This page has been archived and commenting is disabled.

John Hussman: "Make No Mistake - This Is An Equity Bubble, And A Highly Advanced One"

Tyler Durden's picture




 

In case someone needs a beyond idiotic op-ed on the state of the market, we urge them to read the following stunner from USA Today (which is simply a syndicated piece from the Motley Fool, complete with Batman style graphics). Beyond idiotic because in addition to quoting the perpetually amusing Stony Brook assistant professor, Noah Smith, who has never held a job outside of academia and is thus a credible source on all things markety (to wit: "The value of a financial asset is the discounted present value of its future payoffs, and when the discount rate -- of which the Fed interest rate is a component -- goes down, the true fundamental value of risky assets goes up mechanically and automatically. That's rational price appreciation, not a bubble." And by that logic under NIRP the value of an asset is... what? +??) it says this: "Stock prices correct all the time. But what's important to remember is that a correction isn't a bubble." Yes, a correction is not a bubble: it is the result of one, and usually transforms into something far worse once the bubble pops.

Entertaining propaganda aside, for some actually astute observations on the state of the market bubble we go to John Hussman, someone whose opinion on such issues does matter.

Selected excerpts from: Yes, This Is An Equity Bubble

Make no mistake – this is an equity bubble, and a highly advanced one. On the most historically reliable measures, it is easily beyond 1972 and 1987, beyond 1929 and 2007, and is now within about 15% of the 2000 extreme. The main difference between the current episode and that of 2000 is that the 2000 bubble was strikingly obvious in technology, whereas the present one is diffused across all sectors in a way that makes valuations for most stocks actually worse than in 2000. The median price/revenue ratio of S&P 500 components is already far above the 2000 level, and the average across S&P 500 components is nearly the same as in 2000. The extent of this bubble is also partially obscured by record high profit margins that make P/E ratios on single-year measures seem less extreme (though the forward operating P/E of the S&P 500 is already beyond its 2007 peak even without accounting for margins).

Recall also that the ratio of nonfinancial market capitalization to GDP is presently about 1.35, versus a pre-bubble historical norm of about 0.55 and an extreme at the 2000 peak of 1.54. This measure is better correlated with actual subsequent market returns than nearly any alternative, as Warren Buffett also observed in a 2001 Fortune interview. So if one wishes to use the 2000 bubble peak as an objective, we suggest that it would take another 15% market advance to match that highest valuation extreme in history – a point that was predictably followed by a decade of negative returns for the S&P 500, averaging a nominal total return, including dividends, of just 3.7% annually in the more than 14 years since that peak, and even then only because valuations have again approached those previous bubble extremes. The blue line on the chart below shows market cap / GDP on an inverted left (log) scale, the red line shows the actual subsequent 10-year annual nominal total return of the S&P 500.

All of that said, the simple fact is that the
primary driver of the market here is not valuation, or even
fundamentals, but perception. The perception is that somehow the
Federal Reserve has the power to keep the stock market in suspended and
even diagonally advancing animation, and that zero interest rates
offer “no choice” but to hold equities
. Be careful here. What’s
actually true is that the Fed has now created $4 trillion of idle
currency and bank reserves that must be held by someone, and because
investors perceive risky assets as having no risk, they have
been willing to hold them in search of any near-term return greater
than zero. What is actually true is that even an additional year
of zero interest rates beyond present expectations would only be worth
a roughly 4% bump to market valuations. Given the current perceptions
of investors, the Federal Reserve can certainly postpone the collapse
of this bubble, but only by making the eventual outcome that much worse.

Remember how these things unwound after 1929 (even
before the add-on policy mistakes that created the Depression), 1972,
1987, 2000 and 2007 – all market peaks that uniquely shared the same
extreme overvalued, overbought, overbullish syndromes that have been
sustained even longer in the present half-cycle. These speculative
episodes don’t unwind slowly once risk perceptions change
. The shift in
risk perceptions is often accompanied by deteriorating market
internals and widening credit spreads slightly before the major indices
are in full retreat, but not always. Sometimes the shift comes in
response to an unexpected shock, and other times for no apparent reason
at all. Ultimately though, investors treat risky assets as risky
assets. At that point, investors become increasingly eager to hold
truly risk-free securities regardless of their yield. That’s when the
music stops. At that point, there is suddenly no bidder left for risky
and overvalued securities anywhere near prevailing levels.

History suggests that when that moment comes, the
first losses come quickly. Many trend-followers who promised themselves
to sell on the “break” suddenly can’t imagine selling the market
10-20% below its high, especially after a long bull market where every
dip was a buying opportunity. This is why many investors who think they
can get out actually don’t get out. Still, some do sell, and when
those trend-following sell signals occur at widely-followed threshholds
(as they did in 1987), the follow-through can be swift.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sun, 07/27/2014 - 19:31 | 5010883 New Survivalist
New Survivalist's picture

BTFATH, bitchez.

Sun, 07/27/2014 - 19:50 | 5010931 Cattender
Cattender's picture

the whole thing is fake. i have ZERO doubt about it..

Sun, 07/27/2014 - 20:50 | 5011098 Democratic koolaid
Democratic koolaid's picture

The cup it alittle empty? So is it not due to fill back up?

Sun, 07/27/2014 - 21:12 | 5011148 Chris Jusset
Chris Jusset's picture

There has NEVER been an equity bubble that is MORE OBVIOUS than the current BUBBLE (which has been very deliberately inflated by the Fed).

It's simple: for the past 6 years, we've had intentional, well-planned BUBBLE BLOWING by the Fed (with ZIRP, QE, etc.).

Sun, 07/27/2014 - 21:12 | 5011156 remain calm
remain calm's picture

Its not a bubble till it pops

Sun, 07/27/2014 - 21:36 | 5011202 economics9698
economics9698's picture

I am just glad the bastards slammed silver, buying.

Mon, 07/28/2014 - 01:35 | 5011658 Drunk In Church
Drunk In Church's picture

Stay as far away from metal as you can.  Any metal.  When this bitch pops, you are gonna see deflation like you've never seen before.  The dollar will be king.  Bitchez.

Mon, 07/28/2014 - 03:19 | 5011736 Colonel Klink
Colonel Klink's picture

Can you create a username of "I'm a blog spamming asshole", so we can keep track of you?

Mon, 07/28/2014 - 01:07 | 5011616 FreedomGuy
FreedomGuy's picture

All markets are fake. Most everything is fixed from the price of labor to interest rates. The central planners are in the business of manipulating everything to a proscribed end.

Sun, 07/27/2014 - 19:53 | 5010941 Richard Chesler
Richard Chesler's picture

Translation: Back up the truck and load up on stocks. The corrupt state of affairs brought by Obozo and his handlers will remain until at least the spring of 2016.

Fraud and change bitchez!

 

Sun, 07/27/2014 - 20:53 | 5011107 jarana
jarana's picture

Maybe the electoral potential for some powerful groups of interests in a prior-to-2016-elections crash is too sweet to let it be...

Who knows.

I think this whole STOCKry has more intrinsic value as an entertainment than the one actually discounted by the INvestors, and I'm acting accordingly.

Make your bets!! ;)

Sun, 07/27/2014 - 21:36 | 5011198 rum_runner
rum_runner's picture

Yeah.. if only Romney had been elected.  If Rand Paul doesn't get elected or some other third party candidate in 2016 I am going to throw in the towel.  The Red/Blue pendulum is like the devil convincing the world he doesn't exist.

Mon, 07/28/2014 - 01:45 | 5011666 Dexter Morgan
Dexter Morgan's picture

Throw in the towel now. 

Sun, 07/27/2014 - 19:55 | 5010950 max2205
max2205's picture

We can only hope. I expect a pretty big blowoff move and reverse

3% was normal.....might be 6% this time

Sun, 07/27/2014 - 20:00 | 5010966 Remington IV
Remington IV's picture

Stony Brook = Loserville

Sun, 07/27/2014 - 19:31 | 5010884 Cattender
Cattender's picture

Fuck even Marketwatch has been saying it.....

Sun, 07/27/2014 - 19:40 | 5010909 I Write Code
I Write Code's picture

Then it's guaranteed bogus.

Sun, 07/27/2014 - 19:32 | 5010886 ekm1
ekm1's picture

Every single point of Dow about eight thousand is just HFT point, nothing to do with the economy.

 

TRIPLE LEHMAN is imminent for manual trigger, in my view.

Economy is dying.

World has accelerated USD avoidance.

 

TRIPLE LEHMAN soon

Sun, 07/27/2014 - 19:44 | 5010918 ThroxxOfVron
ThroxxOfVron's picture

We had a triple Lehman; -remember Bear Stearns and an AIG ?

Actually AIG was probably a triple Lehman all on it's own since it would probably have buried Goldman and a few others if the Oligarchy hadn't had Hank Paulson on deck to intercede.

Actually what ever happened to Wachovia and CountryWide?

I think that You need to up reexamine the destruction level of the event you are predicting.

 

P.S.  I think You are far closer to the truth than removed from it.  I'm just having a bit of fun pointing out that the level of destruction You are contemplating kinda reminds me of:

http://www.youtube.com/watch?v=jTmXHvGZiSY

Sun, 07/27/2014 - 19:52 | 5010939 ekm1
ekm1's picture

Financial destruction is a highly positive event for the real economy

 

We ought to get on our knees and pray for financial destructions of excessive claims on real assets and output

Sun, 07/27/2014 - 20:03 | 5010980 ThroxxOfVron
ThroxxOfVron's picture

You and I apparently have very similar forms of ( what ordinary persons would mistakenly conclude are religious ) convictions.

You are damned right I want the excessive claims and naked shorts vaporized.

Sun, 07/27/2014 - 20:15 | 5011011 ekm1
ekm1's picture

It is an absolute inevitability.

If it doesn't occur in a normal way, then assassinations of executives will make it happen, very unfortunately.

Sun, 07/27/2014 - 20:48 | 5011095 HumanResourceProblem
HumanResourceProblem's picture

They don't allow that any more.

Sun, 07/27/2014 - 20:59 | 5011124 ekm1
ekm1's picture

If not soon, then bullets through heads will solve the problem, very, very, very unfortunately.

I pray bank lobby surrenders without assassinations, I pray to God

Mon, 07/28/2014 - 01:56 | 5011191 ThroxxOfVron
ThroxxOfVron's picture

These are not fools; these are very clever and deliverate people.   I don't for a moment believe that they do not understand the ramifications of what they have wrought.

They refuse to restrain themselves and find less parasitic and destructive ways to lead their lives.

Not assassinations; executions.  

Assassinations would imply lawless acts undertaken for profit against persons who may be innocent.

Executions implies lawful acts undertaken for the public good against persons who have been proven guilty.

Indeed unfortunate; but, it is their choice to hazard such a conclusion.

You would think that such intelligent persons would heed voices such as ours warning them...

 

It will be painful to carry the self doubt and girisly memories afterwards, and some will.  Some will also harbor regret and horror.   There may be lingering stigma upon those who finally take action despite the necessity.

Part of the problem is that they don't think anyone is going to stand up and do it.

They will probably have to be proven dreadfully wrong in a very public way before they yield.

A terrible reckoning comes.

Yes.   I'm deeply saddened that it seems destined to come once again down to trees and rope and the like...

 

Mon, 07/28/2014 - 08:21 | 5012065 shovelhead
shovelhead's picture

I love the epic drama scenes but the more likely scenario will be a very pleasant retirement in a non-extradition country.

Personally, I would go with the false passport, a scruffy beard and a watercolor easle in the South of France.

Mon, 07/28/2014 - 02:43 | 5011709 ThirteenthFloor
ThirteenthFloor's picture

FOMC board members owned significant shares of AIG that's why it was bailed out. Bear/Furman was long on Gold, it was killed. Lehman was neck deep in mortgages, took bullet. GS was made whole on some Derivs and the Buffman got the call before the news that GS would be made whole so he could ride some gain in exchange for promoting higher taxes on the nuvo-rich. So we got 20/20 on history...who takes the next bullet ?

Bet on JPM, that's why JD leaves dodge with bogus throat cancer. The selling of 1 Chase to China is sign # 2.

Hearing some bad stuff at WF too.

Sun, 07/27/2014 - 19:31 | 5010887 Eireann go Brach
Eireann go Brach's picture

It will pop before Obongo leaves office, karma will take care of that! Then all Americans will be allowed a one day hall pass, to beat anyone you know that voted for Obama!

Sun, 07/27/2014 - 21:26 | 5011183 tankster
tankster's picture

As if Romney would have been any better...

Sun, 07/27/2014 - 22:30 | 5011328 Ned Zeppelin
Ned Zeppelin's picture

Presidents have nothing to do wirh this, only morons think so.

Sun, 07/27/2014 - 23:22 | 5011451 Tulpa
Tulpa's picture

Speaking on behalf of the morons, who appointed Yellen again?

Mon, 07/28/2014 - 02:53 | 5011712 ThirteenthFloor
ThirteenthFloor's picture

Zep is correct its CFR. Obama just does the public speech. Read some CFR shit if you doubt my statement, or Greenspan's '05 Atlanta speech.

Mon, 07/28/2014 - 03:07 | 5011728 ThirteenthFloor
ThirteenthFloor's picture

Elections are rigged in multiple ways. Somalians like to vote multiple times for Dems, and if u study '08 carefully mcCain was leading until Lehman failed, Bush then made his "this sucker is going down speech", and no Rep could win, esp. one with shrapnel in the head.then Obama made his Commonwealth visit to pick up $$ from Soros and Club of Isles clan.

Only 27-30 per intelligent aware Americans even vote. Chk out stats.

Then you got Diebold, and John Boner changing the rules and bylaws at the convention.
Voting is obsolete thanks to the fascist state.

Sun, 07/27/2014 - 19:42 | 5010891 devo
devo's picture

Leverage matters much more than valuations. This guy is living in the past. So long as liquidity/leverage continue, prices go higher.

However, for Goldman et al to make big bonus money, they will have to go short. This would be the only way we see a crash--if the white shoe boys want a bigger Christmas bonus. Not much bonus money to be made when everyone is on one side of a trade.

Sun, 07/27/2014 - 20:50 | 5011096 Freddie
Freddie's picture

The United States is going full Zimbabwe retard.  Open borders, no jobs, EBT, money printing, auto companies owned by taxpayer and unions, banks engaged in massive fraud.   I said in 2008 that Obama would by Mugabe 2 but he is worse.

Sun, 07/27/2014 - 21:02 | 5011132 Oldwood
Oldwood's picture

The reality is hard to argue, but history is yet to be written. The question is who will following generations blame for the world they have, or if they will even care. Normalcy bias will shift and if the assholes have guessed correctly state dependency will trump all other alternatives.

Sun, 07/27/2014 - 22:32 | 5011334 Freddie
Freddie's picture

Here is bravery folks.   Ukrainian people saying F You! to the Maidan-Kiev vermin trying to draft their sons and fathers for the NWO war.  The moms are burning the draft notices.  Sad that Americans did not do that for LBJ'$$ Lyndon Baines Goldberg's Vietnam War.

https://www.youtube.com/watch?v=J_R9-LCwd54#t=151

Where is The US Military and Pentagon defending The US Constitution?  

I have more respect for these brave Ukrainian mothers telling the Kiev scum to shove their US State Dept Nudelman war up their arses.

Sun, 07/27/2014 - 19:35 | 5010897 drinkin koolaid
drinkin koolaid's picture

Wrong once more JH.

Sun, 07/27/2014 - 19:38 | 5010901 kill switch
kill switch's picture

OT,,

What appened to:

 

Silver Fixing Lawsuit: Deutsche Bank, HSBC And Bank Of Nova Scotia Manipulated Daily Benchmark Price

 

Was that deleted??

Sun, 07/27/2014 - 19:46 | 5010919 I Write Code
I Write Code's picture

It's ZIRP and QE.

QE is supposed to taper down, but with unknown effects on ZIRP - the market seems dubious.

And the Fed's $4t balance sheet is not likely to decrease anytime soon.

And the fiscal deficits will continue as long as Obumble remains in the White House.

The money was directed to equities by Ben W. Bernanke his own self.  Will he, or the Fed, ring a bell when it's over?

The most likely resolution is a spike of inflation in which most equities will melt *up*, preserving capital reasonably well.  Presumably gold will also serve this function, but it's hard to guess to exactly what degree.  And Bitcoin?  Shrug.  No idea.  Anyway, if any of this stuff is true, it's a bubble but one in which you need to participate, preferably retroactively to mid-2008.

Sun, 07/27/2014 - 20:19 | 5011021 andrewp111
andrewp111's picture

Be careful. A massive spurt of general inflation could bail out this bubble, but such an event is extremely dependent on politics. Sustainable general inflation that puts a "step function" on the price of everything requires rising wages. Without rising wages, any commodity inflation is likely to cause the return of the Depression instead. As long as we have divided government in DC, rising wages are unlikely to happen. So unless Obama gets impeached and uses that impeachment to rally his base and capture complete control of Congress in the Midterm, I wouldn't bet on general inflation bailing anything out.

Sun, 07/27/2014 - 23:17 | 5011435 Professorlocknload
Professorlocknload's picture

andrew,

But,,, rising wages generally lag in the cycle. Sort of a "Trickle Through" thing. And, to paraphrase Hendry, 'Some $Trillion will do it.'

If the owner and creator of the currency wants inflation (devaluation), it will be.

Only a matter of time.

Mon, 07/28/2014 - 00:39 | 5011587 I Write Code
I Write Code's picture

All good points, and yet those who are running the show care very little about wage levels, if they want some inflation for their monetary games they will do it first and fix it later.  The problem is that so far, inflation has not come when called.  So they keep calling for it louder and louder, and eventually it just may answer.

Even more to the point they ARE getting their inflation, just keeping it out of the official deflator.  That inflation is in some part why the nominal stock prices look higher.  The trick is not to mistake the inflated numbers for a bubble, totally different things.

Sun, 07/27/2014 - 19:48 | 5010925 kchrisc
kchrisc's picture

Equities are just the bubble in the bubble that is the Rothschild Petro$ bubble.

Sun, 07/27/2014 - 19:58 | 5010962 saveUSsavers
saveUSsavers's picture

The TBTF "Gotmefreemoney" Primary Dealer Mafia Underwiters WILL PROP THIS UNTIL ***ALIBABA PAYDAY****  Tyler- you agree? Watch end of month prop into the IPO in August, imho..

Sun, 07/27/2014 - 20:02 | 5010974 Keltner Channel Surf
Keltner Channel Surf's picture

A bubble that’s “highly advanced” -- just like the bubble-headed Talosians from Star Trek, an advanced civilization that became so dependent on an ability to create “real” illusions, they lost the capacity to live, endured unending boredom (and an associated lack of volatility), and began trapping traders, er, that is, space travelers to use as the basis for their addictive illusions . . .

Sun, 07/27/2014 - 20:08 | 5010994 catch edge ghost
catch edge ghost's picture

That's all good except it forgets that The Fed and its Friends are bigger than the Market. There is no Market.

I think most folks fail to realize that among the billionaire-parasite-richer-than-you crowd exists also a great many delusional utopians. It's the utopians you can count on to never let assets decline in a meaningful way ever again. Okay, maybe one more time, but after that one it doesn't matter, right?

As of right now, the price of everything should be very close to zero, but it is not. That's hyper-controlled inflation. And it will continue far longer than you or I will. But be not disheartened, fellow doomer, you'll still get to witness the farce we call the US Dollar descend into that special place in Hell where it belongs, if you quit smoking, eat well and exercise, etc. 

I firmly stand by my predictions the DOW will be OVER 9000! before the end of the year.

Sun, 07/27/2014 - 20:59 | 5011119 Ben Ghazi
Ben Ghazi's picture

Dow OVER 9000?

 

Already there, great prediction.

Sun, 07/27/2014 - 22:52 | 5011380 The Most Intere...
The Most Interesting Frog in the World's picture

Actually I think the only dollars going bye bye are the ones in our bank accounts.

Sun, 07/27/2014 - 20:10 | 5010996 buzzsaw99
buzzsaw99's picture

What dive is he gonna do?

The Triple Lindy.

Melon! Melon! Melon!

There will be an additional springboard installed...

Sun, 07/27/2014 - 20:14 | 5011012 Tasty Sandwich
Tasty Sandwich's picture

I'd say it's more an indication of a failing monetary system.

It is different this time, but not in a good way.

Sun, 07/27/2014 - 20:22 | 5011034 world_debt_slave
world_debt_slave's picture

but, but, Yellen say there no bubble

Sun, 07/27/2014 - 20:23 | 5011038 MASTER OF UNIVERSE
MASTER OF UNIVERSE's picture

The only people in the markets right now are greedy thieves that

know the alarm system is sounding and the police have been dipatched.

They believe in their heart of hearts that they still have time to loot the store and make a getaway before the cops drive to the scene of the crime. Every whistle and bell has sounded out on the Internet. Correction warnings are coming in at a high frequency each day on Z/H and elsewhere. This is through the looking glass stuff in so far as something is bound to blow up economically within one more month. So, by my own idiosyncratic metrics that I follow I am stating that the lithium crystals are about to blow and the ship cannot take it any longer, Captain! Today is the 27th. Before the end of August the lithium crystals will blow. And the USSA Enterprise will run out of gas and get a flat tire. Mark my words.

Sun, 07/27/2014 - 21:25 | 5011177 disabledvet
disabledvet's picture

Don't disagree. This market is no where near the 1929 mania though...and lest we forget the 90's which caused a broad expansion in both p/e's and monetary aggregates (probably the biggest market move in history.)

Relative to the 90's this one has a long way to go...and indeed has been driven entirely by an expansion in p/e ratio's (there was at least a modicum of economic and income growth in the 90's.)

So hard to tell if the massive rally in treasuries means anything beyond "a massive rally in treasuries." The ACA looks to be a total disaster...rumors are it will be declared unconstitutional soon. That might free up some capital for "growthiness."

I can understand counter cyclical financial policy...if the ACA really is a catastrophic failure that might explain the huge energy boom as a "failure to launch" as fiscally speaking the Federal Government has flamed out counter cyclically and has in fact been a drag on consumption.

The Administration has fallen back on roads and bridges....a lot of which I see having been done and continuing to be done around where I live. No traffic though. There simply remains no recovery.

I do think we're staring at World War III however.

"Just start calling for volunteers" and you'd probably get 250,000 in a day in the USA.

Of course talk about a loss to your tax base.

Sun, 07/27/2014 - 20:34 | 5011058 bid the soldier...
bid the soldiers shoot's picture

I certainly agree that the QE monies that went to the banks and other fortunate enterprises, were directed by Bernanke into equities, especially the indexes which would trumpet the recovery and raise 401(k)s and give hope to the hopeless.  

Indeed, we see 5 years after TSHTF, the important American markets have hit all time highs.

And the Fed has $4 trillion of repos on its balance sheet.

But conceivably it could be a much larger number, no?

So this is my question to the gang at ZH:if you examine the rules and regulations of the Federal Reserve System, does the Fed have to tell the public of every repurchase agreement and its amount?

Weren't the announcements of, QE1, QE2, and QE3 just to steady public confidence and give courage to our brave Wall Street traders?  

To let the world know that Uncle Ben, certified Doctor of Depressions, was at the helm, applying all the knowledge about the the Fed he garnered as Chairman in Waiting since 2002?

So if anybody here can point me to the FED's rule that states that the American public must see every repurchase agreement the Fed writes and its amount, I will be grateful forever and upvote all of your comments.

 

Sun, 07/27/2014 - 21:16 | 5011161 ekm1
ekm1's picture

Question is not clear.

What matters if the answer is yes or no?

 

Issue is that Fed is picking winners and losers, thus harming the economy

Sun, 07/27/2014 - 21:46 | 5011225 ThroxxOfVron
ThroxxOfVron's picture

"the FED's rule that states that the American public must see every repurchase agreement the Fed writes and its amount"

There isn't one.

The FED has also sold Derivatives and Interest Rate Swaps; but, I have not been able to find any accounting of them per-se.

 

http://www.marketskeptics.com/2010/05/federal-reserve-has-been-abusing.html

 

 

***I contend that the following material should be read and understood.***


http://www.federalreserve.gov/monetarypolicy/files/FOMC20030625meeting.pdf

"Minutes of the Federal Open Market Committee Meeting on June 24-25, 2003




CHAIRMAN GREENSPAN. … Would somebody like to move approval of the minutes of the May 6 meeting?

MR. GUYNN. So move.

CHAIRMAN GREENSPAN. Without objection they are approved. We turn now to Mr. Reinhart and Mr. Kos.

MR. REINHART. Thank you, Mr. Chairman. I' ll be referring to the material called “Conducting Monetary Policy at Very Low Short-term Interest Rates” which was on the table when you came in. It' s the same as the material I sent to you electronically last week. 


Although I have spoken about these policies in relatively abstract terms, they are part of our history, as shown in exhibit 7. The Federal Reserve has always appreciated the importance of correctly aligning market expectations about the economy. In that regard, and as shown in the top left, one of the more sizable reactions in financial markets in the past few years to an FOMC decision followed the decision on May 6 not to change the overnight rate. The System has also been willing to put its balance sheet at risk to encourage appropriate expectations about interest rates or to calm fears about funds availability. As plotted at the top right, the Desk sold options on RPs for the weeks around the century date changethat totaled nearly $0.5 trillion of notional value. Given that the Desk already operates in all segments of the Treasury market, we wouldn' t have to move up a learning curve if instructed to increase purchases of longer-dated issues. 


The alternative approaches that would involve changes to how the Desk operates are summarized in exhibit 4. The alternatives that could be adopted while changing only the composition of the balance sheet are listed in the top panel. These include (1) extending the average maturity of the outright holdings in the SOMA, (2) setting explicit ceilings on longer-term Treasury yields, and (3) using derivative instruments. Because only the composition of the balance sheet changes, excess reserves can be kept at low levels and under the Desk' s control, allowing the Desk to continue targeting a positive funds rate. "

Sun, 07/27/2014 - 23:03 | 5011401 bid the soldier...
bid the soldiers shoot's picture

If what you say is true, and there's no reason to doubt that it is, then the largest measure of the US money supply, M3, could be a number comprable to the number of grains of sand on the beaches of the better resorts of the world.

I'm sure you are aware that a few months before Bernanke became Chairman, the Fed announced it would cease to publish the amount of M3.  M3 being M2 plus a few other items that were slow to get into circulation.

The Fed is probably keeping the other central banks informed as to the size of M3, and it's just as well that the Chicken Lickens and the Henny Pennys don't know.

It's hard enough reading their comments about foreign relations. 

Repurchase agreements were an important tool of the Fed before QE1 came along. Remember, all those sellers of toxic assets to the Fed are going to have to buy them back someday.

 When they do, M3 will get smaller and smaller and maybe the Fed will publish it  gain :o)

I won't bore you with what happened after that.  I'm sure you have come up with a very interesting scenario. 

Sun, 07/27/2014 - 20:42 | 5011075 q99x2
q99x2's picture

You just BTFD. This is a software bubble and the FED has never had total control of the markets like they do now.

Markets can only go up from here until the nukes hit.

Sun, 07/27/2014 - 20:42 | 5011076 EveningInAmerica
EveningInAmerica's picture

Just more naysayin before the final blow-off top. Buy until your lawn guy is giving you stock tips.

Sun, 07/27/2014 - 20:47 | 5011093 TabakLover
TabakLover's picture

My lawn guy quit...to get his brokers license.

Sun, 07/27/2014 - 20:42 | 5011079 TabakLover
TabakLover's picture

Lunes negro.  Yeah!

Sun, 07/27/2014 - 20:45 | 5011087 kill switch
kill switch's picture

I'll ask again,

 

OT,,

What appened to:

 

Silver Fixing Lawsuit: Deutsche Bank, HSBC And Bank Of Nova Scotia Manipulated Daily Benchmark Price

 

Was that deleted??

Sun, 07/27/2014 - 22:14 | 5011288 defender
defender's picture

Are you talking about a different site?  like this:

http://www.ibtimes.com/silver-fixing-lawsuit-deutsche-bank-hsbc-bank-nov...

only post I have seen here is the gold one:

http://www.zerohedge.com/news/2014-07-26/london-fix-gold-rigging-bullion...

 

Sun, 07/27/2014 - 21:27 | 5011184 Wahooo
Wahooo's picture

This is the most telegraphed bubble burst in economic history. BTFFedDIP

Sun, 07/27/2014 - 21:30 | 5011188 Tulpa
Tulpa's picture

"The value of a financial asset is the discounted present value of its future payoffs, and when the discount rate -- of which the Fed interest rate is a component -- goes down, the true fundamental value of risky assets goes up mechanically and automatically. That's rational price appreciation, not a bubble."

umm, OK, only problem is the discount rate isn't going down.  It's been zero or slightly negative for over five years now; that's already priced in.  If he were comparing valuations with an alternate universe where the fed rates were higher that would be an excellent point, but unfortunately I don't have access to alternate universe markets.

Sun, 07/27/2014 - 21:50 | 5011237 JD59
JD59's picture

Not all stocks are in a bubble. PM stocks are in a reverse bubble!

Sun, 07/27/2014 - 22:04 | 5011265 ThroxxOfVron
ThroxxOfVron's picture

http://www.federalreserve.gov/monetarypolicy/files/FOMC20030625meeting.p...

 

"MR. REINHART.1 Thank you, Mr. Chairman. I’ll be referring to the material called “Conducting Monetary Policy at Very Low Short-term Interest Rates” which was on the table when you came in. It’s the same as the material I sent to you electronically last week. I’d like to start on a personal note, though. I was in line at midnight on Friday with my 11-year-old son to purchase Harry Potter and the Order of the Phoenix. At 870 pages it is somewhat longer than the briefing documents the Committee has received. But it, too, considers an alternative world filled with uncertainty and great perils!

 

 

---

It would be a virtual standing facility if not a literal one. With a soft ceiling, if rates drifted higher, the Desk would arrange a more limited quantity of purchases each day, but it would be prepared to continue such purchases day after day for as long as necessary. This approach would permit closer coordination with sterilizing operations needed to target the funds rate. The tradeoff is to allow some deviation in yields from their ceilings for a short period of time in order to keep the funds rate close to its target. As yields drifted up to the ceiling, the Desk would purchase Treasuries. One important question about design is whether the Desk would begin to sell and thereby lighten the SOMA’s inventory if and when yields fell beyond some defined threshold under the ceilings. Being symmetric in this way would prevent the SOMA from acquiring successively larger portions of Treasury debt. On the other hand, a successful program of purchases and sales would, in effect, create a yield corridor that would damp two-way risk and potentially undermine market forces even more than just ceilings would."

Sun, 07/27/2014 - 22:55 | 5011272 ThroxxOfVron
ThroxxOfVron's picture

...

Sun, 07/27/2014 - 22:19 | 5011300 Burticus
Burticus's picture

Check out a chart of the Weimar stock market in the early 1920s if you want to see how big a bubble can be blown by debasing a currency.

Mon, 07/28/2014 - 06:42 | 5011933 Comte d'herblay
Comte d'herblay's picture

Relying on ancient history to make moves in the present is like the  eldely billionaire, like Murdoch, believing that the beautiful, young, nubile virgin only loves him for himself and not his money.

Forsake the ol pair-o-dimes, embrace J Yell, her predecssors and descendants.

 

Sun, 07/27/2014 - 22:27 | 5011322 ebworthen
ebworthen's picture

-1% but it won't be reported.

Sun, 07/27/2014 - 23:00 | 5011393 dragoneyes74
dragoneyes74's picture

Big news week coming up.  GDP and FOMC on Wed (no press conference), then NFP and ISM on Friday.  Talk about packing it in. 

Nice pop in gold on Friday.  There's really nothing to say here for awhile.  It's trading in a very clear symmetrical triangle.  A breakout in either direction needs to be respected.  There's a lot of room left, so it's entirely possible we trade back and forth down the narrowing end.  I'd rather see a preemptive breakout to the upside, but strangely the market doesn't care what I want.  If you look at silver it has a recent swing high at $21.64.  Silver hasn't taken out a swing high in a couple years now, so if it happens, it would be very encouraging for the long side.  But that would only be the appetizer.  The real meal happens on a gold breakout.  My main concerns are the strengthening dollar and the fact that the net long position for the Specs in silver is at the level where previous tops have occurred.  But the chart is the chart.  All you can do is fade the range or wait for the breakout.  

It will be interesting to see how equities react to the news this week.  Is good news bad?  Bad news good?  What section of the distorted hall of mirrors are we in now?  Probably the "all news is a buy news" section.  It would nice to see a little more selling, though.  Looks to me like typical consolidation in the ES, forming a base to go higher.  Compared to the intense selling at the top this winter, the selling on Thursday and Friday was extremely gentle.  I'm thinking the lowest we go is a stop run below 1942.  The NQ has support near 3900, if we even get that far.  Wake me up when we lose a key support level.  You want to know where we're going?  Take a look a the Nasdaq Comp.  It's at 4485.  The all-time bubble high is 5132.  We're going to 5000.  Does anyone care?  All you can do is play the technicals as they happen, read the price action, and adapt.  Nobody has a clue.  I do remember fondly the days when I thought the market would go down.  And now it's like I'm free, liberated from the sinful, blasphemous thoughts of how selling could be sustained.  It's kinda like finding Jesus.  I am born again in the glory of the Fed.  For it is the Fed who gives life and takes away the sins of the world.  Blessed be its followers. 

I'm playing AAPL for the move to 100 but I would love to see a pullback as I wussed out on it and would like to add.  If not, I'll play the breakout over the recent high.  

The Euro short looks interesting but I'll wait to see how it handles the news this week and then wait for a bounce.  Not chasing.  

Mon, 07/28/2014 - 01:00 | 5011606 OneTinTrooper
OneTinTrooper's picture

thanks for thinking out loud ... honest thoughts tend to be circular and include uncertainty

Mon, 07/28/2014 - 01:14 | 5011627 mc888
mc888's picture

Entire premise is based on "the ratio of nonfinancial market capitalization to GDP".

 

So without an accurate GDP number, it cannot be calculated correctly. Next contestant please.

 

Mon, 07/28/2014 - 02:03 | 5011680 hwa-jurong
hwa-jurong's picture

Good Day !!!!!

     I am Hwa Jurong, a Reputable, Legitimate & an accredited money
Lender. I loan money out to individuals in need of financial assistance.
Do you have a bad credit or are you in need of money to pay bills?
i want to use this medium to inform you that i render reliable beneficiary
assistance as I'll be glad to offer you a loan at 2% interest rate to
reliable individuals.

       Services Rendered include:
*Refinance
*Home Improvement
*Inventor Loans
*Auto Loans
*Debt Consolidation
*Horse Loans
*Line of Credit
*Second Mortgage
*Business Loans
*Personal Loans
*International Loans.
     Please write back if interested.
Upon Response, you'll be mailed a Loan application form to fill. (No social
security and no credit check, 100% Guaranteed!) I Look forward permitting me to
be of service to you. You can contact me via e-mail: hwa_jurong@yahoo.com.sg , hwajurong12@gmail.com , contact@hwa-jurong.com ...
Yours Sincerely,

Hwa Jurong(MD).

Mon, 07/28/2014 - 02:21 | 5011698 r00t61
r00t61's picture

If a loan is offered to me by anyone besides a Nigerian Prince I'm going to reject it out of hand.

Mon, 07/28/2014 - 02:03 | 5011681 hwa-jurong
hwa-jurong's picture

Good Day !!!!!

     I am Hwa Jurong, a Reputable, Legitimate & an accredited money
Lender. I loan money out to individuals in need of financial assistance.
Do you have a bad credit or are you in need of money to pay bills?
i want to use this medium to inform you that i render reliable beneficiary
assistance as I'll be glad to offer you a loan at 2% interest rate to
reliable individuals.

       Services Rendered include:
*Refinance
*Home Improvement
*Inventor Loans
*Auto Loans
*Debt Consolidation
*Horse Loans
*Line of Credit
*Second Mortgage
*Business Loans
*Personal Loans
*International Loans.
     Please write back if interested.
Upon Response, you'll be mailed a Loan application form to fill. (No social
security and no credit check, 100% Guaranteed!) I Look forward permitting me to
be of service to you. You can contact me via e-mail: hwa_jurong@yahoo.com.sg , hwajurong12@gmail.com , contact@hwa-jurong.com ...
Yours Sincerely,

Hwa Jurong(MD).

Mon, 07/28/2014 - 03:16 | 5011733 bardot63
bardot63's picture

Hey, Wun Hung Low, I have a lot of money coming any day from the son of the President of Nigeria who needs to get his sister safely out of Botswannaland, so do you think I could get a jumbo deal? 

Mon, 07/28/2014 - 06:00 | 5011902 nathan1234
nathan1234's picture

Carefull bardot LOL

Wun Hung Low comes along with the deal

 

Mon, 07/28/2014 - 05:58 | 5011901 nathan1234
nathan1234's picture

Goodnight

Mon, 07/28/2014 - 04:52 | 5011833 devilsdictionary
devilsdictionary's picture

Oh, Hussman. A contrarian indicator.

Mon, 07/28/2014 - 05:30 | 5011865 falak pema
falak pema's picture

Equity bubbles and the race to uber wealth :

In the tug of war now hottening up in West between Statists and Market Banking moguls for the cornering of uber-wealth, either to feed the "bail-in" and/or the "wealth tax" pump or, conversely, the Caymanista "tax inversion" bonanza --now actively promoted by the TBTF and the HFs of shadowbanking,-- betting billions of dollars on corporate tax inversion instruments in the market, to further sanctuarise neo feudal power.

Read this about what Deutsche bank now offers its UBER wealthy clients : 

http://www.marketwatch.com/story/deutsche-bank-to-focus-on-wealth-manage...

and this BRICS bond market boom :

http://blogs.wsj.com/moneybeat/2014/07/28/indias-rupee-bond-market-booms...

What does this tell you as Argentina goes belly up ?

The middle class of western word will get well and truly shafted. There is no growth horizon for the millenium generation of the OECD (USA/EU/Japan) countries.

All the while we export weapons and asymmetric wars to the desperate and the damned! 

Boko Haram  and Hamas seems to be their response! 

When thieves fall out their economic models of growth have the pungent smell of sterile fiat and oligarchy (both statist and banksta private) endemically western  style corruption.

The Great Gatsby age is back.

Mon, 07/28/2014 - 05:56 | 5011899 nathan1234
nathan1234's picture

It's a "Booble" Trap

Beware, As you look at it you can be charged with financial harrasment

 

Mon, 07/28/2014 - 06:48 | 5011939 AdvancingTime
AdvancingTime's picture

I agreed ugliness lies ahead. I love the way it is always being kicked out a year or two and never going to happen tomorrow. It is as if we can't handle what is coming at us and need more time.

For a long time I have been trying to develop a scenario for a market "super crash" and a reasonable map that would arrive at such a situation. Below is an article looking at how it could happen sooner rather than later.

http://brucewilds.blogspot.com/2013/01/flash-crash-on-steroids.html

Mon, 07/28/2014 - 08:16 | 5012050 rsnoble
rsnoble's picture

Financial warfare.

Also the clowns in DC can't keep the show going with shit crashing down all around them.

One last time............

Mon, 07/28/2014 - 08:46 | 5012129 shovelhead
shovelhead's picture

What do you think of "Day of the Lemmings" for a script title?

Mon, 07/28/2014 - 09:20 | 5012247 2nd_Look
2nd_Look's picture

a bubble is only a bubble when it bursts otherwise it remains an expansion :-)

quite a long one so far  agree so i'm waiting for the big bam

Mon, 07/28/2014 - 09:31 | 5012282 esum
esum's picture

Every time I withdraw as little as a few grand from the bank the manager comes over and asks why i need the CASH... So I explain i cant buy crack, hookers, gun show items and stolen property at the flea market with credit cards...plus i save $0.05/gallon on gas ... Last time I asked him why the bank is constantly paying billion dollar fines for civil crimes that are really criminal. Banks think the money belongs to them and you are just the donkey who earns it for their use... I cant envision a run on banks going well. I mean if the market crashes do people really think they will be able to get cash out of the banks... Or are we going to see obumbler standing in front of a crowd with a sheet of paper saying 20% of all deposits are now govt property... and the FDIC is defunded for a few months... 

Mon, 07/28/2014 - 12:51 | 5013225 Whitness
Whitness's picture

I think the Fed and the US govt have used up all of thier ammo in the last crash of 2008-2009 and this time around its going to stay down for a while like Japan's Nikkei! I don't think the US can afford another war either...

Do NOT follow this link or you will be banned from the site!