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WWJD?

Eric Parnell's picture




 

The China stock market has plunged into a tailspin. After rising an extraordinary +150% over the past year, the Shanghai Stock Exchange Composite Index has fallen by nearly just as notable -30% in the past three weeks. Despite the fact that China stocks are still +80% higher than they were just one short year ago, the recent sharp plunge has compelled Chinese policy makers to fire all of their stimulus and liquidity guns in a frantic attempt to stem the decline. How the recent market chaos in China ultimately plays out remains to be seen, but the response by Chinese policy makers in recent weeks raises and worthwhile question. What would U.S. Federal Reserve Chair Janet Yellen do if the S&P 500 Index was falling by -30% in similarly short order?

The knee jerk response would be that the Fed would simply launch into a QE4 stimulus program. After all, given that the Fed is quickly seeing their long sought after objective to raise interest rates by the end of the year headed down the drain along with Greece’s Euro Zone membership and China’s stock prices, they would be without the ability to first cut interest rates in an attempt to stabilize the market.

But how eager would the Fed be to enter into yet another asset purchase program amid a -30% market decline? After all, it is not as though the last two rounds of quantitative easing programs succeeded in doing much in the way of creating sustainable growth for the economy other than artificially inflating asset prices including stocks, encouraging the latest round of unhealthy speculative lending activity and exacerbating an already wide income inequality gap. And to this latter point, the fact that Janet Yellen has been outspoken in her concern and frustration about a income gap that has blown out dramatically over the past three decades that completely coincided with the “Fed put” era suggests that she may be inclined toward policy alternatives other than those that have been implemented in the recent past. Lastly, the fact that the Fed has just completed a five-bagger on its balance sheet to $4.5 trillion over the past six years, they may either lack the willingness or even the ability to expand it much further without risking greater systemic risks than they already have to the global financial system in the future.

So what then might she and her policy committee consider? Given that China has been so aggressive recently, let us explore what they have implemented to see if anything viable translates to the U.S. market place.

As mentioned above, they cannot cut interest rates since the Fed funds rate is already at 0%. After all, interest rates cannot go negative, right? Oh yeah, I forgot that we are now living in a bizarro world with negative interest rates well out the yield curve in other parts of the world including across Europe. But as we have seen outside of the U.S., even if you as a lender have to go so far as to pay a government for the right to borrow money from you (interesting arrangement indeed), it does not mean that economic prosperity and sustained market gains are the natural next steps due to any inclination to reallocate capital elsewhere.

What about easing the rules on margin financing? This has been set at 50% since before the movie Jaws hit movie theaters for the first time. And the Fed’s own internal research has concluded that this is not an effective policy tool anyway.

How about the many other options we are seeing in China that reside outside of the Fed’s direct jurisdiction? Maybe they can’t do many of these things directly, but they could certainly actively work to encourage such ideas.

The Fed could help compel prominent investment professionals to take to the airwaves to proclaim their bullishness on U.S. stocks. Sure, but how would that be any different than the daily diet we currently get in the financial media today. We already have too much of this one sided pontificating in the U.S., so encouraging even more of it certainly won’t move the needle here.

Lower stock trading fees? We’ve also got this more than covered here in the U.S. And unlike some global governments that need to get paid for borrowing money from lenders, traders cannot get paid by brokers for making trades. The HFTs would bankrupt the brokers in a nanosecond.

Compel major financial institutions to enter the U.S. stock market to buy shares? Perhaps, but isn’t this the very activity that we have spent the last six years since the financial crisis working to get banks and financial institutions out of doing?

How about suspending new IPO activity? In a market that is already falling by -30%, that would pretty much take care of itself with companies releasing the old “citing market conditions” press release to explain why they are delaying their IPO.

Instituting selling bans and trading limits? If anything, the loss of liquidity would likely only serve to increase the sense of panic and inclination to sell, not discourage it.

In short, if we witnessed a similar sudden -30% decline in U.S. markets, the tools readily available to the Fed are fairly limited at this point. Sure they could always go back to the QE4 well including instituting another round of daily U.S. Treasury purchases or, who knows, maybe even S&P 500 futures. But these are guns that are exhausted at this point, and after spending nearly a year from December 2013 to October 2014 working to slowly extracting themselves from QE3, this would likely be a last resort.

All of this brings us to two key points about monetary policy as we move forward.

First, the recent experience in China has demonstrated the fact that hard limits exist in the ability of policy makers to endlessly inflate asset markets. Investors have exclaimed the “don’t fight the Fed mantra” for years as the reason to steadily file into stocks. But the past three weeks in China has taught us once again that policy makers can only do so much to prevent a major market decline. I say once again because this is a lesson that investors should have already learned during the last two major U.S. bear markets since the start of the millennium as well as the experience in Japan dating back to the last day of the 1980s.

Second, how much should monetary policy makers work to defend the closing price on their major stock indices anyway? Is the China economy so much better off with the Shanghai Composite at 3700 today than it was with it at around 2000 last summer? After all, the rate of growth in the economy has slowed over this time period, so maybe not. And the same could be said for the U.S. Is our economy so much better off with the S&P 500 Index over 2000 than it was at 1350 three years ago? One could even go so far as to contend that it is worse today over 2000 because the advance over this time period has not been sufficiently supported by underlying earnings and has created a potentially destabilizing valuation premium as a result. This, of course, is exactly part of what we are seeing play out in China today.

Before closing, a final point on policy balance. China has been compelled to take so many aggressive policy steps to stem the recent stock market decline. But why then did these same policy makers not seek to more assertively raise interest rates, adequately tighten margin requirements, send financial professionals out more effectively to talk down stock market optimism, effectively increase trading fees and implement sufficient buying curbs among many other potential policy prescriptions when the Shanghai Composite was skyrocketing from 2000 to over 5000 in order to help head this problem off in advance? Borrowing a reference from former Fed Governor Kevin Warsh, sometimes a market would be left better off had it received a steady diet of spinach to help control its stratospheric rise instead of getting nothing more than an endless supply of candy. For once the sugar high finally wears off, the subsequent downside can be nasty.

Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met.

 

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Thu, 07/09/2015 - 01:23 | 6288769 bluskyes
bluskyes's picture

J is for JFK,or Japan?

Thu, 07/09/2015 - 00:17 | 6288645 Victory_Garden
Victory_Garden's picture

WWJD?

Tend his garden...

Wed, 07/08/2015 - 22:21 | 6288352 CHC
CHC's picture

This is all bullshit.  Why should there be any intervention when a market loses steam?  If you're an investor - there is nothing that says you have to be on the winning side all of the time.  No different than going to a casino - at least there, everyone seems to be okay that the house is always on the winning side - you gladly give them your money.  Why is the stock markets different.  You're gambling that the values will go up.  Gamble is the operative word.  You bet or gamble wrong - it's your loss - it shouldn't be mine.

Wed, 07/08/2015 - 23:50 | 6288575 MontgomeryScott
MontgomeryScott's picture

IMAGINE THIS:

YOU are in a casino. It's just like any OTHER casino; but with one catch:

There is someone; a nefarious soul. Perhaps it is an 'investor' gone wrong, or perhaps it is simply a 'pyromaniac'. Either way, this 'person' has come in while you are blithely 'gaming' and has decided that the 'casino' is the NEXT TARGET of 'destruction'. While you keep playing the 'odds' that are obviously RIGGED (and accept the 'free drinks'), this 'personage' is plotting to bring 'all accounts to bear' (including YOURS). This personage intends that ALL people within the 'casino' suffer and die (like it desires to), and pours gasoline all over the first through 25th floors, in order to immolate not only ITSELF. but EVERYONE who has DARED to set foot in what was once it's 'holy space'. YOU are simply an INTERLOPER, who stopped by to get a drink (and some 'fast action')...

OH.

It's 'all bullshit'.

https://www.youtube.com/watch?v=OlsQkcFbSI8

 

 

Wed, 07/08/2015 - 21:40 | 6288249 MontgomeryScott
MontgomeryScott's picture

If I were Mr. Yellen, I would take advantage of the situation by ordering all Federal-Reserve affiliated banks and S&Ls to immediately withdraw 'liquidity', and call the margins. This would cause the market to crash to catostrophically low levels; allowing insider friends to buy up entire corporations for pennies (or less) on the dollar.

SEE, if I WERE Mr. Yellen, I'd be partying like it was 1929, ALL OVER AGAIN!

STRIKE while the iron is HOT! Let NO CRISIS go to waste! PUMP, and DUMP, CHUMPS!

Either THAT, or I'd be having a seance with a Ouija board right now, trying to channel the spirit of Amshel Meyer whatever-his-name-is. Me (Mr. Yellen), and Helicopter Ben, and Turbo-tax Timmy, and the Bernank, and Greinshpawn, all putting our index fingers on the pointer thingie, in the dark, during a full moon... while trying to have sex in a coffin at the same time... in the holiest of lands, 'Bohemian Grove'...

Knukles asks 'What would Jamie do?'. Jamie will be the 'fall guy', testifying before Congress, flashing the 'Presidential' cufflinks; diverting attention from the CORE manipuflation...

Wed, 07/08/2015 - 21:21 | 6288177 BoPeople
BoPeople's picture

I think Janet Yellen would take her payoffs from the banks that crashed the market and then do her best to protect them from lawsuit and prosecution. That is after all her real job, right?

Wed, 07/08/2015 - 20:24 | 6287989 conspicio
conspicio's picture

but...but...James Glassman still says this is good pussy.

Wed, 07/08/2015 - 21:48 | 6288269 MontgomeryScott
MontgomeryScott's picture

THANKS for that.

Never mind that I was just about to eat dinner.

At least WB7 gives a 'content warning' before posting grossly graphic images!

How about a 'courtesy flush', huh?

 

Wed, 07/08/2015 - 20:08 | 6287942 bitterwolf
bitterwolf's picture

lol.that ugly jew troll is a figurehead....it is and always has been decided by the cabal behind the screen...long before the jeckyll island event...

Wed, 07/08/2015 - 22:58 | 6288441 MontgomeryScott
MontgomeryScott's picture

"...it is and always has been decided by the cabal behind the screen...long before the jeckyll island event..."

ZEBRA: 'Who's Behind The Door?' (1983, Atlantic Records, courtesy MTV); Predictive programming for the Proles:

https://www.youtube.com/watch?v=-rL22BdGyQo

THE HAROLD WALLACE ROSENTHAL INTERVIEW (circa 1976):

https://www.youtube.com/watch?v=RJR30CQpPdQ

 

NAY. NYET. NO. OXI!

FUCK THEM ALL TO THEIR MASTER SATAN'S DOMINION OF HELL!

TRIUMPH: 'Fight The Good Fight'; 29 May 1983:

https://www.youtube.com/watch?v=Xevc7-7Tk-Q

 

No timeline here, but I would be pleasantly surprised if the current financial 'Occidental Order' is maintained through Spring 2016. This will give me time to aquire MOAR things that can be traded in barter (as well as a reinforcment of needed survival supplies to defend the stash).

Some stool-grooming cock-sucking butt-fucking, um, 'person' downvoted your comment, I see. Yellen IS an ugly fat short ZIO spokes-bitch figurehead of the Ashkenazim/Khazarim division of the foreign supranationalist 'Rothschild' banking cartel.

Have you ever heard her speak in her natural 'Yonkers Yid' accent? OY! Oy VEY!

OY! OY! OY OY OY!

'How did you outmanouver the Germans?'

'You get your 'Balls' to the 'Walls', man!' (Heard during the debriefings of surviving Spitfire pilots during the 'Battle Of England' circa 1940; regarding the lack of manouverability because of the pre-designed stops in the 'joystick' that limited the aileron movements via  'balls' in the base of the control being limited by rails, called 'walls'. This feedback was important to the Americans, who came up with the P-51 'Mustang', incorporating the best engine made at the time; the Rolls-Royce 'Merlin', and later versions of the Supermarine 'Spitfire'):

https://www.youtube.com/watch?v=MB37Xobja4w

HISTORY SEEMS DESTINED TO REPEAT.

 

 

 

Wed, 07/08/2015 - 18:34 | 6287644 foxmuldar
foxmuldar's picture

Yellen won't be able to stop it when the market decides to take its next big drop.The gig is up. 

Wed, 07/08/2015 - 18:09 | 6287540 thismarketisrigged
thismarketisrigged's picture

i dont think we will ever find out, bc the cunt will never allow the s&p to fall 5 percent, let alone 30 percent, so unfortunately do not think we will find out.

 

i hope we do though and very soon.

Wed, 07/08/2015 - 17:56 | 6287481 shankster
shankster's picture

Won't be long before the big crash hits the falling USA. Hang On dudes!

Wed, 07/08/2015 - 17:22 | 6287332 Consuelo
Consuelo's picture

To know what Mrs. Yellen would do is to know what society would look like in 90 days following a stock market crash, without immediate, forceful and convincing $intervention.   And to know what that looks like, one already has evidence in certain neighborhoods and municipalities in certain regions of the nation.    Then take that evidence and force-multiply it.    We're 'all-in' now.    As others before have suggested, it's Inflate or Die.

 

 

Wed, 07/08/2015 - 19:36 | 6287823 New_Meat
New_Meat's picture

Consuelo: that would be MR. YELLIN, don't cha' know.

Wed, 07/08/2015 - 17:32 | 6287377 J Jason Djfmam
J Jason Djfmam's picture

Or build lots of tall fences.

Wed, 07/08/2015 - 17:18 | 6287314 CarpetShag
CarpetShag's picture

"Shanghai Stock Exchange Composite Index has fallen by nearly just as notable -30%"
".....if the S&P 500 Index was falling by -30% in similarly short order?"

Dude, what is your relationship with numeracy? A fall by a negative number is the same as an increase.
Your stock indices have risen by 30%.

Wed, 07/08/2015 - 19:35 | 6287821 New_Meat
New_Meat's picture

children should be sent into the corner until they have something worthwhile to say.

Or ... in the current rules in these here-abouts: failed first fight.

go figure.

- Ned

Wed, 07/08/2015 - 17:31 | 6287372 J Jason Djfmam
J Jason Djfmam's picture

Ah--Double Negatives--hmm.

Wed, 07/08/2015 - 19:33 | 6287815 knukles
knukles's picture

What Would Jamie Do?

Wed, 07/08/2015 - 23:22 | 6288481 MontgomeryScott
MontgomeryScott's picture

YOU have decided to fuck with the primordial forces of THE UNIVERSE, Mr. Beale!

(Actually, Mr. Dimon is in constant consultation with Mr. B(l)ank-fein.)

 

WHAT WOULD LARRY SILVERSTIEN DO (WWLSD)?

BUY IT UP, and INSURE THE HELL OUT OF IT, SIX WEEKS BEFORE 'THE EVENT'!

(Hat tip to Richard Daughty, the 'Mogambu Guru', and his usage of the first letters of words (named, in Latin, 'acronyms'.)

OMFG! GTFOOH!

WWKD?

Wed, 07/08/2015 - 23:43 | 6288553 dreadnaught
dreadnaught's picture

yeah a false flag from Israel is about due. The story of Larry Silverstein buying the WTC 1,2 is quite a tale. I tried to insert these facts into Wikipedias page on 911, and they yanked it and told me i would be banned from WP....

Thu, 07/09/2015 - 00:13 | 6288637 MontgomeryScott
MontgomeryScott's picture

L.S. signed a 99-year LEASE of WTC 1-6 (signed, early August 2001).

He 'BUILT' (was the primary investor in) WTC7, however (above the Con-Ed substation).

 

Your disinformation/misinformation MIGHT be part of the reason that 'the Wiki' decided to remove your posts (due to lack of factual statement in the situation).

'False-flag' events are a matter of history in EVERY 'nation'. WHY do you seem to think that 'ISRAEL' is the 'overdue progenitor'?

 

 

 

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