Why A Centrally-Planned Heroin Addiction Never Has A Hollywood Ending

Tyler Durden's picture

The market rally has assuredly been more powerful than Morgan Stanley had anticipated, defying the weak fundamentals. Many have said they don’t think fundamentals will matter for the rest of this year. We have seen earnings estimates for the S&P500 decline recently, with notable pre-releases from Intel, FedEx, and Burberry among others, a rash of weak recent economic data including ISM and the underlying inventory build, jobs, PPI, industrial production, and the beginning of softer consumption on the consumer side after a strong August. Yet, the S&P total return index is at an all-time high. People can’t envision a catalyst to make fundamentals matter, they can’t envision a catalyst for earnings to come down, and they still think the “tradable rally” from positioning and policy will last. It well may last for a while more, but the disconnect from fundamentals can’t last forever.

Via Morgan Stanley's Adam Parker: Behavioral Economics 101

Why were sales traders cheering a bad job report Friday before last? Because they were ready for another Pavlovian risk-on trade higher, and from all accounts they are getting what they wanted. We understand that, and we get that there can be a self-fulfilling prophecy, or “tradable” rally. We admit we were too dismissive of this mindset the past few weeks. We hope we learned the lesson for the future, but we’re not sure we’re that smart, so we will see. The question we try to ask ourselves when we walk in the office is, “Do we like stocks more today than we did a few weeks ago?” Every ounce of our experience says that we shouldn’t. Why? Because our view of earnings is not better, the consensus view of earnings is too high, and the market is materially higher than it was only a few weeks ago. Discipline says, no matter what the starting point, you should like things less now than you did then. We all know that the current “bad is good, good is good” mentality can’t persist. We all know that at some point, whether it is in a few days, weeks, or even months, the market will shift to a “bad is bad, and good is bad” psychology. It’s behavioral sciences 101. It always happens that way.


When will fundamentals matter again? We don’t know. Our guess is sometime between October earnings season and right after the US Presidential election. If not, our view that the market’s next double-digit move is down, not up, will be wrong by year-end, and we will have to moderate our stance or push out the timing of our expectations. We use a framework to establish our market view. The framework says earnings will be $99 for the S&P500, not the consensus view of $116. The framework also says that low and volatile earnings growth (S&P500 earnings grew roughly 0% quarter over quarter in the July quarter and are forecasted to decline both year-over-year and sequentially in the October quarter) and extreme interest rates are bad for multiples. Our conviction on our EPS outlook remains reasonably high today. Our conviction on the relevancy of the framework for market multiples over the next three months is clearly the issue at hand.


We don’t do heroin. We are sure the period of being high on heroin is “enjoyable.” Even one light beer is a mood enhancer for us. However, we try to see through to the other side of it and make a judgment that injecting heroin into our arms is not a good idea. What’s our point? We think the probability that we can end up in a benign interest rate environment goes down every time the Fed does more unconventional policy. That’s why it is called unconventional. We had thought that most investors would decide this “heroin” wasn’t worth it. We forgot about what it means to be an addict. We were wrong and clearly mis-calibrated the strike price of the Fed “put”. Maybe not ultimately wrong, and maybe not even by year-end, but for sure over the past few months we were wrong about the demand for this kind of artificial stimulus. We should have known when the economic data were clearly weaker and corporate profits plummeted during pre-release season in June and July that the market rally was about the promise of more unconventional policy. The central debate remains the same, though. Will equities continue to go higher simply because the specter of unlimited liquidity is there or will investors see through to the other side of the “high” and worry that we are going to be in an extreme interest rate environment for a while and that earnings growth will remain tepid? Often addicts know what they’re doing is wrong, but they do it anyway.


Manhattan is crowded. In our judgment, sentiment is decidedly bullish. Decidedly – both on the earnings outlook and the equity market. We know everyone likes to romanticize that they are a contrarian bull on an island by themselves, but trust us, that island is not vacant. It’s crowded. Like Manhattan crowded. (Actually, we just looked it up, and Manhattan, by density, is only the 13th most dense city on earth. Chennai, India is #1. This worldwide web thing is cool.) We have received several emails in the last week from investors with messages of the ilk that “we all know this will end in tears”, but for now, people are not at the rehab center.

People can’t envision a catalyst to make fundamentals matter, they can’t envision a catalyst for earnings to come down, and they still think the “tradable rally” from positioning and policy will last. It well may last for a while more, but the disconnect from fundamentals can’t last forever.

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GetZeeGold's picture



Sooooo.....don't pattern your life after Lindsay Lohan and Britney Spears?


LULZBank's picture

The suspense is killing me already... for a long time...

DeadFred's picture

Last Friday was the high IH(very)HO. Still have my short positions and fingers crossed insanity won't make me close them. I think we're seeing a lot of propaganda to suck money in at the top. Time will tell. Time or flying missiles.

sunaJ's picture

Each time I think that the system cannot take more, I have to remind myself of the outright manipulation that is out there - that which we are aware of and most assuredly a greater portion of which we are not aware.  I believe that it can go on for a long time, such is the power of this meme called fiat money.  I'm becoming more convinced that, as fundamentals do not matter in this arbitrary world, fundamentals will eventually come back all at once and with a vengeance.  I believe that the best opportunity for this to occur will be in the form of failed physical delivery of some commodity (oil, gold, silver, copper...).  That cannot be manipulated, and it represents the real world imposing on this land of make-believe.  You can manipulate anything until it cannot be physically delivered.

new game's picture

spot on, as in the dealer done did the stuff, but now the don wants to be paid; a down right bloody fuckin mess...

Bananamerican's picture

SOME junkies never quit.... Their bodies do it for them

Genie's picture

It's like... deja vu... with amnesia... File under: Behavioral Economics101 - We are sure the period of being high on heroin is “enjoyable.”

Maybe, maybe not, maybe makes you feel sick n puke, and only after you take it a few times does your body give up and succumb to it's //pleasures//.

goldfish1's picture

We are sure the period of being high on heroin is “enjoyable.”

Ain't the high so much as it's the crash and burn.

Alea Iactaest's picture

<-- FUNNYmentals

<-- DysFUNctional


We're going full retard... hold on!

SeverinSlade's picture

Hey, I WISH the Fed would follow in Ms. Spears' footsteps.  She is under a conservatorship after all, remember?

IMAGINE if the Fed were actually CONTROLLED BY CONGRESS (as thus, the PEOPLE).  Controlled and eventually dismantled.

Don't be hatin' on Britney.

A Lunatic's picture



Done. Now I'm all throwuppy inside........

johnjkiii's picture

That's how these episodes always end. The head of state takes over from the bankers and provides the final printing explosion. The fit hits the shan and all the little bits get between the teeth of the middle classes who were thinking they were having a fun ride. Suck it up luny or you'll be one of them.

Awakened Sheeple's picture

The central bankers should walk out to "Smack My Bitch Up" when they speak..

Gully Foyle's picture

Stumbled across this at The Exiled

Makes one wonder


As Occupy Protesters Chant F*** the Fed, Few Are Aware the Federal Reserve Has Been Given Domestic Police Powers; With Glock 22s and Patrol Cars

Quietly, without fanfare or Congressional hearings, the USA Patriot Act in 2001 bestowed on the 12 privately owned Federal Reserve Banks, domestic policing powers.

Section 364 of the Act, “Uniform Protection Authority for Federal Reserve,” reads: “Law enforcement officers designated or authorized by the Board or a reserve bank under paragraph (1) or (2) are authorized while on duty to carry firearms and make arrests without warrants for any offense against the United States committed in their presence…Such officers shall have access to law enforcement information that may be necessary for the protection of the property or personnel of the Board or a reserve bank.”

The police officers are technically known as FRLEO, short for Federal Reserve Law Enforcement Officer.  The system has its own police academies for training, their own patch and badges, uniforms, pistols, rifles, police cars and the power to arrest coast to coast without a warrant.  They have ranks of Sergeant, Lieutenant, Captain and a recruitment ad campaign with the slogan: “It’s about respect and recognition from your peers. It’s you.” 

According to a former St. Louis Federal Reserve Law Enforcement Training Instructor, the officers are trained on pistol, rifle, auto-rifle, sub-gun and shotgun with manufacturers encompassing Smith & Wesson, Glock, Remington and  Armalite.

The FRLEOs employed by the Federal Reserve Board of Governors in Washington, D.C. are considered employees of the Federal government since the Board is a government entity.  Each of the 12 Federal Reserve Banks, as settled law under Lewis v. United States confirms, is a private corporation owned by commercial banks in its region.  An email to several of the Federal Reserve Banks confirmed that they regard their FRLEOs to be privately employed by the bank.

The San Francisco Fed ran an ad for Captain Specialist, noting that “you will be charged with gathering and disseminating law enforcement intelligence information to the District.” It also noted that the individual would need to “obtain and maintain top secret clearance.”  Typically, that clearance level is reserved for only the highest positions in the Federal government.

Benjamin Glutton's picture

Top Secret clearance is not nearly as exclusive as the article suggests. Personal experience....have one myself.

It also noted that the individual would need to “obtain and maintain top secret clearance.”  Typically, that clearance level is reserved for only the highest positions in the Federal government...


When you consider all that has transpired since 2000 you would have to be naive to believe that the financial collapse was unintentional. I would add that it also makes predicting future Fed Res and Fed Gov. actions very simple irrespective of which party is in charge.


I have immense respect for ZH and what contributors and posters do here but you must remember that Washington, D.eath C.entral operates on ten year budgets(publicly). Nothing that the people or media say today will alter the long term goals of this monster that WE are responsible for unleashing upon ourselves.


Aside from a few tweaks here and there Congress are merely a mix of actors, posers and witnesses just like the rest of us.

pepperspray's picture

Why brag about clearance? Who are you?

Benjamin Glutton's picture

not bragging...just being honest in an effort to illustrate the absurdity of that particular assertion.


Zero Hedge is about truth as I know it. This is a truth I have personal experience with. Most likely Bradley Manning had TS or at a minimum Secret clearance.


How did that work out?

pepperspray's picture

Only the most devout advocates receive clearance in the system.  If you are credited with trustworthiness, why risk posting about it on ZH?

Benjamin Glutton's picture

You imagine risk where none exists...the system requires millions of warm bodies that appear to be responsible and or reliable. That is the only requirement for such a clearance.


The only "devout advocates" I am aware of are Marines or Seals...did you see the ST6 member on 60 Minutes or read his book? Maybe he is just another government psyop.


The why is simple. Zero Hedge is about truth. I will act as a free American at all times until I draw my last breath. No compromise no fear.





Dr. Engali's picture

You're just now figuring out that this is bad? Where the heck have you been? I have news for you the fed heroin is the only thing keeping MS alive and you employed.

fonzannoon's picture

Hey speaking of which Doc, can you fill me in on this Margin Stanley, Jim Willie thing? I get that they suck, but why have they been the one with the bullseye on them for a long time now. Besides like you said, it seems the fed, unlike in 2008 won't let a crisis happen. The red phone rings on Saturday now and by Monday all is well.

Dr. Engali's picture

I haven't heard much more beyond people repeating Jim Willie's thesis. I do know that MS is down sizing it's footprint some more in the face of imploding profits.



trebuchet's picture

well for me the 1000 fishing boats and japan report of china boats in its water triggered the sell,  i enjoyd the ride up now im going cold turkey

Jim in MN's picture

Any regulars not seen for a month or so?



Nevada recluse dies with $200 in bank, $7 million in gold at home
DeadFred's picture

Wondered the same thing when I saw the headline.

trebuchet's picture

on this day in 2001, DJIA dropped most points ever to that date..  something like that, reopening after 9//11

buzzsaw99's picture

fundamentals only matter when the right people are left holding the bag. judging by the mass exodus over the last few years i'd say fundamentals will matter again roughly when hell freezes over.

Jim in MN's picture

Oh and by the way, a junkie can stay alive for longer than you can stay solvent. 

Be cool!

Joe Davola's picture

Keith Richards - I'm convinced he's dead, it's just been involuntary response for the past decade or so.

Everybodys All American's picture

When this thing fails it will be epic. I can't wait for Obannana's excuse.

sumo's picture

I can't wait for Jim Cramer, live, crying and begging on behalf of "his people".

larz's picture

It will be Congress' fault - Everybodys All

AynRandFan's picture

If you chart earnings per share of the S&P 500, you will see that fundamentals have not been violated.  But, you will also see that the increases in earnings have died out and appear ready to flatline or head south.  On a per share basis, earnings are higher than 2007 while the S&P 500 is lower.

The real question is not whether stock prices are in a bubble, which they clearly are not, but whether there is any economic underpinning for earnings growth going forward, which appears to be "no".

Vince Clortho's picture

There has also been no "economic underpinning" for stocks melting up for the last 11 months.

So the question now is, "what's different?"

AynRandFan's picture

Earnings were still increasing the last 11 months, and now they're not.

Zola's picture

Must have been Johnny Bravo, since he was always saying it cost him only 5dollars to dig silver out of the ground- must have been making a fortune !

lolmao500's picture

And now for something completely different...

Japan renews provocation over Dokdo

In an unprecedented provocation, all of Japan's overseas missions are uniformly conducting public relations campaigns to claim South Korea's easternmost islets of Dokdo, officials here said Tuesday, indicating that a countermove by Seoul is under way.

"All of Japan's overseas diplomatic missions are in the midst of an extensive public relations drive over Dokdo. Such a move is unprecedented and it seems to be a very serious provocation," said a diplomatic source familiar with the matter.

trebuchet's picture

BOj intervention didn't work, so they trying politics to talk the Yen down..... ???

edmondantes's picture

This is hyperinflation... would you rather be in USD cash/bonds or in stocks? Earnings/fundamentals do not matter. They didn't matter in 1921-23 and they don't matter now.  People who were in cash/bonds got eff all.  People who were in stocks survived to fight another day.  People who had gold outside the banking system did best of all.  As you cannot have everything in gold outside the banking system stocks along with real estate are the 2 least worst alternatives.

Winston Churchill's picture


Do not try to hold property without that gold though.

Rapidly rising propery taxes will outstrip your resources quickly in a hyperinflationary

collapse.Think several years,as it was in Weimar, so it will be again.

Racer's picture

Tulips, South Sea, Dot-com, QEasy

All end the same way

rsnoble's picture

Amazing how everyone knows the FED is responsible for the rally yet cried about the disconnect the entire time and why was it happening. Duh.  Nothing to see here, except green stock prices.

ebworthen's picture

Jim Cramer on CNBC and the crew talking down HFT and mentioning "Terminator 2" and "Skynet".

It was as if they were reading ZH.


fuu's picture

Is that Gorman railing up in the exec wc?

Winston Churchill's picture

Ben has given the market a 'hot shot'.

What a final 'rush' its given it.

khakuda's picture

What these guys aren't fully digesting is that the market is not going up as much or at all in terms of a stable currency like gold.  Priced in fiat, it appears to be going up because fiat is being debased and debauched at ever increasing rates.

1000yrdstare's picture

I got a message for Ben Bernanke..


Did that blow your mind?..... THAT JUST HAPPENED!

Anasteus's picture

One question, can you, Americans vote for president by choosing from at least three candidates? For instance, Obama, Romney and Paul as, say, an independent candidate? I know it's unusual but is it feasible?