Evercore: If Markets Drop More, Don't Expect To Be Bailed Out By The Fed This Time

Tyler Durden's picture

When we were discussing the self-reinforcing dynamics of vol-neutral funds yesterday, which may or may not continue selling today depending on what the VIX does, we concluded that aside from the decision-making mechanics of systematic funds, the biggest question would be if the Fed, or other central banks, do not do step in to prop up the market as they have on every other similar occasion in the past 8 years.

Would that imply that traders - be they CTAs, risk-parity, or simply carbon-based - are finally on their own?

According to a follow up note sent overnight by Evercore ISI's Krishn Guha, the answer is yes... at least for the first 10% of any upcoming market drop. As Guha writes, "with the US equity market sell-off intensifying Wednesday afternoon, a number of clients have asked at what point the Fed would ride to the rescue. Our answer is that this time the cavalry is not coming — at least not unless we see something much larger — at least a 5 - 10 per cent type correction and maybe not immediately even then.

Clients need to rely on their own hedging and risk management strategies, not assume a public put that is anywhere near the current spot price. Indeed Fed officials might even welcome (within reason, it would be unwise to push this too far) the opportunity to disabuse the markets that such protection exists.

Somehow we doubt that after 8 years of propping up market, the Fed will suddenly walk away, but who knows: maybe this time it is different.

His full note below:



With the US equity market sell-off intensifying Wednesday afternoon, a number of clients have asked at what point the Fed would ride to the rescue. Our answer is that this time the cavalry is not coming — at least not unless we see something much larger — at least a 5 - 10 per cent type correction and maybe not immediately even then. Clients need to rely on their own hedging and risk management strategies, not assume a public put that is anywhere near the current spot price. Indeed Fed officials might even welcome (within reason, it would be unwise to push this too far) the opportunity to disabuse the markets that such protection exists.


To be very clear we are not forecasting a market correction; markets have shrugged off political woes before, the cushion from a weaker dollar and very low ten year yields provide some support for valuations, and a moderate but persistent step-up in volatility need not generate a large sell-off from here. We do however fear that there is a gap between market expectations and likely Fed behavior that could intensify any correction that did take place at the point at which market participants realized that expectations of early Fed support were not valid.


In our view the right way to think about the so-called “Fed put” is as follows. There is no direct Fed put in the sense that even those policymakers who are sensitive to market developments do not view a given value of the equity market as a goal of policy or as a necessary condition for achieving the macro goals of policy (full employment and 2 per cent inflation). There is however an indirect and partial Fed put in the sense that policymakers do respond to shocks — including from sudden large declines in the stock market — to the extent that these shocks threaten the achievement of its macro policy goals, and these actions tend to be stabilizing to markets.


The Fed macro put is time-varying with respect to equity market prices. First, the Fed is more sensitive to equity market declines — as to any other form of negative shock — when it is pinned against the zero bound on rates as was the case for most of the past decade but is no longer strictly the case today. Second, the Fed is more sensitive to equity market declines when weakness is sustained, pervasive across asset classes (credit as well as equity) and geographies, and appears associated with real economic developments that threaten a marked deterioration in the outlook and balance of risks that could in turn be compounded by market weakness — as was the case in early 2016 but is not obviously the case today.


As we wrote earlier this month we believe that the factors that caused the Fed to appear skittish in 2015 and 2016 — weak and fragile global growth, extreme dollar strength and associated tightening in financial conditions, pronounced weakness in indicators of inflation expectations and the paucity of plausible upside risks — no longer apply in force today and the Fed is therefore likely to appear more resolute, both with respect to soft patches in the data and any equity market sell-off.


Of course as with soft patches in the data this is not an absolute statement: a large enough and persistent enough decline in the equity market and associated loss of wealth and tightening of financial conditions would obviously have implications for the Fed policy path. However, the FOMC is likely to take a longer-range view than most market participants as to what the benchmark for this evaluation should be. If the S&P 500 fell another 5 per cent it would “only” be back where it was at the time of the December FOMC meeting, since when the dollar has weakened appreciably; even a 10 per cent decline would “only” wipe out the gains since the day before the election. It is not obvious that either consumption or investment were highly sensitive to those moves on the way up, though it is certainly possible that they could be more sensitive on the way down.


Faced with a 5 - 10 per cent equity market decline that appeared driven by a correction of excessive valuations and fiscal policy hopes rather than a more troubling deepening of what the Fed currently assesses to be transitory early year economic weakness, we think the Committee might well still move forward with a June rate hike. The Committee is not so far from the zero bound that it could prudently be too dismissive of an equity market correction and might at that point underline that subsequent tightening would be conditional on the economy continuing to evolve broadly in line with its expectations. But if the macro data on payrolls, unemployment, activity and inflation in the period running up to September indicated that the economy had firmed up following the soft patch in Q1 with relatively little sign of drag from the equity market correction, a September hike, December start to balance sheet roll-off and some further hiking in 2018 would remain plausible — even if there would probably be a little less cumulative hiking over this period than would have been the case with a more robust equity market

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abyssinian's picture

"If the markets drop...?"  why would the markets drop? The Feds been buying all the dips? What a retarded statement  

hedgeless_horseman's picture


If Markets Drop More, Don't Expect To Be Bailed Out

Said the codependent to the addict again and again and again.

Antifaschistische's picture

"bailouts" are only handed to members of the political fraternity.    RNC/DNC.  

Rainman's picture

The average cost of rehabilitating a seal after the Exxon Valdez oil spill in Alaska was $80,000. At a special ceremony, two of the most expensively saved animals were being released back into the wild amid cheers and applause from onlookers. One minute later a killer whale ate them both

Pollygotacracker's picture

What does your post have to do with the article?

SoilMyselfRotten's picture

Absolutely no intervention....after today.....startinnnnnnng...now!

hedgeless_horseman's picture


To paraphrase US Congressman Kevin Brady...


We're are being forced to intervene.  

We don't really want to bail out the banks.

But we must do it, for the sake of Main Street.

But this is the last time.  

And it's only temporary.


Finally, our family approached him, introduced ourselves, told him where we live (in his district) and exchanged warm greetings.  I asked, "Considering that you voted for both TARP bills in 2008, the most recent of many tax-payer bailouts of bank shareholders, and considering that you reported owning more than $100,000 of JPMorgan Chase Common Stock and Employee Stock in 2007, Congressman Brady, what is your position on the Federal Reserve Banks being responsible for regulating and supervising the very same banks that own them, such as JPMorgan Chase? 

Immediately, a twenty-something woman stepped around from behind our elected representative, and in between him and us.  Our congressman stepped backwards several steps.  She said to us, without even a hint of the Texas twang used by Brady, "The congressman believes strongly in protecting our nation's financial system for the benefit of every American."

I said, "Well, like the vast majority of Americans, I did not, and do not, own any bank stocks or receive any bank dividends, especially New York banks.  I am, however, paid my salary in the US dollars that continue to lose value, and I use them to purchase the ever more expensive necessities of life.  Back to my question, please.  Doesn't self-regulation and bailouts put the fox in charge of guarding the tax payer's hen house?  And hasn't our congressman shown himself to be one of the foxes?"

Congressman Brady was smiling, waving, and making his escape to a waiting vehicle.  One of our children shouted, "Dad!  He's getting away!" 

I laughed and nodded.

Give Me Some Truth's picture

Damn. I wish this exchange was captured by C-Span. Politicians and bureaucrats hate direct questions. Kudos for confronting him.

MagicHandPuppet's picture

"If Markets Drop More, Don't Expect  the public to be informed that Deep State favorites will  Be Bailed Out By The Fed This Time"


There.  Fixed it.



meta-trader's picture

she was a waitress in a cocktail bar now she owns a jet... http://bit.ly/2jdTzrM

OpenThePodBayDoorHAL's picture

This article is complete rubbish, the Fed will just keep selling the VIX futures and the algos will do the buying for them. If that doesn't work then it's QE 4,5,6, infinity. They'll change the name of the Federal Reserve Note to the Enterprise Participation Note as the line between "money" and "stocks" continues to disappear.

Answer: get on the train, or you're fucked. And get off the train, or you're fucked. Notice anything? You're fucked either way.

remain calm's picture

The Fed is the market assholes.

Nobody For President's picture

 You should REALLY stop drinking decaf...

Zorba's idea's picture

That would be a metaphorical response to the "QE" reality in the real world. Polly, you might want to stop eating the pellets at the bottom of your cage.

NEOSERF's picture

Exactly, if not the Fed then the SNB...really think they are going to show a loss on their stocks and have to explain to the Swiss people why they were gambling and lost 15% of their money...never.

Give Me Some Truth's picture

It IS the ultimate Ponzi. If there was a threat that that market was going to crash wouldn't a central bank like this one simply print more fiat and buy a shit-load of stocks to blow the price back up again? This says nothing about the precedent of governments picking which companies they are going to enrich (and which they are going to screw - miners for example). Also, if pension funds are not going to go bust, the stock market must continue to expand. In short, there is no way the stock market will be allowed to "crash." 

Hammer823's picture

The "market" could drop 2,000 more points and we'd still be at the record all time high set last August.

The stock market is rigged to go up.  

The 3,000 point trump rally has insulated us from any true downturn.


LawsofPhysics's picture

...and banks are still flush with cash reserves...

...and bankers and financiers still have access to all the money they want for 0.75% interest!!!!!

Let's hope our trade partners keep accepting that paper/digital promise in exchange for their real goods....

Hammer823's picture

what other choice do they have?

what other choice do any of us have?

this is the system.  and they have to preserve it.

hedgeless_horseman's picture


There is a another system called, evolution, survival of the fittest.

It will, eventually, win out over moral hazard.

Give Me Some Truth's picture

I've previously posted about the concept known as the "survival instinct." To me, this explains why the Establishment/Powers that Be will do anything and everything to, well, survive (and of course prosper). The lies and manipulations and corruption will continue. If they don't, these people perish. They ain't interested in going there.

LawsofPhysics's picture

LOL!!!  Plenty of other "choices", none of them are easy. 

Nothing of real value is created without real work and real risk!!!!

Fuck em.

If you don't do real work, then you do not eat.

Mustafa Kemal's picture

"If you don't do real work, then you do not eat."

Thats not really true.

peopledontwanttruth's picture

Depressions caused by CBs particularly the FED by flooding the market and people with money supply, then contraction of the money supply.

What follows after a depression? All apart of the plan.

Give Me Some Truth's picture

Right. The "markets" won't drop (or if they do for a day or two they will quickly recover). I try to use logic in my posts, but I do make assumptions. My two assumptions:

1) The stock market is rigged

2) The stock market simply cannot fall, at least according to the Establishment who is pulling the levers behind the curtain.

If these two assumptions are correct, it follows logically that the stock market will not fall. I know - these are giant, shocking assumptions, but I'm betting they are true. I'd even say that "evidence" supports the validity of these assumptions. I'll watch what happens in the next couple of days to see if this "evidence" continues. I'm almost certain it will.

peopledontwanttruth's picture

I'm betting we're going to see things nobody is expecting and people will wet their pants and fall to the ground

Once the flow of water gets moving even the biggest dams and dikes (aka the establishment) won't be able to hold it back.

Give Me Some Truth's picture

This is actually  my long-term bet too. It's why I'm betting on monetary metals over green paper. My bet, specifically: The result the central planners conspire to achieve is always the opposite of what they intended/expected/advertised. So: Short the central planners. Bet on "economic mother nature" prevailing in the end. This, to me, is a pretty safe bet.

peopledontwanttruth's picture

We live such short lives in the whole sceme of things who knows where we're at? Maybe at the end of your long term bet already?

Juggernaut x2's picture

What a massive pile of crap. And all of the Trumptards that say the Fed will do nothing if there is a big selloff in order to screw Trump are just as full of shit as well.

GunnerySgtHartman's picture

Riiiiiiiiiiight ... Auntie Janet will do the bidding of her bankster masters without hesitation, you just watch.

onewayticket2's picture

..but this time the nation's first black president is not in office.  worse yet, the biggest threat to elitist power EVER in our nation's history is in office.


Salsa Verde's picture

Sure, it'll be different this time.


shizzledizzle's picture

This time?! When did the FED ever stop bailing water?

buzzsaw99's picture

i don't even read crap like this anymore because i know damn well the fed will step in and start buying if it goes low enough.

101 years and counting's picture

apparently hell would be unleashed on earth if (gasp) stocks dare drop a meager 10%.  not even a healthy correction of 20%.....

btw, the fed blows bubbles to enrich their owners.  when their owners have sold out of stocks, the fed pops bubbles.  apparently, no one learned from every other asset bubble over the last 30 years.  wash.rinse.repeat.

the only difference this time: it took 7+ years to finally con the peasant to go 100% back into stocks.

TradingTroll's picture

Oh you're no fun ;)

Why not put on a little short down to 20k Dow or so?

Or did you mean it when you said you only play long?

buzzsaw99's picture

imo selling stuff you don't own is patently immoral and also stupid.

Give Me Some Truth's picture

The national bank of Switzerland is one of the largest investors in the U.S. stock market. Who knows what "Fed money" is being surreptitiously distributed around the nation and world so that the U.S. stock market bubble continues. Or direct Fed/Government intervention. An audit of the Fed would give us these answers. Which is why such an audit will never happen. Anyone see Trump - King Swamp Drainer - pushing for this?

Sebastianbelle's picture

Oh you mean banks won't get bailed out? Yeah, right!

Pintergast's picture

The Fed needs to keep its filthy fingers off the controls and let market forces take over. Until that happens we will continue to live in fantasy land.

Give Me Some Truth's picture

The NYT, Wash Post, WSJ, AP, Reuters, L.A. Times, CBS News, etc: "Transparency and openness for our local school boards and city councils! (Complete and protected and perpetual secrecy for the U.S. Federal Reserve!). Figure that one out.

LawsofPhysics's picture


So, after over 40 years of a dishonest "let the majarity eat cake" monetary policy, now they are going to be honest and re-attach money creation to real collateral and real risk?



I won't hold my breath.  Power and control corrupt, absolute power and control corrupt absolutely...

These fuckers will never willingly give up what they have stolen, nor will they indict themselves.

Get long sharecropping and guillotines, turns out humanity hasn't really learned a damn thing.

FreeShitter's picture

An most likely never will....we have safe spaces, tweets, facebook, and snapchat.

Pareto's picture

a number of clients have asked at what point the Fed would ride to the rescue. Our answer is that this time the cavalry is not coming — at least not unless we see something much larger — at least a 5 - 10 per cent type correction and maybe not immediately even then


I stopped reading after that stupid assertion.

GodHelpAmerica's picture

Central banks stepped up buying of stocks so they can raise into weakness. They are on a mission.

Everyday the west's economies look more and more like the state-run Chinese economy...

OpenThePodBayDoorHAL's picture

LOL, "raise rates" LOL. Never happen. Sure they'll do some cosmetic raises, 25 b.p.

It's stagflation of everything and there's no Volcker in sight