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The Coming Crash Is Simply The Normalization Of A Mispriced Market

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The correlation between the Fed's monetary heroin production and the stock market will break down as the market normalizes.

In the spirit of calling things what they are, longtime correspondent Harun I. explains that market crashes are simply distorted/mispriced economies attempting to normalize. Here's Harun's commentary:
 

Let’s examine the term "crash." A crash is nothing more than the economy trying to normalize, however, everyone seems to think the environment created by bubbles (unpayable debt) is normal. This is truly fascinating because accepting unpayable debt as a norm means that prices are irrelevant, and since prices are irrelevant, there is no risk. But just because we think a thought does not make it a fact. Interestingly, each attempt at normalization requires exponentially greater amounts of expropriation of purchasing power.

Exactly, how does one grow one's way out of this? To clarify the term normalize, I mean that the economy shrinks to a level of real and sustainable supply and demand dynamics. Normalize does not mean "desirable" or "politically favorable."

Thank you, Harun, for describing the underlying dynamic of crashes. Just as forest fires normalize the forest's complex ecology by turning deadwood to nourishing ash and opening up the forest to new growth, in an analogous way crashes clear markets of financial deadwood and cartels that have blocked new growth.

I explain the analogy of the forest fire further in The Yellowstone Analogy and The Crisis of Neoliberal Capitalism (May 18, 2009).

We are living in a dying forest where fires have been suppressed at ever greater cost bcause the deadwood--the central bank and its cartel-cronies--are doing everything in their power to maintain their perquisites and power. But as Harun noted, the cost of each fire suppression (not just in eroded purchasing power but in systemic instability and the mispricing of risk) goes up dramatically.

Courtesy of mdbriefing.com, here is the Federal Reserve balance sheet--the main tool, along with Federal subsidies of politicized sectors such as home mortgages, of suppressing normalization of the economy and stock market:

While the Fed can push monetary heroin into the financial system, it can't force anyone to shove the debt-needle in their arm. One consequence is the velocity of money is absolutely cratering. If there is any measure of the economy's underlying financial health, it's this:


(thanks to correspondent Scott for calling my attention to this chart)

The correlation of the Fed's pushing of monetary heroin to the stock market has long been noted:

The question is: is correlation causation? In other words, will the market continue to loft higher regardless of any other inputs as long as the Fed is pushing some kind of monetary heroin into the financial sector?

As noted on the chart of the Fed balance sheet, the Fed's purchases of Treasury bonds and home mortgages are both rolling over (tapering), and so the Fed has been substituting another form of synthetic monetary heroin (reverse repos) to suppress the much-needed and long-delayed normalization of the economy and stock market.

Suppressing the next fire will take more than the reverse repo squirt-gun. Given the tremendous forces needing to be normalized, the correlation between the Fed's monetary heroin production and the stock market will break down as the market normalizes, much to the shock of all the financial deadwood that's been protected all these years.

To those who believe the correlation of Fed monetary heroin and the stock market is eternal and cannot possibly come undone, please consider this line from songwriter Jackson Browne: Don't think it won't happen just because it hasn't happened yet.

 

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Fri, 07/18/2014 - 10:51 | 4973343 Badabing
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bring it on

 

GOLD @ $2000

Fri, 07/18/2014 - 10:52 | 4973363 Pladizow
Pladizow's picture

Been waiting for reversion for 4+ years. Could it be another 4?

Fri, 07/18/2014 - 11:17 | 4973522 gh0atrider
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Turn your lives over to Satoshi while there is still time.

Fri, 07/18/2014 - 21:12 | 4976074 max2205
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6 years is a long time to call Wolf......ZZZZZZZZZZZZZZZ

Fri, 07/18/2014 - 11:22 | 4973537 I am more equal...
I am more equal than others's picture

 

 

Sort of like waiting to die from cancer.  You know you are going to die and desperately want to live on but the reaper is coming.  All the experimental drugs or interventions provide hope but the outcome won't change.  Some interventions are only going to make death more painful.

Fri, 07/18/2014 - 12:02 | 4973726 Professorlocknload
Professorlocknload's picture

More like waiting to die from old age.

Fri, 07/18/2014 - 18:16 | 4975567 goose fat
goose fat's picture

Don't loose hope. Sure it will be nasty, but there is much more in store. Much to look forward to.

http://www.thewarningsecondcoming.com/arab-uprising-spark-global-unrest-...

 

Fri, 07/18/2014 - 15:00 | 4974768 daveO
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Doubtful. Look at the debt charts. It's been exponential for the last 5 years.

Fri, 07/18/2014 - 21:39 | 4976152 Diggintunnels
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The outcome is clear, but the timeline is unknowable.

Fri, 07/18/2014 - 10:56 | 4973383 TeamDepends
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There was a period of five years or so in the early 1700s when gold went up 288x.  Not 288%, 288 times!

Fri, 07/18/2014 - 11:12 | 4973502 Obchelli
Obchelli's picture

What crash? Market is up like yesterday never happened and many individual stocks outperforming DOW on upside. dow up 1/3 o yesterday loss and majority of stocks recovered all losses from tyesterday especially financials

Fri, 07/18/2014 - 11:17 | 4973517 tempo
tempo's picture

Primary dealer liquidity controls the market. Liquidity high and the market will make ATHs. This fall may be the first small challenge. But the FED can always increase liquidity.

Fri, 07/18/2014 - 10:51 | 4973353 yogibear
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Any talk of a market crash just makes Wall Street push stocks higher.

Fri, 07/18/2014 - 11:25 | 4973546 Lewshine
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WHATAGIFT! Who didn't know that a Thursday selloff, which could have been based on a nuclear holoucast, wouldn't be saved by good old reliable, keep a happy face under any circumstance FEDERAL RESERVE??? Remember, this is NOT a market - Its a shell game meant to pursuade opinion. It's a clumsy, illiterate, scam of epic preportions. Take their free money!

Fri, 07/18/2014 - 11:24 | 4973550 Lewshine
Lewshine's picture

WHATAGIFT! Who didn't know that a Thursday selloff, which could have been based on a nuclear holoucast, wouldn't be saved by good old reliable, keep a happy face under any circumstance FEDERAL RESERVE??? Remember, this is NOT a market - Its a shell game meant to pursuade opinion. It's a clumsy, illiterate, scam of epic preportions. Take their free money!

Fri, 07/18/2014 - 11:25 | 4973552 Lewshine
Lewshine's picture

WHATAGIFT! Who didn't know that a Thursday selloff, which could have been based on a nuclear holoucast, wouldn't be saved by good old reliable, keep a happy face under any circumstance FEDERAL RESERVE??? Remember, this is NOT a market - Its a shell game meant to pursuade opinion. It's a clumsy, illiterate, scam of epic preportions. Take their free money!

Fri, 07/18/2014 - 12:49 | 4974005 thamnosma
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Please post that again, I couldn't quite read it.

Fri, 07/18/2014 - 10:52 | 4973357 Greenskeeper_Carl
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They may be 'mispriced'. But just look at today. We have 300 people dead from someone shooting down a passenger jet, a near war in Ukraine, Israel launching a ground offensive in gaza, all this shit with ISIS in Syria and Iraq that hasn't been resolved, and you have a negative US GDP print, yet all the markets are up today, and gold is dropping off. What a farce.

Fri, 07/18/2014 - 10:59 | 4973402 Pladizow
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"The only one smarter than anyone, is everyone." - Napoleon

Fri, 07/18/2014 - 19:24 | 4975751 Yen Cross
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 Noted. +1

Fri, 07/18/2014 - 11:04 | 4973447 khakuda
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Exactly.  The Fed's open fire hydrant of cash and promises of ZIRP forever overwhelms everything else.  Wars, slowing sales and earnings, a terrorist attack, overvaluation - all of it gets overwhelmed via dollar debasement.  Remember, stock prices are going up because the Fed is destroying the purchasing power of the dollar by creating so much stimulus.  It's the unit of measure that is being destroyed, corporate American isn't 50% more valuable than it was 2 years ago if it were measured in a stable measure.

Fri, 07/18/2014 - 12:32 | 4973909 Professorlocknload
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Bingo. These last 5 years have been a period of working a 50%+ currency devaluation through the system. And Wall Street, as Fed pet, was first to see that. Gold caught it as well.

And if these various apparatchiks don't like the numbers at the end of this bout, they'll simply devalue again. They have no downside risk, because if they kill the currency, they will issue a new one.

They certainly fear the risk of deflation, because they lose all control.

It's important to understand, Yellen is a political appointee. A politician. One who is granted the power to create currency. To maintain that position of enhancing her party's success, she must also appease the "opposition" in Con- gress, and print whatever they spend,,,because, well, the "ends" of staying in power justify any "means."

Fri, 07/18/2014 - 14:54 | 4974736 daveO
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Also, corporate insiders are piling on debt to enrich themselves at common shareholders' expense. Who's buying all that corporate debt? Bernanke once said the FED could do it to prevent deflation. The banks will ultimately own the whole darn country in the name of battling deflation. That's alright, it's for the children! /sarc Forward!

Fri, 07/18/2014 - 11:07 | 4973467 Cruel Aid
Cruel Aid's picture

tragic plane accident is not a market mover and israel... nothing new there

Fri, 07/18/2014 - 12:51 | 4974018 thamnosma
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It wasn't an accident

Fri, 07/18/2014 - 11:12 | 4973495 the grateful un...
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you're looking at these short term indicators, none of which amounts to much, the airline disaster gave the MSM something to fill the dull summer months, israel will do what they always do. the ME is going through another iteration of Arab Spring, and gold goes down? hmmm. gold will lead this market up or down, so stay tuned. gaza is a problem created in 1948 by the british, ukraine is the central bank juggenaut, (even while they lose ground to the new BRIC banking system, and transactional online currency) the real problems are structural (like they always were) pay attention to them the rest is window dressing

Fri, 07/18/2014 - 11:06 | 4973385 Ness.
Ness.'s picture

Market crash?  haha - Now that's good for a LOL

Fri, 07/18/2014 - 10:57 | 4973389 R3ap3R
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All the money is in the banks and when the crash comes the to big to fail model wil be renamed the biggest fail model. When banks only trade with each other what will happen when they cant trust each other anymore oh wait yeah bail out... but how will they finance it the Fed? Velocity of m2 is shocking though

Fri, 07/18/2014 - 10:56 | 4973393 Eirik Magnus Larssen
Eirik Magnus Larssen's picture

Cold logic.

Fri, 07/18/2014 - 11:02 | 4973397 q99x2
q99x2's picture

FREDy's dead.

They didn't buy 2 billion bullets simply due to a normalization of the FEDs software.

We are talking toast here.

http://soundcloud.com/v-guerrilla

Fri, 07/18/2014 - 10:59 | 4973403 Spungo
Spungo's picture

So.... we should burn bankers at the stake to spur growth?

Fri, 07/18/2014 - 12:01 | 4973731 RaceToTheBottom
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Don't restrict yourself to just spuring growth.

Do it just for fun....

Fri, 07/18/2014 - 18:50 | 4975657 Savyindallas
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Do it because it is right   -No justice, no peace. I think I can finally relate to that slogan now.

Fri, 07/18/2014 - 11:03 | 4973442 Diggintunnels
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LOL.. Preacher, meet the choir...

Fri, 07/18/2014 - 11:03 | 4973443 Diggintunnels
Diggintunnels's picture

LOL.. Preacher, meet the choir...

Fri, 07/18/2014 - 11:06 | 4973455 I woke up
I woke up's picture

FRED needs to "seasonally adjust" their charts or stop access to them, problem solved

Fri, 07/18/2014 - 11:05 | 4973456 the grateful un...
the grateful unemployed's picture

obamas alice in wonderland assertion that we have to raise the debt ceiling becauses its money we already spent begs the question how do we seperate new from existing debt. the fed is saying about this 2.5T, well somebody has to hold this paper, it happens to be on our balance sheet, but imagine the fed selling that 2.5T into the bond market. ooops. obama is such a liar if even to himself, i don't like bernanke, so i appoint yellen, its like hitler for stalin. makes you wonder who was behind hitler (american corporatists?) money velocity can go negative, (people taking money out of circulation as fast as that money is printed, and we are almost there policy wise, while new money goes into old hard assets, and for the time being stock paper is an old hard asset) and if the s&P diverges from the fed balance sheet line, hows that going to work? can the fed add another 2.5T if the S&P is cut in half? no because the value of those paper assets would be falling. but you have to hand it to them, they have gotten 1:1 dollar for dollar stock market performance out of every dollar of QE, but their balance sheet won't drop the same way, that is 100% of one is two, while 50% of two is one. there is no way to retire that debt even if the market loses half its value. orphan the fed.

Fri, 07/18/2014 - 11:05 | 4973459 Hindenburg...Oh Man
Hindenburg...Oh Man's picture

ZIRP forevah!

Fri, 07/18/2014 - 11:05 | 4973460 buzzsaw99
buzzsaw99's picture

repo is just another word for fraud

Fri, 07/18/2014 - 11:06 | 4973463 madbraz
madbraz's picture

And the powers-that-be (NY FED) just went nuts on the VIX to try to erase yesterday's big loss for the big boys.

 

I guess we also live in a totalitarian state.  I mean, the stock market is controlled, the media is controlled, you can't protest anything (sonic boom attacks on Occupy protesters, for example), you are spied upon by your own country, you are obbliged by law to buy certain products, you have to pick from a choice of presidential candidates who come from the same cesspool...

 

Safe to say, guaranteed, that the next generation is screwed beyond belief.  

 

 

Fri, 07/18/2014 - 11:10 | 4973483 GrinandBearit
GrinandBearit's picture

For the last 6 years, ALL dips have been buying opps.

I do not see that changing anytime soon.

Fri, 07/18/2014 - 11:53 | 4973657 mayhem_korner
mayhem_korner's picture

I do not see that changing anytime soon.

 

Unless you can outrace the pre-informed HFT algos to the door, not knowing when it is going to change is equivalent to believing it will not.

Fri, 07/18/2014 - 11:12 | 4973491 I Write Code
I Write Code's picture

Yes correlation is causation

in this case

and so the rest of this article is moot.

Fri, 07/18/2014 - 11:11 | 4973492 Everybodys All ...
Everybodys All American's picture

Hey, look everybody knows now how this ends. It's just a matter of time and no one knows exactly the time. This could go on a while and this could end today. I'm thinking sooner rather than later though. The debt loads are simply unsustainable whether it's corporate buybacks with debt offerings or sovereigns printing treasury notes. This is not growth we are seeing anywhere as these financial numbers are masked with inflation. Stay nimble.

Fri, 07/18/2014 - 11:58 | 4973693 mayhem_korner
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If everybody knows how this ends, the mispricing would vanish.  The ponzi scheme relies on the masses either (1) not knowing how it ends, or (2) believing that it won't while they are holding the bag.

Fri, 07/18/2014 - 11:19 | 4973526 Badabing
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Down vote bot triggered with the word gold

Fri, 07/18/2014 - 11:21 | 4973533 Iriestx
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They own the printing presses.  The stock market will NEVER go down until it goes to zero.

Fri, 07/18/2014 - 11:20 | 4973536 Iriestx
Iriestx's picture

They own the printing presses.  The stock market will NEVER go down until it goes to zero.

Fri, 07/18/2014 - 11:30 | 4973578 gdiamond22
gdiamond22's picture

Bull Markets climb a wall of worry.

More upside before the cards crash

Fri, 07/18/2014 - 11:31 | 4973582 gdiamond22
gdiamond22's picture

Bull Markets climb a wall of worry.

More upside before the cards crash

Fri, 07/18/2014 - 11:33 | 4973596 RaceToTheBottom
RaceToTheBottom's picture

Velocity of Money is a really bad chart.  That one calls into question the whole concept of Repothication and Fractional Reserve Banking

Fri, 07/18/2014 - 12:02 | 4973730 mayhem_korner
mayhem_korner's picture

 

 

The banks aren't lending to John Doe.  They are swapping defaulted loans for fresh liquidity, and propping up equities (and bonuses) with it.  Meanwhile, joe-on-the-street is dealing with wage stagnation.  All that is consistent with decreased money velocity.  If money velocity was where it was 7 years ago, bread would be $8/loaf.

Fri, 07/18/2014 - 11:38 | 4973606 oklaboy
oklaboy's picture

Th"IF" question as been answered, now for the "WHEN" answer?

Fri, 07/18/2014 - 11:39 | 4973610 oklaboy
oklaboy's picture

Th"IF" question as been answered, now for the "WHEN" answer?

Fri, 07/18/2014 - 11:40 | 4973613 KnuckleDragger-X
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Of course it'll be a complete surprise to Wal Street when it all falls apart because they've been using the Fed fairy dust for years...

Fri, 07/18/2014 - 11:41 | 4973614 KnuckleDragger-X
KnuckleDragger-X's picture

Of course it'll be a complete surprise to Wal Street when it all falls apart because they've been using the Fed fairy dust for years...

Fri, 07/18/2014 - 11:59 | 4973707 mayhem_korner
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Seems to be a double posting plague on this thread.

Fri, 07/18/2014 - 12:29 | 4973905 pakled
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Been occurring for the past couple of days. The save process for posting is running incredibly slow. Every time you click SAVE while waiting it queues up the post again.

 

Either ZH server are getting hammered of late (sooo much juicy news), or trouble with their pipe (on-ramp), or ....

Fri, 07/18/2014 - 14:20 | 4974572 Tall Tom
Tall Tom's picture

Or...Maybe the NSA is screwing with them?

 

When I see that the server is down for extended periods I think that when the Shit hits That Proverbial Fan we will not have ZH here to report it...

 

The NSA will take them down completely.

 

They must totally control the information feed at that time.

 

 

Fri, 07/18/2014 - 15:32 | 4974954 pakled
pakled's picture

Exactly. And I haven't heard of ZH running a backup BBS. Nor many computers with modems installed. Which would be the way we could still pow-wow if/when broadband goes down. Assuming the dial tone lines stay up.

Fri, 07/18/2014 - 15:41 | 4974992 fuu
fuu's picture

We could set up our own PRNs.

Fri, 07/18/2014 - 15:39 | 4974975 pakled
pakled's picture

(whoops)

Fri, 07/18/2014 - 12:00 | 4973718 Eyeroller
Eyeroller's picture

Given Lie-awatha Warren's surprising attack on the Ponzi Munchkin (a fellow Keynesian) during the Senate hearings, it begs the question:

What does Lie-awatha know??

Is a crash imminent, and Lie-awatha wanted to create video clips of her wisdom to be used as ads in a presidential campaign?

Fri, 07/18/2014 - 12:47 | 4973999 thamnosma
thamnosma's picture

A few months ago I saw an "Elizabeth Warren 2016" bumper sticker and I'm in California.  She hasn't even finished a term in the Senate and she's a proven liar, even about her own identity.  Kinda rings a bell, like in our current "President".

Fri, 07/18/2014 - 18:45 | 4975647 Savyindallas
Savyindallas's picture

I just bought 4 "Putin For president 2016" T-shirts. -made in the USA.  That helped stimulate the economy. Just doing my small part as an AmeriKan.

Fri, 07/18/2014 - 14:43 | 4974697 daveO
daveO's picture

A crash is imminent when the Too Big to Fail banks are fully protected. Maybe, that's what she knows. The pols are well connected to banksters by puppet strings. If all their garbage has been offloaded, they can weather a market crash that falls onto pension fund investors, just like Detoilet's bankruptcy. Then, they can buy for pennies on the dollar.

Fri, 07/18/2014 - 12:06 | 4973764 boeing747
boeing747's picture

Everything in this year is so 2006.

Fri, 07/18/2014 - 13:40 | 4974327 Bear
Bear's picture

I hope so ... it was a great year for me

Fri, 07/18/2014 - 12:25 | 4973884 pakled
pakled's picture

"Don't think it won't happen just because it hasn't happened yet"

Yeah. Everything that happens, happens after a period of not happening.

 

You know, when it comes down to it, there is only ONE thing that can be predicted about what tomorrow will bring... government intervention. It's the ONLY certainty. You can take that to the bank.

 

It's a shame there isn't a futures market for gov intervention. I would take my money out of the mattress and go all in.


Fri, 07/18/2014 - 12:45 | 4973987 thamnosma
thamnosma's picture

That money velocity chart really is something.  Imagine if that turns around.

Fri, 07/18/2014 - 14:29 | 4974597 Tall Tom
Tall Tom's picture

Imagine that it does not and MV = 0.

 

There is no economy at that point. Nobody is spending anything.

 

If it does not turn around and stabilize then it will be just as horrific as if it bounces higher and begins a steep increase..

 

It needs to be STABLE. Stability is what is needed.

Fri, 07/18/2014 - 12:50 | 4974013 OneTinTrooper
OneTinTrooper's picture

If the crash happens next year and the crash is back to this level, then there will be a crash but not a crash from today's perspective.  If you know what I mean.

Fri, 07/18/2014 - 12:58 | 4974073 Downtoolong
Downtoolong's picture

Funny, I bet most investors buy insurance to protect their home from a loss, but, they do nothing to insure their financial investments from a loss.

One reason, of course, is that financial insurance costs a lot more than home insurance. And that tells you all you need to know about the relative size of market and investment risk.

 

Fri, 07/18/2014 - 13:59 | 4974422 RabbitOne
RabbitOne's picture

Looks like Dow 40,000 says David Elias in his book. I don’t know about that. Covers like that are often great contrary indicators. Some of the signs in the S&P I follow are:

-          S&P having a daily loss of 2% or more (2% decline) that shows some sign of fear.

-       S&P having many consecutive losing weeks.

-          S&P breaking weekly trend lines or having lower lows.

 When I see this I will consider shorts. Instead buy the dip works well for me.

 

Fri, 07/18/2014 - 19:50 | 4975828 taraxias
taraxias's picture

When you see that it will be too late for you to go short.

Fri, 07/18/2014 - 14:40 | 4974677 scubapro
scubapro's picture

 

 

this chart indicates the INITIAL cessation of growth of the balance sheet leads to immediate stock market declines.  we know that inside of 60 days eachtimein the past new QE was announced so we cannot observe anything more that this. 

the current systems cannot survive without perpetual 'growth', if it only needed growth at the natural rate of population, maybe 3%,  we could either have 100% debt to equity at 3% rates, so to speak, or 150% at 1.5% rates.   once we slip beneath this type of balance is a vicous circle, unless debt is destroyed which means money supply is lessened which means massvie change in equity values.

Fri, 07/18/2014 - 19:34 | 4975773 Chuck Knoblauch
Chuck Knoblauch's picture

The fault, dear Brutus, is not in our stars.

But in the Federal Reserve.

Devaluation of the dollar causes inflation.

The Fedeal Reserve is responsible for creating inflation.

To what end, dear Brutus?

 

 

 

Fri, 07/18/2014 - 19:49 | 4975822 orangegeek
orangegeek's picture

The Nasdaq100 was about 1000 in March 2009

 

Today same is near 4000 - you have to see it to believe it

 

http://bullandbearmash.com/chart/nasdaq100-weekly-portugals-largest-bank...

 

China defaults keep piling up and Fed is running out of bonds for collateral and has a used car salesman running it.

 

You can't make this crap up.

Fri, 07/18/2014 - 22:00 | 4976063 Salsipuedes
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"Say a prayer for the pretender. He knows that all his hopes and dreams, begin and end there." - J. Browne

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