Fed: Crushing The "Smart" Money's Hopes Since 2009

Tyler Durden's picture

While the ever-present analogs to the last few years of crisis-response-improvement-complacency (CRIC), as Morgan Stanley so clearly described, have provided a clear picture of what to expect, the treja vu is now starting to fade in one very important market indicator. As BofA notes, the forward expectations of Fed Funds rates have finally started to shift from an endless string of 'hope' for growth and reflation just around the corner and rate hikes any quarter now (despite the Fed's 'exceptional' chatter) to a much less sanguine pit of despair that rates will indeed stay low for 'ever' reflecting a stagnating deleveraging economic reality. At some point they will be right as the Japanization of rates around the fiat world becomes the new normal and 'smart/fast-money' traders appear hope-less.

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CClarity's picture

Complacency takes us closer to the whoosh.  666 to be tested again.

NotApplicable's picture

ZIRP, the world's first self-kicking can.

LawsofPhysics's picture

LMFAO!  Yes, only if you really believe that there is no real cost for creating capital, especially without actually creating any real value.

Leopold B. Scotch's picture

The world used to be flat. Now so are interest rates.

Lucius Cornelius Sulla's picture

It is not a matter of cost of capital it is a matter of demand that is driving down rates.  There is a lot of demand for Treasuries because they are perceived as a safe haven from debt destruction.  But there is little demand to build capital stock in a world filled with over-capacity from mal-investment.  Until the existing capital stock is liquidated and brought in line with market demand there is no reason to form more production capacity.

LawsofPhysics's picture

Right, and so negative interest rates means grandma and grandpa will be eating cat food and their hard earned savings and retirement will be taken from them to pay down the debt.  Winning?  I think not.

The capital and resource mal-investment and mis-allocation continues. 

JFK.4PREZ's picture

From here on the 'economy' will be referred to as the 'Greenspan System'

rsnoble's picture

Test results: All the media will proclaim 666 held up. Reality: It's great support for a bounce. After that we will have a 3rd test and the score will be "F".

earleflorida's picture

Resistance is 'F'utile 

evolutionx's picture

Bundesbank Target-2 alarm:

almost 700 B in May + 55 B



Abraxas's picture

He'll print soon enough. It's always darkest just before the dawn. So, if you want to steal your neighbor’s newspapers, this is the time to do it.

disabledvet's picture

"From Lend Lease to Lease Lend" Europe. Move along!

fonzannoon's picture

anytime I hear an imbecile talk about rising rates I ask them how we finance the national debt. When they look stupid and awkward I then ask them what happens to our interest payments on that debt if rates rise? Game over.

SeanJKerrigan's picture

Bernanke said just yesterday the national debt could absorb a 1 percent increase in rates, and I agree, it wouldn't be that significant in the short to medium term. Just another hundred billion or so.  That said, the larger the debt gets, the harder to absorb a 1 percent or more increase. There's still time to fix things, but that window is closing fast.

fonzannoon's picture

If the perception ever got out that rates were actually going to rise the treasury hot potato would fly around so fast no one would know what happened. By the time it was over rates would have skyrocketed. They will hold this balloon underwater until they can't and when they can't it will be unreal.

Quintus's picture

This is the truth of the matter.  Interest rates can never rise again without bankrupting the country.  The longer the Govt keeps running $1 trillion+ deficits, the more certain it becomes that rates will have to (somehow) be kept as close as possible to zero to avoid strangling the economy with interest payments.

I don't see any way out of this that doesn't involve either permanent Japanese style economic stagnation or a lot of printing.

I don't even believe the US can actually pull off a Japanese style lost 2 decades, as it lacks (a) a trade surplus and (b) the ability to fund its government debt from an undemanding and compliant domestic population.

So how's the Fed going to keep interest rates at zero while funding enormous deficits in perpetuity?  I can't wait to see what they come up with.

fonzannoon's picture

If they scare the shit out of us enough they can prob get rates negative. Maybe they can get them negative enough where us dumb sheep pile in and start paying down the debt without even knowing it by paying a few percent for the privelage of holding gov't debt.

Winston Churchill's picture


All 401s must only hold USTs.

That will kick the can another 18 months.By then a full

police state will exist.

LawsofPhysics's picture

Yes, and with negative interest rates, the 401ks will essentially pay down the debt.

LoneCapitalist's picture

They may pay ON the debt, but the debt will never go down. Not even with neg. rates.

MrPoopypants's picture

'Interest rates can never rise again without bankrupting the country' =/= 'Interest rates can never rise'

Why do we assume that the Fed gives a shit whether the American public is solvent?  The Fed is a privately owned, independent entity whose interests are counter to those of the public.

If the USG goes under, think of all the assets that will be handed over to the private sector (looted), all the social services that will be cut, and all the debt slaves who will remain under peonage.  The military and police are increasingly a privatized, contracted affair, and they'll serve whoever signs their paycheck.  This model is time-tested and well worn, especially in the Western Hemisphere.

The real question is, what serves TPTB better - inflation or deflation?  In my mind it's a toss-up.

PivotalTrades's picture

So how did the rising rate thing arise in Greece, Spain, Italy  doesnt fit your argument.. And once the rats have all arrived in UST and the math of that situation becomes evident rates will rise..

eclectic syncretist's picture

It's a hell of high price just to avoid letting the banks reap what they've sown.

Zola's picture

I kind of see that chart in a different light, those were "semi free market" expectations of what the fed should have done (ie normalize interest rates at 3pct min) and now the market has degenerated to the point where nearly all free market based decisions have been destroyed and the 0 will stay until the point of catastrophic failure when it will jump to 10% +

veyron's picture

What exactly is 'smart money'?

LawsofPhysics's picture

Gold, shit that was easy.

StackAttack's picture

Gold and silver and platinum, oh my!  STACK ATTACK!

Urban Roman's picture

and Tungsten!

... btchz ...

earleflorida's picture

 old dumb money that lives off the smart`dividends - simple folks that got it exactly right?

junkyardjack's picture

Precious Metals are saying loud and clear what will happen at the June meetings, nothing...

rsnoble's picture

Don't worry, when our next president announces "now looks like a good time to buy stocks" at the DOW 3k level.......it will actually be the truth.

francis_sawyer's picture

There is no reality anymore... There is only THE BERNANK & his little college paper experiment...

eclectic syncretist's picture

Now they've got to get the 10yr bond to zero.  For banks, turning the housing market around would save the day.

youngman's picture

They have taken the savers out of the banks... its just gone..no one keeps any amount of money in a bank anymore...just enough to pay bills....and they are paying bills off....this is good...next the pensions..hedgies....investors ...are all  searching or more like chasing yields...this is bad...as there are crooks ..they live in Wall Street...who will sell you an investment with a great YIELD.....but you will never get your money back....but it looks good on paper....this is bubble #2....Bonds are a joke...Bubble # 3....will rates ever go up.......not as long as we can print.....so they will print....but if somone gets some balls and stops the politicians from spending and the Central Banks from Printing....then they will go up.... high..and fast....right now there are some of us that have our PM´s and are sitting on the sidelines watching this mess...others have bonds and are watching this mess....the rest are day traders playing the melt...up or down...time will tell who will have the better investment

yogibear's picture

Bernanke can print all he wants. It does nothing to fix the underlying issues. Bernanke and his fellow banksters filled every nook and cranny with debt. 

The derivative monster is waiting in the corner and it's huge.


onebir's picture

Isn't this the most gold-bullish thing possible?

(Shame some of those implied fwd curves aren't dated tho.)

RiverRoad's picture

Here we go:  into the Dim Ages.

Ned Zeppelin's picture

Mr. Bernanke says he will act if the Euro crisis deepens, which of course it will.  The market loves this talk. But the question is what can he do? Lower rates? Buy treasuries or mortgage securities (the latter, to "help the housing situation" if you beleive that. . . . ).  He is waving an empty bazooka around and the market has to know this, but acts as if he does. Why? 

I think if Europe begins to slip and the CDSs start clicking and whirring all over the globe - the awakening of the derivatives monster - spelling the complete destruction of the big banks, they will cause the politicians in their thrall to pull a Hank Paulson and move very quickly and to to some very radical things to lock down the hatches.  While not really a doomsday type guy, I think martial law is not out of the question in my book, and they will create reasons why this will be welcomed with open arms.  It will all be done to make sure the TBTFs and their bondholders do not suffer any losses. 

I think we live in dangerous times right now. 

Cursive's picture

@Ned Zeppelin

Very well said.  I'm dont' think of myself as a doomer either, but it is difficult to think of any happy ending here.  I wouldn't rule out martial law.  Hell, LA has seen it several times in the last 4 decades.  The events we are heading toward are exponentially worse than Watts or Rodney King.  Fernando a/k/a Ferfal has done an excellent job documenting the descent in Argentina.  We will see much of that here, but I don't expect a full-out war zone like some.

Vince Clortho's picture

Bernank is threatening to sacrifice the U.S. economy in an admirable effort to kick the can a few more times for Europe.

Globalist CB Fascism.

csmith's picture

Here's the Fed's response:


OK guys, NET THEM ALL OUT and we'll figure out who's dead. Once we know who, we'll provide all the new cash needed to fold all the corpses into the living.

Extend and pretend II. The sequel.

surfsup's picture

There's always a ramp UP in interest rates before these "economic disturbances."  -- Run along kiddies, nothting to see there... 

Cursive's picture

If yields did rise, it will overwhelm the Fed's B/S.  The majority of people think that the Fed can do anything and that the Fed will defend equity prices at all costs.  Not true.  The Fed will defend equity prices at the expense of employment and the USD, but it won't defend equity prices at the expense of it's balance sheet.  If a "smart" investor knew this, they wouldn't touch equities.

csmith's picture

"Hope" lies down and dies.

sbenard's picture

Rates will need to stay low forever, or the Fed will bankrtup the Treasury.

geewhiz190's picture

back in 1997 WSJ ran a front pager how "experts" expect oil to stay low for at least next 5 years ($14.00 a barrel then). starting to get the same drumbeat about rates.. bottom line-nobody knows, really, nobody knows. ps. that was the last time oil was in the teens.  tacticly the need to hedge is always there.

bnbdnb's picture

Asset correlation, less gold 99.9999999%.

MFL8240's picture

This is the MOST COURRPT group of gangsters since Weimar Germany.  The result will be the same, a collapse of the US economy and they will blame everyone else.  Bernanke is incompetent and unable to tell the truth, he must be replaced by competence.