Panic And Perspective On Wall Street From Art Cashin

Tyler Durden's picture

Some much needed veteran trader perspective from the fermentation "Chairman."

From UBS Art Cashin

Panic And Perspective On Wall Street - We’re going to adjust our usual format a bit to try and put yesterday in a little bit of perspective. Having done this over 50 years, I’ve seen a good deal of market history - the Cuban Missile Crisis, the Kennedy Assassination, the ’87 Crash, various wars, and much more - and perspective is essential to survival - at least financial survival.

If you were writing a textbook on the mechanics of finance and markets, you might have a chapter on volatility. If so, you might list a history on the normal volatility of each asset class.

Most volatile would likely be the stock market. Valuations are based on imperfect information and individual assumptions.

Next down the volatility scale might be commodities where conditions tend, overall, to change slowly with the occasional sudden surprise from weather or other natural events.

Next down the volatility scale, would likely be the bond market - much better information and a very large, very liquid marketplace.

In your textbook, the least volatile asset should be currencies. While they historically have had wide swings, as other assets have, but they tend to move incrementally - normally small intra-day moves.

Yesterday, the textbook was thrown out the window. All asset classes saw sudden and sharp moves far in excess of normal volatility patterns. To an old timer, that points to one conclusion. Liquidation. Wide-spread liquidation across asset classes. Currencies, bonds, commodities and stocks all moved swiftly and sharply in a direction that screamed - Seek safety! Raise cash! Get liquid!

I have been lucky enough to build a mildly successful career by seeing and relating the various causes and effects that move markets. Yesterday had many contributors. European banks tottered amid more rumors and, there was a sense that in the U.S. solutions were slipping away as political acrimony grows. Even the old reliable China growth story got dinged. Chinese manufacturing numbers hinted a slowdown if not recession. FedEx added to the China worries by noting a sharp drop-off in Asian technology shipments. There were also reports that folks were having a tough time getting paid by Chinese counterparties.

All of that had a quick and discernible negative impact on markets. But, the selling was far more pervasive and dramatic than simply a conscious adjustment of positions based upon new data. Thursday’s action screamed liquidation - and not all of it voluntary.

That, in turn, brought echoes of 2008. Who were today’s counterparties? Was there an AIG type in the new European crisis? Those are the kinds of unknowns that fuel liquidations. Everyone begins asking everyone else to put up more collateral. It becomes a feeding frenzy for the rumormongers. They can make anyone a victim. With counterparties unidentified, there is almost no way to counter wild rumors. We need a time out here.

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Bad Lieutenant's picture



If you look at the distribution of the Fed's UST securities, you'll see it has about $900B of treasuries less than 6 years (   So in accordance with Operation Twist 2, it has a sobering amount of long-end buying power as long as the appetite for short term paper remains strong.  Combine what with a flight from the euro and fears of a renewed global recession/depression, and that's basically $900B worth of firepower the Fed has to unleash on the long end of curve.  

So the Fed unfortunately has a pretty insidious plan here.  As long as the appetite for short dated paper remains strong (and given euro, EU banking, and global slowdown fear, it *absolutely* will remain strong), Ben effectively has almost a trillion dollars to keep the long end of the treasury curve within its control -- all while the size of the Fed balance sheet remains steady.  The timing is perfect for short-dated UST paper: the euro and EU debt faces imminent repricing, EU and US banks are looking worse and worse by the day, and big money managers have never been more eager to retreat into the short end of the curve as US government and commerce is looking more and more sickly.

Although all this isn't a QE by strict definition, OT2 in effect *is* QE3 to the tune of $900B because by the time the bulk of that long dated debt is due, collapse is going to already have been long played out.  OT2 will allow the UST to issue massive amounts of long term paper at crazy-low rates, thanks to the demand for short term paper allowing the Fed to covert that into ammo to gun the long end of the curve into submission.  Sadly, because all the CNBC "experts" of the world won't identify these subtleties, they'll be able to cultivate a bearish sentiment on PMs since they'll tell all the sheep that US hasn't printed since the end of QE2.  Meanwhile, up to $900B of cash will be able to see the light of day since the UST will be able to issue tons of long-dated debt (at crazy low rates) that won't be due to be paid until major crisis/collapse has come and gone.

Given that the Fed's fate is innately bound to the US Treasury's, anyone that regards the Fed as not being willing to take the massive risk associated with transitioning to holding the long end of the curve isn't seeing things in the proper light.  For the Fed to first see even any *unrealized* mark to market losses from their long dated holdings means that they would have run out of short term paper to sell -- all $900B of it (that's a lot!).  For the Fed to incur *realized* losses they would have to choose to sell into those lower long end prices as their gunning power ran out, but if you think about it, what would drive the Fed to sell?   The Fed is chartered to generate dollars for any security they buy, so why would they ever realize any losses when they can just generate new dollars to buy other assets?  Point being: the Fed, in effect, does not incur any *additional* risk of ever *realizing* losses by buying the long end because it is innately already bound to the fate of the US.  When the insititutional world eventually realizes the UST's hole is only to ever get deeper in real terms (months or years from now) and panic really starts to set in, the Fed is of course going to burn alongside the UST.  Whether the Fed's portfolio is 5%, 50%, or 99% long-dated treasuries won't matter!

What sucks is if you're already a fully positioned precious metal holder, then you're in for a ride (I'm personally in this category).  On the surface it would appear that since the Fed won't be dropping any more palettes out of helicopters for at least a few months, it's clearly hard to make a bullish case for PMs in the short to medium term unfortunately.  The long term fundamentals of course are only getting worse, so the question is, how interested are PM market players going to be in trying to profit off this foreseeable PM decline ahead.  One could argue that now Fall 2008 looks a lot more likely, we could see an ugly swing down in PMs (until they step in with generating dollars to stem off deflationary collapse).  The fucked up thing is that the more the Fed is able to convert their short term holdings into long term paper via short term paper demand, the more dollars that in turn will enter the system (as if they were printed).  

So how much will PM and commodity sentiment get crushed while smart money uses the new cash entering the system (courtesy of OT2) to buy it all up on the cheap?  I have no idea, but the natural laws of finance of economics can only be stretched and deferred for so long until they snap back ferociously and unleash terrible ruin. 

Tyler Durden's picture

What people completely fail to grasp over and over is that the Fed's balance sheet does not need to print money to dilute equity: an equal effect of increasing the riskiness of currency collateral happens when, as in the case of Twist, the Fed extends the duration of its holdings, in essence causing its DV01 to surge and implicitly making the paper in circulation even riskier. But, as usual, it takes markets about 12 months to get even the simplest things.

spiral_eyes's picture

I understand that OT2 will allow the Fed to shovel dollars without technically getting into the helicopter, but if the market doesn't get it, and asset prices collapse (alongside the default cascade coming out of Europe) won't that render OT2 completely ineffective?

Only QE3/abolishing IOER seem capable of staving off this next round of debt-deflation.

Bad Lieutenant's picture

You're totally right, but the question is that what this phase offers to the elite.  The beauty of their plan is that deflationary fear will fuel the buying of short term UST paper, effectively diluting the fiat base as more cash enters the system.

Perhaps what you're driving at is that prices ala fall 2008 can only drop so much until banks and big companies start to get sucked into the wood chipper, and I totally agree.  Hence my comment about that this phase will only be short to medium term (until the Fed/UST step in with real printing).  Either way they get what they want: fiat dilution while they buy up PMs and commodities on the cheap.

spiral_eyes's picture

I give Benny 2 months. Maybe less if it gets nasty next week.

Bad Lieutenant's picture

Yeah, I feel that too.  One thing is for sure, this is one big bow-wrapped gift for any folks that aren't fully positioned yet in PMs. 

anynonmous's picture

Lefty you should be elevated to the contributor bar great stuff

I said in another thread I lived through LEH and went heavily into fiat physical around 900 but when it started to slide I bailed quickly watching it go to the sevens and then watching it go back thru 900 and the rest is history (there's till something to the buy and hold thing - so I agree PMs are on sale along with the producers but timing is a different story  thanks for a great post

scatterbrains's picture

so what your saying basically is that even if I had a clue what you meant I'd still be wrong because the correct market reaction wont be seen for many months.

curbyourrisk's picture

We print debt.  not money.


Debt must be repaid and repaid with interest.  If we only printed money the debts of this country would be much smaler, but we would be faicng much higher rates of inflation right now.


Which is the lesser of the 2 evils?

M2Market's picture

I wonder what would be worse:  The Treasury prints a $1million check and give it to everyone in the country or the Treasury issue an equal amount of debt and have the Fed monetize it.   Anyone here care to comment?

CapitalistRock's picture

In a practical sense, money goes only from the fed to the treasury and not back the other way. So it doesn't matter. It's printed money going into the economy. You can be certain that the debts owed to the fed will be defaulted on one way or another.

M2Market's picture

I wonder what would be worse:  The Treasury prints a $1million check and give it to everyone in the country or the Treasury issue an equal amount of debt and have the Fed monetize it.   Anyone here care to comment?

SofaPapa's picture

I've often wondered this.  If you simply put the cash in people's hands, the vast majority of that money is going to find its way into the banks anyway, no?  And people would then be less "indebted", so at least private debt burden would drop.  Same endpoint for the cash, different pathway?  I don't work in the financial world, though.  What am I missing?

reinhardt001's picture

if by "dilute equity" you mean decresae purchainsg power, not necessirly.  riskier =/= cheaper in a deflationary environment (see e.g., "significant downside risks") if everything else is becoming riskier and deflating faster than the currency is being diluted.

disabledvet's picture

But didn't the fed only announce "the twist?" i mean from where I'm sitting "wall street started dancin' EARLY!" and "it appears to be more of a boogie boogie" than a "twist."

Storch's picture

In addition to twist the fed will be trading risky MBS for riskier MBS without aking for comessurate increase in yield. In fact they will accept less yield on purpose to try and jump the housing market. Read bruce k's articles he is smarter than us. Never realized that shiticizing the balance sheet is the same as expanding it but makes sense. These guys are so sneaky i kind of admire it almost.

bigdumbnugly's picture

ty for the take, bad L.

but noticed that zh's post went up at 10:48 and then bad L's long post and tyler's response at 10:54?

double agent?

Clorox Cowboy's picture

You can't just "gun the long end of the curve into submission" without side-effects.  What happens to all the annuities and pensions that depend on those long term yields?  Ask yourself:  If these "tools" we're seeing deployed now are supposedly so powerful and so free of unintended consequences...then why hasn't the Fed simply "gunned the long end of the curve into submission" continuously since 1913?  If central bank intervention is so great, why was it so rare (prior to now)?

Repeat after me.  There is no free lunch!

Bad Lieutenant's picture

Of course big funds are going to see less and less yield.  Agreed that they will slowly cook until panic collectively ignites, but in the mean time they see unrealized gains due to UST debt price appreciation which makes their numbers look a lot better.  

My "gunning into submission" image only refers to the Fed maintaining a bid for long dated UST paper in order to offset the holders that become sellers as they wake up to the true risk of 30 year UST paper.  And what I'm trying to say in my main post is that the Fed on its own has $900B to soak up those newly awakened sellers (in addition to the clods that bid alongside the Fed because they're fooled by the faux price action).  

Thus, and this is what TD was saying, the size of a fiat pool is effectively grown (the equivalent of printing) as the the assets back it are converted into higher risk assets.

Caviar Emptor's picture

The "newly awakened sellers" of long dated UST paper...the Fed assumes (and hopes) that money will go into "invesmtent". THat was the original strategy in OT1. That was the world of 1960: we had a productive economy to "invest' in. Today's Fed is trying to tie this all in to a grand, DC-coordinated plan to re-start the housing market. It was a pre-requisite to the big mortgage-refi stimulus package which is coming, so as to make mortage rates as low as possible. 

Here's the trouble: housing is still hopeless in a delfationary ecnomy with massive, uncorrected overcapacity , massive uncorrected trade imbalances and high strucutral unemployment and decades of declining incomes. Housing prices need to come down even more, by a lot to make up the gap. Add in fiscal austerity for good measure. 

No, the sellers of long dated USTs (if any) will seek safety. And the perfect hedge against biflation is still gold. And concerns over global currency and political instability only adds fuel. 

Moon Pie's picture

CE, housing is more hopeless than you say.  Even assuming another 10-20% drop in prices (or more), the legal/title issues surrounding the banks and title insurers have not yet  been addressed and, in my view, will only possibly be properly addressed via litigation, mainly on the investor side, but also the property owner side.  The FED/Treasury/TBTF's are going to do all they can to avoid that and effectively further extend the real pain that must occur. 

They know the BONY/Countrywide deal is fcockd'd and now the Fed/Obama is stepping in for some other whitewash deal.  I believe the real reason they are is NOT to refi millions of mtgs primarily, although it might have a minor stimulative effect, but rather to do a mtg/DOT paperwork "redo" on as many loans/title that they can, which might be admirable if they came right out and said that.

On top of that, real incomes are declining.  Taken together, the uncertainty there will have families living in their current homes for a long time to come (if they can). 

Housing will be the LAST sector to recover, if it ever does.

Clark Bent's picture

I agree that housing has a long way to fall. But the servicers are doing their best to crater it, and I can't find out why exactly, though I suspect they are getting government money. What I see in my little practice is servicers seducing borrowers into default by promising them better terms if they quit paying their mortgages. They cite HAMP for this, which never seems to materialize, and then the banks declare the borrowers in default for doing exactly what the servicer told them to do. You might think that judges would listen to this, but not so much. They refuse to believe that servicers have ulterior motives. I need to be able to prove they are getting better money by making foreclosures than they would get from keeping borrowers paying, cuz that is exactly what they are doing, and they seem disinclined to tell me why. Also, borrowers got nothing to fight with, no resources, and no sympathy from courts. If anyone here has any insights,

merizobeach's picture

"Housing prices need to come down even more, by a lot to make up the gap."


Seems so, and if it happens, there will be so many people underwater on their current mortgages that we may see the Prime Mortgage Crisis, as people who could continue to pay instead walk away and "refi" (into a new home at the new market value).  Banks will get left holding the bag again, and we will realize that right now is just the calm eye of the typhoon, and the second half of the storm will then be upon us.

citta vritti's picture

doesn't Fed's OT2 stand as a guarantee of high(er) nominal prices for long-term Treasury paper, which is of great interest to China, as one of the largest holders? So, if China so chooses, they can sell for USD without affecting the market too much, and use resulting USD for other purposes?

Sophist Economicus's picture

There is no 'free lunch' in the long-run.   But, these very smart folks aren't dealing with long-run solutions at the moment.    They have played out various scenarios - like a war-game and have determined the long-end is where they can get some traction.   It is a solid move in the short-run.  


As for the long-run, well,  at the firm I used to work for, we had a practice that worked with the 'spook' side of the government.   There were 'simulations' and 'war games' galore in trying to figure-out the survivability of different levels of nuclear war and the collateral damage it would inflict.   Everybody knew that the long-run answer was everybody was screwed -- however, in the short-run, there would be a 'winner' if the game was played right -- LOL!    Do not underestimate the ego of these academic bureaucrats.  THey believe they are infallible and are smart enough to handle any issue that comes up.   THAT will be their ultimate UNDOING.   Unfortunately, many innocents will get hurt in the process

Bicycle Repairman's picture

If I understand this correctly, OT2 pushes down the price of PMs and gives TPTB cash.  TPTB buy the PMs and other hard assets.  TPTB now have PMs, hard assets and a long term solution.  Then the Fed prints. We get feudalism.


disabledvet's picture

Too late! The free market already bought in to the "insidious plan!" (and my sources 'on the inside' tell me "Bernanke is sick and tired of being the greatest hedge fund manager in history" and "has wondered aloud if Wall Street honestly and truly can't find some new gunslingers" because "managing all their money for them is tasking."

haskelslocal's picture

Fed is able to convert their short term holdings into long term paper via short term paper demand, the more dollars that in turn will enter the system (as if they were printed).  

 But isn't this increase in dollars from Twist minimal? If the Fed has short term treasuries now and therefore, there are more dollars in circulation, than it would seem that those dollars just spend more time churning in and out from treasury redemptions, etc. To Twist to long term treasuries will in effect stop the churn and lock the dollars into circulation for a longer period of time. So the "X" factor is only the value of the churn and how much currency = X.

I guess the proverbial question is what percentage of $900B is X? Perhaps only a small percent?


Bad Lieutenant's picture

Good points, but why would it be limited to a small percent?  As PMs, commodities, and equities selloff in the weeks/months to come because the sheep don't think there's fiat dilution going on (cue TD's point about printing isn't the only way fiat is diluted), why wouldn't the proceeds be put into short term UST paper.  If you're a big fund manager, you're not going to ever get fired by recommending selling commodities and equities and buying short term UST paper in the face of looming recession/depression.  Especially when Ben tells the world things are about to suck. Needless to say btw, it's fits perfectly in that Ben is telling the world this.

haskelslocal's picture

Bingo. Thanks for carrying me through on that... Totally get it now...

Caviar Emptor's picture

@Bad Lieut:  Again, the Fed's mistake is assuming that ultra-low rates for long-term paper will encourage selling and that the money will flow into the housing market. They're underestimating the deflationary forces in the economy: massive uncorrected overcapacity and trade imbalances, declining incomes, high structural unemployment, offshoring with capital flight, and coming fiscal austerity. OT2 is part of a grand package fro DC, the first step, before a mass mortgage refi stimulus. It will fail. Money will seek safety. Gold never loses buying power. It will continue to be accumulated and favored along with long dated USTs. 

Bad Lieutenant's picture

The lynchpin is keeping the long end of the curve from breaking down (where yields rise and confidence in US debt collapses).   So as long as confidence in US debt is preserved (expressed via low yields across the curve), that's all the Fed and UST need to keep the train on the tracks.  

The fact that PMs will be the only trusted money once widespread panic sets is irrelevant as long as the fiat train is still on the tracks.  Will the train come horribly off the tracks in the near future?  The natural laws of economics and finance say yes without a doubt.  But we're not quite there yet, I'm sad to say.  The Fed has to lose control of the long end before the real deal can set in, and OT2 gives them a lot of firepower to keep a bid under long dated UST paper.  

Greenspan actually admitted this himself a year or two back when testifying.  I wish I had a link, but he basically said that the first sign of real crisis is when the long end starts to selloff and the Fed can't stop it (for whatever reason).  That's when money velocity takes off and Weimar starts.


CapitalistRock's picture

Never underestimate ego. Fund managers don't go to work in the morning because they are motivated by job security.

snowball777's picture

Why is the short-end going to stay hardy when they can front-run the flogging of the long-end?

Operation Water-Weenie!

TwoHoot's picture

The danger as I see it is that to keep their balance sheet steady, the FED must have external buyers on the short end and external sellers on the long end of the curve in roughly equal amounts. In other words, for the FED to lengthen its portfolio duration, someone else has to shorten their portfolio duration. Otherwise the FED balance sheet increases (easing) or decreases (tightening).

It seems to me that both the short and long term outcome is very uncertain.




covert's picture

the market is still searching for its bottom, keep watching. the time to buy is approaching.


WeekendAtBernankes's picture

You shoud be making full posts on this blog.  Thanks for the analysis.

MichaelG's picture



We need a time out here.


Or the final whistle.

snowball777's picture

Intentional foul. 2 shots.

citta vritti's picture

outside the three point line - make that three shots, plus a chaser

GeneMarchbanks's picture

NO, we need more rumors. Psssst! Hey! Did ya hear the news? As it turns out, the banking system runs on fraud, ... pass it on...

TradingJoe's picture


RunningMan's picture

Wait, that's it? The conclusion is we need a time out? So the guy who has made his career watching ups and downs simply offers his expert perspective that a time out is the cure, and that the action was the result of rumors. Great. Perfect. I'll go back to work. Wait, I'm not getting paying work from clients right now, and haven't all year. You think that's relevant?

SheepDog-One's picture

The markets just need a nap, theyre cranky and not playing well with others.

exi1ed0ne's picture

Or a bath. Tell Uncle Warren to pass the soap.

scratch_and_sniff's picture

Time out indeed, im not taking another trade until this dies down a little - i couldn’t even get up this morning, i felt like my head had been put in a vice after watching yesterdays price action, i watched a weeks trades go up in smoke in under an hour last night...its back to basics for me, leverage slashed and pulling my punches.

jdelano's picture

Why on earth were you long?