Europe's Biggest Bank Dares To Ask: Is The Fed Preparing For A "Controlled Demolition" Of The Market

Tyler Durden's picture

Why did we focus so much attention yesterday on a post in which the IMF confirmed what we had said since last October, namely that the BOJ's days of ravenous debt monetization are coming to a tapering end as soon as 2017 (as willing sellers simply run out of product)? Simple: because in the global fiat regime, asset prices are nothing more than an indication of central bank generosity. Or, as Deutsche Bank puts it: "Ultimately in a fiat money system asset prices reflect “outside” i.e. central bank money and the extent to which it multiplied through the banking system."

The problem is that the BOJ and the ECB are the only two remaining central banks in a world in which Reverse QE aka "Quantitative Tightening" in China, and the Fed's tightening in the form of an upcoming rate hike (unless the Fed loses all credibility and reverts its pro-rate hike bias), are now actively involved in reducing global liquidity. It is only a matter of time before the market starts pricing in that the Bank of Japan's open-ended QE has begun its tapering (followed by a QE-ending) countdown, which will lead to devastating risk-asset consequences. The ECB, which is also greatly supply constrained as Ewald Nowotny admitted yesterday, will follow closely behind.

But while we expanded on the Japanese problem to come in detail yesterday, here are some key observations on what is going on in both the US and China as of this moment - the two places which all now admit are the culprit for the recent equity selloff, and which the market has finally realized are actively soaking up global liquidity.

Here the problem, as we initially discussed last November in "How The Petrodollar Quietly Died, And Nobody Noticed", is that as a result of the soaring US dollar and collapse in oil prices, Petrodollar recycling has crashed, leading to an outright liquidation of FX reserves, read US Treasurys by emerging market nations. This was reinforced on August 11th when China joined the global liquidation push as a result of its devaluation announcement, a topic which we also covered far ahead of everyone else with our May report "Revealing The Identity Of The Mystery "Belgian" Buyer Of US Treasurys", exposing Chinese dumping of US Treasurys via Belgium.

We also hope to have made it quite clear that China's reserve liquidation and that of the EM petro-exporters is really two sides of the same coin: in a world in which the USD is soaring as a result of Fed tightening concerns, other central banks have no choice but to liquidate FX reserve assets: this includes both EMs, and most recently, China.

Needless to say, these key trends covered here over the past year have finally become the biggest mainstream topic, and have led to the biggest equity drop in years, including the first correction in the S&P since 2011. Elsewhere, the risk devastation is much more profound, with emerging market equity markets and currencies crashing around the globe at a pace reminiscent of the Asian 1998 crisis, while in China both the housing and credit, not to mention the stock market, bubble have all long burst.

Before we continue, we present a brief detour from Deutsche Bank's Dominic Konstam on precisely how it is that in the current fiat system, global central bank liquidity is fungible and until a few months ago, had led to record equity asset prices in most places around the globe. To wit:

Let’s start from some basics. Global liquidity can be thought of as the sum of all central banks’ balance sheets (liabilities side) expressed in dollar terms. We then have the case of completely flexible exchange rates versus one of fixed exchange rates. In the event that one central bank, say the Fed, is expanding its balance sheet, they will add to global liquidity directly. If exchange rates are flexible this will also mean the dollar tends to weaken so that the value of other central banks’ liabilities in the global system goes up in dollar terms. Dollar weakness thus might contribute to a higher dollar price for dollar denominated global commodities, as an example. If exchange rates are pegged then to achieve that peg other central banks will need to expand their own balance sheets and take on dollar FX reserves on the asset side. Global liquidity is therefore increased initially by the Fed but, secondly, by further liability expansion, by the other central banks. Depending on the sensitivity of exchange rates to relative balance sheet adjustments, it is not an a priori case that the same balance sheet expansion by the Fed leads to greater or less global liquidity expansion under either exchange rate regime. Hence the mere existence of a massive build up in FX reserves shouldn’t be viewed as a massive expansion of global liquidity per se – although as we shall show later, the empirical observation is that this is a more powerful force for the “impact” of changes in global liquidity on financial assets.

That, in broad strokes, explains how and why the Fed's easing, or tightening, terms have such profound implications not only on every asset class, and currency pair, but on global economic output.

Liquidity in the broadest sense tends to support growth momentum, particularly when it is in excess of current nominal growth. Positive changes in liquidity should therefore be equity bullish and bond price negative. Central bank liquidity is a large part of broad liquidity and, subject to bank multipliers, the same holds true. Both Fed tightening and China’s FX adjustment imply a tightening of liquidity conditions that, all else equal, implies a loss in output momentum.


But while the impact on global economic growth is tangible, there is also a substantial delay before its full impact is observed. When it comes to asset prices, however, the market is far faster at discounting the disappearance of the "invisible hand":

Ultimately in a fiat money system asset prices reflect “outside” i.e. central bank money and the extent to which it multiplied through the banking system. The loss of reserves represents not just a direct loss of outside money but also a reduction in the multiplier. There should be no expectation that the multiplier is quickly restored through offsetting central bank operations.

Here Deutsche Bank suggests your panic, because according to its estimates, while the US equity market may have corrected, it has a long ways to go just to catch up to the dramatic slowdown in global plus Fed reserves (that does not even take in account the reality that soon both the BOJ and the ECB will be forced by the market to taper and slow down their own liquidity injections):

Let’s start with risk assets, proxied by global equity prices. It would appear at  first glance that the correlation is negative in that when central bank liquidity is expanding, equities are falling and vice versa. Of course this likely suggests a policy response in that central banks are typically “late” so that they react once equities are falling and then equities tend to recover. If we shift liquidity forward 6 quarters we can see that the market “leads” anticipated” additional liquidity by something similar. This is very worrying now in that it suggests that equity price appreciation could decelerate easily to -20 or even 40 percent based on near zero central bank liquidity, assuming similar multipliers to the post crisis period.


Some more dire predictions from Deutsche on what will happen next to equity prices:

If we only consider the FX and Fed components of liquidity there appears to be a tighter and more contemporaneous relationship with equity prices. The suggestion is at one level still the same, absent Fed and FX reserve expansion, equity prices look more likely to decelerate and quite sharply.


The Fed’s balance sheet for example could easily be negative 5 percent this time next year, depending on how they manage the SOMA portfolio and would be associated with further FX reserve loss unless countries, including China allowed for a much weaker currency. This would be a great concern for global (central bank liquidity).

Once again, all of this assumes a status quo for the QE out of Europe and Japan, which as we pounded the table yesterday, are both in the process of being "timed out"

The tie out, presumably with the “leading” indicator of other central bank action is that other central banks have been instrumental in supporting equities in the past. The largest of course being the ECB and BoJ. If the Fed isn’t going doing its job, it is good to know someone is willing to do the job for them, albeit there is a “lag” before they appreciate the extent of someone else’s policy “failure”.

Worse, as noted yesterday soon there will be nobody left to mask everyone one's failure: the global liquidity circle jerk is coming to an end.

What does this mean for bond yields? Well, as we explained previously, clearly the selling of TSYs by China is a clear negative for bond prices. However, what Deutsche Bank accurately notes, is that should the world undergo a dramatic plunge in risk assets, the resulting tsunami of residual liquidity will most likely end up in the long-end, sending Treasury yields lower. To wit:

... if investors believe that liquidity is likely to continue to fall one should not sell real yields but buy them and be more worried about risk assets than anything else. This flies in the face of recent concerns that China’s potential liquidation of Treasuries for FX intervention is a Treasury negative and should drive real yields higher.... More generally the simple point is that falling reserves should be the least of worries for rates – as they have so far proven to be since late 2014 and instead, rates need to focus more on risk assets.


The relationship between central bank liquidity and the byproduct of FX reserve accumulation is clearly central to risk asset performance and therefore interest rates. The simplistic error is to assume that all assets are treated equally. They are not – or at least have not been especially since the crisis. If liquidity weakens and risk assets trade badly, rates are most likely to rally not sell off. It doesn’t matter how many Treasury bills are redeemed or USD cash is liquidated from foreign central bank assets, US rates are more likely to fall than rise especially further out the curve. In some ways this really shouldn’t be that hard to appreciate. After all central bank liquidity drives broader measures of liquidity that also drives, with a lag, economic activity.

Two points: we agree with DB that if the market were to price in collapsing "outside" money, i.e. central bank liquidity, that risk assets would crush (and far more than just the 20-40% hinted above). After all it was central bank intervention and only central bank intervention that pushed the S&P from 666 to its all time high of just above 2100.

However, we also disagree for one simple reason: as we explained in "What Would Happen If Everyone Joins China In Dumping Treasurys", the real question is what would everyone else do. If the other EMs join China in liquidating the combined $7.5 trillion in FX reserves (i.e., mostly US Trasurys but also those of Europe and Japan) shown below...

... into an illiquid Treasury bond market where central banks already hold 30% or more of all 10 Year equivalents (the BOJ will own 60% by 2018), then it is debatable whether the mere outflow from stocks into bonds will offset the rate carnage.

And, as we showed before, all else equal, the unwinding of the past decade's accumulation of EM reserves, some $8 trillion, could possibly lead to a surge in yields from the current 2% back to 6% or higher.

In other words, inductively reserve liquidation may not be a concern, but practically - when taking in account just how illiquid the global TSY market has become - said liquidation will without doubt lead to a surge in yields, if only occasionally due to illiquidity driven demand discontinuities.

* * *

So where does that leave us? Summarizing Deutsche Bank's observations, they confirm everything we have said from day one, namely that the QE crusade undertaken first by the Fed in 2009 and then all central banks, has been the biggest can-kicking exercise in history, one which brought a few years of artificial calm to the market while making the wealth disparity between the poor and rich the widest it has ever been as it crushed the global middle class; now the end of QE is finally coming.

And this is where Deutsche Bank, which understands very well that the Fed's tightening coupled with Quantiative Tightening, would lead to nothing short of a global equity collapse (especially once the market prices in the inevitable tightening resulting from the BOJ's taper over the coming two years), is shocked. To wit:

This reinforces our view that the Fed is in danger of committing policy error. Not because one and done is a non issue but because the market will initially struggle to price “done” after “one”. And the Fed’s communication skills hardly lend themselves to over achievement. More likely in our view, is that one in September will lead to a December pricing and additional hikes in 2016, suggesting 2s could easily trade to 1 ¼ percent. This may well be an overshoot but it could imply another leg lower for risk assets and a sharp reflattening of the yield curve.

But it was the conclusion to Deutsche's stream of consciousness that is the real shocker: in it DB's Dominic Konstam implicitly ask out loud whether what comes next for global capital markets (most equity, but probably rates as well), is nothing short of a controlled demolition. A premeditated controlled demolition, and facilitated by the Fed's actions or rather lack thereof:

The more sinister undercurrent is that as the relationship between negative rates has tightened with weaker liquidity since the crisis, there is a sense that policy is being priced to “fail” rather than succeed. Real rates fall when central banks back away from stimulus presumably because they “think” they have done enough and the (global) economy is on a healing trajectory. This could be viewed as a damning indictment of policy and is not unrelated to other structural factors that make policy less effective than it would be otherwise - including the self evident break in bank multipliers due to new regulations and capital requirements.

What would happen then? Well, DB casually tosses an S&P trading a "half its value", but more importantly, also remarks that what we have also said from day one, namely that "helicopter money" in whatever fiscal stimulus form it takes (even if it is in the purest literal one) is the only remaining outcome after a 50% crash in the S&P:

Of course our definition of “failure” may also be a little zealous. After all why should equities always rise in value? Why should debt holders be expected to afford their debt burden? There are plenty of alternative viable equilibria with SPX half its value, longevity liabilities in default and debt deflation in abundance. In those equilibria traditional QE ceases to work and the only road back to what we think is the current desired equilibrium is via true helicopter money via fiscal stimulus where there are no independent central banks. 

And there it is: Deutsche Bank saying, in not so many words, what Ray Dalio hinted at, namely that the Fed's tightening would be the mechanistic precursor to a market crash and thus, QE4.

Only Deutsche takes the answer to its rhetorical question if the Fed is preparing for a "controlled demolition" of risk assets one step forward: realizing that at this point more QE will be self-defeating, the only remaining recourse to avoid what may be another systemic catastrophe would be the one both Friedman and Bernanke hinted at many years ago: the literal paradropping of money to preserve the fiat system for just a few more days (At this point we urge rereading footnote 18 in Ben Bernanke's "Deflation: Making Sure "It" Doesn't Happen Here" speech)

While we can only note that the gravity of the above admission by Europe's largest bank can not be exaggerated - for "very serious banks" to say this, something epic must be just over the horizon - we should add: if Deutsche Bank (with its €55 trillion in derivatives) is right and if the Fed refuses to change its posture, exposure to any asset which has counterparty risk and/or whose value is a function of faith in central banks, should be effectively wound down.

* * *

While we have no way of knowing how this all plays out, especially if Deutsche is correct, we'll leave readers with one of our favorite diagrams: Exter's inverted pyramid.

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q99x2's picture

Yes they are creating a controlled demolition of the stock market. FACT.

knukles's picture

Random thought.  Do you think that Bill might have tried to cheer up Hillary this morning by reminding her that Nelson Mandella wasn't elected head of state in South Africa until after 27 years in prison?

Hulk's picture

I'll take 94 year old presidents for $1000 Alex !!!

Wonder what those cankles will look like in 27 years ???

quintago's picture

What is taking place right now is a controlled demolition of China. Our NYC boys are getting ready to go abroad and pick off foreign assets, and to do that they will want a strong dollar. They will raise rates to achieve that. Everybody who thinks raising rates has anything to do with the stock market is wrong, right now. That was the last stage of the plan. This stage involves a strong dollar, regardless of what happens to equities. In fact, if our equity market tanks, the perception or reality, however you look at it, will drive down global asset prices further. "We" are getting ready to buy back assets for pennies on the dollar.

daveO's picture

Yes. The fact that we have a presidential candidate talking about tariffs, after 25 years of 'free trade' baloney, agrees. Same goes for ME oil countries. They are up to their eyeballs in debt. Raising rates is the equivalent of their monetary tide turning and leaving their shores.

TongueStun's picture

The last "info" graphic fails to show Ag, which is a typical oversight...............Au is 'overvalued' in terms of Ag

goldpercent's picture

What if the fact that Ag is an industrial metal actually hurts the perception of its value as the production of electronics tank?  What if the little guy who has been able to buy Ag suddenly needs to convert their Ag into fiat to pay for necessities?  What if the people rushing to the safety of monetary metals have no idea what you are talking about and focus on Au? Are large institutions prepared to store silver in the quantities needed to represent their deposits, or do they only have capacity for the much more compact Au?  How much Ag can you sew into the lining of your clothes?  To my mind Ag does seem to be better positioned in many ways, but I'm pretty sure that doesn't matter. 

J S Bach's picture

From its inception, the central planning usurers KNOW what the inevitable outcome of their diabolical central banking practices will be.  They are evil.  No other way to put it.  The fount of all of their power on this earth is through the control of the counterfeiting banking system they have nefariously erected.  We must act to ensure that when it finally does collapse, they are not only not allowed to enslave us with another debt-based monstrosity, but are hanged with due diligence.

Arnold's picture

When I was a good part of taking apart Fairchild Semiconductor, the gold wire vaults were a big deal.

I have taken apart vaults that have been bigger delios but Fairchild was the most memorable.

Four chan's picture

the central planners take care of their own and destroy every one else.

Israel is transporting an undisclosed number of Africans to Sweden in a deal brokered by the UN. “Dozens” have already arrived in Sweden. Each is given a $3,500 “grant” by Israel.

Sweden is a tiny nation of only 9.5 million. Already, a shocking 2 million are non-Swedes. Swedes also have one of the lowest birthrates in Europe. About 530,000 are non-European immigrants. In 2013 Muslims rioted in Sweden for a week straight causing massive amounts of damage.

The Interior Ministry said the migrants left for Sweden in the context of a government incentive scheme and were granted $3,500 each upon departure. They are encouraged to leave Israel voluntarily and to promise not to return.

The Jewish Supremacists argue that having non-Jews in Israel “threatens the Jewish nature of the state.”

“If we don’t stop their entry, the problem that currently stands at 60,000 could grow to 600,000, and that threatens our existence as a Jewish and democratic state,” Netanyahu said. 

jeff montanye's picture

the jewish state as a jewish state is doomed.  demographic trends, moore's law, the internet and nuclear weapons technology insure it if the better case of global ostracism proves fruitless.

Four chan's picture

i'm more worried about beautiful sweden and everywhere else being invaded with diversity directed by the world planners.

Tarshatha's picture

It's all by design, so cui bono.

“Anti-Semitism in Europe”—Caused by Jewish Lobby Promoted Third World Immigration

TheReplacement's picture

There is no point in worrying about Sweden, or most of Europe for that matter.  It is already lost.  Oddly, every other ZHer's favorite villan in eastern Europe when regarding Ukraine and Russia, Poland, is the least affected to this point.

chubbar's picture

As enthralled as I am about this topic and the economic breakdown we are about to experience, I've come to believe that this is just a smokescreen for something much bigger than people can imagine.

Put me down as a nutjob or whatever, but I've spent quite a bit of time reviewing the research into extraterrestrials this past year. I don't have a doubt in my mind that not only do they exist but that their existence is the greatest secret ever kept from the world. So much documentation of their existence that this isn't reallly the point of this comment. What IS relevent is what they are doing here and how much of what is currently being planned is part of an agenda that involves them (maybe none of it, but does a NWO fit their agenda)?

There are many researchers that have uncovered quite a bit of evidence but I like this guy Bob Dean because he is someone who actually read the NATO report on ET's and has spent decades putting together a comprehensive (as much as can be possible under the circumstances) theory of why they are here. It's fascinating and once you adopt the belief that we are not alone and never have been, it's almost impossible to view world events in any other light than that of a grander scheme (for better or worse). I recommend everyone take the time to look at all the evidence that is being documented in real time.

For those interested, google (in no particular order) Stephen Greer, Richard Dolan, Bob Dean, "secret space program" (there are several speakers on youtube from last years conference in San Mateo you can find online), Hoagland and Hancock (can't recall their first names). Not all are in agreement on what is going on and some have some pretty wild theories that are mostly unprovable opinions. What isn't opinion is that ET's exist and are here.

As a primer, check out Bob Dean's speach he gave last year (former command Sgt Major and staff member at SHOC, supreme headquarters operational command post, european theater) when you have time.

Four chan's picture

hanger one is a bomb ass show.

vie's picture

You're right, it is about something much bigger.  

ETs are a controlled opposition diversion to cover for military technological development over the past 50 years that we've been kept in the dark about.  Think about it, ETs are like us in relation to a random ant hill in the Amazon.  What's more likely you, as an alien, have the technology to go anywhere you want, yet you decide to focus your energy on directing the politics of this tiny ant hill...  or, the militaries around the world have secretly been developing advanced technologies and are releasing it in a way that serves their agendas?

Don't you think you, as a military, would basically instantly win WWIII if you presented yourself as an alien race to broker piece and destroy all nuclear weapons?  Best pysop ever.

gizmotron's picture

Hoagland is an opportunistic quackpot.

KnightTakesKing's picture

@chubber: they are not extraterrestrial. They are extra dimensional. Scientists are hard at work (CERN) to open up a portal to allow these demons to pour on thru.

Professor Fate's picture

Like I said in a post yesterday...the central bank's bazookas are completely out of bullets.  Got nothin'.  Nada...nichto.  And all poor Janet can do at this point is run to the end of her chain and bark.  The "Bernank" totally screwed that pooch.

Fate the Magnificent
"Push the Button. Max" 

TSA Thug's picture

Footnote 19.

Some recent academic literature has warned of the possibility of an "uncontrolled deflationary spiral," in which deflation feeds on itself and becomes inevitably more severe. To the best of my knowledge, none of these analyses consider feasible policies of the type that I have described today. I have argued here that these policies would eliminate the possibility of uncontrollable deflation.

RaceToTheBottom's picture

The more incompetent the presidential candidate, the better chance they have of getting elected.  That has become the rule and still continues to be the rule.

All the candidates know it and are trying to outdo each other in the Asshole department.

KnuckleDragger-X's picture

You can talk about plans or models or just anything you want, I'll put my money on a chaotic universe. Right now God is pointing and laughing......

AE911Truth's picture

The bankers must repay us; and helicopter money will work.

The "Network of Global Corporate Control" stole "many thousands of trillions" of dollars from us, which amounts to millions of dollars each for every person on the planet.


scaleindependent's picture

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If we only consider the FX and Fed components of liquidity there appears to be a tighter and more contemporaneous relationship with equity prices. The suggestion is at one level still the same, absent Fed and FX reserve expansion, equity prices look more likely to decelerate and quite sharply."


On the long running argument at ZH regarding "Flow vs Stock", i.e. Tyler's argument w Fonzanoon. The above quote from Deutsche supports Tyler's assertion that it is the Flow not the stock of liquidity that matters.



black dragon's picture

detais please.  which nyc boys... which china assets


GooseShtepping Moron's picture

China is not stupid enough to sell off its assets for pennies. There is that small matter of sovereign nationhood to consider. They don't have to sell a damn thing if they don't want to.

JRobby's picture

Great post!

"Everybody who thinks raising rates has anything to do with the stock market is wrong"

They love to say rising rates impacts earning negetively so stock prices fall. Bullshit!

This will not be a meaningful rate increase and earnings are/should be affected by demand for a company's products. Demand has been crushed. Stock markets are levitated through central bank liquidity management, buy backs and algos.

brockhardman's picture

If they need any inspiration of how to pull off a "controlled demolition", there are plenty of easily accessible YouTube vids of Building 7 coming down.

omniversling's picture

Ordo ab Chao

Many September Events (cue doomy musak):



September 23, 2015 The Crowning of Nimrod's Tower


holdbuysell's picture

One of the more enlightening documentaries on the subject:

The New Pearl Harbor

jeff montanye's picture

indeed.  just realizing that nothing below the plane hits was "supposed to be" damaged, so a part, in one case a small part, of a building is falling on the rest of the building.  it would collapse somewhat, a little, at a slowing rate.  that's physics.  to watch the collapses in slow motion, magnified, is a revelation.

not to mention studying larry silverstein's machinations, lease arrangements, health issues, insurance policies, litigation and media slip ups. 

dante needs a new ring.

holdbuysell's picture

At the most basic level, the physics don't make sense relative to the official version.

Luc X. Ifer's picture

September folks, *SEPTEMBER* - the month for high scale controlled demolitions, did you forgot it?! The kind which benefits very few clever guys and screw millions of suckers


Winston Churchill's picture

Elephantitis is my guess for $100.

Dog Will Hunt's picture

You'd lose the hundred, Winnie.  It's elephantiasis.  

One of We's picture

I think could actually rub one off to a vision of that bitch behind bars in an orange pantsuit....

Insurrexion's picture

Bill's punishment for being a white headed pimple on the face of American history is partially having to wake up next to that skanky monster reading us sexy ZH posters on her Blackberry.


The other part is the Vickster Nuland menstruating and snoring next to them.

Let that image burn in a while. Go ahead, I double dare ya punk.


Love Alexa

Insurrexion's picture

Thanks for the complement Knuks.

TeamDepends's picture

Please, what makes you think Bill and Hil sleep in the same house or time zone? Haven't you heard? Wild Bill bought a mansion for Hil and her gal-pals. He calls it "The Humador".

Arnold's picture

Not quite nice ., but well on the way to perfect.