"Two Roads Diverged" - Wall Street's Doubts Summarized As "The Liquidity Tide Recedes"

Tyler Durden's picture

From Russ Certo, head of rates at Brean Capital

Two Roads Diverged

As we know, it has been a suspect week with a variety of earnings misses.  Although I have been constructive on risk asset markets generally, equities anecdotally, as figured year end push for alpha desires could let it run into year end.  New year and ball game can change quickly.  Just wondering if a larger rotation is in order.                        

There is an overall considerable theme of what you may find when a liquidity tide recedes as most major crises or risk pullbacks have been precipitated by either combination of tighter monetary or fiscal policy.  Some with a considerable lag like a year after Greenspan departed from Fed helm, or many other examples.  I'm not suggesting NOW is a time for a compression in risk but am aware of the possibility, especially when Fed Chairs take victory laps, Bernanke this week.  Symbolic if nothing more.       Cover of TIME magazine?

I happen to think that 2014 is a VERY different year than 2013 from a variety of viewpoints.  First, there appears to be a dispersion of opinion about markets, valuations, policy frameworks and more.  This is a healthy departure from YEARS of artificialityArtificiality in valuations, artificiality in market and policy mechanics and essentially artificiality in EVERY financial, and real, relationship on the planet based on central bank(s) balance sheet expansion and other measures intended to be a stop-gap resolution to  tightening financial conditions, adverse expectations of economic activity, and the great rollover....of both financial and non-financial debt financing.       Boy, what a week in the IG issuance space with over $100 billion month to date, maybe $35 billion on the week.        Debt rollover on steroids.        

Beneath the veneer of market aesthetics, I already see fundamental (and technical) relevance.  This could be construed as an optimist pursuit or reality that markets are incrementally transcending reliance and/or dependence on the wings of central bank policy prerogatives.  The market bird is trying to fly on its own with inklings of a return to FUNDAMENTAL analysis.  A good thing, conceptually, and gradualist development of passing the valuation baton back to market runners.  A likely major pillar objective of policy despite more than a few critics worried about seemingly dormant lurking imbalances created by immeasurable policy and monetary and fundamentally skewed risk asset relationships globally. 

This exercise of summarization of ebb and flow and comings and goings of markets and policy naturally funnels a discussion to what stature of central bank policy currently or accurately exists?  Current events.  What is the accurate stage of policy?

I actually think this is a more delicate nuance than I perceive viewed in overall market sentiment. Granted, we have taken a major step for mankind, which is the topical engagement of some level of scope or reduction of liquidity provisioning,” not tightening.”  Tip of the iceberg communique with markets to INTRODUCE the concept of stepping off the gas but not hitting the break.  Reeks of fragility to me but narrative headed in right direction to stop medicating the patient, the global economy.

Some markets have logically responded in kind.  The highest beta markets as either beneficiaries or vulnerable to monetary policy changes, the emerging markets, have reflected at least the optics of change with policy.  More auditory than optics in hearing a PROSPECTIVE change in garbled Fedspeak.  The high flyer currencies which capture the nominal flighty hot money flows globally affirmed the Fed message. 

In literally the simplest of terms, the G7 industrialized, not peripheral; interest rate complex has simply moved the needle in form of +110 basis point higher moves in nominal sovereign interest rates.  And there are a bevy of other expressions which played nicely and rightly conformed to the messages coming out of the central bank sandbox.  But there are ALSO notable dichotomies, which send a different or even the opposite message.

I perceive a deviation in perception of message as some markets or market participants appear to be betting on taper or a return to normalcy in global growth or U.S. growth outcomes???  OR no taper, or conversely QE4 or whatever.  Sovereign spreads have moved materially tighter vs. industrial and supposed risk free rates (Tsys, Gilts, Bunds) both last year and in the first three weeks of 2014. Something a new leg of QE would represent, not a taper.   A different year!!!

There have been VERY reliable risk asset market beta correlations over the last 5 years and sovereign or peripheral spreads have been AS volatile and correlated as any asset class.  These things trade like dancing with a rattle-snake.  Greece, Spain, France etc.  They can bite you with fangs.  They have been meaningfully more correlated to high yield spreads and yields and to central bank balance sheet expansion as nearly any asset class.  So, the infusion of central bank liquidity into markets has seen "relief" rallies in peripherals and one would think the converse would be true as well.  The valuations have represented the flavor and direction of risk on/risk off or liquidity on/liquidity off reliably for many months/years.

But I THOUGHT markets were deliberating tapering views and expressions as validated by some good soldier markets BUT that is not necessarily what the rally in riskiest of sovereign "credits" is suggesting.  The complex seems to be decoupling with Fed balance sheet correlation and message.  Some are OVER 100 standard deviations from the mean!  They are rich and could/should be sold.     Especially if one was to follow the obvious correlation with the direction of central bank as stated.

But look to other arena's like TIPS breakevens which also have been correlated with liquidity and risk on/off and central bank balance sheet expansion.  Correlated to NASDAQ, HY, peripherals and the like.   BUT this complex COUNTERS what peripherals are doing.  They haven't shown up to the punch bowl party yet.  Not invited.      This is a departure of markets that have largely and generally been in synch from a liquidity and performance correlation view.

Like gold and silver which got tattooed vis a vis down 35%+ performance last year MOSTLY, but not exclusively, due to perceptions of winds of central bank change.  BUT even within a contrary, the fact that rallies in Spain, France, Greece, and Italy reflect more of central bank easing notions, the opposite of taper.  In essence, the complex has gone batty uber-appreciation this year.  Sure, many eyeball the Launchpad physical metals marginal stabilization no longer falling on a knife but the miner bonds and the mining stocks are string like bull with significant appreciation.  This decidedly isn't the stuff of taper which had the bond daddy's romancing notions of 3% 10yr breaks, 40 basis point Green Eurodollar sell-offs,  emerging market rinse, and upticks in volatility amongst other things.

Equity bourses appear to be changing hands between investors with oscillating rotations which mark the first prospective 3 week consecutive sell-off in a while.  New year.  This is taper light.       Somewhere in between and further blurs the correlation metrics. 

So, which is it?  Are we tapering or not and why are merely a few global asset classed pointed out here, why are they deviating or arguably pricing in different central bank prospects or scenarios or outcomes? 

I'm not afraid but I am intrigued as to the fact that there may some strong opinions within markets and I perceive a widely received comfortability with taper or tightening notions, negative leanings on interest rate forecasts, a complacency of Fed call if you will.  And all of these hingings occur without intimate knowledge of the most critical variable of all, what Janet Yellen thinks? She has been awfully quiet as of late and there are many foregone conclusions or assumptions in market psyche without having heard a peep from the new MAESTRO.

Moreover, looking in the REAR view mirror within a week where multiple (two) Fed Governor proclamations, communicated and implicated notions which arguably would be considered radical in ANY other policy period of a hundred years.  How to conduct "monetary policy at a ZERO lower bound (Williams) " and "doing something as surprising and drastic as cutting interest on excess reserves BELOW zero (Kocherlakota)."

This doesn't sound like no stinking taper?  A tale of two markets.  To be or not to be.  To taper or not to taper.  Two roads diverged and I took the one less traveled by, and that has made all the difference.  Robert Frost.

Which is it? Different markets pricing different things.  Right or wrong, the market always has a message; listen critically.    


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IridiumRebel's picture

The global economy as a "patient" in recovery is wrong. The global economy is a Zombie. The electricity and liquidity of Dr. FEDenstein will soon run short and the Zombie will return to the realm of the dead; lifeless.

_ConanTheLibertarian_'s picture

Indeed. It's clearly a patient on life support. You can't just remove some of it.

Thomas's picture

Either that is some seriously twisted prose, or somebody better call 911 because I am having a stroke.

Doña K's picture

I urge the zerohedge community to coin Yellen's metonym as "La Maestra"

Headbanger's picture

Nahhh.. Have a scotch or two like me and it reads quite well, actually.

TuesdayBen's picture

Fragmented sentences.  Lots of them.  An editorial assistant.  For Russ, please.

DaveyJones's picture

I found Bernanke's favorite Frost poem:

Nature’s first green is gold,
Her hardest hue to hold.
Her early leaf’s a flower;
But only so an hour.
Then leaf subsides to leaf.
So Eden sank to grief,
So dawn goes down to day.
Nothing gold can stay.

boogerbently's picture

Everyone is mezmerized by the:

"Two roads diverged and I took the one less traveled by, and that has made all the difference."

I think the key line is:

"Though as for that the passing there had worn them really about the same."

It's about choices, and "rationalizing" them.

Winston Churchill's picture

A corpse awaiting a final  bowel evacuation before burial, at least the US economy is.

drchris's picture

Increase in Real GDP from 2012Q3 to 2013Q3: 305 Billion 

Total QE from 2012Q3 to 2013Q3: 1,020 Billion

Real GDP - QE = -715 Billion

There is no economy w/o QE.

Greenskeeper_Carl's picture

pretty sad state f affairs when after all this in the article, the only thing that really matters is the new head of the central bank, and how much money she will print. That tells you all you need to know about "free markets" in this country where they go up or down based on this one persons actions

Thomas's picture

Yellen will get challenged, she will shit a pickle, and then turn to the playbook that saved her predecessors's bacon in the past. 

TuesdayBen's picture

Pickles. Yellen. Bacon. Yuck.

Greenskeeper_Carl's picture

and it will probably work, for a little while. But we have reached the point of diminishing returns with printing moar money. It is taking more and more to get less and less, and eventually the rest of the world will grow tired of our money printing shenanigans and reject our debt and dollar.

DaveyJones's picture

I'd rather shit a pickle that pick a shittle

machineh's picture

'There appears to be a dispersion of opinion about markets.'

Whereas at Nasdaq 5000, even bears had thrown in the towel, in pragmatic recognition that momentum trumps everything (until it doesn't).

S&P 2K by springtime. That's Yellen's unwritten target, I'm told. (Don't taze me bro; I'm just the messenger.)

Ignatius's picture

Gold closed above $1250/oz on weekly chart.  Might be significant.

RaceToTheBottom's picture

I keep hearing a close over 1270 would be significant...

Tinky's picture

I find neither your, nor the original poster's contribution to be of any significance.

RaceToTheBottom's picture

I find your reply to be of less significance than my reply

duncecap rack's picture

Tyler's. Could you please reprint critical market crashes? I tried hard to digest it when you printed it before but I don't think I quite got it. I think i remember a confused dispersed market sentiment like this as being the ideal starting condition.

put_peter's picture

This time it is different... err 2014 is different...

ebworthen's picture

This was hard to read; some jumbly writing.


"Sure, many eyeball the Launchpad physical metals marginal stabilization no longer falling on a knife but the miner bonds and the mining stocks are string like bull with significant appreciation."

I'll cut you a break if English is not your native tongue.

The markets are rigged, and the FED is going to take the floor out from under the cotton candy equity markets when their masters tell them to.

It has nothing to do with policy or inflation/employment and everything to do with fleecing the general public.

As far as rotation in and out of sectors and sovereign bond and equity markets oscillating wildly it is about speculation (gambling).

Rampant speculation and jiggering of sectors and currencies by the whales - provided with endless betting money via central bank theft of public treasuries.

These are not markets; this is the Casino in Biff's World, and the main street of Potterville.


What could possibly be different if the same parasites control the markets. Same as it ever was.                                                                                           @put peter

nowhereman's picture

"Like gold and silver which got tattooed vis a vis down 35%+ performance last year MOSTLY, but not exclusively, due to perceptions of winds of central bank change. "

Nope. Due to manipulation by your friendly neighborhood mega bank. 

Come on people, if this guy doesn't know that, what else doesn't he know?

His analysis is as bogus as his premis.

Save_America1st's picture

or 2014 is going to just be more of the same from the kleptocratic lunatics who are running the asylum.  More oppression, more tyranny, more militaristic police state, more war drums beating, more loss of freedom and liberty (especially all of that here in America), more taxes, fucked up laws that create more poverty, more fines, fees, regulations, higher costs, lower earning ability, less job opportunity, more loss of privacy, more surveillance, on and on and on...I mean, you fucking name it and if it's anything they can do to screw with us they're going to keep fucking do it and then some until something finally snaps one way or another.

There is no rosey upside because the same sociopaths and Marxists are still going to be running/ruining everything.  And hey...those fuckers haven't been working hard to take America down for over 100 years just to give up now!  They mean to dismantle this country and our Constitutional rights and nothing is going to stop them short of a major civil war and their heads rolling around on the ground free of their torsos.  Every last fucking one of them. 

Does anyone actually think diplomacy or politics or "compromise" or any of that bullshit is going to work against these crazy fuckers?  That's all just a smoke screen used by BOTH sides in order to keep the sheeple in a fog while the wheels of destruction come rolling on in over us. 

They're purposely destroying this world in order to solidify ultimate power and control over us while they rule us like slave masters.  This is becoming a prison planet.  That's not going to change unless and until it all collapses and we fight it out hard core face to face.

These people doing this to us are evil sons of bitches.  If you think about it, they're like a completely alien race compared to us.  I think that's how they should be treated:  As a hostile alien race who are trying to take over our planet.  Would the world just roll over and show our bellies if a hostile alien race came to invade us and enslave us or exterminate us???  Fuck no!  We'd fight until the last man standing.  

Well why in the hell our we letting these psychos do the same thing to us???  They and all they believe in are totally alien to freedom and liberty and our natural rights as human beings.  These people are dillusional science fiction freaks who think they can dominate us any way they want.  Fuck that.  

I call them MUTANTS...because zombies are fake, but MUTANTS are real:

Marxist, Utopian, Treasonous, Authoritarian, Nepharious, Tyrannical, Sociopaths

As far as I'm concerned they're an alien race of MUTANTS who threaten our free and peaceful way of life and they can take their new world order and shove it up their ass.   

2 quotes from the same dude:

"A nation can survive its fools, and even the ambitious. But it cannot survive treason from within. An enemy at the gates is less formidable, for he is known and carries his banner openly. But the traitor moves amongst those within the gate freely, his sly whispers rustling through all the alleys, heard in the very halls of government itself. For the traitor appears not a traitor; he speaks in accents familiar to his victims, and he wears their face and their arguments, he appeals to the baseness that lies deep in the hearts of all men. He rots the soul of a nation, he works secretly and unknown in the night to undermine the pillars of the city, he infects the body politic so that it can no longer resist. A murderer is less to fear. The traitor is the plague."


Marcus Tullius Cicero - (106-43 B.C.) Roman Statesman, Philosopher and Orator


“The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.” –Cicero – 55 BC 


Rome collapsed...and so will this entire world if we don't fight back against these animals.

koncaswatch's picture

Since we're quoting here...  Another timely quote:

"Sooner or later everyone sits down to a banquet of consequences." - Robert Louis Stevenson

Tinky's picture

Of all the words to misspell...

besnook's picture

i think they think they may have pulled it off with europe lagging a bit but certainly bottomed(by their estimation). i think they think the fed is god and yellen is jellin'. i think when people in power think everything in the process of a sinking ship is going according to plan i should be thinking of abandoning ship.


atomp's picture

WTF was that!? Google translate? Please tell me English is not this guys native tongue.

glenlloyd's picture

His writing is very difficult to read....

starman's picture

The surgery went well but the patient
Didn't survive!

Inthemix96's picture

Christ, did Boris write this?

Very hard reading through this ZH.  He may of had a point, but I do believe because I cant understand it, I missed it.  1*


GooseShtepping Moron's picture

I'll agree with the general opinion that somebody had better get that man an editor.

Fuh Querada's picture

He is the brother of "Fuc to Market".

q99x2's picture

What you are listening for is called a "false flag."

Tinky's picture

I wonder what Russ' first two languages are?

csmith's picture

Exactly. Unclear writing is a sign of unclear thinking.

Laughing Stock's picture

This post = pile of useless verbose wordy shit

ZH needs someone to be a gatekeeper and shitcan garbage like this before it hits the site

Quality not Quanity please!

You don't ned to post a new entry every 5 fucking seconds

Shit like this, Pheonix Crapital, Russ Winter, and a host of other who-haa nonsense douchebag posters are diluting the brand

Please, use some fucking restraint

Thank you!

disabledvet's picture

After spending 5 seconds word clouding this I pressed the Kate Upton button.

Kreditanstalt's picture

WHAT is this guy trying so hard to say?

TimmyM's picture

He has been trying to trade a rigged bond market for years and it is driving him crazy. He is paid to care, and to have an opinion. Years of ZIRP and QE are killing bond traders in the brain first.

satoshi101's picture

YELLEN is queen for eternity.

YELLEN has already telegraphed all


Negative Savings Rates


The neg saving rates, means old people will flee fixed account banking an hide their money in the stock market.

What other outcome?

DOW to the MOON, USD to the MOON

Bond's to hell

Bitcoin to zero


Ned Zeppelin's picture

Another bullshit "QE is over, so let's reflect" story.

How stupid does the author think we are are? QE is far from over.

Paracelsus's picture

If we had stopped the export of our blue collar jobs....

If the highly inflationary Vietnam war had been avoided.....

If we had managed to maintain a two tier system,gold/silver and paper....

If we had limited the growth of the Gov't,especially the intelligence bureaucracy that keeps us all "safe"....

If we had confirmed mandatory 15 year prison sentences for fraud on Wall Street....

If the GSE's Fannie Mae and Freddie Mac had never been created... 

If there were no bailouts ever as a policy.Put risk back on the table.....

If the print button at the FED could only be activated by an elected group of citizens from the poorer districts.....

If only....

Why do we have to go thru the '29 crash again? People starving... Why? Another useless war no doubt...Why?