4 Things To Ponder This Weekend

Tyler Durden's picture

Submitted by Lance Roberts of STA Wealth Management,

As we enter into the two final months of the year, it is also the beginning of the seasonally strong period for the stock market.  It has already been a phenomenal year for asset prices as the Federal Reserve's ongoing liquidity programs have seemingly trumped every potential headwind imaginable from Washington scandals, potential invasions, government shutdowns and threats of default.  This leaves us with four things to ponder this weekend revolving around a central question:  "Does the Fed's Q.E. programs actually work as intended and what are the potential consequences?"

1) Three Questions For Ben Bernanke (via ZeroHedge)

David Einhorn of Greenlight Capital turns his attention to Ben Bernanke with three primary questions:

"We maintain that excessively easy monetary policy is actually thwarting the recovery. But even if there is some trivial short-term benefit to QE, policy makers should be focusing on the longerterm perils of QE that are likely far more important. Here are some questions that come to mind:


How much does QE contribute to the growing inequality of wealth in this country and what are the risks this creates?


How much systemic risk does the Fed create by becoming what Warren Buffett termed 'the greatest hedge fund in history'?


How might the Fed's expanded balance sheet and its failure to even begin to 'normalize' monetary policy four years into the recovery limit its flexibility to deal with the next recession or crisis?"

2) Heal Thy Economy Or Fuel The Next Crisis  (Project Syndicate)

Nouriel Roubini, a professor at NYU's Stern School of Business, plays tag team with David Einhorn questioning the policies and programs of not only the Federal Reserve but of all global central banks.

"As below-trend GDP growth and high unemployment continue to afflict most advanced economies, their central banks have resorted to increasingly unconventional monetary policy. An alphabet soup of measures has been served up: ZIRP (zero-interest-rate policy); QE (quantitative easing, or purchases of government bonds to reduce long-term rates when short-term policy rates are zero); CE (credit easing, or purchases of private assets aimed at lowering the private sector's cost of capital); and FG (forward guidance, or the commitment to maintain QE or ZIRP until, say, the unemployment rate reaches a certain target). Some have gone as far as proposing NIPR (negative-interest-rate policy).

And yet, through it all, growth rates have remained stubbornly low and unemployment rates unacceptably high, partly because the increase in money supply following QE has not led to credit creation to finance private consumption or investment. Instead, banks have hoarded the increase in the monetary base in the form of idle excess reserves. There is a credit crunch, as banks with insufficient capital do not want to lend to risky borrowers, while slow growth and high levels of household debt have also depressed credit demand.

As a result, all of this excess liquidity is flowing to the financial sector rather than the real economy. Near-zero policy rates encourage "carry trades" – debt-financed investment in higher-yielding risky assets such as longer-term government and private bonds, equities, commodities and currencies of countries with high interest rates. The result has been frothy financial markets that could eventually turn bubbly."

 Nouriel's comments touch on a topic that has become much more "mainstream" as of late which questions whether asset prices have once again began to over inflate.

3) 5 Signs The Stock Market Is In A Bubble (CBS Moneywatch)

Larry Fink, CEO of giant money manager BlackRock, clearly thinks the market is frothy.

"We've seen real bubble-like markets again," he said at a panel discussion this week, according to theBloomberg news agency. "We've had a huge increase in the equity markets."


Fink and many others are concerned about the impact of the Federal Reserve's "quantitative easing" program, under which the central bank is buying $85 billion a month in government bonds and mortgage securities in hopes of stimulating economic growth. These assets have vastly expanded the Fed's balance sheet, including recently. Since Sept. 4 alone, those balance sheets have increased 4.3 percent, while the S&P 500 has increased 4.9 percent.

In other words, investors are doubling down to capitalize on the cheap money that continues to flood the market."

The financial markets have long been seen as a gauge of future economic activity.   As the stock market rises the economy has also risen.  However, that has not been the case over the last several years with the economy stuck at a sub-par rate of growth.  Today, with the high degree of correlation between the Fed's balance sheet and the financial markets, it is getting increasingly difficult to make the case that the markets are reflecting anything but themselves.



4) Why The Fed Can't Taper (Via Pragmatic Capitalist)

Fraces Coppola, proprietor of the Coppola Comment, recently discussed the issues behind the Fed's inability to "taper" its current Q.E. program.

"Tapering is removing central bank support of asset prices. Unless not just the US economy but the GLOBAL economy is "on the up" at the time that tapering commences, the result of tapering will be a global fall in asset prices. That isn't going to cause hyperinflation, as the Austrian school thinks, but it would cause a global recession.


I'm afraid it is not US fundamentals, but global fundamentals that will determine the Fed's ability to taper. If the Fed tapers when the global economy is already in the doldrums, as it is at the moment, the recessionary rebound to the US economy would be considerable.


Because of the US dollar's pre-eminence (and the pre-eminence of USTs, too – we don't talk about that enough), the Fed is effectively the world's central bank. It is high time that the US accepted that its monetary (and fiscal) policies must be driven by the needs of the global economy, not just the US. The 'exorbitant privilege' is an exorbitant responsibility, too."

QE Doesn't Do Much

As I discussed this past week the reality is that the Fed is now caught in a "liquidity trap."  If they begin to remove its liquidity support the markets, and the economy, roll over.  The results would like be quite devastating for investors.   However, continuing to push asset prices higher also will eventually end badly.  It is quite the conundrum for the Federal Reserve and for investors.

While the Federal Reserve continues to push its liquidity programs, the reality is that it does little for economic growth.  Nobel Prize winner Eugene Fama discussed with Rick Santelli how the only thing that really benefits from QE programs, other than asset prices, are the "expectations" of benefits on the economy.  He explains, in the following CNBC interview, that there is really no reason why QE programs would have much economic impact at all.


How we got here is one thing.  Apparently, getting out will be quite another.  John Hussman summed this all up well:

"In regard to what is demonstrably true, it can easily be shown that unemployment has a significant inverse relationship with real, after-inflation wage growth. This is the true Phillips Curve, but reflects a simple scarcity relationship between available labor and its real price, but this relationship can't be manipulated to create jobs (see Will the Real Phillips Curve Please Stand Up). It's also true that changes in stock prices are mildly correlated with subsequent reductions in the unemployment rate and higher GDP growth. But the effect sizes are strikingly weak. A 1% increase in stock prices correlates with a transitory increase of only 0.03-0.05% in subsequent GDP, and a decline of only about 0.02% in the unemployment rate. So to use the stock market as a policy instrument, the Fed would have to move the stock market about 70% above fair value just to get 2.8% in transitory GDP growth, and a 1.4% decline in the unemployment rate. Guess what? The Fed has done exactly that. The scale of present financial distortion is enormous, and further distortions rely on the permanent belief that there is actually a mechanistic link between monetary policy and stock prices.


We know very well the mechanisms and actual historical relationships between monetary policy and financial markets, and doubt that any amount of quantitative easing will prevent a market slaughter in any environment where investors find short-term liquidity desirable (QE only “works” to the extent that zero-interest liquidity is treated as an undesirable “hot potato”). Still, the novelty of quantitative easing, and the misattributed belief that monetary policy ended the banking crisis, has created financial distortions where perception-is-reality, at least for now. We believe that the modifier “for now” will prove no more durable than it was during the tech bubble or the housing bubble."

It is something to ponder over the weekend.


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LetThemEatRand's picture

All of this gnashing of teeth and questions to ponder merely gives cover to the truth that all of this is by design.  The very wealthy are getting very wealthier by design.  The middle class is shrinking by design.  Anyone who thinks these are "unintended consequences" isn't paying attention.

Zer0head's picture


Bloomberg's Danny Blanchflower at his pompous best




his comments on the Fed's  exit strategy are the stuff of pure genius

Carl Popper's picture

Never assume conspiracy when incompetency will suffice.

Fiat is a great idea in theory. Those who are feeding at the trough are opportunists. They also have probably realized it cant last because of human nature being the way it is, and are hedged accordingly with gold.

I have a hard time believing that they want to kill the golden goose.

max2205's picture

Just let me know when they taper....otherwise I just see a rotation now to 'traditional' big cap stocks from IWM....LONG SPY OR DJIA AND SHORT IWM for the easy pair

Bindar Dundat's picture

I am a happily retired politician who spent thirty years as a CEO of a public company and has an educational background in applied physics.  For the last three years I have been studying economics and how Fed policy is impacting us. It has been a heck of a learning curve.  I am only now seeing it clearly and I can assure you Obama has not had the time nor the inclination to understand how to begin to answer those three questions.  

Asking him those questions is a waste.  The real question to the President should be: who are you taking your orders from?


LetThemEatRand's picture

"who are you taking your orders from."

Exactly.  The guys from whom O and both Teams in Congress take their orders most certainly know what is going on, and they most certainly are not experiencing any unintended consequences.

observer007's picture



Giant Fukushima Mutant Turtle Finally Captured By Japanese Military


LetThemEatRand's picture

Under that story should be a story about how the NSA is collecting all of our data to protect us from guys in caves as opposed to protecting the elites from us.

dizzyfingers's picture

To Oldwood:

Yes, and it's to be STONE soup, so delicious!!

Oracle 911's picture

Yep, and your smile will really shine.

Fish Gone Bad's picture

Does the Fed's Q.E. programs actually work as intended

Why of course.  The intent was to take $85B worth of property a month and give it to the banks who then put back all the tranches and thereby own all the mortgages.  The plan was to get people to trade money printed out of thin air for all the fruits of their labors. 

cursing fish cafepress

Ban KKiller's picture

Yes, this is true. Who owns all of the MBS market now? Fannie? Freddie? Don't think so! They sell as fast as they can knowing the banksters did not perform the needed assignements putting the notes/mortgages into the trust. Oh well...what could go wrogn...er...wrong? 

centerline's picture

The "getting out" part is funny.

Yeah, keeping selling the line that everything will be okay in the morning if TPTB just do [fill in the blank].

Paradigm shift, bitches.  Cycles are rolling over all at once.

CrashisOptimistic's picture

There have been a few celebratory snippets about a GDP increase via the $10 decrease in the price of oil.  Oddly, we never hear about GDP slowing when the price goes up $10.  And btw, Iraq killings have taken their oil output down sharply, more than the US gain in oil output this year, so the price decline is not supply related.  Rather, declining economic activity continues to erode consumption.

Besides that, we have an entire world focused on supporting weak economies everywhere, from Emerging Markets, to Europe to the US's pathetic sub 2% (excluding the June redefinition of GDP).  As long as everyone takes action in concert to prevent collapse, there won't be one.  Period.  Money is an illusory substance and when the world wants it to be strong rather than weak, they can make it so via decree.

However, the fly in that ointment appears when some major player decides to be patriotic rather than cooperative.  When someone actually becomes loyal to his or her own country, they will seek advantage, and if the rest of the world continues to "cooperate", that country will indeed get an advantage.  THAT is how cooperation unravels -- and THAT . . . is called Russia.

Russia is moving to dominate.  They have the oil.  They have Putin, who seeks to dominate.  The only purpose, in his mind, for the global economy is to provide wealth from someone else to his Russians.  Watch Russia.  Russia is going to be ruthless.  You'll really see their power when the Bakken rollsover and US oil output resumes its normal, natural decline.


centerline's picture

Agree about the geopolitics.  Disagree about collapse being avoidable.  Exponential math is just a bitch.

The system is predicated on perpetual growth.  Without it, the system cannablizes itself (deflation or hyperinflation, depending on the function of debt).  Pull the plug = instant riots.  Stay the course = war and riots.  Change the system = nope, not gonna happen because the basis of the current system in effect power, which boils down to resources.

We are unfortunately destined to repeat cycles over and over.  Why?  Because the behavior of mankind does not change.  



q99x2's picture

Santa Claus rally and then the January effect. The Washington D.C. globalist traitors will be blind with hubris. Time to put the con on and put nemesis to work.

LawsofPhysics's picture

"A nothing activity" - LMFAO.  Okay fine, I will now create my own credits from thin air to buy all kinds of real assets, equities and securities then.  Apparently counterfeiting money is now a "nothing activity".

If it wasn't clear before, it should be now.  Nobel prizes in the social science of eCONomics are given to those whose "work" supports the status quo, period.

hedge accordingly.

Bearwagon's picture

I'd like to add that those prizes you mentioned are no "Nobel Prizes". Those are just the "Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel", cheap steel sheet medals, commissioned by the swedish central bank. Those are nothing more than an evil sham ...

shovelhead's picture

I'll bet nobody knew that for the last, oh say, whenever years.

Thank goodness Osama Bin Laden's Peace Prize is real.

Bearwagon's picture

Oh, don't get me started, please. I never meant to say anything good about the Nobel Prizes. And while you mention that nobody knew, I suddenly get enlightened: That must be why everyone calls it by a false name - now, where did I hear of that mechanism already?!

centerline's picture

Most people have lived thier whole lives in summertime.  Fall is being ignored by the majority as an anomoly.  The weather is going to get warm again any moment.  Right?

Winter will not be expected by most.  

Carl Popper's picture


You being a farmer and all knowthat credit has always been created from thin air. It used to be the private note or private word of a farmer. Now we have institutionalized and backed everyone's credit with a FED.

But you can still create your own out of thin air if you dont like FRN credit.

LawsofPhysics's picture

"credit has always been created from thin air" - Bullshit, many societies have used coinage and other physical units of exchange.

That aside, it all comes down to trust.  One person/country trusting another to offer something of real value in exchange for the fruits of each other's labor when it comes time to settle trade accounts.

Once trust is lost and the EBT cards no longer work, all hell will break loose.

It has been this way since the humanity started forming advanced "civilizations".

hedge accordingly.

as to this comment --> "But you can still create your own out of thin air if you dont like FRN credit"- In many ways I do this already when we bring our products to the local market.  Many people trade with me using all kinds of things.  Make all the laws you want to try and restrict such behavior, laws that cannot be enforced are not laws at all.  All economies are really local at the end of the day and will become even more local in the future.

Carl Popper's picture

You are confusing money and credit.

Things with "Moneyness" have intrinsic value.

Credit is a promise. The FRN is a promise not money. This is why it can be created from thin air. People treat it as money to the glee of governments and financiers who steal a tiny bit of its value yearly from those foolish enough to be overweighted in FRN's

The FRN is a national promissory note. Not much different than farmer joe promising to pay the dry goods store after harvest.

Dont hold too many promisory notes. Exchange them for real things.

LawsofPhysics's picture

Bullshit, both are promises to deliver on future labor.  Don't overthink this, money is still better to be holding (so long as it is still accepted as such).  If your money dies and you have physical assets, you are still in a better position then having outstanding debt to pay.  If you don't know why, I suggest tuning into the show "Repo Men".

Carl Popper's picture

Gld can be money
Cigarettes can be money.
Even pussy, but velocity of circulation has intrinsic limits.
Those have intrinsic value. They cannot be created out of thin air.

A promise to pay the above is credit. An infinite number of promises to pay the above can be created.

These are just the basic definitions out of standard textbooks.

FRN's are not money. They were never intended to be money which is why they are called notes. They are backed by the national faith and credit, versus the private note of farmer jones based on the promise to deliver goods in the fall in exchange for real goods at the dry goods store in the spring. This private promisory note or credit is backed by faith in the farmer

Just because someone holds a note that is a promise to pay, and they never redeem it but save in notes, that does not make it money. See the difference?

Professorlocknload's picture

++ on that, Carl.

And that in mind, who would want to collect "Credit Instruments" in preparation for "Deflation?" The fact they are credit is the reason deflation can't happen in the first place. I submit, deflation doesn't happen until these FRN IOU's are gone, and price is again discovered in exchange of goods, commodities, food, fuel, labor, assets marked to each other while awaiting some new form of currency.

Bearwagon's picture

It all comes down to: "You cannot print trust!"

falak pema's picture

Collateral damage of the fracking boom (and its not ecology related).

I read this about the effect of excessively high concentration of uncut driller crews on the local female population; sometimes the ratio of male temps to female permanents spiking at 80/1; leading to unplanned but predictable consequences :


Its not just the potable water that gets polluted or starts to burn fire and brimstone!

CrashisOptimistic's picture

Huge incentive exists by those companies to automate drilling and fracking.  Shut off that costly employment boom.

This is called progress.  When you eliminate 80% of jobs and put those people on benefits, this is called progress.

Osmium's picture

So Fama says they have 4 trillion on each side of the balance sheet and when they want to pull back, they just retire the reserves and everything will be fine.

Is he saying the Fed is going to just write off the 4 trillion like it never existed?


Carl Popper's picture

The fed will hold to maturity and naturally run off the balance sheet, all the while saying they eventually plan to sell.

As long as the market believes the fed could sell at any time it is QE. If the market believed the fed would never sell then it would be naked monetization.

"the last duty of a central banker is to tell the truth". Alan Blinder

Professorlocknload's picture

  And if asked about the long run effect of this ever expanding "balance" sheet, any Central Banker worth his mettle would respond, by rote, "In the long run we're all dead." JMK

  Translated, "In the long run, all forget."


GreatUncle's picture

Never thought of it that way before, so something new.

*The FED becoming the biggest hedge fund in the world.*

Does the too big to fail tag apply when on subsequent failure all nations globally and their taxpayers bail the fed out?

Maybe that is the Bernake put! Need more lots more first though like a quadrillion should do it. Whilst in the other corner Japan maybe also be going for it realising the game is up.

Once TBTF is global a bail out is kind of guaranteed and the ultimate blackmail. The masterstroke.

centerline's picture

This is just a big damn house of cards at this point.  Sociopaths everywhere doing everything they can to keep it from falling down so they can continue to live large on whatever scam they have going.  Inadvertantly adding more and more levels to said house of cards.  A global ponzi scheme on life support.


Gringo Viejo's picture

I've never been one to ponder.
I've at times reflected, but I've always found pondering to be somewhat ponderous.

ZH Snob's picture

the best thing about QEternity is that, given its way, it will eventually end the central bank's hegemony and destroy all fiat currency. 

sure, the system will end, but you can be sure that the same thieving players are already plotting about the next one.  the only hope we have is that along with the overhaul these sociopaths will lose their sterling reputations and be prosecuted.  would that not be sweet, seeing them do real time in state prisons and not in one of those federal summer camps? 

it just might happen when all the rats begin scrambling off the ship and there is no more protection to be found.


shovelhead's picture


They OWN most of the State prisons.

And the people who work to keep them full and profitable.

The only one who is going to get overhauled is We the Muppets.

ZH Snob's picture

ugh, you're right.  who am I kidding.  corruption never goes out of fashion.  nothing will be as it should until He returns.



Wyatt Junker's picture

$85B/month is nothing.  Not when you got $600T in global derivatives to cover in addition to another $200T in American entitlements to cover in the next couple decades.  

Wake me up when we get to $850B/month.  Then maybe this thing will get rolling.

Devaluate the scrip by a factor of ten ASAP.  

There's your reset.

A six pack in today's dollars will become the next new sixty pack. 


LawsofPhysics's picture

Print/create all the script you want, there will be no escape from the calorie shortage.

Only one law applies now;  When fraud is the status quo, possession is the law.

Carl Popper's picture

Lol. Depends on fracking depletion rates and what we find in and around antartica and the arctic and african coasts.

Pray for a global cooling to offset the worst effects of carbon dioxide. We need more sunspots a lot more. Lol. To cool the earth.

I remain a semi optimist on humanity and obtaining sufficient cslories at least the next 50 years.

LawsofPhysics's picture

Unfortunately, in order to obtain those new calories you mention, we must invest considerable calories.  Once the ratio of calories returned on calories invested is less than one, it's game over.  Let's hope humanity stops mis-allocating and mal-investing resources and capital soon then.

centerline's picture

EROEI is the fundamental analysis of our existence.  This cycle of history is predicated on energy.  To a large degree oil.  Everything at it's base though boils down to food and water.





Emergency Ward's picture

Before it was, "a million dollars ain't what it used to be." 

Today it's, "a billion dollars ain't what it used to be."

xamax's picture

I still expect NFLX at 500 and TSLA at 300 by year end. Onlly at these levels I m ready to sell.

Gulfcoastcommentary's picture

Here's my take on the Eugene Fama and Rick Santelli conversation in my blog titled:  "Another Over-Educated, Nobel Prize Winning Idiot"  at  http://gulfcoastcommentary.blogspot.com/2013/10/another-over-educated-no...