Why 'S&P 2000' Is A Fed-Manufactured Mirage: The "Buy The Dips" Chart That Says It All

Tyler Durden's picture

Submitted by David Stockman of Contra Corner blog,

That 4% market correction was quick and virtually painless. Not missing a beat after the market briefly tested 1900, the dip buyers came roaring back - gunning for the 2000 marker on the S&P 500, confident that longs were not selling and that shorts had long ago been obliterated. Needless to say, bubblevision had its banners ready to crawl triumphantly across the screen.

When the algos finally did print the magic 2000 number, it represented a 200% gain from the March 2009 lows. And to complete the symmetry, the S&P 500 thereby clocked in at exactly 20X LTM reported earnings based on consistent historical pension accounting.

The bulls said not to worry because the market is still “cheap” - like it always is, until it isn’t. Yet now more than ever is the time to keep the champagne corked. The stock charts show an outsized skunk in the woodpile, while the economic data completely belie the sizzling gains in risk asset prices that have been racked up during the last 65 months. Even more crucially, the Wall Street casino’s puppeteers at the Fed more or less admitted at Jackson Hole that they are utterly lost in Keynesian voodoo. To put it generously, Yellen’s speech amounted to a vaporous word cloud wrapped in incoherent double-talk.

In this context, Lance Roberts recently published a stock chart that shows why “S&P 2000″ is yet another signal that a giant financial train wreck is waiting to happen. For a fleeting moment six years ago, the thundering 50% plunge of the stock indices caused a crisis of confidence in the Wall Street casino that had been fostered over two decades by Greenspan and Bernanke. During that short season of trauma and disbelief, the idea briefly resonated that prosperity cannot be built on towering mountains of debt and egregious stimulation and manipulation of financial markets by the central bank.

But then began the greatest flood of monetary expansion ever conceived, with Professor Ben Bernanke leading the charge. So doing, he claimed to be combatting a Great Depression 2.0 that never actually threatened, based on Milton Friedman’s complaint about the alleged Fed mistakes of 1930-1933 that never happened. I documented these immense urban legends in The Great Deformation, but suffice it to say here that the thousands of mainly country banks which closed in the early 1930s were actually insolvent, not victims of Fed inattention; and that the short, sharp recession of 2008-09 involved the unavoidable liquidation of housing bubble inventory and jobs, not the on-set of a depressionary plunge into an economic black hole.

Nevertheless, Bernanke doubled the Fed’s balance sheet from $850 billion (built-up over 94 years) to $1.8 trillion during the seven weeks after the Lehman event; and then by the thirteen week mark in early December 2008 he had nearly tripled it to the $2.3 trillion. Moreover, once the genie of rampant money printing was out of the bottle, it did not take long to invent the pretexts for QE in its quick succession of phases and details. In a historical heartbeat, the balance sheet of the Fed soared to $4.5 trillion, eviscerating the last remnants of honest price discovery on Wall Street as it rambled upward.

The graph below is blinding proof that the S&P 500 is now a complete creature of central bank liquidity and manipulation. Like clockwork, the dips have become shallower and the rebounds more resilient.  Given the faltering nature of the domestic recovery since 2009 and the self-evident headwinds issuing from all points in the global economy there is not a snowballs chance that this chart would have been generated on the free market in response to honest price discovery along the way:


Just consider the most recent economic data. There is nary a hint in the fundamental data of the “escape velocity” which today’s bubbling stock market is allegedly “pricing-in”.

Even before the inevitable markdown of Q2 GDP in the next revision, for example, real final sales posted at just a tepid 2.0% gain versus prior year. And that was exactly the same as the 2.0%y/y real final sales gain posted in Q2 2013, and down slightly from the 2.2% y/y gain recorded in Q2 2012. Altogether, the real economy has been stuck dead center in the 2% zone since the Great Recession officially bottomed in June 2009. Setting aside the footballing of quarterly inventory figures, in fact, real final sales have grown at just 1.7% per annum during the last 60 months of so-called “recovery”.

Needless to say, there is nothing remotely that weak in modern financial history. What has taken the stock market up is relentless multiple expansion and a dangerous over-valuation of corporate profits. Yet the latter represent an economic aberration that has taken the profit share of national income to unsustainable off-the-charts levels, and which has been achieved owing to central bank policies that have made debt artificially cheap and labor inordinately expensive.

The fruits of these distortions are evident in the graphs below. An economy that is not creating breadwinner jobs, gains in real household incomes and real increases in productive assets is not remotely worth 20X earnings. It is only a matter of time before another black swan event like the Lehman bankruptcy shatters confidence in the Fed’s con game, causing the pleasant undulations in Lance Roberts’ chart to give way to another dizzying plunge.

To be sure, the Fed is a serial bubble machine. But even it cannot defy economic gravity indefinitely.

Breadwinner Economy - Click to enlarge

Breadwinner Economy – Click to enlarge

Real Business Investment - Click to enlarge

Real Business Investment – Click to enlarge


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I swear I've seen this article 1k times on this site over the past five years.

LawsofPhysics's picture

And it will continue to get more and more impressive, especially as the DOW sails through 36,000...

(and a loaf of bread costs you a month's wages - winning)

NOTaREALmerican's picture

Well, you've got to stop measuring using the currency used by Trash Class and use the DowBuck.      Breads never been cheaper in DowBucks.

Al Huxley's picture

...and don't forget, even though prices continue to rise, there will be no inflation (according to 'official sources'), so no real need to raise interest rates.  Just keep swapping sawdust for beef and flour in the fast food, keep charging up the EBT cards and eventually we'll get to the endpoint - 80% of the population fattened like cattle, WalMart will literally install feeding troughs, and the majority will belly up to the trough, then back to their hovels with their subsidized smartphones and reality TV, while the 'important people' oversee the construction of their summer palaces. 


All this concern about fundamentals and 'overbought' just shows an almost touchingly naive belief that 'the system' will still eventually work like it used to.

TheRedScourge's picture

Now that the sentiment on ZH is almost a consensus of higher highs, I think maybe it's time I bought some short positions.

WhackoWarner's picture

What's that old gold advice. Think of selling some gold if DJIA= 2 oz. of gold.....or maybe even = 1 oz. gold. 

If this was the case today (17066)  I would think of selling an oz or 2. 

HUGE_Gamma's picture

I'm starting to think ZH is a NY Fed/ GS shill just trying to sucker a few extra dollars from shorts by fear mongering.. How a about a Bear in the headlights MEME when this closes above 2000?

lester1's picture

The FED is crazy to think the economy can survive without QE or ZIRP. 

They talk about interest rate hikes. Ok , well do it then and watch the economy tank. There will be a lot of defaults on QE loans.

silentboom's picture

They'll never do it.  If they really raised rates the government would default and a black hole would form in the middle of wall street.

Wait What's picture

"well do it then and watch the economy tank"

it's already guaranteed that as soon as this round of QE ends the economy is going to tank. forget rate hikes, start taking bets on when & how big the next round of QE is going to be. they've already broken the $1Trillion+ threshold, the only amount that will keep the market complacent (READ: financial stability) will be upwards of $2Trillion.

i'm already trying to figure out how to bet that instead of a rate hikes we get more QE the summer of 2015.

q99x2's picture

Soros is too old to play this game. He should be arrested.

Al Huxley's picture

All the market is pricing in is free money forever.  Nobody buying and selling this market gives a fuck about anything other than the fact that they can buy with leverage at no cost.  First interest rate hike (because the economy's getting stronger - look at the stock market) will be the end of it, but keep in mind that the Fed isn't going to suicide itself by raising rates, and 'invest' accordingly.

huggy_in_london's picture

Sounds like 1929 ... all on leverage with no cost.  And before you all red arrow me I draw your attention to page 47 of the epic work by Galbraith 'The Great Crash 1929' ....

"In the stock market the buyer of securities on margin gets full title to his property in an unconditional sale.  But he rids himself of the most grievous burden of ownership - that of putting up the purchase price......"

I do believe that there eventually was a cost to pay after all that......

Al Huxley's picture

IMO, the system was slightly less crooked then - maybe more crooked on the surface, but less crooked at the core.  I've read the book, BTW.  Also, by '29 there was plenty of retail participation donating money to the bubble, whereas demographics, and the catastrophically bad condition of most of the real economy prevent from happening now.  This is a controlled wealth confiscation market, not a bubble market.

huggy_in_london's picture

I wouldn't call the juicing of stocks and housing controlled wealth confiscation.  It looks and feels like a bubble to me.  I mean, up every-single-day?  A consensus that nothing can go wrong when buying.  That's a bubble.  Value, we are told, doesn't matter. Its "just buy" cause someone else will pay you more for it in short order.  You can bake into tomorrow another 5 handles in spoos right now. Its as good as done.  Eventually this will end the same way all bubbles do.  Its just a question of time (and that could be years away of course).  Nothing matters to anyone at the moment, and it won't until it matters to everyone.  Usual story, this has happened plenty times before and thats just in my 20+ years trading. 

SheepDog-One's picture

1929 required killing millions, this time around, billions?

Devils Advocate's picture

CNBS and others are now touting that interest rate hikes are and will be good for the stock market!!!  Basically you can't lose!

huggy_in_london's picture

No one takes them seriously.  Everyone goes on that show with a nod and a wink.

SheepDog-One's picture

In the CNBS circus world, everyone's a winna!

silentboom's picture

Let them eat stocks!

walküre's picture

That could very well become a slogan to start the next revolution.

I'm sure some rich twit somewhere heard about hungry people in America and that was her response: "Let 'em eat stawks"

At least Marie Antoinette still understood that cake was food.

Dr. Engali's picture

The fed has made it clear where the excess currency is to go. If it flows to an area they don't approve of, it will be targeted and smacked down accordingly. Sit back and enjoy the ride to S&P 3000 as our currency dies.

RattNRoll's picture

One World Currency

One World Govt


One World Religion.


You betcha it's coming...

Al Huxley's picture

Excellent observation, although I have serious doubts as to the Fed 'reducing its balance sheet', so I don't buy the implied follow-on of a market meltdown.

Maplehood's picture

I'm not sure the author is implying a meltdown, but a downturn for sure.  If the Fed tapers. then its balance sheet should gradually shrink as bonds come to maturity and retire.  That's clearly a huge "if" and I have serious doubts about it as well

JustObserving's picture
Why 'S&P 2000' Is A Fed-Manufactured Mirage

The whole US economy is a mirage:

As I have emphasized for years, the West already lives in the dystopia forecast by George Orwell. Jobs are created by hypothetical add-ons to the reported payroll figures and by inappropriate use of seasonal adjustments. Inflation is erased by substituting lower priced items in the inflation index for those that rise in price and by redefining rising prices as quality improvements. Real GDP growth is magicked into existence by deflating nominal GDP with the understated measure of inflation. Now corporations without factories are going to produce US manufacturing output, US exports, and US manufacturing jobs!

Every sphere of Western existence is defined by propaganda. Consequently, we have reached a perfect state of nihilism. We can believe nothing that we are told by government, corporations, and the presstitute media.

We live in a lie, and the lie is ever expanding


AdvancingTime's picture

I agree where I live things are flat. The economic recovery that the media and talking heads have been bantering around does not exist and is just a myth. A manipulated stock market distorted by recent economic policy hides and mask the real truth, in many ways it is ground zero in the war to convince us all is well.

The American people and Main Street will tell you they are far from convinced that it is smooth sailing ahead. Huge weakness in the economy has been shown by numbers that barely get by even after record amounts of stimulus. Fact is if QE or the massive government deficit spending that props up our economy is removed it will fold like a cheap umbrella.

Recent changes in how the GDP is figured , which boosted growth thus reducing the debt to growth ratio, and attempts to spin poor numbers regarding employment have been met with skepticism. More on this subject in the article below.


TabakLover's picture

"Mrs. Yellen."


"Blow us."

walküre's picture

Doesn't matter that a pound of apples costs 4x more this summer than 5 years ago. The family can share one apple for dessert on Sundays.

Potato peels make a good base for soups.

At least we're still eating real food rather than synthetic chemical fillers.

Things could be worse. Hopefully the 20 y/o car won't break down or the landlord is selling the rundown digs for land value.

Real problems lived by real people in the reality of America today

NOTaREALmerican's picture

The winners using the DowBuck don't really care about the trials-n-tribulations of genetically inferior Trash Class.   They'll figure out how to survive and - unfortunately - reproduce.

walküre's picture

The ranks of the "trash class" are growing. Guess where the increase in "trash class" inventory is coming from? The "winners" of the DowBuck lottery had a bad streak and lost it nearly all. They're still trying to figure out how their stocks are all down but the index is green every day.

NOTaREALmerican's picture

Re:  The ranks of the "trash class" are growing

Sure, but because they are genetically inferior, they'll arrive at the wrong "conclusion" (as they've always do about everything).  

walküre's picture

Thanks for spelling it out. There is only one superior gene pool which considers itself "chosen people". The fact they always win is not because they're better gamblers. They run the casino.

NOTaREALmerican's picture

If a group of people demonstrates an overwhelming level of superiority over the entire world (not JUST the easily manipulated the whites, but the Asians too) for 3 thousand years...  well,  there's only two possibilities:

1)  Gods

2)  Space aliens. 

walküre's picture

3) inherently and collectively deceitful and genuinely bound by commonly shared grief

Ripping off everyone else with justification because they deserve to be ripped off and because they've caused grief to the group at some point in time.

firstdivision's picture

Anyone that has shorted this market in the past few years is the reason the market is able to squeeze higher. Don't feel sorry for the shorts that think they're smarter than the casino owners.

huggy_in_london's picture

I am pretty sure that within a year, as long as you can fund your position, I think you will make more money shorting it here than getting long right here.  

RaceToTheBottom's picture

75% down from here  VS   a printing press with a long term history and a good maintenance schedule.

SheepDog-One's picture

Funny how after every 'correction', it's all back to higher than before things needed to be corrected. Just a bunch of bullshit.

orangegeek's picture

the global economy is a piece of shit


markets are propped up by central banks and other institutions


blah, blah, blah - the planet knows this


so when is the dog going to roll over?  when ?

yogibear's picture

The tapering is all talk. They really have no intentions on doing it and the market said BS to the fed as well.

Fed tapering talk is all noise.

Catullus's picture

Wake me up when the fed actually let's a treasury bond mature.

This market is cheap because your money is worthless. I'm just surprised gold and silver aren't $2,500 and $48 respectively. But I digest...

Econolingus's picture

And in other news, the moon remains in orbit until gravity overcomes velocity.

SheepDog-One's picture

Well at least the moon is just staying the same size and not swelling but like 2% every day, unlike the centrally hand held Jabba the Hutt markets.

spinone's picture

This is the end of a 100 year demographic, economic, technological and monetary cycle.  No one knows how it will end or what will come next, because the whole world has never used fiat currency before.

AdvancingTime's picture

To say the market is rigged is an understatement. After over 30 years of trading commodities I will flat out state without any reservations that lies and manipulation run rampant. If you think anyone is looking out for the small independent trader you are wrong. An unholy alliance of the Federal Reserve, the government, and the too big to fail has left the rest of us in a precarious position.

For the big boys, its insider information and computer trading, this includes computing patterns that exploit where stops are placed, this improves their ability to wash the weak out of their positions. The bottom-line is that the higher the market goes the more vulnerable it becomes to a major collapse and sudden downward move. More on this subject in the article below.