"The Stuka" - How The Fed Manipulates You Into Believing What It Wants You To Believe

Tyler Durden's picture

Submitted by W. Ben Hunt of Epsilon Theory

Up to the walls of Jericho
With sword drawn in his hand
Go blow them horns, cried Joshua
The battle is in my hands

      – “Joshua Fit the Battle of Jericho”, traditional African-American spiritual

The Stuka

At the outset of World War II, the German Luftwaffe attached an ear-splitting siren – the Jericho Trumpet – to the Junker Ju-87 dive-bomber, commonly called the Stuka. Dive-bombers are wonderful tactical aircraft if you have control of the skies, highly effective against tanks, vehicles of all sorts, even smaller ships, but they simply don’t carry enough ordnance to be a strategic weapon. They can certainly help you win a battle, but they’re unlikely to help you win a war. By attaching the Jericho Trumpet, however, the Stuka became a psychological weapon as much as a physical weapon, striking fear in a much wider swath than the actual bombs. During the early Blitzkrieg days of the war, the Stuka had exactly this sort of strategic effect, crushing the morale of the Polish army in particular.

Because it was a propeller-driven siren, the Jericho Trumpet actually made the Stuka a less effective dive-bomber, slowing its air speed and making it an easier target to hit. This was a trade-off that the German High Command was happy to make so long as the Stuka maintained its mystique as a terrifying harbinger of death from above, but that mystique was shattered once the Royal Air Force started shooting them down by the dozens in the Battle of Britain. By the end of 1940 the Stuka was almost entirely redeployed from the Western Front to the East, and those planes that remained had their sirens removed. As Churchill famously said of the RAF, “never was so much owed by so many to so few,” and it’s the psychological dimension of this victory that is so striking to me. I don’t think it’s a coincidence that the military tides of World War II shifted in the West at exactly the same moment that the Luftwaffe took off the Jericho Trumpet and the Stuka lost its mojo.

Today the financial media – and the WSJ’s Jon Hilsenrath in particular – is the Fed’s Jericho Trumpet. Unlike the Luftwaffe, the Fed is not trying to inspire terror, but they are similarly trying to turn a powerful tactical weapon into a strategic weapon through psychological means. The Fed is now embracing the use of communication as a policy tool in a totally separate manner from whatever concrete actions the communication is ostensibly about, and they use Hilsenrath (and a few others) as a modern-day Joshua to blow the horn. The Fed is now playing the Common Knowledge game openly and directly, making public statements through their media intermediaries to tell you how ALL market participants perceive reality, even though in fact NO market participant has a clear view of reality. In the Common Knowledge game – whether it’s the Island of the Green-Eyed Tribe that modern game theorists write about, the Newspaper Beauty Contest that Keynes wrote about in the 1930’s, or the Emperor’s New Clothes that Hans Christian Andersen wrote about in the 1830’s – the strong public statement of what “everyone knows” creates a reality where it is rational behavior for everyone to act as if they, too, see this reality … even if they privately don’t see it at all.

Here’s the money quote from Hilsenrath’s article last Friday after the November jobs report, titled (self-referentially enough) “Hilsenrath’s Five Takeaways on What the Jobs Report Means for the Fed”:

MARKETS BELIEVE TAPERING ISN’T TIGHTENING: Markets are positioned more to the Fed’s liking today than they were in September, when it put off reducing, or “tapering,” the monthly bond purchases. Most notably, the Fed’s message is sinking in that a wind down of the program won’t mean it’s in a hurry to raise short-term interest rates. Futures markets place a very low probability on Fed rate increases before 2015, in contrast to September, when fed funds futures markets indicated rate increases were expected by the end of 2014. The Fed has been trying to drive home the idea that “tapering is not tightening” for months and is likely to feel comforted that investors believe it as a pullback gets serious consideration.

In truth, the shift in the implied futures market expectations of short-term rate hikes from late 2014 into early 2015 says nothing about what “The Market” believes about tapering. It says a lot about the enormous effort that the Fed is putting into its forward guidance on rates, as a communications policy replacement for its prior reliance on forward guidance and linkage of unemployment rates and QE (a mistake that I wrote extensively about at the time and is now universally seen as a policy error). The Fed, through Hilsenrath, is trying to tell you how you should think about tapering. Not by giving you a substantive argument, but simply by announcing to you in a very authoritative voice what everyone else thinks about tapering.

Hey, don’t worry about tapering. No one else is worried about tapering. You are totally out of step with all the smart people if you’re worried about tapering. It’s duration of ZIRP that matters, not QE. Don’t you know that? Everyone else knows that. Maybe you’re just not very smart if you can’t see that, too. Can you see it now? Ah, good.

This is game-playing in an almost pure form. It’s smart and it’s effective. The siren from above is starting to wail: if you react negatively in your investment decisions to tapering, you are Fighting the Fed.

The bombs are going to drop – increased forward guidance on rates and decreased direct bond purchases – but these policies in and of themselves are just tactical. What’s really at stake is the strategic meaning of these policies, the belief system that takes hold (or doesn’t) around the power of the Fed to create market outcomes.

Over the next three or four months we’re going to see quite a battle for the hearts and minds of investors, with both “sides” employing the Narrative of Don’t Fight the Fed. On the one hand you will have the Fed, with their Jericho Trumpet of Hilsenrath et al shrieking at you a new interpretation of the Narrative: ZIRP is the source of the Fed’s power, not QE, so tapering is no big deal. On the other hand you also have the Fed, but the Fed of the past several years and the way it has trained the market to believe that the portfolio rebalancing effect … i.e., the behavioral impact of QE that Bernanke has directly credited with driving up the stock market … is what really matters. And if that’s your reality, then tapering is a big deal, indeed. I’ll be monitoring all this closely at Epsilon Theory in the weeks ahead.

Importantly, this psychological battle is taking place entirely within the larger Narrative of Central Bank Omnipotence. If the QE meme wins the day and tapering ends up hitting the markets hard … well, it’s Fed balance sheet operations that determine market outcomes. If the ZIRP meme wins the day and tapering is a non-event … well, it’s Fed forward guidance on rates that determines market outcomes. Either way, it’s a Fed-centric universe. Forever and ever, amen.

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seek's picture


We're in a negative interest rate environment and people for the most part don't even realize it. If they taper, they will have to do something else to maintain NIRP, and people will like it even less.

BoNeSxxx's picture

Interesting aside... no Stukas survived WWII.  Not one.  Every one seen since has been a recreation.


Kinskian's picture

Some did survive the war, I have a photo in my collection of at least one that was captured intact in southern Germany at the end of the war. Whether any survived the peace is another matter. 

NotApplicable's picture

I hope the resident "have to taper" Tyler read this piece.

It's sad seeing one of our own Tyler's used as a Fed propaganda tool.

Sure, Taper Tyler might be right from a market perspective...

but that's the joke, isn't it?

asteroids's picture

Of course tapering is tightening. Once you remove liquidity from the system, it'll go down. The FED is trying some kind of Jedi mind trick, it won't work here.

Lin S's picture

I think you're thinking of the Do-17.  There are Stukas inside the Imperial War Museum, I believe.

Headbanger's picture

Nein. Zahlreiche Do-17 überlebten den Krieg. Sehen Sie diese.


Und zwei Junkers JU-87 Stuka den Krieg unbeschadet überstanden


optimator's picture

A5+HL is still in the Chicago museum of Science and Industry, and one in the Imperial War Museum in england.

Analyse2's picture

The strange thing is that it was the Stukas which plaid the first role in the defeat of French army in 1940.

It is the air superiority (over 1,000 Stuka bombers knocked out the troops defending Sedan) and also the intelligent and massive use of the German panzers that broke the defenses.

The Stukas also greatly jeopardized all the subsequent counter-attacks.

Since WW2, air superiority is the winning key of all battles, and in 1940 the Stukas were the first and perfect illustration of this new fact  

alangreedspank's picture

NIRP * (15 years) = 1 generation of DERP investors.

duo's picture

$3 in interest income lost by savers for every $1 saved by borrowers (corporations floating debt to buy back their own stock not included), what could go wrong?

Dollar Bill Hiccup's picture

This is an excellent piece.

There are inherent problems with manipulation of self reflexive systems.


kito's picture

The bombs are going to drop – increased forward guidance on rates and decreased direct bond purchases – but these policies in and of themselves are just tactical.


im going to guess most on this site dont think much of an article that insists there will be a tapering, nor would most on here take for gospel that its a fed centric world "forever".


NOZZLE's picture

Self reflexive, the Stuka bomb drop mechanism was controlled by an altimeter that unshackled the bomb and pulled back on the stick at the same time because the amount of force on the stick required to come out of the dive was greater than any pilot was capable of.

optimator's picture

Automatic pull out to protect pilot from black out.

booboo's picture

My dad a flew for belguim and he told me about the time he was surrounded by  Fokkers, i explained to a friend that a Fokker was a german plane and my dad said yes, but these fokkers were Messerschmitts

frenzic's picture

It was a dutch planemaker but soit.

Mrmojorisin515's picture

I love how everyone is harping about negative interest rates "it'll make it easier to service the debt" which as we've all learned for the past 30 years is utter bullshit because we've had inflation (generally much higher then what is reported) and yet the debt is still unservicable.  Debt still ways a shit ton when you don't increase the wages of your employees which is why they took on the debt generally in the first place.......


graspAU's picture

“While boasting of our noble deeds, we are careful to conceal the ugly fact that by our iniquitous money system we have nationalized a system of oppression which, though more refined, is not less cruel than the old system of chattel slavery.”
-Horace Greely -1872, in writing his opinion of the National Banking Act.

“Debt is the fatal disease of republics, the first thing and the mightiest to undermine governments and corrupt the people”
-Wendell Philips

“When you borrow you lose a little bit of sovereignty, no matter who you are…”
-Brian Lenihan, Irish Finance Minister – November 16, 2010


Colonel Klink's picture

I can't wait until people wake up and Central Bankers start being hung by the dozens!

BadDog's picture

is it hung or hanged?  I can never get that straight.

Colonel Klink's picture

Whichever, the results are still beneficial.

Headbanger's picture

It's "hanged" Herr Oberst! 

Colonel Klink's picture

Thanks Headbanger!  I'll use the mnemonic of, bankers should be hanged, but I'm hung!  Both would be accurate, knockwurst baby!

10mm's picture

When the people wake up. Right tee O.

Colonel Klink's picture

Yeah that's the operative need.  Sadly!

fockewulf190's picture

I´m stacking no matter what some chump over at the WSJ gets forced fed to blab about.  None of them can convince me "they" have the 1 quadrillion derivative exposure timebomb defused and set back to safe.  It´s going to blow and vaporize all paper assets with it.  Prepare accordingly and shut your ears to the continuing games of the propagandists.

NotApplicable's picture

Why would anyone ever believe the bomb has been defused when they've been adding trip-wires to every exit?

fockewulf190's picture

What is pitiful is that most people don´t have the faintest clue that there is even a bomb to begin with.  These insane idiots running the circus are going to end up Mad Maxing the lot of us.

optimator's picture

The path to the exit door should have a little sign reading "Achtung Minen", but it doesn't.

BidnessMan's picture

The sign over the exit door reads Arbeit Macht Frei

Kinskian's picture

Clicked on this post for the JU-87's. Heil Hans-Ulrich Rudel!


Colonel Klink's picture

Amazing man and pilot. 

A small piece of family history.  My grandfather was so good at anti-aircraft gunnery, he was ordered to be an AA gunner on Hitlers Train.  Since he was regular conscript (not Nazi or SS), he obviously couldn't refuse his orders.  He simply believed in serving his nation and being the best he could be at any job he did.  Toward the end of the war he captured by the Russians.  He later escaped the Russian camp and at the encouragement of American troops, ran to the American prisoner camp while being shot at by the Russians.  Until the day he died, he still had shrapnel embedded in his arm from a grenade.  He rarely ever spoke of the war, it took a toll on him as it does on all men who experience the horrors firsthand.  RIP Opa.

TheSkipper1967's picture


I to had an Opa that I never knew.  He fought in the east and did come back but died of lung cancer.  My mother is German and I was born in Germany to a GI.  All I have from him is a family photo of him in uniform (regular Army) and his family, plus an old hat of his.  I look at that photo today and wonder if I will be in the same situation giving up my sons to a war.  I hate no man that does right by his family. 

Kinskian's picture

You and the Colonel should both obtain your grandfather's military records from the German Archives. You might also try searching the captured German records at the National Archives in DC.

Katrillion's picture

I obtained my Opi's Wehrmacht records from the German archives. Took about a year and a small fee.

Colonel Klink's picture

I have several photos of both my grandfather (WWII) and great grandfather (WWI) in uniform.  I'm sorry you never had a chance to meet him.  My Opa wasn't a "warm" man, never said he loved you, but he was tough, determined, and you KNEW he'd kill for you if anyone ever messed with his family.  I've got many of those same traits.

I have a couple other stories I was told.  This was just outside of Kaiserlautern around 1943 or so, as they were walking the countryside. - He tackled my grandmother (who was carrying my mother as a baby) as she was running towards a barn during an air raid, just before the barn blew up (he was on leave).  Saving both of them from certain death.  My mother grew up in post WWII Germany very poor.  Probably explains my frugal nature.

I sympathize with both sides and those caught in the middle too.  My father served in the Air Force for 27 years.  It's not just the service member who sacrifices but the family too.

While I'm not a big believer, God bless to you and yours.

EDIT:  Thanks to all who gave an up arrow for your respect.

fockewulf190's picture

Been living in Bavaria since 1994 after a 3 year stint watching the Wall fall.  It´s hard to believe this place today was once the absolute center of one of the most evil regimes in the history of mankind. 

Colonel Klink's picture

Hint - They're still there!  Much of the surrounding countries are still home to the families of the Central Banks.  Different than the "official record of history", it has been said that there were other forces behind Hitler driving him.

WOAR's picture

Even when someone is your enemy, you have to admire their tenacity.

Colonel Klink's picture

I believe agent K in Men in Black summed up the human race....damn what a gullible breed!

RaceToTheBottom's picture

Quick open the curtain and peek behind it.  The guy behind it is fairly wheezly and not all that smart.

kchrisc's picture

Are there still people that believe anything a pol, crat or bankster says anyways?