Bubble Babble - Why The Fed Is Clueless

Tyler Durden's picture

Submitted by Jeffrey Schnider of Alhambra Partners,

It is only one word, but it has been repeated so many times by FOMC members in the past year or so it has taken on the imprimatur of officialdom vernacular. Whenever speaking of bubbles, these policymakers inevitably include the word, “obvious.”

Long is the list of internal literature that purports to place bubbles in the same category with the Supreme Court’s definition of pornography – we know it only when we see it. In that respect, “obvious” is the perfect qualifier that situates even the brightest of the PhD’s in the same herd as the little guy investor. It would be hard to blame them in disaster if that were actually the case since “everyone” else missed it too.

ABOOK May 2014 Obvious

According to St Louis Fed President James Bullard’s “obvious” bubble definition, there have been two “gigantic” bubbles in recent history. In his analysis, the first, dot-coms, ended “relatively benignly” while the second did not (I think that too is obvious). There is such a huge flaw in that perception because it childishly permits the bury-your-head-under-the-blanket strain of examination. If you don’t see the monster maybe it won’t see you.

There is no useful means by which you can plausibly separate the two bubbles, as one not only followed from another (intentionally, pace Krugman) they were in so many ways concurrent. You cannot assume otherwise because it is now “obvious.” That sets up a curious contradiction since they are obvious apparently only in hindsight. Janet Yellen certainly was not concurrently aware of their existence, holding no special favor or petition toward a solution at the time. Maybe obviousness needs to be itself obvious.

Tortured logic is all you end up with here. And it was apparent once more this week in Yellen’s morning remarks.

For the equity market as a whole, the answer is valuations are at historically normal ranges. Long-term interest rates are low and that is one of the factors that feeds into equity market valuation. There are pockets where we could potentially see misvaluations, but overall those broad metrics don’t suggest that we are in obviously bubble territory. [emphasis added]

The first sentence in the quote above is intimately related to the last, though it is not obvious at first glance. Historical range now includes that obvious dot-com bubble which stretched valuations to extreme proportions. That means that anything even just short of the height of ridiculousness of 1999-2000 gains inclusion into the “historical range.” We can compare valuations, for example, between now and the late-1990’s and still maintain the vapid validity of that statement. In fact and increasingly that is the only time period that matches current conditions.

ABOOK Apr 2014 Bull Bear Cycles2

Taken a step further, the only way to become an obvious bubble is apparently to exceed the dot-coms by an obvious degree or order of magnitude. In 1999 and 2000, Greenspan was still a genius who crafted a “new normal” without a business cycle out of nothing but his charming briefcase. It can only be defined, Bullard admits, in hindsight, which is realistically the only place obvious can attain obviousness.

ABOOK May 2014 Magin Debt Net Worth

Bubbles are not just the perfect analogy to runaway asset inflation because of the similarity of inflating behavior on surface tension and the inevitability of the burst, but also because bubbles encapsulate. An asset bubble is one in which the greater proportion sees nothing but what they want to see.

To accept his [Bullard’s] premise is to discount mania. If bubbles were so obvious, then they would never occur except in the risk of not being the Greater Fool. But while some acknowledge that risk, most charge headlong into the craze with little or no reservation. Or, more precisely, it is the rationalizing of why risk is overstated, over-emphasized or just plain non-existent. It is the rationalizations that create and sustain bubbles, and their primary effect is to render the bubble un-obvious.

What we are about to discover is whether segmentation and containment applies. Small caps are the closest class to “obvious” that may exist among equities today (credit is another story, but about which nobody in the authoritative class wishes to speak; at all). It is certainly true that pieces of “markets” can be overvalued and leave undisturbed the wider market, but there should also be caution about whether factors leading to narrow overvaluation do not also apply more broadly. In today’s world where the price of risk is highly controlled, it would be obvious folly to discount such associations and interactions among all classes.

ABOOK Mar 2014 Valuations Stocks to GDP

The “good” news is that we will know for sure, including Yellen and her FOMC conspirators, at some point once it all becomes perfectly clear in hindsight.

What a way to craft scarily intrusive policy!

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bonin006's picture

It is difficult to get a man to understand something when his salary depends upon his not understanding it.

-Upton Sinclair

NotApplicable's picture

Only an idiot, or a voter (but I repeat myself), would believe they are clueless.

Why does everyone insist upon holding criminals up to the lying facade? All that does is to provide it with further support.

Someone please beat Mr. Schnider upside the head repeatedly until this malady (Crameritis) passes.

ronsterizor's picture

Better yet, why is the Fed clueless?



ghostfaceinvestah's picture

They are not clueless, they realize our economy is highly leveraged to the stock market.  Individuals, corporations, universities, governments - all adjust their economic activity based on the level of the stock market.  If stock markets plummet, we face not a recession, but a full blown depression.

Thus, they need to keep stock prices inflated, even well above any levels that can be justified by economics.  That is one of the main reasons interest rates are suppressed - to make stocks look attractive in relation; to force investors out of fixed income. 

4Y_LURKER's picture

Dear ZH, you've changed.


I used to read you before the financial crisis, during, and after, for the voice in the wilderness so to speak.

Lately, since the cigarette burn, there has been less pertinent content focused upon those who came to seek Fightclub in the first place.

As of late there has been more thinktank real politik than actual disdain for the financial collusion.

Please improve your content and quality of users, or PM me the new, new, website for maximum economic and politic intregue.



fonzannoon's picture

In order for a bubble to pop there has to be an escape valve right? So is that not the brilliance here? They have shut off that escape valve? I mean if you are the fed, then does it matter if the sheep move back and forth between the bond pen and the stock pen? As long as they file along somewhat neatly I don't understand how a bubble can pop?

Maybe if the sheep stampede from bonds into stocks you get a parabolic move in stocks. But who is doing that with the markets at ATH's and with no growth? 

Maybe if the sheep stampede from stocks into bonds you get a big move down in stocks, but you also get ultra low yields where eventually there is no reward for owning bonds. Still, the system is still intact in that scenario.

So where is the escape valve? Where are trillions of dollars going to rush to? Seems more likely the sheep just keep grazing calmly between the two pens

NoDebt's picture

"I have one word for you, Fonz.  Are you listening?  Japan."

Or plastics.  220, 221, whatever it takes.

All this money and not a damned productive thing to do with it, other than lever up.

If you want to make a million dollars, first go borrow 20 million dollars....

fonzannoon's picture

someone sent this to me a few weeks ago. This is how you know Carlin will be right about everything. Talk about making great calls ahead of time.


maskone909's picture

regardless of stocks and bonds the m2 continues to grow and V continues to fall off a cliff.  there is your escape valve/black swan.


that money is going to have to hit the street some time, right?  or else, whats the point of juicing the markets? 


velocity of m2



m2 stock


fonzannoon's picture

I'm with you Maskone, completely. I follow those two charts. so lay it out. how do you see that playing out? I wonder if we start with Junk bonds imploding. high yield credit freezing up. whaddaya think?

maskone909's picture

it will start with a pick up in velocity.  the easiest and most efficient way is through housing.  resurgence of ninja loans? i dont really know.  kyle bass thinks everything is great now (agentina WTF?) but you cant hide the elephant in the room which is those two fed charts.  its unprecidented.  perhapse the blueprint for destruction lies with wiemar and zimbabwe.  what cracked first then?  although they were not a reserve currency.  but hey, by the time this blows, we might not be either.

fonzannoon's picture

I'm just brainstorming here, not arguing. but I don't think the consumer wants more debt. so whether it's ninja loans or any other form of credit. I see it going the other way and drying up actually. I think the velocity has to come from fiscal policy. remember Obama's 3k for thingamajigs? Think that but on a much larger scale. maybe that is why the fed is talking income inequality lately. they know they need to inject some $$$ directly into the system and bypass debt. Unless that starts happening I think we get the japanese implosion nodebt is referring to.

Problem is once you go down the road i mentioned, the sheep get used to it, and u know where that goes.

maskone909's picture

brainstorming too....

the consumer doesnt want debt, but that doesnt matter because all the consumer needs is collateral, then the ability to obtain credit is increased.  debt is the end result no matter what imho. its the nature of the beast

fonzannoon's picture

I am torn on this one. I tend to lean towards nodebt (below)  that velocity continues to decrease. The peons are too docile and ignorant to demand some dough from the money tree. Too scared for their jobs to demand a raise. It feels like velocity is just a submarine falling towards the ocean floor with no power. Just a matter of time before it implodes.

They are watching this commercial


and living this one


maskone909's picture


i will drink to that, cheers man.

centerline's picture

I tend to agree on the velocity continuing to choke.  Crushing the middle class is the largest part of this.  All of the actions to tax the crap out of everyone, close loopholes, chase down money wherever it is hiding, etc. are deflationary and will crush velocity.

If we see a massive spike in velocity, I would be afraid it would be a confidence issue and we would be heading towards the "Shazam" moment as the Tylers put it some years ago.  I just dont think that has a chance until the capital flows reverse and reality starts to assert itself.

NoDebt's picture

I know velocity is low right now, but it's going to go lower, absent some massive unforseen external shock.  When large swaths of a population are being bled of their wealth, velocity goes down.  When large swaths of a population are passing their prime working/earning years (aging demographic), velocity goes down.  I see no reversal in those trends anytime soon.


NotApplicable's picture

Looks to me like the plan is to never allow that money to hit the street. Well, at least not Main St.

The street where the Maserati dealer is though... they'll likely see some of it.

daveO's picture

Right. That's why CONgress started allowing the FED to pay interest on bankster's excess reserves.  

HardAssets's picture

'velocity of m2' ?  

'm2 stock' ?

Its Friday night and I don't care. I briefly ran into this gorgeous young woman with long black hair. I think she's from India.

I want to meet her and m2 isn't on my mind at all.

Ya gotta park the brain & think of other things sometimes guys.

Have a good weekend.

Relentless101's picture

That time will be when other countries start asking for debt payments that we can't afford.

Charles Nelson Reilly's picture

you think retail investors are going to be putting there money into bonds?

People will hoard cash as soon as the market teeters.  There isn't as much trust as you think.  Even for the dumb sheeple out there.

666's picture

Why, they'll put their money into MyRA when the market teeters! Obummer told us it's supa-dupa safe, and he wouldn't lie.

Wink, wink; nudge, nudge.

101 years and counting's picture

the last 30% of the great stock bubble has been done with leverage.  

centerline's picture

From a closed system perspective, it would appear so.  That there really is only one game and all people can do is move between parts of said game.  What will be the escape valve though is that it is not a closed system.  International capital flows is what will do it.  Just a matter of time.

Right now, with all the turmoil, the US benefits because capital runs to safety.  And the only place with deep enough markets is the US.  Yeah, it's all rigged.  And it's all corrupt.  Just like Vegas.  In fact, the analogy works perfectly.

But, what happens when capital starts moving the other direction?  When things elsewhere stabalize and the US is choking even more on it's own debt, aging population, etc.

fonzannoon's picture

 but they are closing those valves too right? I mean they are targeting foreign accounts already. the key seems tl be to calmly close that valve without making a scene of it and scaring everyone. I feel like they are doing/did that already.

centerline's picture

They are certainly slamming average people, going after the money... closing up the loopholes... etc.

But, otherwise it seems the door is still wide open.  Stocks, real estate, bonds.  Any place that foreign capital can find a place to park.

fonzannoon's picture

so you picture a crack up boom scenario?

centerline's picture

Not really sure what is means for those of us here when the big sucking sound starts.  I have to admit that reconciling what the currency does relative to timing and cost of living, jobs, etc. is really where I get lost.  No matter what, I think it is a wipe out.  Just dont know how best to brace for impact!  So, I am here and other places trying to learn, stay informed and so forth.


daveO's picture

IMO,that's partly why they're stirring up shit in the Ukraine. To stampede money over here from Europe and force Draghi to print more at the same time. The other reason is to encircle and destroy Putin. 

101 years and counting's picture

"Why the Fed is clueless" Is that a rehtorical question????

Simple:  none of them have any clue what it is to run a business because not one of them has ever spent a day actually working outside of that little bubble called academia.

I Write Code's picture

er, um, uh, ... huh?

As to the closing value on that last chart anyway, it is only reasonable because of ZIRP.

Mark123's picture

Since the mid 90's:

Bubble #1 - kill glass steagall, banks can play with other peoples money

Bubble #2 - reduce lending standards (or elimate) for all lending

Bubble # 3 - taxpayers refund losses for banks, and central banks buy assets with money created from thin air

Bubble #4 - ????

I hate to think what comes next.  But at the end of the day, no matter what, the gulf between the bankers and the rest of us will be more enormous.  Where is Charles Dickens to record all this?

centerline's picture

#4 = consumer debt (auto and student loans).

Already here.

AdvancingTime's picture

*  Many of the new cars hitting the road are really leases which show up as a sale, and many of them may be motivated because an automobile owner faced with a costly repair may be oping for this alternative verses putting money they do not have into their current ride. This means those living on disability or student loans are buying an ego boosting vehicle that they cannot in reality afford, or need. Super low artificial interest rates are making this possible. Nearly 85% of new-car buyers in the second quarter signed up for a loan or lease to fund their purchase says credit bureau Experian. That’s the highest level since it began tracking this sector in 2006. That means that these consumers may be over-leveraged and not have money to purchase other goods.

*  Many people taking student loans have been using the money for their "living expenses" this includes cars, trips, vacations and more. The amount of these loans has expanded in an alarming way. All this has a very dark side that will effect the lives of these borrowers going forward. In many ways society is encouraging young people to take on this debt and to hock their futures. The picture going forward is somewhat bleak for those that have taken student loans, with the borrowers about twice as likely to be behind on student debt as for credit cards, car loans, and mortgages.

The above was lifted from the article below.


NOTaREALmerican's picture

Re:   Where is Charles Dickens to record all this?

It's MUCH better now tho.   Charles Dickens recorded the misery of the poor.  

The poor are protected now, they've got all the (near) food, internet, sports, and bling they want.   So,  Chuck isn't needed anymore.    The most-fit member of society are happy, the least-fit member of society are happy.

It's what Americans have wanted for generations:   Survival of the Fittest, Bitchez!!

Bow Tie's picture

when the next crash comes you can be sure as hell that everyone didn't miss it/not see it coming. tar & feathers for the ones calling the shots, screwing us all over way into the future. i just hope more people can see it for what it is, accept no excuses.

DOGGONE's picture

Simply adjust asset price histories for inflation
and bubbles are 'obvious' -- which us why inflation-adjusted is seldom shown!

NOTaREALmerican's picture

Man,  another guy who must have skipped the Bullshit 101 class in Kindergarden.

It's only a bubble IF you remove the bullshit from numbers,  but WHO would WANT to REMOVE bullshit from anything ?!

If we apply the first law of bullshit, which was covered in Bullshit 101, it clearly states:  

X + bullshit -> $ ^ bullshit

So, what rational person would remove bullshit from anything, you'd be reducing your '$' (Bling).  


q99x2's picture

Bankers been at for 100s of years. The best technology, the best minds. They are not fucking clueless. They are criminals.

They are bankers. That's what bankers do.

AdvancingTime's picture

If your only friends are bankers you have no freiends.

asscannon101's picture

'Well, in retrospect, it was OBVIOUS that The Emporer had no clothes- we ALL knew that... There was just SO much groupthink in the air and we ALL knew the penalty for being honest in that kind of environment... Besides, the money and perks were just SO much better when you get to sit in the King's court that we all dreaded the day that the truth could no longer be supressed...'

polo007's picture


May 4 (Reuters) - After an extended period of relative peace among members of the U.S. Federal Reserve's interest rate policy-making committee, fireworks will erupt in coming months as they debate how to reduce the central bank's multi-trillion-dollar balance sheet, a former vice-chairman of the central bank said on Sunday.

"The Fed may get more raucous about what to do next as tapering draws to a close," Alan Blinder, a banking industry consultant and economics professor at Princeton University said in a speech to the Investment Management Consultants Association in Boston.

The cacophony is likely to "rattle the markets" beginning in late summer as traders debate how precipitously the Fed will turn from reducing its purchases of U.S. government debt and mortgage securities to actively selling it.

The Open Market Committee will announce its strategy in October or December, he said, but traders will begin focusing earlier on what will happen with rates as some members of the rate-setting panel begin openly contradicting Fed Chair Janet Yellen, he said.

The Fed built up its balance sheet over the last five-and-a-half years as it bought securities to lower interest rates in attempts to stimulate the weak economy.

But hawkish members of the Federal Open Market Committee who worry about inflation, such as Federal Reserve Bank of Dallas President Richard Fisher and Philadelphia Fed Bank President Charles Plosser, are likely to call for aggressive sales and contradict plans by Yellen and other doves in the majority who want to keep rates low as long as unemployment continues at high levels, Blinder told the group of stockbrokers and investment advisers.

Blinder, a supporter of Yellen who served on President Bill Clinton's Council of Economic Advisers in the mid-90s, said the "perils of a big balance sheet are not so horrible."

The Fed held only about $900 million on its balance sheet before Lehman Brothers' collapse in 2008 triggered the financial crisis, but will "never go back there" from its current level of about $4.25 trillion, Blinder said.

A balance sheet of $1.5 to $2 trillion will likely be the new normal, he said.

He congratulated Yellen on artfully backing away from former Fed Chairman Ben Bernanke's assertion that rates can begin rising once the U.S. unemployment rate hits about 6.5 percent.

The Federal Funds rate that determines short-term interest rate will not rise anytime soon, Blinder said, noting guidance from Yellen that she is watching several indicators of the economy.

The housing market, consumer spending and other parts of the U.S. economy are still recovering very slowly, said Blinder, adding that it will be six to 12 months after the Fed completely stops purchasing securities before rates start to rise.

daveO's picture

They'll only sell if banks need the collateral, I'd say. Otherwise, just ride them out.

Random_Robert's picture

The parabolic needs to become parabolic-er  before it reaches the "obvious" stage.

You know, like M1 money supply... Duh.


AdvancingTime's picture

 Janet Yellen has been head of the Federal Reserve bank long enough that we no longer need to speculate as to her job performance. As we begin to critique her ability to perform we must remember perception is often just as important as reality. Another issue that comes into play is how you stack up or compare to the person who held the position previously, this often extends to style as much as it does to substance.

As expected it appears Janet Yellen has chosen to take us down the same the rabbit hole as Bernanke on a journey to prove that if we just continue doing what is not working, all will turn out fine. More on Yellen as the head of the Federal reserve in the article below.


Pareto's picture

Related, but, not really......................been wating for the housing market to have a dump here in Canada, like everybody (including ZeroHedge) has been saying.  I look around where i'm at and i ain't seeing nothing for sale, but prices are at all time highs.  Its a tight market here. Nobody is selling and what is available for sale - the fire marshal would not shed a tear were it to go up in flames.  That stuff is starting around $325K.  Average house price is $430K according to the real estate association.  And agricultural land has took off as well.  So, its a seller's market here, and looks to stay that way for some time, in my opinion, especially given a reported less than 1% vacancy rate.  Which means it will take some time to work off the excess demand, all else equal.  Happy Friday.