Buying Time In A Brought-Forward World... And Why There Is No Plan B

Tyler Durden's picture

Here we go again, creating another asset bubble for the third time in a decade and a half, is how Monument Securities' Paul Mylchreest begins his latest must-read Thunder Road report. As Eckhard Tolle once wrote, “the primary cause of unhappiness is never the situation but your thoughts about it," and that seems apt right now. After Lehman, policy makers went “all-in” on bailouts/ZIRP/QE etc. This avoided an “all-out” collapse and bought time in which a self-sustaining recovery could materialise. The Fed’s tapering threat showed that, five years on from Lehman, the recovery was still not self-sustaining. Mylchreest's study of long-wave (Kondratieff) cycles, however, leaves us concerned as to whether it ever will be. More commentators are having doubts; and the problem looming into view is that we might need a new "plan." The (rhetorical) question then is "Have we really got to the point where it's just about more and more QE, corralling more and more flow into the equity market until it becomes (unsustainably) 'top-heavy'?"


Policy makers are pushing monetary systems and experimental policies to their limit, so shouldn’t we consider the possibility of correspondingly extreme outcomes in financial markets in due course... cause and effect?

No Plan B?

After Lehman, policy makers went “all-in” on bailouts/ZIRP/QE etc. This avoided an “all-out” collapse and bought time in which a self-sustaining recovery could materialise. The Fed’s tapering threat showed that, five years on from Lehman, the recovery was still not self-sustaining. Our study of long-wave (Kondratieff) cycles, however, leaves us concerned as to whether it ever will be. More commentators are having doubts, e.g. Andrew Law of Caxton in the recent FT interview. The problem looming into view is that we might need a new “plan.”

Does the incoming Fed Chairwoman have a new plan and, more importantly, one which could work? We have our doubts, the default strategy being continued reliance on liquidity-driven asset bubbles, while hoping for the best in terms of traction with the real economy. Our colleague, Andy Ash, commented last week.

“The biggest impact of QE1 was on metals and EM (emerging markets) indicating that the result of QE was predicted to be growth. The three lowest beneficiaries of QE3 have been Gold , Metals and EM, all SIZEABLY NEGATIVE IN RETURNS. So QE3’s effect unlike QE1’s has been nothing to do with global growth. The biggest return on QE3 was/is Western equities.”

If the US is locked into low growth for the foreseeable future, should the S&P 500 be trading on a 12-month forward earnings multiple of 16.2x, slightly higher than the 15.5x long-term average? Let’s not forget that Europe appears to be stuck in an even lower growth scenario and China’s growth rate is moderating. Moreover, corporate margins are close to an all-time high and earnings forecasts are being progressively downgraded.

So higher and higher valuations for more distant, and (arguably) increasingly uncertain, cash flows.

With the temporary deal agreed in Washington, QE looks set to continue running at US$85bn until March 2014, maybe longer. We’ve written about the QE/repo linkage a lot in recent months and it’s our opinion that the collateralisation of excess deposits created by QE has positively impacted equities via shadow banking conduits, e.g. repos.

Even the US Treasury (Treasury Borrowing Advisory Committee report for Q2 2013) noted the correlation between weeks when QE exceeded US$5bn and strength in the S&P 500.

Have we really got to the point where it’s just about more and more QE, corralling more and more flow into the equity market until it becomes (unsustainably) “top-heavy”?


Trying to Make Sense of Bubbles

If we are in a centrally-planned bubble (and it feels like it to us), we are reliant on second guessing policymakers, trying to gauge flows (positive for equities right now) and utilising any indicators which seem to be showing good correlations. An example of the latter is the Summation Index. This is a measure of market breadth, being a running total of Advance minus Decline values of the McClellan Oscillator. A pattern of declining peaks had formed since the correction in late-May, but this reversed with the recent upward move.

We are still in the biggest debt crisis in history and the banking sector will remain at the centre of its ebbs and flows. The divergence of the sector’s performance from the broader market pre-empted the Lehman collapse in 2008. In the US, we are keeping a close eye on the breakdown in the BKX.


In such extreme circumstances, we should also keep an idea of “crash patterns” in the back of our minds in case. These often play out as a peak followed by a failure to make a new high and a subsequent break of support. Here are some notable examples.


A final word on equity market indicators. In our reports since May, we’ve been “road-testing” a model for the US equity market (using the DJIA which has a longer history). It is based on cycles, not economic indicators, but cycles in time. It is created from the interaction of 18 cycles in US equities. These vary in length from just under 3 months to more than 30 years. Most of these cycles were discovered by the Foundation for the Study of Cycles (FSC), which has published a vast body of work during the last 70 years. We’d like to make contact with any readers who’ve also looked into this type of work, as trying to incorporate it into our research is very much work in progress.

While in its very early days, the model has been a reasonably good predictor of market direction since the beginning of 2009 (having also picked out most of the market peaks and troughs since 1905). We are slightly alarmed because it’s predicting that the Dow should be rolling over now into the first part of 2014.

Buying time in a brought forward world

Manipulating the Time Horizon

We’ve been reflecting on the idea that using unconventional monetary policies, i.e. QE at the long end of the yield curve, central banks have “bought time” in a profound sense by manipulating the time horizon. This leads to longer-term cash flows associated with financial assets being discounted at artificially low rates. It has been crossing our minds as to how much equity investors have really considered this issue, even if (like us) they are believers in equities overcoming bonds in the inflationary endgame (see “Inflationary Deflation” report from December 2012?

Fixed income investors are acutely aware that QE has forced them to extend duration. That comes with the scary knowledge that they might all rush for the exit at the same time. While many financial assets have long duration, equities have very long “duration,” often reflecting theoretical cash flows to infinity. Equity investors typically make detailed estimates for corporate cash flows, e.g. for 7-10 years. Beyond that, cash flows to infinity are capitalised (using long-term growth rate assumptions, ROIC fades, etc) in the form of terminal values...or until analysts predict that the deposit/reservoir will be depleted in the case of mining/energy stocks. QE obviously keeps rates lower than they would otherwise be and increases the value of these capitalised cash flows - especially more distant ones.

When we think about long-term economic cycles, one of (if not) the biggest single driver is the growth in debt (and, problematically, its eventual reduction at the end of the cycle). If we consider the US economy, the huge increase in debt has brought forward consumption over an extended period of several decades. That process has become increasingly “long in the tooth”, so it’s hardly surprising that credit and consumption growth is currently subdued.

When so much consumption has already been “brought forward”, it might seem counter-intuitive that the valuation of distant cash flows is being inflated via PEs above their historic average AND artificially suppressed interest rates. When you also consider that corporate margins are close to a historic peak, the market takes on the appearance of an athlete that is expected to continue performing at peak level almost indefinitely.

Hmmm, as Grant (“Things That Make You Go Hmmm”) Williams might say.

It Should Work Both Ways

In a world of US$85bn per month QE, the corollary of the discussion above should be that the valuation of long duration financial assets should be unusually sensitive on the downside to anything that threatens this current “buying time” and “brought forward” model for long-term financial assets. The obvious candidates are:

  • A rise in interest rates; and/or
  • An event which leads to a significant contraction in the time horizon for investors, such as a sudden deterioration in the macro outlook, or a geo-political shock.

The market turmoil induced by Bernanke and his colleagues with the taper threat (quickly watered down and subsequently canned) seems entirely fitting in this light. The consequence is that the Fed’s ability to taper looks ever more serious with regard to asset prices. This is the two-way version of the “Stockholm syndrome” between the Fed and markets we’ve highlighted before.

Boxed in?


Full Thunder Road Report below:

Thunderroad Report Q4.pdf

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observer007's picture

Never Seen Before Evidence – 9/11 – The “Hidden Airport in Masonic Footprint”


Despite all the previous arguments and evidence presented to date that clearly shows the American government’s own official storyline on what had happened on 9/11, is far from true

Chris Jusset's picture

There's no Plan-B for the US Bubble Economy because blowing more bubbles is THE ONLY WAY the Fed knows how to respond.


When there's a recession ==> JUST BLOW MORE BUBBLES

When the previous bubbles pop ==> JUST REFLATE THE OLD BUBBLES

ZerOhead's picture



Double, double toil and trouble
Fires will end Bernankes's bubble

Macbeth Act 4, scene 1, 10–11, etc.

TwoShortPlanks's picture

Something smells Fishy

Many others feel that there are global dealings afoot....go with what your gut is saying!

Groundhog Day's picture

That was a long winded way of saying blah blah blah.....BTFATH

The Alarmist's picture

Plan B would be planning to deal with the rest of the populace if they fail to turn the rest of the populace into slaves.  IOW, Plan B would be pointless on the part of our lords and masters.

DoChenRollingBearing's picture

Next few months are going to be a good time for me to sell more stocks...

Waterfallsparkles's picture

Although, I think that the Bankers brought down the Market to bankrupt many firms so that they could consolidate them into their Companies for little or no cost.  I do believe that the fall out was greater than their expectations.

They thought after bringing down the Market to a point of no return that they could just turn on a dime and do Tarp and Qe whatever and everything would be fine. 

But, everything is not fine.  Many lost their nest egg in the Market and will never be back, no matter how high they rise Stock prices.

Once you lose trust it is gone.  You cannot build it in a few short years by printing until the cows come home. 

The only reason the Market is up is because everyone, at least Main Street expects it to crash again and bets against it.  Yet, once they give that up as well, the market will surly Crash.

NoDebt's picture

Look, you can make this shit as complicated as you want, but sometimes I go back to the simple stuff:  look around you.  Look who's running things right now.  Do you think anything good is going to happen under the current watch?  Liquidity-addicted bankers and governments, the zero in the White House, corrupt self-centered politicians who think their shit don't stink, more than half the households on some sort of government assistance, etc.

Does this sound like fertile ground for anything remotely resembling a self-sustaining recovery?

This is a self-sustaining collapse, is what it is.  Inflate the nominal as much as you want, the real is still in terminal decline.

DoChenRollingBearing's picture

Looking around is often the best way to read a situation.

Bro of the Sorrowful Figure's picture

what makes it worse is the effect on culture. all of this corruption lends to decreasing morality amongst the populace, especially our young who are born into and depend on the welfare state. we have entire generations who don't understand that you have to work for a living, they know nothing else besdies collecting benefits. then the same people get into politics and the problem becomes self perpetuating. all negatives exacerbate each other in this terrible clusterfuck downward spiral into oblivion.

ebworthen's picture

I've been saying it since the '09 crash that our 1932 moment has yet to arrive.

Winston Churchill's picture

Its been five long years of maniacle levitation.

Yellen will have to double the printing for it to continue much longer.

Either its a crash if she doesn't, or a crash of the dollar if she does.

Not much longer to wait now for our 1932 redux.

No wonder Summers didn't want the job.

Zero guest's picture

Are you saying  the Fed will have to buy more and more bonds just to maintain the low level of long term interest rates we are seeing now? Interesting prediction. That would indicate the Fed was losing the battle against higher long term rates.

Greenskeeper_Carl's picture

i agree that its yet to arrive. We could have a had a major collapse and restucture, a lot of real pain,and be experiencing real growth and progress by now,but instead we papered over the inevitable which will make the inevitable even more painful. I just dont think its coming as soon as a lot of people on this site. I think this will muddle alonga a lot longer than most of us believe possible. We will keep fighting debt with more debt, and in the end it will result in a catastrophe, i just think its still a long time away.

blackchips's picture

The Fed is trying to preserve capitalism at all costs while the Obama admin is trying to force America into the LOSING governance of European socialism. Every action the FED has taken to promote growth has been countered by Obama & his banana republic regime.The FED needs to cut off the head of the snake before its venom kills us all.

Buffalo Bones's picture

What we have is not capitalism or a free market. It is an abortion.

ebworthen's picture

Are you being satirical?

The FED trying to preserve capitalism? 

There is nothing capitalistic about the FED.

The FED facilitates the banana republic spending; and the Republicrats are just as complicit as the Demicans.

I apologize if your satire went over my head.

Hughing's picture

plan b for socialists is the same as denying papal infallibility.

Jack Burton's picture

It's all about the well known Bernanke fixation on "wealth effect" economic growth. Bernanke prints money that he flows into equity markets. The holders of equities see huge growth in the value of their holdings. Presto! You have cash rich people looking to get a piece of the good life. Buying new homes, cars, furnishings, vacations, the ripple effect puts people to work. Or so Bernanke thinks! But in effect, the 85 billion a month that flows into the stock markets boosting the holders of those stocks, is only feeding the wealth effect of the 1-10% who hold nearly all shares in the market. Contrary to the 401K myth, most Americans have a tiny fraction invested in markets, or for even more, nothing at all. The 1% really do feel most of this wealth effect, thus they become super wealthy. But this does not spread through the economy like say an increase in workers wages across the board would do. It just is that the rich are already rich and more income just goes into their accounts and portfolios.

To boost a consumer economy, you must see a boost in average people's incomes, AND this is exactally NOT what is happening. In fact, the war on wages brought about by global labor competition is shrinking paychecks and reducing job security. The average consumer is pulling back in fear and in dread of even more pay reductions and job losses. This reduces demand. Every victory of management and owners in forcing workers to take lower wages to compete with foreign labor makes the bottom line more profitable, but in this process, the consumer is stripped of the income business expects the consumer to spend buying corporate products. It is a self defeating grab for marginal profit gains from reducing labor costs.

Most Americans are being beaten to death with threats of taking every last job and shipping it to China, India and a host of other third world nations down the wage food chain. In the end, the customer is broke, THEN, who does business make it's profits from?

When middle class Americans made a decent wage, they filled the car showrooms, they filled depatment stores and furniture shops looking to spend that paycheck. Business profited and labor had both a job and a paycheck of real value. The war on labor has been won, we all know that. Unions are dead. Labor has zero wage bargaining power. Yes, a few workers still have some ability to get wages, as business needs certain skill sets, but those sets are small and many are now shipable to overseas workers who are being educated and trained at a rapid rate. Soon nearly every American job will be able to be done in a low wage nation. No AMerican's will earn shit for wages, WHO will buy all the fucking garbage business has made in China and shipped here then?

Nobody gets it. Just keep slamming labor and beating them over the head. Perhaps that makes you feel good. But who buys the shit, when the American is jobless and pennyless? Nobody thats who!

All that is left are the soldiers, police, prison guards and spys and government workers. Everyone else is fucking on the street! You want that kind of economy? You are going to get it!

Greenskeeper_Carl's picture

That is crap. Unions in general protect worthless people, especiallly in the public sector, and contribute a large portion of their union dues to political causes that have largely contributed to their own demise. Not in any way says both parties arent to blame, but these great labor unions over the past few years have given millions to people who have perpetuated the decline in the amreican middle class. Look at what unions did for GM. They made an overpriced piece of shit car that couldnt be sold for a profit, and who got the bailout? Union workers were bailed out from the problems they themselves created, sounds like the bankers to me, by being over priced, un-firable, and with wholly unrealistic pension/health plans, that were rescued by the non-union american tax payer, who will never get that money back. And unionized govt employees, that are somehow able to collectively bargain against the american taxpayer, helping create and perpetuate un needed and unproductive bueacracies that continually get rewarded for thier own incompetence by being given ever more power and money in the hope that this will fix them. Thanks unions!!


RafterManFMJ's picture

I concur; the best thing you can do with worthless people is work them till they are used up, then put them in an oven.

Unions organizing at a local level to try for a larger share of any pie is abhorrent. Capital, especially international capital, is the forever friend of the working man.

Only the magic elixir of all-powerful international capital, their bought-and-paid for .gov lackeys, a supine media and judiciary, and a steady, health dose of inflation will, as experience has shown, reward the working man with an ever-growing standard of living based not on debt but rather on wealth.

If we can expand the pool of workers by encouraging all women to work, by failing to patrol the borders, and by importing skilled and in demand tech workers that are happy to work for 20K per year on H1B visas, all the better.

Factories that cannot be uprooted for points East can at least be staffed by undocumented workers and H1Bs. I raise my fist in solidarity with you GreensKeeper_Carl, as we greet this new lovely dawn of America. God bless us, each and every one.

starfcker's picture

spot on jack. i was mentally working on a fairly long comment, but you explained it all perfectly. only thing i would add is the snakeheads think they can substitute benifits for wages to maintain purchasing power among the masses, but that completely defeats the idea that the economic machine might one day groan back to life. breeds a lot of strife and resentment, and empowers the worst sociopathic behavior in the population by rewarding it. so you're really fat? here's some more money for your disability and we will give you a front row parking spot and a nifty scooter when you go shopping. and nicely done rafterman. hope you didn't get blood on your shirt.  forward!!!

Being Free's picture

Rule 80B, bitchez.

Anusocracy's picture

'As Eckhard Tolle once wrote, “the primary cause of unhappiness is never the situation but your thoughts about it,"'

If I could have, I would've given the article a zero just for that quote.

Buffalo Bones's picture

People are about relative wealth, not absolute wealth.

StillSilence's picture

Some truth to this in terms of a persons mental/emotional approach to whatever it might be they are dealing with, but certainly (I hope) it's not meant to suggest that we need only to ignore those/that which suppress us and our rights in order to "deal" with it and be happy. 

I'm quite certain anyone will become upset if he finds someone stealing from his home, particularly from his family, and he's not going to just change his outlook and accept those cirucmstances, hes going to change them. Same concept should apply on a larger scale relating to a system that steals from it's users, but clearly not enough people understand and care to want to stop it. They are sound asleep in the back while the burgalar is cleaing the safe!



threeputting's picture

Gold is the only buy right now.

DoChenRollingBearing's picture

Everybody who can should have at least some physical gold.  Even the mainstream finance guys go along with 5% - 10% of your wealth in gold.

Gold is about the only relatively uncorrelated asset out there.  It is the best store of wealth.

GreatUncle's picture

Starting to view gold in a different way. At uni studying maths you look at the upper and lower limits on many things.

Upper limit house prices attempting to be propelled ever higher.

The continuall falling cost of durables or was e.g a microwave is peanuts now compared to when they first came out.

Gold is some point between these two limits and yes it can move.

As the FED keeps the QE flowing, imports rise eventually if the dollar devalues gold takes off driven by the increasing value. Gold is 100% material no labour component and will track the physical.

Alternatively house prices collapse it will only fall as far as the value of gold so if a house price collapse did occur GOLD WILL BE INDUCED TO RISE to support the house price. Again its the physical interchange.

JamesBond's picture

There is an echo in the world - if you listen closely

President Raul Castro, who replaced his brother Fidel in 2008, has instituted a series of market-oriented reforms to Cuba's Soviet style economy where the state still employs 79 percent of the 5 million-strong labor force.

"These measures are corrections to continue bringing order to this form of management, fight impunity and insist people live up to the law," the government said on Saturday.

"In no way does this mean a step backward. Quite the contrary, we will continue to decidedly advance in the updating of our economic model," it said, adding that would only be possible "in an atmosphere of order, discipline and obedience."

Bryan's picture

The only problem with enforcing "order, discipline and obedience" with humans is that it's like herding cats.  Humans are not naturally compliant and obedient creatures.  Therein lies the rub of a managed economy.

Typing Typer's picture

It's like that Tom Baker Dr. Who episode where a great galactic Queen was reaching the end of her very long life and she started a program to use vaster and vaster resources to extend her life till she was using up multiple planets, Tom Baker asked her "..and then what? Stars?". It was exponentially impossible to continue it, in the end she had to die.

polo007's picture

The total value of stocks around the world recently rose above $60 trillion for the first time since 2007 – and central banks like the U.S. Federal Reserve have played a big role in that rise by buying bonds and other assets to stimulate economies and provide cheap money.

Market investors are obsessed with the issue of how long this stimulus — much of which is called “quantitative easing” — can continue.

On Friday, U.S. Federal Reserve chairman Ben Bernanke is expected to speak on a panel at the International Monetary Fund, and China’s Communist Party will stage the third plenary session of the central committee on economic policy reforms on Saturday.

Central banks around the world, including the European Central Bank and the Bank of England, are expected to make key announcements on interest rates throughout the coming week and edgy investors will pay forensic attention to the language of their public statements for any clues to future policies.

The role of the central banks in markets has taken on new importance.

In the last five years since the 2008 financial crisis, the total assets of the world’s major central banks are estimated to have more than doubled to roughly $15 trillion. That’s equal to a quarter of the current value of global shares.

World stocks lost roughly $30 trillion in market capitalization after the 2008 crisis — but have bounced back by doubling in value during the past four or five years thanks partly to the stimulus measures of the central banks.

U.S. stocks climbed recently to record highs after the Federal Reserve surprised markets by deciding not to reduce or “taper” its $85 billion-a-month bond buying stimulus measures – for now.

Looking forward, it seems that every economist or financial analyst has a different view on when — or if — the Fed will begin to reduce its stimulus, and investors remain edgy about the prospect of the stimulants being taken away.

It has rarely been so important for the central bankers of the world to mind their language.

$60 trillion of the public’s wealth is riding on those words.

Lordflin's picture

So plan A isn't working??? Now you tell me!

ToNYC's picture

Instead of buying time for a self-sustaining economy, it froze the nerves to the invisible hand with a ZIRP drip to the Fed banks. What it did do is sold time, big time when the real signals are vital and the recovery was shot in the foot, rather getting a shot in the arm.