Weekend Reading: Yellen Takes Away The Punchbowl

Authored by Lance Roberts via RealInvestmentAdvice.com,

September 20th, 2017 will likely be a day that goes down in market history.

It will either be remembered as one of the greatest achievements in the history of monetary policy experiments, or the beginning of the next bear market or worse.

Given the Fed’s inability to spark either inflation or economic growth, as witnessed by their dismal forecasting record shown below, I would lean towards the latter.

The media is very interesting. Despite the fact there is clear evidence that unbridled Central Bank interventions supported the market on the way up, there is now a consensus that believes the “unwinding” will have “no effect” on the market.

This would seem to be naive given that, as shown below, the biggest injections of liquidity from the Fed have come near market bottoms. Without the proverbial “punch bowl,” where does the “support” come from to stem declines?

I tend to agree with BofA who recently warned” the paint may be drying but the wall is about to crumble.”

This point can be summarized simply as follows: there is $1 trillion in excess TSY supply coming down the line, and either yields will have to jump for the net issuance to be absorbed, or equities will have to plunge 30% for the incremental demand to appear.”

“An unwind of the Fed’s balance sheet also increases UST supply to the public. Ultimately, the Treasury needs to borrow from the public to pay back principal to the Fed resulting in an increase in marketable issuance. We estimate the Treasury’s borrowing needs will increase roughly by $1tn over the next five years due to the Fed roll offs. However, not all increases in UST supply are made equal. This will be the first time UST supply is projected to increase when EM reserve growth likely remains benign.


Our analysis suggests this would necessitate a significant rise in yields or a notable correction in equity markets to trigger the two largest remaining sources (pensions or mutual funds) to step up to meet the demand shortfall. Again, this is a slower moving trigger that tightens financial conditions either by necessitating higher yields or lower equities.”

Of course, as I have discussed previously, a surge in interest rates would lead to a massive recession in the economy. Therefore, while it is possible you could experience a short-term pop in rates, the end result will be a substantial decline in equities as money flees to the safety of bonds driving rates toward zero.

“From many perspectives, the real risk of the heavy equity exposure in portfolios is outweighed by the potential for further reward. The realization of ‘risk,’ when it occurs, will lead to a rapid unwinding of the markets pushing volatility higher and bond yields lower. This is why I continue to acquire bonds on rallies in the markets, which suppresses bond prices, to increase portfolio income and hedge against a future market dislocation.”

My best guess is the Fed has made a critical error. But just as a “turnover” early in the first-quarter of the game may not seem to be an issue, it can very well wind up being the single defining moment when the game was already lost. 

In the meantime, here is what I am reading this weekend.



Research / Interesting Reads

“If you are playing the rigged game of investing, the house always wins.” ? Robert Rolih


Scuba Steve Fri, 09/22/2017 - 17:15 Permalink

The 50 other agents across the globe doing U.S. Fed/CB buying ...born yesterday or what ?And just because they are not "buying" per say, doesnt mean they are not printing for others to. jmo.

Francis Marx Fri, 09/22/2017 - 17:18 Permalink

Watching the stocks today the central bank dippers are buying non-stop.You can tell because the trading is like a group of drunken sailors.The price action doesnt correspond to anything.

Barney08 Fri, 09/22/2017 - 17:20 Permalink

I'm not worried none of this stops the SNB from buying. As long as those MFs keep printing and buying nothing is going down. You have been warned - Bitchez!

Frankly Speaking Fri, 09/22/2017 - 17:24 Permalink

Without the proverbial “punch bowl,” where does the “support” come from to stem declines?The US Treasury's Plunge Protection Team. Commited to higher bonds and equities and lower PMs.

SybilDefense Frankly Speaking Fri, 09/22/2017 - 19:52 Permalink

The goal was always negative interest rates.  TPTB will further implement their plan to make stawks look wonderful until all are swindled in, while hammering PMs to cause physical (money) buyers to question the cost of holding the relic.  At their convenience and at the most effective time to crash as many sheeple possible, crash it will.  At that point the unwashed masses will beg for their negative interest rates and pay the banksters whatever they demand. My suggestion is to continue to pack and stack.  They can't get us all.

In reply to by Frankly Speaking

buzzsaw99 Fri, 09/22/2017 - 17:29 Permalink

there is now a consensus that believes the “unwinding” will have “no effect” on the market. This would seem to be naive given that... Now who's being naive?  [/Michael Corleone to Kay,  Godfather I  ]We estimate the Treasury’s borrowing needs will increase roughly by $1tn over the next five years due to the Fed roll offs...You believed that?  [/Michael Corleone to Fredo,  Godfather II  ]

el buitre Fri, 09/22/2017 - 17:41 Permalink

Dumbass article.  Fed is talking about taking away the punch bowl.  Nothing is going to happen.  It's just another market BS manipulation.  The only thing positive which the Fed could do is shoot itself in the groin and head (in that order).

moonmac Fri, 09/22/2017 - 17:55 Permalink

2 goose eggs in a row. That hasn't happened to me since 2009. We tried raising prices the last few weeks but yesterday our CEO got back from China and we lowered them again because China is slowing down. Steel mills are closing for lack of demand and expensive regulations.

spqrusa Fri, 09/22/2017 - 21:52 Permalink

There is no "FED error" - it is by design.The Woodrow Wilson "Fed" has always been a political agency of the Blue-turds, i.e. the UN, Demoncrats, and their RINO friends who run CONgress, SCROTUS, and POTUS.If Trump is "true", he will call out the Fed's game and End the Fed. Otherwise, we will truely know his swampiness.

Fantasy Free E… Fri, 09/22/2017 - 22:13 Permalink

p { margin-bottom: 0.1in; line-height: 120%; }a:link { }How silly. Yellen has not given up the punch bowl or anything else. Truth has no utility in politics. Don't expect it because it is not used. The stock market is still being managed and it seems to be a successful effort so far. http://quillian.net/blog/the-fed-unwinding/ The fangs are in the beginning of a controlled correction. Any time a major stock has a bad day, AAPL or MCD for example, other stocks pop upward that day for little or no reason so that the averages are not disturbed. Anytime a goosing effort is too weak to move the averages up the Russell 2000 is strong. Why? The stocks in that index are so thin, they move out of proportion to even a small amount of stimulation. The phenomena of of averages taking turns being strong and weak in pretty new in the over all scheme of things. Just a few years back, the indexes were in sync all but a few times per year. These things are all dynamics of manipulation. The algorithms are very complex but what they accomplish are very simple. Feign weakness to draw in shorts. Keep the volume down and volatility low. If stocks are too weak to move all together, move one index one day and another the next. All of this is much too cute to be anything but intelligent design. Central banks will increase their buying of equities if stocks start to sink. When someone starts talking about punch bowls, it is important to know who is really drinking the punch. There is always a chance the general public will discover how much and by whom they are being fleeced. That would make a difference but it is unlikely to happen until more people start suffering.

Uranium Mountain Fri, 09/22/2017 - 23:43 Permalink

If pensions and mutual funds will be buying the bonds the Fed are dumping and causing rates to go to zero, then why didn't that happen in 2008?  I remember the Fed had to prop up markets with their purchases. The fund markets don't have the Trillions required to prop up jack shit.

conraddobler Sat, 09/23/2017 - 04:46 Permalink

They can manipulate the price of anything but are actually causing frictional loss of value in the process.The cost becomes staggering enough to bring down the entire facade after a bit because all real value is driven from the field.Pretty soon you have people selling plastic burgers and eventually people tire of these and one day you show up and no one is there to eat the shit and you are done.It all ends when we can get some mutal agreement to stop transacting on price and begin transacting in value.That they have no solution for because they don't sell value they sell price. 

overmedicatedu… Sat, 09/23/2017 - 06:56 Permalink

fed formed..1913..the concentration of wealth and power in America starts..after 100yrs we now have less than a handful of powerful elites owning 40% of the worlds wealth..not that there is any cause and effect here..LOL,,oh and for decades only a JU is allowed to be in charge of the FED..also no cause or effect there..coincidence all