"It’s Been A Fun Ride, But Prepare For A Global Slowdown"

Tyler Durden's picture

While in principle central banks around the world can talk up the market to infinity or until the last short has covered without ever committing to any action (obviously at some point long before that reality will take over and the fact that revenues and earnings are collapsing as stock prices are soaring will finally be grasped by every marginal buyer, but that is irrelevant for this thought experiment) the reality is that absent more unsterilized reserves entering the cash starved banking system, whose earnings absent such accounting gimmicks as loan loss reserve release and DVA, are the worst they have been in years, the banks will wither and die. Recall that the $1.6 trillion or so in excess reserves are currently used by banks mostly as window dressing to cover up capital deficiencies masked in the form of asset purchases, subsequently repoed out. Which is why central banks would certainly prefer to just talk the talk (ref: Draghi et al), private banks demand that they actually walk the walk, and the sooner the better. One such bank, which has the largest legacy liabilities and non-performing loans courtesy of its idiotic purchase of that epic housing scam factory Countrywide, is Bank of America. Which is why it is not at all surprising that just that bank has come out with a report titled "Shipwrecked" in which it says that not only will (or maybe should is the right word) launch QE3 immediately, but the QE will be bigger than expected, but as warned elsewhere, will be "much less effective than QE1/QE2, both in terms of boosting risky assets and stimulating the economy." 

From Bank of America


That sinking feeling

Sifting through our strategists’ top reports this week, we can’t help but notice one overarching theme – it’s been a fun ride, but prepare for a global slowdown. US stocks have been particularly volatile this week on earnings and we’ve also had the biggest weekly outflows in equities this year. Headlines continue to be macrodominated and it’s not easy to be a captain of a ship in such troubled global waters.

Shiver me timbers, Mr. Market

Rising Spanish and Italian bond yields were in the news this week, and the pace of the increase suggests the market believes more is needed to avoid a potential full scale sovereign bailout. According to economist Laurence Boone, the most market efficient but politically viable solution for Spain and Italy in the short term would be a combination of secondary market purchases by the European Central Bank and primary market purchases by the European Financial Stability Facility/European Stability Mechanism. The problem, though, is that this would likely produce only a temporary respite for the bond market and no sustainable relief from stress in the financial markets.

The case for further Fed action

As the economy sputters and downside risks grow, Fed officials once again find themselves contemplating further easing. In our view, the Fed will move when it is comfortable that the growth slowdown is likely to persist.

Likely next steps: forward guidance extension and QE3

We have revised our Fed call. We now believe the Fed will extend its forward guidance to “at least through late-2015” on August 1, rather than through “mid-2015”. We also expect the announcement of a $600bn QE program in Treasuries and MBS on September 13, up from $500bn in our old forecast. We expect lower 5-10y rates in the near term and recommend fading any significant knee-jerk back-up in rates on a QE3 announcement. We believe QE3 will be much less effective than QE1/QE2, both in terms of boosting risky assets and stimulating the economy.

The Fed has other tools

The Fed may cut IOER to 0 or 10bp, but we believe that the benefits are outweighed by the costs of disruption to the money markets. Further, the Fed can use the discount window to lend against collateral but bank capital constraints could limit the resulting increase in loan growth.

There are nuclear options if the need arises

With markets increasingly questioning the effectiveness or availability of the Fed’s tools, we analyze aggressive “nuclear options”, which will be much harder to implement, but would likely be much more effective. These include imposing a ceiling on yields; open ended asset purchases until certain mandate triggers are met (mandate targeting); FX intervention to weaken the dollar; money financed fiscal expansion; and raising the inflation target above 2%. In our view, the nuclear options become likely if the Fed believes the economy is sliding into recession or sees high risk of deflation.

Euro Area: No QE yet, but official intervention is possible

With Spanish and Italian bond yields at very high levels and after the 26 July comments from Draghi alluding to the ECB’s readiness to act to preserve the euro, we look at the possibility of official interventions (ECB, EFSF, coupling ECBEFSF). This could take several forms – from ECB pari passu purchases of all bonds (similar to Fed and BoE quantitative easing) to EFSF targeted purchases in the secondary market for countries under a program. The most market efficient but politically viable solution for Spain (and Italy) in the short term would be a combination of secondary market purchases by the ECB and primary market purchases by the EFSF/ESM. We argue, though, that this would produce only a temporary respite for the bond market but no sustainable relief from stress in the financial markets.

ECB purchases first, then EFSF/ESM once ESM is ratified

In our view, bond market intervention would first take the form of SMP, which could have an important impact on yields given the lack of liquidity in the bond markets. The temporary nature and limited efficacy of such intervention, should the bond market pressure not wane, could call for larger official intervention. But this would require countries under pressure to request such support, which could take several weeks or months to materialize in the current environment. For the time being, we think Spain has some room to maneuver: 1) it is under limited pressure probably until year end, even in current market conditions; and 2) the ESM will not be in place until October, thus limiting the size of EFSF/ESM interventions. Should a problem occur, it would likely be in the form of bank liquidity access, which the ECB tends to fix by lowering collateral requirements.

That said, we see four reasons for potential official intervention:

1. Fear of contagion if Italian yields rise to the same extent as Spanish yields, which could compel the ECB to intervene.

2. The EU may push Spain into requesting EFSF/ESM intervention once the ESM is operational. The loan to recapitalize Spanish banks could give the EU some leverage.

3. As we approach Q4, the market will focus on 2013 Spanish bond issuance needs. These are likely to be high given the funding needs of Spain’s regions, and impossible to complete without a reduction in yield levels (and therefore probably official intervention).

4. Rating agencies downgrade toward end Q3/Q4, and disappointing news on growth is a trigger point that could push bond yields in a new upwards spiral.

No Relief From Spain

No relief from the (S)pain. Judging by the pace of the recent increase in Spanish government yields, it appears that – despite bank recaps and various other reforms – the market believes more is needed to avoid a potential full scale sovereign bailout. Just as the final details of the Spanish bank bailout emerged, the market has grown increasingly concerned about Spain’s commitment to bail out its regions.

Clearly, as we have seen, US credit is not immune when potentially systemic risks play out for Spain and Italy. However, we have argued that – with increased prospects for policy intervention – the likelihood of big systemic European events impacting US credit in major ways has declined significantly. The market appears to agree, as for example, Friday, when the most recent Spanish concerns surfaced, we saw the third largest daily inflow to high yield funds on record ($740mm). Also, the iTraxx.main-CDX.IG relationship is again near the wides, even with US credit spreads tighter.

The Flow Show: Equity Exodus

Biggest weekly outflows in 2012 for equities (heavy selling of SPY, IWM, QQQ and GLD). Bond inflows still booming, potentially heading for bubble, especially high yield. Bearish positioning, profit and policy expectations = upside equity trading risk.

Continued stock volatility

In the past two US equity trading sessions 64 stocks have moved +/- 15% in price. This level of stock volatility creates concern, indicates performance issues, coincides with redemptions and may indicate investor rush to benchmark.

Wide trading range … central bankers protect floor

The big picture for equities is still that a wide trading range = a classic deleveraging pattern post credit boom-bubble-bust. When floors are threatened the central banks act. In July, Europe, China equities threatening floors, Italy/Spain bond/equity/macro collapse flipping into core Europe, threat of global recession. Significant event risk next week: August 1 Fed and ISM, August 2 ECB and BoE, August 3 Payrolls.

Deflationary ECB goes inflationary

German 2-year breakeven rates are now negative, ie German deflation discounted. ECB must turn inflationary. This week the ECB eased rhetorically, with Draghi promising action (similar to the Bernanke QE2 speech in Jackson Hole in August 2010. Assuming this materializes, the ECB could soon be QE buying short-dated peripheral bonds. Bottom-line: the probability of an unlimited, unsterilized sovereign bond purchase program by the ECB to reduce bond yields just increased.

What to watch, what to do

To track ECB success/failure, watch if 10-year German bund yield rises above 1.75%, for steeper yield curve 2-10s in core bond markets UST/UKT/DBR & temporary bounce in Euro. Lower peripheral EU bond yields would mean equity reversal trades: bounce in three most oversold global sectors are Eurozone banks, Eurozone utilities & telco; EM/Canada/Oz/UK resources to Labor Day.

EU/EM floors defended, fiscal consolidation needed to break US ceiling

Sustained rally in unpopular equities in H2 requires at minimum ECB/Fed QE success + signs of China growth reviving. No multiple re-rating is likely without sensible global fiscal policy consolidation. Bull market/bubbles to continue in growth, yield, quality, and weakening sales growth/potential policy failure argues risk aversion is set to make a comeback September/October.

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Precious's picture

Putting up "Bank Owned" for-sale signs is an invitation for mischief.

Precious's picture

excellent - even more mischief

ZeroAvatar's picture

You could put up a sign, "For Sale by Ower".

goldfish1's picture

"It’s Been A Fun Ride, But Prepare For A Global Slowdown"


Fun for whom?

The Monkey's picture

What is the trade going to be on the other side of this relief rally?

- Will it be a long equities / commodities trade because open market purchases put a floor under the market? The other central banks still yet to come?

- Will it be a short equity / long volatility trade because this action is really a sentiment overshoot to be followed with disappointment?

- Will it be a short treasury trade as purchases on the long end fail to nail down nominal rates like QE2?

- Will dollar index tank, or is this a buying opportunity?

Share your thoughts!

Vincent Vega's picture

Go long on self sufficiency and all that that implies.

monogratis's picture

True that. 

You know, the great irony and that which provides me satisfaction is that while the gold and silver markets can be manipulated by the fed, the oil market cannot.  This beautiful fact is what essentially destroys the entire premise that QE3 can do anything for the economy.  An economy which is heavily dependent upon cheap energy and cheap oil, cannot be fixed by keeping oil prices high.  While I agree with Mike Shedlock that oil prices are very susceptible to deflation, it does appear that deflation will not occur in the short term and therefore we can expect the further destruction of capital markets through monetary easing and therefore the gradual destruction of the consumer.

Deflation will occur, but only in the labor market -- which means that poverty levels will continue to increase.  Prices will remain high despite the fact that demand will fall because the opportunity cost of discounting goods will be too great for fear of restocking inventory at a higher cost.  That's my experience as a retailer in an extremely wealthy Southern California area.  I can only imagine things are worse in other places.

Stoploss's picture

Talk is cheap..

Enough of the bullshit, just go ahead and start monetizing anything and everything.

Just do it.

Lets end this before the election, because monetizing right now will end the election process anyway, and neither will be elected and the country goes into military lock-down.

Which is actually the best alternative at this point, because neither "candidate" is qualified for the position anyway.

Yes, this is good. Im all for it, let 'er rip boys, so the bigger you go,  the faster we go down.


TPTB_r_TBTF's picture

yep, talk is sure cheap.  But it wouldnT be so cheap if i had a nickel (or a pre-80s penny) for every time a ZeroHead claimed "the End is nigh".


Stoploss's picture

Maybe you haven't been paying attention, but every time he monetizes, asset deflation ratchets up two notches, along with food and energy costs. This cycle will not complete overnight, but none the less, it will complete. This is just the prolonged agony of a slow slide down, with a powerless FED and ECB.

The timing is perfect, yet again, another central planner induced wave of asset deflation awaits you, with five dollar gas to go with it. Maybe they'll let you put the gas on the snap card.

If i had a tlc for every time i heard Hilsentard say Ben was going to monetize, i would have twice as many tlc's.

Thanks for the idea.

veyron's picture

all of these bearish reports out of banks compelled me to go long the past week

Muppet of the Universe's picture

I can't figure it out.  Yesterday's 6 o clock moment was Draghi word diarreah driven...  & it was funsies.  But today, at 1:55, WTF mate?


I see nothing out of the ordinary across index maps. 

Does anyone know where this major bm came from?

Did the Bernank just try to clear out shorts?  Did he read ZH and QErage?

Did the Bernanke stop buying bonds for today and QE the markets?

Did some banker some where drop a qe word dump?

It's not fair I wanna short so bad :(  Fair market value must be famahed.


WAHTEHFUK happun?  Seriously, does anyone know?

chet's picture

Forget it Muppet, this is Chinatown.

The Monkey's picture

The time to short this market is when the central banks have all done their thing, bullish sentiment is at an extreme, prices are at new highs and have been levitating for days, Europe has been "solved", etc.

Remember, the Fed hit the gas in 1927 and set off a huge speculative bubble. With an aggressive Fed, there is no telling how far prices can go. All we know is that easy money for a long time is the set-up for a big bust. The longer these policies go on, the bigger the set-up. But it looks like they are going to die trying to make these policies work at any future cost, which makes little sense unless the situation is truly dire.

Muppet of the Universe's picture



YOU MOTHER FUCKERS. You cost me 50% of my index trades profits with that market injection of 99.9% jew.

Luckily I bet against bonds today -long dollar  //  long oil - short nat gas  //  Long corn - short soybeans  //  long gold... MOAR GOLD.



& fuck that shit, if they wanted to save the econ they could reinstate capitalism and abandon the welfare state. 

But noooo, they have to print the money supply into oblivion and call it monetary policy.

The Bernank is to money as Tyson is to chicken.


Stoploss's picture

We're bouncing between the 50 day and whatever rumor pops it over the 20 day, and back down to the 50.

Last pop was 1380, this pop 1390, in line with the trend.

The Monkey's picture

Don't try to short unless the opportunity presents itself. IronIcally, that's paychologically the hardest time to short; prices are very high, things look very bullish.

All this short selling in a range bound market in front of the central banks was destined to have a bad end.

withnmeans's picture

Don't get whip sawed, the Governments and Big Banks are controlling the Markets. Stay out till they devour each other. If the little people don't play poker with them "its game over". House always wins, however if you don't play they don't take in any money.

Take a look at the market volume, the smart money is out, hence low volume. The volume will not be back in the game until the game has been changed "Hmm, to a legal factual system". Not sure if or when this will ever happen, I guess that is why several countries are moving to Gold, they can bank on that "they cannot bank on a false market place"

The Market is up because the Big House is throwing money at the Big Banks, telling them to buy it up, watch out, they will pull the rug out from beneath you...... 

Tirpitz's picture

Can the general mood get any worse? The charts look as if the summer low were in, silver has something brewing on the long side, ECA is strong, and even INTC displays a very bullish setup. UNG lags, so far, but how much longer?

Time to make money big way.

The Monkey's picture

I'm afraid you may be right. This looks like a set-up for a new speculative bubble. They must be coming to the conclusion that they have no other choice. The question is why?

The alternative must be pretty horrendous.

Oh well. Like everone else, I'll trade the tape carefully until it breaks.

LMAOLORI's picture

"The Fed has other tools

The Fed may cut IOER to 0 or 10bp, but we believe that the benefits are outweighed by the costs of disruption to the money markets."


Bullshit the Fed just doesn't want to stop feeding it's member banks billions!  Alan Blinder say's...


"The simpler option is one I've been urging on the Fed for more than two years: Lower the interest rate paid on excess reserves. The basic idea is simple. If the Fed reduces the reward for holding excess reserves, banks will hold less of them—which means they will have to find something else to do with the money, such as lending it out or putting it in the capital markets.

The Fed sees this as a radical change. But remember that it paid no interest on reserves before the 2008 crisis and, not surprisingly, banks held practically no excess reserves then. In early October of that year, Congress gave the Fed authority to pay interest on reserves, which it promptly started doing. When the Fed trimmed the federal funds rate to its current 0-25 basis-point range in December 2008, it also lowered the interest rate on reserves to 25 basis points, where it has been ever since.

My suggestion is to push it lower in two stages. First, test the waters by cutting the interest on excess reserves (in Fedspeak, the "IOER") to zero. Then, if nothing goes wrong, drop it to, say, minus-25 basis points—that is, charge banks a fee for holding their money at the Fed. Doing so would provide a powerful incentive for banks to disgorge some of their idle reserves. True, most of the money would probably find its way into short-term money-market instruments such as fed funds, T-bills and commercial paper. But some would probably flow into increased lending, which is just what the economy needs.

The Fed has steadfastly opposed this idea for years. Why? One objection is true but silly: Lowering the IOER might not be a very powerful instrument. No kidding. Are there a lot of powerful instruments sitting around unused?

The other objection is that making the IOER zero or negative would push other money-market rates even closer to zero than they are now, thereby hurting money-market funds and otherwise impeding the functioning of money markets. My answer two years ago was that we have more important things to worry about. My answer  today is that it has mostly happened anyway: U.S. money-market rates are negligible.


But suppose it doesn't work. Suppose the Fed cuts the IOER from 25 basis points to minus 25 basis points, and banks don't lend one penny more. In that case, the Fed stops paying banks almost $4 billion a year in interest and, instead, starts collecting roughly equal fees from banks. That would be almost an $8 billion swing from banks to taxpayers. There are worse things."

MillionDollarBoner_'s picture

but...but...but...if the FED reduces the IOER to zero, whare is the incentive for the banks to purchase Treasury Bills?


Jonas Parker's picture

"The Fed has other tools... "

You mean Bernake and Geithner aren't the ONLY ones???

Beam Me Up Scotty's picture

"But suppose it doesn't work. Suppose the Fed cuts the IOER from 25 basis points to minus 25 basis points, and banks don't lend one penny more. In that case, the Fed stops paying banks almost $4 billion a year in interest and, instead, starts collecting roughly equal fees from banks. That would be almost an $8 billion swing from banks to taxpayers. There are worse things."?

The primary dealers might be flush with cash, but I dont think the local bank is.  They are struggling because they have lots of deposits, but can't make any money on it because rates are so low.  They can't play stock market roulette like the GS and JPM's can.  I think alot of smaller banks would go tits up if the Fed goes negative on bank deposits.  Their costs went up when the FDIC limit was raised to $250k.  Small banks can't find good loan candidates, dont have a credit card business, can't get a good return on deposits, and still have their fixed costs they have to pay.  Margins are thin and getting thinner.

Also, I won't be holding my money at the bank if they think they are going to charge me to take care of it.  I'll do it myself.  Bank runs anyone?

LooseLee's picture

I guess my questions would be; Who is in a position to take on more debt in this world? Who's wages are increasing and debt decreasing? Where is this 'demand' for more credit to come from? Who needs more 'things'? Someone who stands behind this fascist/socialist/keynesian/moneterist/central planning 'theory' please respond and answer my questions with thoughtful analysis and factual evidence. Thank you.

Squid Vicious's picture

most def bullish... loading up here!! it's like that button that Cramer pushes sometimes "All Aboard!" I love that... (sarc/off)

same old story's picture

I am not sure why Tyler keeps posting these and other articles.  None of it matters.  all that matters is what CP and the rumor mill is doing

HD's picture

Are you suggesting the Tylers retire and just leave one final post, "It's all FUCKED UP and likely to remain so. Gone Fishin.'"?

LULZBank's picture

No, we expect Tylers to go down like Charlie Frost in the movie 2012, with a proud smile and proclaimations, "Remember you heard it first on Zero hedge."

http://www.youtube.com/watch?v=7fThZ9R8gCY    Only in English :)

jtmo3's picture

Yada, yada...buy stocks and shut the fuck up.

Meesohaawnee's picture

if i were Mitt Romney id be all over this blatant manipulation propaganda market push.. ITS SO OBVIOUS MITT!! Mr im gonna clean up the corruption is only laughin so hard today.. haha those suckers are gonna think all is good.

magpie's picture

As if the mediapush wasn't enough.

I had to force myself to watch BB the last two days.

LMAOLORI's picture


Romney did say he would get rid of bernanke it would be a good strategy for him

MeBizarro's picture

Trusting a guy like Mitt to even acknwoledge letting alone attempt to bring legal action is like expecting a heroin junkie not to use the hit you have when you leave the room. 

HD's picture

"...open ended asset purchases until certain mandate triggers are met (mandate targeting)"

This is the option that scares me. It would all but eliminate shorting, reduce liquidity even further and force the fed to buy every "significant" dip. There really would be nothing but algos trading a tighter and tighter range. Market could not move up or down meaningfully.

The Monkey's picture

Scariest part is they are increasingly committed to a policy from which there is no exit.

HD's picture

That's TPTB for you - all balls, no brains.

calgal's picture

roaches can get in but they can't get out!

The Monkey's picture

I'm voting for Romney on the hope that he actually will end Bernanke's tenure. I have no idea what he will really do, but Obama is just fine with the status quo.

These policies are terrible.

MeBizarro's picture

Only reason I would remotely consider voting for him.  Given his positions on issues and general background, it is hard to see him not even doubling-down though on a host of terrible policies. 

Caggge's picture

The exit is called system reset. Capitalism is a big game of monopoly. When one person has all the property.....why play? Especially when the one person with all the property was the banker and he didn't allow bank audits.

Hype Alert's picture

How is that different than today?

Glitch's picture

"This is the option that scares me. It would all but eliminate shorting, reduce liquidity even further and force the fed to buy every "significant" dip. There really would be nothing but algos trading a tighter and tighter range. Market could not move up or down meaningfully."

I'm wondering real hard wether this isn't already the case.

Go Tribe's picture

A flat-lined market. So equities become what, dividend vehicles? Everything at the 30-year yield?

Glitch's picture

To some degree, maybe yes.

Hype Alert's picture

If they keep this crap up, they are going to scare the consumer into the very back of the caves, in the hills and for a very long time.  The economy sucks and the people are wanting to get out of debt, not spend to make the bankers happy.  Keep this crap up and something is going to freeze up, big time!

adr's picture

Somehow even without consumers buying, corporate profits continue to go up.

I believe my, products to the bottom of the sea to make room for more products thesis is correct.

kito's picture

"It’s Been A Fun Ride, But Prepare For A Global Slowdown"


prepare for a slowdown??????.......wtf has the last 5 years been???? 

slowdown is yesterdays news.........prepare for a beatdown......