Citi Warns "Fed Is Kicking The Can Over The Edge Of A Cliff"

Tyler Durden's picture

It is becoming increasingly obvious that we are seeing the disconnect between financial markets and the real economy grow. It is also increasingly obvious (to Citi's FX Technicals team) that not only is QE not helping this dynamic, it is making things worse. It encourages misallocation of capital out of the real economy, it encourages poor risk management, it increases the danger of financial asset inflation/bubbles, and it emboldens fiscal irresponsibility etc.etc. If the Fed was prepared to draw a line under this experiment now rather than continuing to "kick the can down the road" it would not be painless but it would likely be less painful than what we might see later. Failure to do so will likely see us at the "end of the road" at some time in the future and the 'can' being "kicked over the edge of a cliff." Enough is enough. It is time to recognize reality. It is time to take monetary and fiscal responsibility - "America is exhausted… is time."

Via Citi FX Technicals,

Small business (the “backbone of the US economy”) is struggling again

These numbers were released this week and give rise for concern. The outlook here does not look very promising as we see all of the charts above starting to look shaky

We are particularly focused on the overall small business optimism index and what it suggests.

Small business optimism index

This chart is very compelling and looks to be following exactly the same path as that seen in 2011 (when QE2 was due to end only to “morph into operation twist”) and again in 2012 (when operation twist was due to end only to “morph” into “QE infinity”)

Important points to note on this chart are:

94.7: This was the major low posted in March 2003 (The month that the major rally in the stock market (S&P) began which then peaked in October 2007.That gave us a low to high move of 105%.) Traditional Fed easing ended in June 2003 with the Fed funds rate at 1%.This indicator then rallied to a peak of 107.7 by November 2004. The next time this support was revisited was in November 2007 when it gave way with a “print” of 94.4


94.5: This was the high of the bounce off the March 2009 low and was posted in Feb. 2011. The index then fell away and this high of 94.5 was once again posted in April 2012


94.4: After another fall away, this index again bounced into a peak of 94.4 in May 2013 and has since moved lower again.

After the break of supports in 2007 the low posted was 81 (March 2009) while we saw levels of 88.1 and 87.5 respectively after the 2011 and 2012 peaks. (The 2011 move took 6 months (Aug. 2011) and the 2012 move took 7 months (Nov 2012)). Operation twist was instituted in Sept 2011 while QE “infinity” was put in place in Sept 2012. If we were to follow the same path then the Fed could well be talking easing bias rather than tapering by the New Year (we hope not)

Overlay of the small business optimism index and the S&P 500

As can be seen from the chart above the Small business optimism index and the S&P were very correlated from 2007-2012. If anything, the Small business optimism index has tended to slightly lead i.e. the business backdrop seemed to reflect the economic backdrop which was then reflected in the equity market.

However, since Sept. 2012 when the Fed went “all in” with QE “infinity” there has been a huge divergence between these two. After an initial “hiccup” of about 9% in the Equity market it has since rallied 32% in 11 months, with no corresponding support from the business index.

There is now a “huge divergence” between the “backbone of the US economy” (Small business) and the Equity market. This clearly shows that while sharp balance sheet expansion at the Fed continues to “elevate” the equity market, it is far from clear that it is providing incremental benefit to the real economy. If these small business indicators continue to deteriorate as we expect then there is likely an inevitable negative feedback loop to the real economy and ultimately employment creation (Which at this point remains “qualitatively poor”)

If the Fed is not concerned about the dangers of creating a potential “bubble” in financial assets that does not see fundamental support, then they should be. They might want to explain what their next policy measure would be IF they allow a financial bubble to emerge while they sit at “Zero bound” short-term rates and a balance sheet likely sitting above $4 trillion.

The Equity market move is fundamental: Yeah right!

S&P and the Fed balance sheet since early 2009. Not at all correlated... well maybe a little


S&P, Fed Balance sheet and US GDP: QE infinity is working really well…..DUH..

Year on year real GDP growth peaked in 2010 at 2.8%.(YOY growth in nominal GDP peaked at 5.2% in 2012 and is now back at 3.1%). These levels remain extremely low by “normal” recovery standards and have failed to re-accelerate despite the fact that the Fed has nearly doubled the size of its balance sheet since 2010.

The Fed balance sheet is now $3.85 trillion and still rising.

Consumer confidence chart further supports these concerns

Has rolled lower following the June 2013 peak and is now back below the 2011 and 2012 peaks.

Huge divergence between consumer confidence and the S&P

Starting with 2000 and followed by 2007 and 2013 consumer confidence has hit a high followed by a lower high and another lower high.

At the same time the S&P has seen a high followed by a higher high and another higher high.

Effectively consumer confidence is acting like a momentum indicator and exhibiting “triple divergence” vis a vis the equity market

In 2000 there was a 4 month lag from when consumer confidence turned and the S&P began to struggle. In 2007 it was 3 months. So far there has been a 4 month lag (Consumer confidence peaked in June and so far the S&P has peaked in October at 1775).

It is also worth noting that the 1998-2000 rally (Which we think is very similar to today) in the S&P was 68%. A similar rally off the 2011 low gives us 1,806. In 2000 the peak of the S&P was also set at 14% above the 55 week moving average. Today such a gap would equate to 1,810 on the S&P. So there may still be a little “juice” left in this move into year end.

ABC news weekly consumer comfort index is now accelerating to the downside

As it did in 2000 and again in 2007. A move below minus 40 to minus 41 again would be concerning and suggest a danger of a return to the lows seen in 2008/2011.

The velocty of money is extremely slow.

Subpar velocity of money leads to subpar economic growth leads to subpar job creation leads to downward pressure on inflation (disinflation)

We would argue that QE encourages excessive misallocation of capital into financial markets and thereby directly contributes a decrease/contraction in money velocity.

While velocity of money and core PCE are at levels identical to the mid 1960’s and similar to the early 1970’s nominal GDP (YOY) is much lower.

In fact nominal GDP is actually back to levels (troughs) similar to 1982, 1991 and 2001.

This is happening at the same time as financial assets are booming. This is just one of many charts that suggest that all QE is now doing is encouraging a misallocation of capital into financial assets thereby contributing to the lowest level in money velocity since the data series above began in 1959. This contributes to slow economic growth and poor “qualitative” employment creation as well as disinflation. (Transfers the inflation into asset markets like we did between 1980 and 2000) This argues that we should measure inflation as a combination of traditional economy inflation and financial asset inflation thereby “smoothing” the cycle instead of encouraging “booms and busts”

Will the above eventually encourage the Fed to adopt a nominal GDP target (i.e. to encourage more traditional inflation).If so, how do they hope to achieve that. We do not really know the answer but it seems increasingly obvious that QE is not it.

Meanwhile the employment backdrop remains “qualitatively” weak.

So given all of the above let us look at what we think should happen and also what we think will (unfortunately) happen

What should happen (In our view)

The Fed needs to hold their nerve and start tapering. This is less to do with the view of the underlying economic picture and more to the view that QE has become “destructive”. It encourages a misallocation of capital and poor risk management. As a consequence there is every chance that it contributes to a falling velocity of money as liquidity simply “round trips” in financial assets rather than multiplies out in the real economy. If the “trickle down effects” of the equity market were really happening then after a 166% rally in the S&P we should be “booming”. However, the “average Joe” in the US economy is more exposed to

  • Credit- which is still tighter than in prior recoveries
  • Housing- Which is recovering but at a much slower pace than previous recoveries
  • Job creation- Which is recovering but remains “qualitatively poor”

It is quite possible (likely even) that this process will not be painless but that is not a reason not to do it. QE does not work and another way needs to be tried. The continued expansion of the Fed’s balance sheet simply encourages fiscal irresponsibility at a Governmental level in the misguided idea that the Fed will bail us out. If the Fed holds the line then Congress will be forced to address our issues head on, and that would be a good thing.

Throwing the “ball” into the fiscal arena would force Congress to look at ways to stimulate the economy in the near term but only if they address the “drag” on the economy of the long term fiscal promises that they cannot keep (i.e. reform entitlements, healthcare etc)

Fiscal stimulus and regulation reform (to make both more business friendly) would be a much more effective transfer mechanism in putting money in people’s pockets today. If combined with looking towards more business friendly policies it would potentially be a more effective “kick start” for the economy.

What about an HIA 2 (Homeland investment act) initiative to encourage repatriation of all those non-taxed corporate profits sitting overseas? A very low tax rate for these funds conditional on a robust framework for how that money needs to be used (Capex, infrastructure spending, job creation etc). This would be a fiscal stimulus that does not cost any money in the existing budgetary process (Surely that could attract a bipartisan approach). The tax received could also be used in similar areas.

A dynamic such as above (Less monetary easing/marginal tightening, combined with short term fiscal relief and long term fiscal reform would be unequivocally USD bullish in the medium to long term. Therefore a set of policies such as this would hugely strengthen our bullish USD view.

What likely will happen (In our view?)

The Fed will try to hold the line on tapering in the near term. Yellen will “do a Ben”. What we mean by that is that when Ben Bernanke was appointed he had a reputation of being “Helicopter Ben”. (A reputation that was obviously well deserved given the dynamics of recent years). However he spent his “early days” trying to establish his “dual mandate” credentials and “monetary responsibility” In fact he did this “to a fault” maintaining a “hawkish tone” in the first half of 2007 and suggesting the Fed might raise rates. They never did and the rest as they say is history. Yellen has a reputation for being a consensus builder and therefore in the “transition phase” it is likely that she will take a more balanced tone between the hawks and the doves. She may even concede some concern about the balance of positive/negative risks that QE brings (something we opined on above). In fact it is even possible that we get some tapering in the near term, possibly even in December.

What will matter as we see this tone and possibly action will be the reaction function of markets. IF yields push higher, IF Equity markets start to correct, IF housing numbers continue to moderate, IF emerging markets start showing stress again, will they hold the line and continue to steadily taper? We would like to think yes but a “Leopard does not change its spots”. Real GDP is very low by historic standards at this point in the cycle, official inflation (Core PCE) at the very low end of a 0.95% to 10.23% 43 year range (Stands at 1.2%) and the qualitative employment “recovery” is poor. We do not therefore believe that the Fed will “hold its nerve” if we get another negative reaction like we saw last summer to signals of imminent tapering.

In this instance it is far more likely (unfortunately) that they do not taper, or if they already have, that they reverse course and start to talk of other measures like inflation targeting/nominal GDP targeting etc. We hope not as we really think this would eventually be a strongly misguided and potentially disastrous course of action. History has shown that the longer an economy/market is subject to “interference” such that it becomes the norm rather than the exception then the worse the outcome eventually is. We cannot afford the danger of another 2000 or another 2007 in a zero bound interest rate environment and a Fed balance sheet potentially well North of $4 trillion.

Enough is enough. It is time to recognize reality. It is time to take monetary and fiscal responsibility. It is time to fix the excesses of the last quarter century+. It is time to take the pain today so that we can gain tomorrow. It is time to make this a better place for the next generation. Isn’t that what we are meant to do? That would be a much better legacy that that which are likely heading to if “Kick the can” remains the only “bankrupt” policy we have.

We honestly HOPE that this is the course we take. The US has a history of “finding a way”. As Winston Churchill famously said. “We can always count on the Americans to do the right thing, after they have exhausted all the other possibilities.”

America is exhausted… is time.

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kaiserhoff's picture

Ah shit.  Now I am worried.

When was Citi ever right about anything?


HardAssets's picture

Is this CYA, a set up for a trade,  or did these guys not get the memo from upstairs ?

Citi likes this sh*t, its keeping them 'solvent' (kinda)


No tapering . . . . . ever

markmotive's picture

Since when does anyone give a sh!t what the f@ckers at Citi have to say?

You want to know the scale of the hate-on for these big-city bankers, just look at the tweets from the #askJPM f@ckup.

Nexus789's picture

Maybe JPM sauced up Twitter to create a spike.

mmanvil74's picture

Part of the reason for many of these disconnects is that the S&P 500 has very little to do with the US economy, and a whole lot more to do with the global economy.  

In the global economy, we have growth, and global corporations are profitable based on that growth.  S&P 500 companies don't really need broad growth in US to remain profitable, they just need US to stay out of recession while the rest of the world continues to gobble up goods and services produced by the S&P 500 companies.  

What I would like to see is a revenue and profit breakdown of the S&P 500 based on geographical zones - what % of aggregate S&P 500 company's sales and profits come from different parts of the world?  My guess is USA is maybe 1/3 of profits, maybe less.  

So don't be surprised as "mainstreet USA" struggles, while S&P 500 rises - they are nowhere nearly as dependent on one another as people think.  

I am not saying S&P 500 is fairly priced today, it seems to be high and ready for a (significant) pullback, but, in a world of ZIRP, what else do you buy but the world's largest, most profitable company's stocks?

Stoploss's picture

It's becoming clear to some the more they monetize the worse it gets.

This is the part where the bond market panics, and tries to raise rates, causing Jan to crank the lever, driving the final nail in housing.

Dey gona be a whole lotta pissed off mo fo's come this time next year.

HoofHearted's picture

I prefer, "The Fed is about to kick the can into the house of cards."

stocktivity's picture

Blah blah blah...until the printing stops, It's all Bullshit!!!  The market crashes and Janet just prints dollars out of thin air and does a QE to buy stocks. Rally on.

Razzle Dazzle's picture

The wisdom is in your seemingly simplistic explanation. There is no great architecture. Continue throttling the gas, as there is no brake pedal or steering wheel. 

Deathrips's picture

See my post for Scotia Banks best and brightests revelations, for my exact thoughts on Citi revelations. Sigh....


Heres a heartfelt FUCK YOU BERNANKE!!



Edit: Thats funny Kaiser.... assume the position.

DoChenRollingBearing's picture

Scotia and Citi on the same day.  Hmm.  Now if we get GS to say something similar...:  Hmm!!

Bay of Pigs's picture

That's what I thought. Citi? Why is ZH putting this bullshit on here?

I didn't even bother to read it.

TaperProof's picture

I like how Citi is just now figuring this out... they should read ZeroHedge and especially the comments.

q99x2's picture

More evidence that we no longer need the FED.

PacOps's picture

When did we ever need it?

Ham-bone's picture




  • GDP $13.7 T
  • Marketable debt = $5.1 T  (blended interest rate of 5%)
  • Non-marketable debt $4.1 T
    • Fed  4% of Notes/Bonds/TIPS ($200 B)
    • Foreigner  42% of Notes/Bonds/TIPS ($2.2 T)


  • GDP $16 T
  • Marketable debt = $12.2 T  (blended interest rate of 2.3%)
  • Non-marketable debt = $4.9 T
    • Fed           22% of Notes/Bonds/TIPS ($2.2 T)
    • Foreigner  50% of Notes/Bonds/TIPS ($5 T)

Couple things to notice here -

1- "Foreigners" have purchased more T's than the Fed via it's QE since '08...even w/ all the talk of Russia or China abandoning the dollar, the exact opposite is happening in their T holdings (Russia up 3000%, China up 125%)...I really wonder if they are simply being given currency swaps with which to purchase the T's (ie, they put up nothing and have nothing to lose buying these T's...they are playing w/ Fed house money???)

2- the vulnerability to the dollar is greater (or less) than ever dependent how you look at it.  Never have foreigners owned more total or % wise of US T debt...which either means a sell off creates more of an interest risk than ever...or the co-dependency means "foreigners" will continue to buy ever greater % of currency to avoid the much anticipated "dollar collapse"...fuck if I know.

3- in another 5yrs from now if these trends were extrapolated out, could look like...


  • GDP $19 T
  • Marketable debt = $20 T  (blended interest rate of 1%)
  • Non-marketable debt = $3.5 T (SS surplus becomes clear deficit) 
    • Fed         40% of Notes/Bonds/TIPS
    • Foreigner  60% of Notes/Bonds/TIPS
bunzbunzbunz's picture

Holy you actually look things up and try to learn? That's good. It seems lost on people here that if there is indeed a currency war, the U.S. would need to be a part of it. And if it is indeed a war, why THE FUCK would gold be safe? Gold is the obvious 'safe haven' to every illiterate fuck that can't read a graph, so obviously those in the war may need to devalue it to hurt the enemy.

donsluck's picture

As many people look to the gold price as evidence of future inflation, and the FED wants inflation, and the FED believes inflation is mostly a mindset of expectations, wouldn't the FED WANT a higher gold price?

MrButtoMcFarty's picture

The REAL QE is still coming.

The Fed will double down before they taper.

Just my asshole opinion....

GrinandBearit's picture

Yes... double, even triple the amount of today's QE.  Nothing to stop them from doing this.

I also believe that Chinese will back the yuan with all the gold they are buying.  The new world reserve currency will be the yuan.

OwnSilverPlayMusic's picture

You can't stop this trainwreck.  Get a good bourbon, roll yourself a nice joint and just kick back and watch the fireworks. Learning mandarin wouldn't hurt either.

James-Morrison's picture

It's not like the writing is on the wall already.

You just have to look.

max2205's picture

I am convinced they will let the market 'correct' to 1200.....then it'll be flat for about 10 years....better than 667

Stuck on Zero's picture

Problem: The U.S. economy is in a major descent. 

Government solution:  Fed sends another trillion to the big banks and buys another trillion in T bonds.



q99x2's picture

Not many articles about CSCO and the NSA fallout or about the tech revolution against the NWO.

ChaosEquilibrium's picture

The COLLAPSE will be/is EPIC!!!!

29.5 hours's picture


"We would argue that QE encourages excessive misallocation of capital into financial markets"

And I would argue that there are people at Citi who have demonstrated, at last, the ability to detect the blindingly obvious.

I'm with kaiserhoff -- it is now sort of worrying that the Wall St. Journal and other mainstream sources are beginning to put out disaster vibes. Something is off.



rsnoble's picture

And what does Citi have to stand by for saying enough is enough?  Are they ready to initiate a mass short position?  Why should we listen and or trust this group of fucktards over the over?

rubearish10's picture

Great article and QEellen will not hold the line (and taper) because she did say today that another crisis must be avoided. So, why even take the chance??

Carl Popper's picture

She just told all of us to go full retard and that she has our back. Better listen.

explosivo's picture

Doesn't Citi own the Fed?

Mandel Bot's picture

When a too-big-to-fail bank bites the hand that feeds it, the feeding frenzy cannot be far off.

lakecity55's picture

It's good they can't print Gold.

Or Silver.

Got Fizz?

GrinandBearit's picture

WTF?  Citi is profiting from all of it!

Sleepless Knight's picture

why so responsible NOW?

Clowns on Acid's picture

Citi just doesn't get it, they are victims of their own cobwebbed thinking. Using technicals to analyze a fabian inspired QE printing scam ? Puh feckin' lease.

"Enough is enough. It is time to recognize reality. It is time to take monetary and fiscal responsibility. It is time to fix the excesses of the last quarter century+. It is time to take the pain today so that we can gain tomorrow. It is time to make this a better place for the next generation. Isn’t that what we are meant to do? That would be a much better legacy that that which are likely heading to if “Kick the can” remains the only “bankrupt” policy we have.

We honestly HOPE that this is the course we take. The US has a history of “finding a way”. As Winston Churchill famously said. “We can always count on the Americans to do the right thing, after they have exhausted all the other possibilities.”America is exhausted… is time."

They have yet to realize that the Fabians' do not give a shiite about " pain today for gain tomorrow" or "better place for next generation". The Fabian response is - STFU and get ready to pay for everyones SNAP card, Obamaphone, and ObamaCare, and higher capital gains taxes on your equity market gains.... ' cause you didn't build that... QE did.

The Fabians will drive equities higher and higher. It will keep the sheeple believing that they are "making money" or "getting rich" from QE like they are supposed to be based on the ClubFed policies. Cramer said tonight that it is a good thing and the people should just's not a bubble if you don't think its a bubble.

As equities go higher and higher... the retreat from QE becomes moar and moar difficult. If there is a USD crisis, then there will aslo be a Euro and Yen crisis... oh buy gold you say ? Right...the Fabians have showed historically, that they will just outlaw using gold as a currency. The Fabians will look for an Int'l, comon currency...SDRs or soemhting similar.

I do agree with Citi on this point.... it is getting very late and the point of no return is nigh.  

jim249's picture

I am just glad there are large organizations screaming form the top of their lungs that enough is enough! It is TIME!

buzzsaw99's picture

Ungrateful bastards.

You only exist out here because of me! That's the only reason! Without *me*, you, personally, every fuckin' wise guy skell around'll take a ... whether you know this or not, but you only have your fuckin casino because I made that possible. [/Nicky "federal reserve" Santoro]

akarc's picture

This is so much garbage I'm gonna have to clean the spit off my computer screen. A Banks saying enough is enough? After they already have it all?  A market that is nothing more than a bunch of rich fucks playing poker with stocks? Ante up boys how many walmarts for a facebook, oh yeah slave boy, bring us another round.

What has happened, what should happen, what might happen, what probably will happen, if, if and if some more. The commentary has become as absurd as the reality.  

ChaosEquilibrium's picture

Ever day going forward the FED is reducing the "pool of useful people' in a future societal structure!!  Bankers, Traders, Management, Lawyers, Politicans....I truly hope you are acquiring "useful skills"...but I DO NOT wish you 'luck'-----YOU ARE BECOMING just might not realize that eventual FACT!

starman's picture

This train is about to crash in to the ticket booth! Good luck with that.

Cabreado's picture

Nausea-inducing article, from every angle, including seeing it here.

The only worthiness comes from where The Sickness is being INvoluntarily exposed, little by little... and that's how it works.


surf0766's picture

See they know it is over. None of them want the credit for what is coming. The "see we told ya so's" are out in force.

We must be closer than anyone knows. Nice bill in Russia this week.  How strong is the dollar again in Kramerika?

Notarocketscientist's picture

Nah - it is not time.

The central banks know that there is no way out of this - if they taper we collapse NOW - if they don't taper we will collapse but it will be delayed - and it will still be an absolute collapse

Do you want to collapse now or LATER?

I prefer later.

So what do we see? More crazy policies like lending money to clowns to buy cars in order to keep auto sales from going off a cliff.  Bernanke is not stupid - he knows this is a crazy policy.  But it's better than the alternative.

The reality is that we have reached the end of growth because we have reached the End of Cheap Energy


Scientists Wary of Shale Oil and Gas as U.S. Energy Salvation

Hughes sums up: "Tight oil is an important contributor to the U.S. energy supply, but its long-term sustainability is questionable. It should be not be viewed as a panacea for business as usual in future U.S. energy security planning."



U.S. Shale-Oil Boom May Not Last as Fracking Wells Lack Staying Power

“I look at shale as more of a retirement party than a revolution,” says Art Berman, a petroleum geologist who spent 20 years with what was then Amoco and now runs his own firm, Labyrinth Consulting Services, in Sugar Land, Tex. “It’s the last gasp.”



Robert Ayres, a scientist and professor at the Paris-based INSEAD business school, wrote recently that a "mini-bubble" is being inflated by shale gas enthusiasts. “Drilling for oil in the U.S. in 2012 was at the rate of 25,000 new wells per year, just to keep output at the same level as it was in the year 2000, when only 5,000 wells were drilled."


Why America's Shale Oil Boom Could End Sooner Than You Think



Overinflated industry claims could pull the rug out from optimistic growth forecasts within just five years.  A report released in March by the Berlin-based Energy Watch Group (EWG) concluded that: "... world oil production has not increased anymore but has entered a plateau since about 2005."  Crude oil production was "already in slight decline since about 2008." 

edotabin's picture

Fracking was the only way out (that I could see) of this death spiral. We make nothing, we do nothing, we know nothing, we learn nothing..... At some point, it will be reduced to ....nothing.