The (European) Placebo Effect

Tyler Durden's picture

From Peter Tchir of TF Market Advisors

The Placebo Effect

The “Placebo Effect” is fascinating.  In a typical drug testing trial, one group of patients will receive the actual drug being tested, and a “control” group will be given an “inert” medicine (or “sugar pill”) that shouldn’t do anything for the patient, but the patient doesn’t know that.

So much of what I find wrong about “economics” is that it masquerades as far more of a science than it actually is.  It doesn’t have theories that can be “tested” in a real world, where 2 similar situations are treated differently to see which “treatment” works better.  Each economy and each situation is so different that it is IMPOSSIBLE to determine why policies failed or what should have been done differently.  It is possible to come up with reasonable ideas and theories of what could have been done or should have been done, but they are only theories. The systems are so complex that finding situations with similar starting conditions with similarly motivated entities involved is simply impossible to find.  The fact that so much of our policy  seems to be based on research into what should have been done in the Great Depression and what has been seen in Japan is frankly scary.  There is no way to “know” how the Great Depression would have turned out with a different set of policies.  We can make conjectures, but that is all they are – conjectures.

Making it even more difficult to determine if a policy is working is the “placebo” effect.  The market is being fed a lot of medicine (pun intended).  LTRO and Greek “resolution” being the latest medicines.  But are these treatments really working or are we rallying on a diet of pablum?

The LTRO was designed to support the market, the market is up, so the LTRO must be working.  That at least is the logic many investors are applying.  They see the improvement in sovereign debt yields, the avalanche of “positive” (if unfounded) headlines, and the relentless march higher of the stock market.  So the plan is working?  Not so fast.  The treatment was designed to help the stock market.  The stock market is encouraged by that and believes it is getting better.  That price action in turn convinces more people that things are better or fixed, and creates further demand for stocks.  But is it real or are we just in another “Placebo Effect” stock market rally?  The problem with the patients who get better on the placebo, is that the effect tends to be short-lived since nothing is actually fixed.

While the improvement in 5 year Italian yields has been impressive since the start of this year and is in almost 225 bps, we have seen prior “policy induced” rallies that ultimately faded.  Maybe this time is different or maybe the “placebo effect” has just been stronger, or aided by other factors.  The willingness of the market to forget that 3 times last year, it was convinced things were better only to get worse is amazing.  The market wants to believe – a key criteria for making a “placebo” effective. 

While Italian bonds have improved, the main reason is belief in LTRO and some signs of progress in the unelected Italian government.  What is being ignored is evidence that banks are hoarding most of the LTRO cash for future debt repayment, growing concern that senior unsecured lenders to banks are becoming too subordinated by the ECB, changes in laws designed to hurt bondholders, growing concern over ECB’s SMP holdings – both as a form of subordination to other bondholders and a source of real risk to the countries backing up the ECB.  Very little has been fixed and in fact progress has slowed down on some things.  After the Unicredit rights offering spooked the market, the banks seem under far less pressure to improve their capital base.  They seem to be able to convince the authorities that “they should wait for a better time to raise capital” and that with all the policies in place, risk has gone down and carry will help. 

That reminds me a lot of what happened after Bear Stearns was rescued.

Rather than making changes to derivatives after Bear Stearns was “rescued” (and there were special clauses in the JPM deal that addressed concerns on derivatives) nothing got changed.  Rather than forcing the weakest banks to raise capital, the Fed wanted to let them wait until the markets were more receptive.  The market saw the rescue and fed policy as an “all clear” sign and commenced another nice rally.

It is hard to remember, but the highs for the S&P 500 were reached in October 2007, after everyone was well aware of the lurking problems in the mortgage market.  Subprime had already collapsed, banks were taking huge write-downs, but a few new policies from the Fed and an aggressive rate cut were enough to fuel an early fall rally.  Nothing had been solved, yet the market hit a new high.  It took time for the market to realize that nothing had really happened, and that liquidity didn’t solve the problems and we slid towards new lows, but the market has a long history of temporarily responding to the central bank “medicine” only to rollover and hit new lows once the “placebo effect” is over.

I do not expect another crash like the what we saw in the fall of 2008, but continue to view the market as 5% - 10% overvalued.  The longer we don’t take the pain, the bigger the fall as it gives more time for the problems in the system to spread and it makes them less controllable.  If we get another sell-off, the impact of LTRO3 would be lower since the sell-off would be occurring with the knowledge that LTRO3 is a real possibility – ie, it will already be priced in.  The willingness, even desire to keep bad and weak institutions on life support is a mistake.  The complexity of the system is growing, and once the effects of the latest “treatment” wear off, that added complexity makes the next wave of problems harder to arrest.

There is some possibility we in a 2009/2010 central bank fueled rally, but I see more similarities to the October 2007 rally, the post Bear Stearns rally, and the countless Europe is solved rallies of last year.  Remain very cautious and don’t mistake a “placebo effect” for a “cure”.

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GetZeeGold's picture



Sugar power pills....for everyone!




battle axe's picture

It is sugar pills for cancer. That  will work...

GetZeeGold's picture



The fine print on the bottle says it works for everything.



economics1996's picture

100% fractional reserve banking, gold/silver, peace, prosperity, federal government constitutionally restricted to no more than 11%of the GDP.

Economics 101.

All the bad economics comes from;

1.  Federal governments.

2.  Central banks. 

Thomas's picture

5-10% overbought? You've got to be kidding me. Maybe it won't crash but this thing is a pig with lipstick, which isn't 5-10% overbought. I am with Grantham; S&P 950 might get me into some dividend paying stocks.

Spooky Polish's picture

Oh , Thank You . I fell soooo fixed now.

francis_sawyer's picture

blue pills... red pills... now SUGAR pills?

Thomas's picture

Blue pills? Red pills? Try orange barrels.

valley chick's picture

quote:   I do not expect another crash like the what we saw in the fall of 2008, but continue to view the market as 5% - 10% overvalued.



Cursive's picture

@Valley Chick

"nothing got changed"

Yeah, hecwrites this and then acts like the system risk we saw before is maybe worth a 5% discount to current values.

ArkansasAngie's picture

horse manure.  The market is considerably more over valued than that.  It took how many trillions to put it where it is today?  That money was imaginary from the get-go.  The recovery is too


fonzannoon's picture

Exactly Valley chick....All these problems that are being covered up...and when they are exposed....5-10% correction? Really? It's that easy?

taraxias's picture

Even as early in the day as this, there won't be a better post put up here today than yours.

Peter has truly capitulated to the power of the central banks when after laying his argument out so well he then calls for a .......... 5-10% correction.


Curtis LeMay's picture


Data this morning showed that [European] bank lending to the private sector remains fragile, despite recent unprecedented injections of liquidity[see LTRO of $500 bn]. The European Central Bank calculated in regular monthly data that growth in loans to the private sector picked up only fractionally to just 1.1pc in January from 1pc the previous month.


Although banks queued up in their hundreds to borrow nearly half a trillion euros after the ECB launched its longest-ever liquidity operations, there have been concerns that banks are simply hoarding the cash rather than lending it to businesses and households.


This should "do wonders" for companies and businesses throughout euroland :o)

But wait, there's more! LTRO II is coming next month - another $500 bn for the euro banksters.

I wonder if at all isn't going to the Caymans and Switzerland or something...

Dr. Engali's picture

Okay Peter you're going off the deep edge if you think this market is only 5 or 10% overvalued.It's more like 60 or 70% overvalued.

valley chick's picture

maybe the Placebo Effect Dr. pill or sugar pill for Peter? 

Shizzmoney's picture

We can make conjectures, but that is all they are – conjectures. The LTRO was designed to support the market, the market is up, so the LTRO must be working

The LTRO *is* working....just for those with a net worth of over $500K

Zola's picture

Lol, all that analysis and then there is a risk of a 5 to 10 pct to the downside ? HAHAHAHA - WTF ???!!!

I should be working's picture

Most people are unable to discern the difference between causation and correlation.  So you hear X caused Y, when more likely X had nothing to do with Y they just happened at the same time.

As for Europe nothing is solved.  The only question is when the other shoe is gonna drop.

Catullus's picture

I agree to some extent that recommendations coming from the economics profession is comparing now to the Great Depression.  It's a valid argument to make that these are similar events.  Yes, we're dealing with human beings so they will react differently to things nearly every time you do something, especially if they're aware of what you're doing and how other people are likely to react.  The analysis causes its own outcome. 

But Keynesians like Bernanke and the current cadre of central banking avant guard of economists assume that allowing bank failures during the Great Depression extended or caused the crisis, not necessarily just the contraction of the money supply like Friedman and Schwartz. But this is concluding that umbrellas cause thunderstorms, because the banks were (and are now) failing from the realization that the assets on their balance sheets do not match up with the liabilities outstanding. 

The problem is tough in fractional reserve banking.  To sound the alarm and say "raise capital" to banks might be what causes the crisis in confidence that causes a run.  You can only ever be reactionary as a central banker.  You need to let a run happen and confidence be battered and then come in and say as you're printing or backstopping trillions "now would be a good time to raise capital".

Sean7k's picture

We begin with the current bashing of economics as a non-science, without any consideration of how any discipline functions within a known set of rules that are fairly constant.

The author fails here, because he doesn't recognize the effects of lawlessness. How can economic rules function when banks do not have to record losses, can segregate liabilities into good and bad accounts, extend loan maturations; all while various central banks are buying bonds to depress yields, interest rates are managed to unrealistic yields and money supply is flooding the market to hide shadow deflation?

This has nothing to do with the inability of economics to predict market behavior and everything to do with criminal behavior. This is government by bankers run rampant. The courts are in collusion as MF Global testifies. The CME and CFTC are a sham and the SEC is a joke.

Liquidity will not solve a fiscal problem, but we will try until it gives the bankers the ability to claim every last bastion of wealth on the planet. This is not economics- it is a financial mafia throwing the decapitated horsehead on the bed of humanity.

Downtoolong's picture

"I think, therefore I am, I think."

Moody Blues 

whoknoz's picture

actually there never was a real pill...just placebos for everyone...with the real sickos running the dispensing room...

slaughterer's picture

Peter's analysis seems very much in line with the MSM in Germany: the latest cover of Wirtschaftswoche has an image of a man riding a bull with a few pillows taped onto him.  The last time I saw this type of marketing ("Nutzten Sie den Aufschwung" from DB) the market collapsed in abotu a month.  Nevertheless, there are countless banks offering 2.5% interest for 6-12 months on new deposits in Germany, which I assume is LTRO trickle down. 

overthehill's picture


chinaboy's picture

With LTRO, SMP.. European economy will eventually be identical with North Korea, Soviet Union, China under Mao. Karl Marx always wanted communism in Europe. He did not know things happened starting with Greece.


Migrant workers, all over the world, unite!

sasebo's picture

 The fact that so much of our policy seems to be based on research into what should have been done in the Great Depression and what has been seen in Japan is frankly scary. 

"Scary"?  How about crazy?

To grow an economy requires some of it's output be saved & used to build new production capacity & maintain the old. Printing & computer generating more "funny money" only ensures all existing production is consumed & existing capacity deteriorates causing production to decline.

I'd call this crazy.

pazmaker's picture

My Bible qoute for the banksters and their cronies   Proverbs 11:1

Snakeeyes's picture

HEY! At least pending home sales are up this morning!

Of course, this is after massive stimulus from the Federal government and Federal Reserve.

AND Senate Democrats want MORE housing stimulus!



bennyboy43's picture

Ahh Italian Bonds... if only I could trade them myself!! Anyone know an instrument I could pluck from the goody bag on either thinkorswim or CMC markets???