Things That Make You Go Hmmm... Like Every New Fed Chair Gets A Test

Tyler Durden's picture

Ordinarily Grant Williams would bet the ranch on this spat being defused diplomatically and everybody leaving the negotiating table a little disgruntled (which would mean the outcome was just about perfect); but he suspects that markets have become dangerously conditioned — by one perfectly executed landing after another in recent years — to expect (and position for) the best.

As I was mulling all this over today, a good friend emailed me and asked me my thoughts on exactly this topic.

The man in question is one of the very brightest minds it is my pleasure to be able to call on for advice and counsel, and so I thought, what better way to tidy up this week's many questions than by including the culmination of our email conversation (though with the odd expletive removed and certain names changed to protect the innocent):

On 15 Mar, 2014, at 12:10 pm, Mr. Big <> wrote:

apples to apples? ok, so why, how, what to do?

On Sat, Mar 15, 2014, at 12:26 AM, Grant Williams <> wrote:

My worry is this (I'm writing about it right now):


Markets have become conditioned to Goldilocks outcomes manufactured by CBs & govts over a period of three years when EVERYTHING should have gone wrong but nothing has.


The Taper hasn't mattered (yet) because everybody believes that, if the wheels come off, the Fed will blink and crank it up again.


China's problems are starting to become too difficult to ignore. (GDP 7.7% & PMI sub-50 for a manufacturing economy? Righto. Don't even get me started on the shadow banking system, which is straining at every seam right now.)


Abenomics is just beginning to be shown up for the farce it really is — just in time for the consumption tax hike coming in a few weeks. Abe's fabled "three arrows" are not the ones everybody imagines but rather the kind of arrows with a sucker rather than a point on the end. Actually, in this case, on BOTH ends.


Putin is in a corner, and we KNOW he don't take to backin' down none.


Obama's approval is at all-time lows with midterms on the horizon, so he needs to look Presidential at home.


Draghi is trying to force the BuBa to BEG him for QE before turning the taps on, and it is crushing Europe, but he won't blink (I don't think).


The Fed meets next week and will taper another $10 bn.


That's the broad backdrop. Now, let me ask you this:


What if this next $10 bn taper is the "bang" moment when markets suddenly realize that the Fed ARE serious about continuing to wind it down? What if the latent fear over all of the above issues, combined with that next $10 bn and the words of smart guys like Seth Klarman ringing in their ears, tells managers it's "safety time"?


At some point the market factors QE at $0 if the Taper continues — and that time ISN'T after they withdraw the last $10 bn.


Above all, what if (and the marginal signs have been nagging away at me the last ten days or so) everything goes back to trading how it SHOULD, based on everything we know about markets and economics, instead of lingering in the Magical Fairydust World created by central banks since 2009?


Markets have been reacting correctly and beginning to decorrelate over the past several sessions.


Where does everything trade if a stimulus level of zero suddenly gets discounted?


I don't know EXACTLY, but I'll hazard a guess at "a ****-load lower" to kick things off.


Gold is talking loudly, so is copper. JGBs and equities are mumbling, so are bonds.


Something is happening, right now, in all the dark corners of the dance hall, and whatever that "something" is, it will NOT lead to an extension of the bull market.


Do we "crash"? I think that's the wrong question.


The right questions (I think) are these:


If a major correction begins, at what stage do they turn on the printing presses again? 10% lower? 15%? 20%?


When they DO (and it is WHEN, not IF), what happens now that the last vestige of their credibility has evaporated? A quick spike then a crash, or does the patient flatline on the bed no matter how much juice they pump into it?


I'm nervous as hell and feel a sharp disturbance in The Force. We've been here before and pulled back from the brink every time, but this time that outcome is expected again by most, and that is extremely dangerous.


Markets are most assuredly NOT ready for reality.


What say you, Wise Man?

On Sat, Mar 15, 2014, at 12:33 AM, Mr. Big <> wrote:

EVERY new Fed chief gets a serious test. Every one. I have been trying to figure Yellen's. I know this:


A weakened/prone US, scared Russia, and nervous China is not good and not priced in.

On 15 Mar, 2014, at 12:42 pm, Grant Williams <> wrote:

Agreed 100%.


I've been saying for two years that nothing matters to anybody until it matters to everybody, and I have a nasty feeling that the test is this:


Suddenly, in one moment, EVERYTHING matters to everybody.


That's something even central banks won't be able to stop.


Every new Fed chair gets a test.

Burns had the run on gold that led to Nixon's closing of the window; Miller had the Oil Shock; Volcker had the inflation tiger to wrestle; Greenspan had the '87 crash; and Bernanke had the subprime crisis followed by the 2008 crash.

Now it's Yellen's turn.

After fifteen months of steady and predictable (thanks largely to the Fed's largesse and Draghi's promise to do "whatever it takes"), we are about to enter a period of extreme unpredictability right at the moment when the Fed is about to demonstrate to the markets that, yes, they really ARE serious about continuing to taper $10 bn every month.

The troubles facing the world are far, far broader than just the messy politics of Ukraine; and there is a very real chance that those troubles coalesce into one giant ball of concern that is big enough to shatter the fake sense of calm we've all been lulled into by the passage of time between crises.

If they do coalesce, I can't think of a single asset anywhere in the world that is priced correctly for such a situation.

Full Grant Williams Letter below...


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kaiserhoff's picture

I think Mr. Yellen should cut interest rates.

Oh, wait.

knukles's picture

Hey, yeah, I forgot about that.  Every new Fed chair person has always been poked in the ribs whilst napping by a "hostile" central bank.

Gee golly gosh, Vlad....

Great reminder, Grant & thanks Tyler!

PS In case nobody's noticed, that Chinee YaunRenminimbi thingamajig's been getting cratered of late.  Yawn  Get it, Yaun?
maniacal laughter

Spigot's picture

Cratering Yuan results in cratering Asian tigers, cratering raw materials exporting economies, leading to extreme stress. Commodities CERTAINLY will crater as Chinese "banks" no longer loan on forward commodity contracts as collateral. FUGLYness of FUGLYness.

kaiserhoff's picture

Tiger penis berry gude treatment for impotence in ode Chinee man, but first must relieve Tiger of his penis.

.... You go first....

jackstraw001's picture

So, what do PMs do in such an environment?

new game's picture

they will follow the commods and will there will be margin calls to go allaround. gold gets hammered as all do. look at 08, if you doubt my wisdom. treasuries will see historic moves as prescribed by fed. oh, and that will play well for restimulation, yea fucking right...

100 percent cash awaiting the obvious.

expect a 1000 pt move soon.

kaiserhoff's picture

Aw, who needs trade with China.  Walmart could go back to selling... what the hell would Walmart sell?

Broccoli, maybe?

NoDebt's picture

Prescription drugs and cigarettes.  You almost had me, Kaiserhoff.  I almost couldn't come up with an answer to that question.  But then, fueled by the brain steroid called 'Jim Beam', I arrived at the answer.  Prescription drugs and cigarettes.

kaiserhoff's picture

I'm trying to perfect my own version of Maker's Mark, but yeah, sure would solve the parking problem;)

You forgot depends;)

Groundhog Day's picture

How bout cheekan wit brokwee

Bluebear's picture

Yes, but I believe that Ben didn't get his test until more than a year on the job... Not sure about Greenspan and the others though... There is no evidence to say that things will immediately turn downhill from here... could even be a year from now...

seek's picture

You jest, but negative interest rates are completely doable, especially if they're implemented using any kind of asset confiscation. Want to pump the markets, just make any bank balance over 100K subject to a 10% wealth tax and exempt stock holdings. Boom, negative effective interest rates and juiced market.

NoDebt's picture

Seek, would you please stop giving them additional bad ideas?  They've got plenty of their own already.

Uber Vandal's picture

Refer to her Feb. 2010 comment, when she was the SF Fed Reserve Bank President.

yellencrash's picture

That's when the retirees finally get out the torches and pitchforks. They don't have much left to lose, nor long to live, and they'll come out swinging if that happens. That would be a true civil war where the handout grabbers try to push for euthanasia and the young and rich go right along with it and we suddenly have an Auschwitz of old people...the very people who tried to do the right thing, live within their means, and who are the type who keep our society stable and worthy of trust. 

Our society has degenerated really far, as do all societies as old as ours is. I don't know if anyone can do anything but watch it go over the waterfall and hope for a miracle landing. Most people don't have any idea what short ETFs or put options are, and so that's going to be an uncrowded trade in terms of retail investors, which means if the savers' cash gets confiscated and the main street culture loses all its retirement money, the middle class and the backbone of our society becomes peasant class, and there's no backbone. This is all so very sad and I think it's going to happen any time now. 

ThroxxOfVron's picture

"I think Mr. Yellen should cut interest rates.

Oh, wait."


One Negative Interest Rate enema coming right up.    Say 'Aaahhh!  -Er, I mean bend over..well, do both and we'll see what happens...

Tasty Sandwich's picture

It's hilarious that the first non-white President and the first female Fed chair are going to be left holding the bag for the most epic financial and economic catastrophe in human history.

NoDebt's picture

The well-connected white guys are smart enough not to stand on the tracks when they know there's a train coming.

Uh oh.  I think I just said something bad.  I withdraw my comment and pre-apologize.

yellencrash's picture

To me it's not hilarious at all. Because women and minorities do deserve an equal shot at success, and unfortunately, if this does unravel, the bigots will have ammo to marginalize women and minorities. That would be a terrible thing. Bankers on the other hand, I have no sympathy, empathy, or anything for them as a class, and I think they are overdue for some humble pie. 

kaiserhoff's picture

Dykes are women?

This sort of shit got us where we are today.  With zero respect for an honest day's work, and among the youngin's damn little knowledge of what real work is.

Soul Glow's picture

Every new Fed Chair gets a test because the last Fed Chair sucked big balls and left a mess.

Spigot's picture

I agree that each "new" FED chair fails miserable on the 'first' crisis ... which is the repeated narrative: 'they made a mistake that caused all this devastation'. IMO, these are intended "mistakes". Yellen is a puppet. She will make a "mistake" perfectly timed. They have crafted a narrative which is a mask for the intended effect.

medium giraffe's picture

Squiddy eyeing spx 1900 for Dec '14 suggests caution against commiting to the downside too soon.  Banker suicide volume looking healthier, but still not high enough to trigger shorts.   

El Hosel's picture

Nothing but Fairydust and Happy Endings are priced in, all "marked" to complete and total fantasy. Yeah, it can go higher and longer.

Why wouldn't it?

ms8172's picture

Well... I would like to see that test.... like this month!

yellencrash's picture

This is all exactly what I've been thinking. Thus the username yellencrash. A perfect storm. And the fact that the market rallied into the announcement sets it up with the ultimate degree of blind complacency. I think the Elliott Wave bunch have it spot on. They were a little early with the alarm as they usually are, but if you read what Prechter has been saying in his latest newsletter, he's bet his reputation on a cataclysmic crash. I recall when the market first started to dive and the Fed cut rates and it bounced for almost no time then just kept dropping. Another interesting thing. I have been using the Whisper app and getting maybe 10 likes on my posts, and then I posted one about how I think the market could crash but that no-one would believe me so I just keep it to myself. It got over 500 likes. This is among relatively uneducated and lower income young people using this app. It got me to thinking that if people at that level are getting the picture, perhaps the emperors are the only ones left who don't realize they are wearing no clothes. The other thing is, what if something truly unexpected happens, like a serious attack of some kind or something somewhere. Or shots fired in Ukraine. It just feels eerily calm in a way that my intuition tells me comes right before the obvious sturm and drang.

NoDebt's picture

Wecome to the meat grinder, friend.  You're one of a long line of people who have been saying the same basic thing for the last 5 years.  You'll eventually be right.  But being early is the same as being wrong.

yellencrash's picture

Being early isn't the same as being wrong when you're early to something that's a supercycle level change. My grandpa went and got his money out of the bank before the bank run in the 30s--early--but had he waited he would have lost everything. And the market didn't recover for over 20 years. So I'll take 5 years early in exchange for 1 month late into another 20 to 30 year long devastation like the one that began in 1929.

navy62802's picture

As this continues to play out, I think that the markets will be the least of our worries. I think that eventually, we will end up in an actual cold war type of situation, and people will not be worried about the latest iPhone update ... they will be worried about being vaporized by Russian ICBMs. I think that we will end up with a draft, and most of the nation is not ready for that much reality. They would rather eat their McDonald's and waste away into oblivion, having never stood for anything.

Stuck on Zero's picture

--> Print more

--> Print less

(Fed Test Question)


prains's picture

----> print even more

----> put a brick on the accelerator and run

hairball48's picture

I agree with Grant.

I just hope the coming shitstorm comes sooner, rather than later. It's like this huge boil that needs lancing badly. I'll feel better after the pus explodes and drains away :)

RafterManFMJ's picture

The puss have been running away off tall buildings, and lancing themselves with nail guns recently.

NihilistZero's picture

"...major correction begins, at what stage do they turn on the printing presses again? 10% lower? 15%? 20%?"  

I know I'm in the minority, but I think QE is done.  We can all agree the FED is the Big 4 Banks and represents their interests right?  Doesn't letting the inevitable end of this farce happen while the system itself (which is what gives them their power) is still salvageable serve the Big 4s interests?  We all know this fiat system is fucked in the long run, but I just can't see them giving a lethal overdose of QE while all these other destabilizing factors are at play when they don't have to.  The dollar system can survive a steep stock market drop.  Housing Bubble 2.0 popping means we can survive a drastic cut in .gov spending as people's $$$ will go a lot farther with lower housing costs.  I can't imagine however the system surviving a FED that is publicly regarded as clueless and out of control.  I mean WE can know there clueless, but for that to be the general consensus?  Arapid return toQE would signal just that...



EndOfDayExit's picture

I'm in the same camp. QE is done, though it appears that the markets take so far is that it would be resumed soon. It will not be. What a surprise!

Long SP500 puts.

Ghostdog's picture

I agree with everything you said NZ but there is one wild card. And that card is bigger than all the fed printing, all the deflationary forces of Japan and even all the war mongering and that thing is Obama's Ego. Its hard for me to think that with his approval rating at the lowest in 5 years and mid terms that look to be disasterous for the blue party that he would say, yeah. let the market collapse too and dont do anything about it. Granted he ultimately may not have a choice if things get bad enough but it seems (unless a collapse is his plan) tough to fathom that he would stand idley by as his legacy falls to "worst president ever". I could see him saying is 100B a month doesnt work than do 200B a month.. if that doesnt work do 400B a month, granted the inflation on the other side would start killing people but he will just blame it on someone else like he always does and the uninformed dont know any better. Your thoughts?

NihilistZero's picture

Thanks for the plus one ghostdog, but you REALLY need to stop drinking the "All Powerful Barack" kool-aid.  He get's his orders from Wall Street, not vice-versa.  They put the empty suit in power and he will take his lumps if america.corp says he needs to.  To many people on this site are to smart to be falling for the Team Red/Blue shenanigans.  If Yellen gets the orders to let the market fall back an residential RE adjust downward to save the dollar and perhaps the Big 4 banks commercial paper theat's exactly what she's going to do.  obama MIGHT get a courtesy call to tell him he's fucked :-)

The SYSTEM (the nexus of the fiat dollar and government) which gives the banks and mega-corps there control is all that matters.  TPTB will maintain this structure for as long as it can be.  Right now a rise in interest rates and letting the next downturn begin is the best way for them to maintain said power structure.  Hedge accordingly.

besnook's picture

putin just told the world to cut your dollar exposure. the dollar collapses, dollar inflation goes through the roof, the empire rolls over and the usa middle class starts trolling dumpsters for food.

Notarocketscientist's picture

Grant Williams - his newsletter is the best out there

Spungo's picture

The fed should set a negative interest rate. This would drive the stock market to all time highs!

TheRideNeverEnds's picture

There WILL be a day of reckoning but that day will not be tomorrow.  


The S&P has a good few hundred points at least to run, why sell now when you can just sell at the top.   I am sure the talking heads will let us know when the time is right to get out.  


Buy low sell high dontcha know?   Buying here is a no brainer what with ES 2000 this year being a given. 

Duude's picture

Its readily apparent Janet will soon be adding more back into QE. She already laid the groundwork when she affirmed her feelings about letting inflation run a bit more. We always knew her the dove and her colors are coming out already. IMHO, Use the recent drawdown on gold as an opportunity to buy more.