wonder what the November schedule will look like?

Wed, 10/30/2013 - 11:05 | 4104732 Obese-Redneck
Obese-Redneck's picture

The bad stuff happens when former chief Kessler becomes a security guard at you local Walls-Mart packing an attitude because he pissed away everything, EVERYTHING! because John Kerry is coming for yer guns LOL, whatta douche!

Wed, 10/30/2013 - 11:13 | 4104765 Headbanger
Headbanger's picture

Whoa!!   Check out the spike in VIX!

Wed, 10/30/2013 - 11:24 | 4104783 nope-1004
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Title of this thread confirms tapering will NEVER happen.

But then again, neither will Exit Strategy, Green Chutes, Hope & Change, Strong Dollar Policy, No monetizing the debt,.........

The lies emanating are extreme and obvious.  The truth is the FED will kill the dollar by printing to oblivion to keep the current banking elite in control, in the mean time placating the masses by the illusion that stawks are ok and at all time highs.

The economy is a joke, really.


Wed, 10/30/2013 - 11:20 | 4104792 Osmium
Osmium's picture

Fat Finger? Or are they losing control of all the spinning plates?

Wed, 10/30/2013 - 11:25 | 4104813 Pool Shark
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Bad things happen?

But, that's unpossible! A Nobel Prize-winning economist said it would be a "non-event!"


Wed, 10/30/2013 - 11:27 | 4104826 Headbanger
Headbanger's picture



Wed, 10/30/2013 - 11:07 | 4104742 DoChenRollingBearing
DoChenRollingBearing's picture

Physical gold and physical US$ would be good diversification at this point.  IMO, this is a good time to SELL stocks and bonds.

The Fed and .gov have brought us to the brink of disaster.  How do we get out of all of this?

As ZH-er "NoDebt" wrote last night:

No easy answers.

Wed, 10/30/2013 - 11:17 | 4104772 DoChenRollingBearing
DoChenRollingBearing's picture


Edit: wrong thread, sorry.

Wed, 10/30/2013 - 11:08 | 4104745 DaddyO
DaddyO's picture

But someone just told us that the "Unwind" didn't matter, sheesh you guys get it together!

We're so close to the final tipping point that the info is coming so fast and furious it will boggle the mind if you let it.

Step back, reassess, and realign your thinking.

Returning to a simpler way of life is the best protection in the coming unwind.

Self-reliant living is the absolute surest way to protect yourself and your loved ones from the CB's and the harm they have unleashed.


Wed, 10/30/2013 - 11:18 | 4104774 NoDebt
NoDebt's picture

Do you normally listen to economists for investment advice?  They're about the biggest idiots on the planet when it comes to that stuff.  Only doctors are worse.

BTW- I am an economist.  But I've sworn that stuff off and I'm feeling much better now.

Wed, 10/30/2013 - 12:02 | 4104960 DOT
DOT's picture

There are real things (structures) and unreal things (measurement).  I feel ya bro'. If I can take you back a moment, do you remember the development of the general non-zero sum game by vonNumann and Morganstern? The neccessity of a 'ficticious' but essential third player, that has no ability to affect the outcome,yet retains the ability to alter the play. Some days I think I am the third player. Somes days I think it's the Fed (it makes me laugh!) Economists are soo funny.

Wed, 10/30/2013 - 13:47 | 4105452 spekulatn
Wed, 10/30/2013 - 11:10 | 4104754 Bearwagon
Bearwagon's picture

All the better. The more it becomes, the faster the shadows will run out of collateral. ;-)

Wed, 10/30/2013 - 11:14 | 4104769 NoDebt
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A wall St. guy namend Mortimer who ISN'T yelling "BUY!  BUY!  BUY!"??

Does he have the fix on Frozen Concentrated Orange Juice or something?

Wed, 10/30/2013 - 12:05 | 4104971 BoNeSxxx
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Whiskey... Allllllllll you want.

Wed, 10/30/2013 - 11:18 | 4104778 game theory
game theory's picture

My guess is 85b/month until the people who are stockpiling all the cash learn some economics.  All the people and companies piling money into the banks and short-term treasuries...someone needs to do a profile on them...since it is halloween it would be appropriately scary stuff.

Wed, 10/30/2013 - 11:04 | 4104729 Running On Bing...
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If you agree, get long, push it up. Let's have some fun.


Wed, 10/30/2013 - 11:11 | 4104750 Headbanger
Headbanger's picture

Yeah no shit.  The bigger they are....

But what's going to be a lot worse about this crash is it will leave the populace stunned, dazed and bewildered that the Federal Government was so powerless to prevent it with all the money wasted trying. The despair will be palpable and followed by rage for trusting such imbeciles with their stupid economic theories! 

Don't ever admit you were or are an economist when the system collapses!

And be prepared for some pandemic to be launched by the government as a means for them to stay in control and power when the economy implodes!

They will blame it on terrorists of course!

Wed, 10/30/2013 - 11:33 | 4104854 OldE_Ant
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It may leave the 40% FSA stunned, dazed, and hungry, but the rest of us knew and know what is coming.  We planned, we are ready.

I will be the first to tell anyone who didn't see it coming to step out into that intersection because that is about as far as they deserve to go.

Or better, oh you didn't see that coming.  Don't worry you won't see this coming zombie.  "blam"

Wed, 10/30/2013 - 11:45 | 4104902 Headbanger
Headbanger's picture

Don't waste your ammo like that. Unless you want to serve up some Zombie for lunch maybe. Don't forget the fava beans and a nice Chianti.

Wed, 10/30/2013 - 11:13 | 4104768 bubblemania
bubblemania's picture


Wed, 10/30/2013 - 10:55 | 4104691 King_of_simpletons
King_of_simpletons's picture

The only reason Bernanke got kicked out and and replaced with Yellen is because Ben was not printing fast enough. His hands became sore very fast. Yellen is coming prepared with strong gloves. She is going to crank the printing presses like there is no tomorrow. Whiners and conspiracy theorists can cry hoarse as much as they want, but the fact of the matter is that this market is headed to 20K. Whether you make money off of it is your choice. Stock market is the only place to make money these days. Fed can never tighten. Look at Japan. Decades++ without any tightening.

Wed, 10/30/2013 - 11:05 | 4104726 in4mayshun
in4mayshun's picture

"...when the FED tightens..."
That's funny. And when I win the lottery my life will improve dramatically.

Wed, 10/30/2013 - 11:13 | 4104764 rubearish10
rubearish10's picture

it is truly funny. Btw, you have better odds on winning the lottery!

Wed, 10/30/2013 - 11:06 | 4104736 earnyermoney
earnyermoney's picture

"Look at Japan ..."

You might want to pull up a 30 Yr chart of the stock indexes in Japan. We're 15 years behind Japan but we're heading for the same conclusion.

Wed, 10/30/2013 - 11:20 | 4104791 FieldingMellish
FieldingMellish's picture

All hail Mr. Yellen.

Wed, 10/30/2013 - 11:23 | 4104809 banzai401
banzai401's picture

ben wanted out, ... he's bored with the job, and wants to
go back being a teacher, where he can always be treated
with respect.

yellen, wants the job, sort of for the same reason
hillary bitch wants to be president, ...power tripping

now that the FED is the only buyer of USA debt, that makes
the FED 'decider' the most powerful person in the USA.

I'm surprised hillary bitch doesn't want the job,

Essentially there is no taxpayer anymore, ... its only
the FED, thus the FED is the owner, ... albeit with
monopoly money, ...but its all a game anyhow.

Wed, 10/30/2013 - 10:55 | 4104694 Dr. Engali
Dr. Engali's picture

You're damn right you can never leave. TPTB are locking down all exits as we speak.

Wed, 10/30/2013 - 11:17 | 4104779 banzai401
banzai401's picture

Well this is to be expected if you bothered with your history,

Smart Jews got out after 1932, dead-jews waited until post 1938 to exit, and then it was too fucking late.

Same as now, most of the world doesn't want POOR US trash in their country, here in asia in the past year most places have changed the rules for obtaining long-term visa's.

Then there is the issue of getting your money out, that should have been done prior to 2010.

So talking about 'exit' is a little fucking late. But still I
I think Canada or Alaska, is better or mexico, than anywhere in the USA. Of course you got to have some money, and most americans ain't got shit, ... live paycheck to paycheck, and the world will not accept such lowlifes.

Wed, 10/30/2013 - 11:30 | 4104838 WillyGroper
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"Then there is the issue of getting your money out, that should have been done prior to 2010. So talking about 'exit' is a little fucking late."


2001 Patriot Act.

It's a lot fucking late, Einstein.

Wed, 10/30/2013 - 11:19 | 4104780 kralizec
kralizec's picture

Hotel California.


Wed, 10/30/2013 - 11:42 | 4104886 butchee
butchee's picture

I hate the fuckin eagles, man.

Wed, 10/30/2013 - 11:20 | 4104790 Groundhog Day
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All the cheerleaders (JPM, GS, BNP, BLK, SOCGEN et al) are suddenly coming out with these statements of adverse effects of rising rates? Are they now fully positioned to fuck the sheep one last time before all hell breaks loose or are they just covering their asses so they can later say we told you this would happen (kinda like when they place a stuffer in your statement with all the changes taking place in super fine print so you don't bother to read it)

Inquiring minds want to know

Wed, 10/30/2013 - 11:42 | 4104892 Colonel Klink
Colonel Klink's picture

The key is to already be out of the system.

Wed, 10/30/2013 - 10:59 | 4104709 rubearish10
rubearish10's picture

BNP and SocGen are on the other side of your short position.

Wed, 10/30/2013 - 10:59 | 4104710 Bearwagon
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It ain't over till it's over - but if time is up, time is up.

Wed, 10/30/2013 - 11:01 | 4104718 LawsofPhysics
LawsofPhysics's picture

"When the Fed tightens" - LMFAO!!!


Money is an illusion folks (especially in a fiat world), this is about maintaining power and control over real assets and resources (including the human kind).  Similar to when you child has a temper tantrum, just stand back and wait...

it won't hurt to hedge accordingly either.

Wed, 10/30/2013 - 11:42 | 4104888 Honey Badger
Honey Badger's picture

I don't know how you are invested, but if one believed that the Fed will never tighten again, you would hold minimal cash, maximum precious metals, and some stocks from time to time.  You would certainly hold stocks now, as the masses have not come to the belief that the Fed will never tighten.  Not trying to argue with anyone here, but I was a bit surpised by the negative responses to this article.  What am I missing? 

Wed, 10/30/2013 - 11:44 | 4104898 Sonic the porcupine
Sonic the porcupine's picture

The fed might consider tapering once the dollar is so devalued that people won't bother to stop to pick up a $10,000 bill sitting on the sidewalk.

Wed, 10/30/2013 - 11:01 | 4104719 No Way Out
No Way Out's picture

Meh...Eugene Fama said only yesterday it's no big deal and he's a Nobel Prize winner in economics don't cha know..

(i really hope I dont need to add /sarc here)

Wed, 10/30/2013 - 11:02 | 4104720 rubearish10
rubearish10's picture

....and when FED tightening is announced......

....and if it's not?


Wed, 10/30/2013 - 11:14 | 4104770 CrashisOptimistic
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Pending home sales cratered.  CPI just missed badly to the downside.  Ben's 2% target is a pipedream on that.

Employment (as opposed to unemployment) missed its expectations, also.

If taper truly is data dependent, there is no justification for it.

Wed, 10/30/2013 - 11:02 | 4104721 Calculus99
Calculus99's picture

Remind me, who was it that said 'for every action there's a REACTION"....


Wed, 10/30/2013 - 11:06 | 4104735 LawsofPhysics
LawsofPhysics's picture

Unfortunately there is a big difference between physics and finance.  In finance today, liquidity problems are easily fixed by creating an infinite amount of "credits" out of thin air.  Unfortunately, the calories required for any real business to create an actual product of real value cannot be created out of thin air.

See the problem yet?  In the meantime, could I interest you in a financial "product" of mass destruction?

Wed, 10/30/2013 - 11:14 | 4104766 banzai401
banzai401's picture

Not unlike Rome, once the Roman coin was worthless the food quit flowing to Rome,

Problem it took 500 years, and of course mercenary's took
over the gubmint, today DEA, DHS, FBI, CIA, NSA are all
merc's that have 'gone off the reservation'

How long can it last? So long as the paper money is
valued by the world, that said the majority of the 'world'
wants to see the USA DIE asap.

Simply amazing that the majority here on ZH don't even get it, that the USA has already GONE FULL ZOMBIE.

The walking dead, with their dead money, trading one another, and the gubmint printing fake money to hand-out to keep the zombies shopping.

How long before the world quits filling the shelves of Walmart?

Wed, 10/30/2013 - 11:17 | 4104776 CrashisOptimistic
CrashisOptimistic's picture

You do realize any kind of money fails as oil's joules ratio gets worse?  Money is an invented concept, and all things associated with it exist only via agreement.

Calories and joules exist regardless of agreement.

Wed, 10/30/2013 - 11:33 | 4104855 WillyGroper
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"Simply amazing that the majority here on ZH don't even get it, that the USA has already GONE FULL ZOMBIE."

You're pretty full of yourself, aren't cha.

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