Window Dressing Or Something More?

Many people seems to be crediting the market’s resilience to factors such as end of the month/quarter window dressing.

I remain unconvinced.

There has been a solid bid under this markets since October, goosed every time Ben Bernanke thinks about any form of liquidity. If he so much as eases himself into a hot bath, the market shoots higher.

The chart below is a variant of something we have shown repeatedly. It is the SPX overlaid with each of the Fed Quantitative operations. The latter phase of this Bull market clearly reflects the Fed’s impact on equity prices.

Let’s start with 2009: In March of that year, I saw the conditions in place for a bottom. However, I was not clued into just how significant the Fed’s role was going to be a year later. I credit (former bond guy and now all around strategist) James Bianco for making me understand in September 2010 just how influential — nay, dominant — the Fed was going to be with QE2. When we saw the same circumstances in October 2011 — August selloff, fear of double dip recession — we just knew the next Fed program was imminent. Operation Twist was launched about 25% SPX ago. Now, markets are running up in anticipation of the third movie in the Fed trilogy, QE3.

I keep telling hedge fund buddies its not their job  to be policy wonks. My job is to assess the seas, winds and tides, and sail into the right direction. That’s the role of any asset manager.

However, I cannot help but wonder if Bernanke hasn’t painted himself into the same corner that Greenspan did. The traders on the street — essentially 2-year olds with fast computers that slosh around billions in assets — know exactly how to throw a hissy fit. They are happy to whack the market 20% to get Ben’s attention, and he seems happy to give them their binky to make them stop crying and go back to their cribs.

The Fed and Wall Street have evolved into a dysfunctional relationship, and the most powerful central bank in the world seems to not know significantly the power in its most significant relationship has shifted.

The Fed has been %#$$y-whipped by a bunch of tantrum throwing 28 year old traders. In order to tighten monetary policies to some semblance of normalcy is going to take a number of things going just right. I hope they can accomplish this; I suspect to do so is going to require a combination of extraordinary skills and stupendous luck.

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Another Fed Stimulus Program Ending Soon ? click for larger chart

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Source: 10 Indicators to Watch for Another Spring Slide Jeffrey Kleintop LPL Financial March 26, 2012 http://lplfinancial.lpl.com/Documents/ResearchPublications/Weekly_Market_Commentary.pdf

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

Bubble.

‘ To tighten monetary policies to some semblance of normalcy is going to take a number of things going just right.’

‘Tighten’ is a soothing euphemism that conceals a troubling enormity.

When the Fed first started goosing its balance sheet in QE1, it promised to shed its excess assets as soon as the emergency passed. Then it did the exact opposite with QE2, piling on even more assets. The Fed’s promise to return to the quaint bygone days of a mere trillion-dollar balance sheet has already gone down the memory hole.

Meanwhile, in a squalid race to the bottom, other major central banks such as the ECB and BOE have ballooned their balance sheets with the same reckless abandon. A U.S. attempt to go it alone in restoring monetary responsibility would produce similar results to the U.S. remaining pegged to gold until 1933, after Britain ended its gold peg in 1931: that is, a face-ripping depression.

With the Fed’s tripled balance sheet now de facto permanent, ‘tightening’ in the conventional sense of raising the Fed Funds rate will do little to prevent the banking system’s vast excess reserves from being monetized. The latter part of this decade could resemble the 1970s, when even double-digit short rates failed to arrest the inflationary impulse.

Bottom line, normalcy will NOT be restored when the global money supply has been ramped like never before. When flakes and madmen are put in charge of the currency, the only ‘normalcy’ one can expect is a Walpurgisnacht-style drunken revel, a la Weimar, as the fires of inflation roar and crackle in the darkening night.

Marty Zweig lives!

@machinehead: you left out the PBOC. It has expanded the balance sheets of all it’s subsidiary banks by an even greater factor than the Fed, ECB and BOE by ordering them to lend, lend, lend, and will have little choice but to take all those loans onto it’s balance sheet as it becomes more apparent that the loans are mostly crap.

BTW, didn’t know that New Yorkers used the term binky. Thought it was a regional thing.

This market needs ZIRP and QE to maintain current levels.

ZIRP and QE are only justified by depression economic conditions which are normally not particularly good for income, assets, and corporate profits.

The instant the Fed takes its foot off the QE accelerator, there will be a 20% “hissy fit” as you so eloquently described.

If economic conditions start to get back to normal and the Fed has to then back away from ZIRP and go to at least inflation-neutral Fed Funds rate, the market will probably tank 50%.

Meanwhile, backing away from ZIRP and QE will drive up government borrowing costs which will explode deficits and force government spending cut-backs. It probably won’t impact private and corporate borrowing as much except for mortgage rates.

Bernanke hasn’t painted himself into a corner. He has painted himself back to the edge of a cliff.

“The Fed has been %#$$y-whipped by a bunch of tantrum throwing 28 year old traders. In order to tighten monetary policies to some semblance of normalcy is going to take a number of things going just right.”

I think thats what was desired at the time, and the correct personnel were chosen for the job. When its time to reverse the relationship, new management will be brought in. I’d expect a short, bloody reign by the closest thing they can find to an end-of-career self-styled outsider.

“With the Fed's tripled balance sheet now de facto permanent, "?tightening' in the conventional sense of raising the Fed Funds rate will do little to prevent the banking system's vast excess reserves from being monetized.”

Reserves being primarily in bonds, which will be put back to dealers, doesn’t seem like monetization.

[...] Barry: "Fed has been p-whipped by a bunch of tantrum throwing 28 year old traders."  (TBP) [...]

A big question is whether Bernanke has the power/balls for more QE, or whether politics or fear for his own safety makes it harder and harder to do.

The seniors being hurt by ZIRP will at some point find their political voice.

As to the safety aspect, I am in no way advocating assassination, but BB is the highest profile symbol of all that is wrong with the financial system and it is not beyond belief that someone who has lost everything in the housing bubble or market manipulations could go postal like the day trader in Atlanta during the Tech Bubble. As shown by the Tucson shootings, it is very easy for unstable people to acquire Glocks.

A year or two ago, Einhorn (Greenlight) was going around giving a talk and part of it was how he came to realize stabilizing the market has become one of the Fed’s unnamed mandate. The story goes something like this: European market totally tanked for no apparently reason, Fed called an emergency meeting and announced a .5 point rate cut before market open. A few months later, it turned out the tanking of the European market was caused by a trader in France making unauthorized trades. Einhorn said he realized then that the market tanking (without any macro economic trigger) alone was enough to push the fed to open the spigot. Bill Freckenstein has been right with money printing all along, for years, he’s been steadfast with all governments will ease/print, and people will argue, but he’s been right in every single case (e.g. Q1 last year, when things look wonderful, as it is now, talking head were saying no more QE, but Bill was sure there will be more to come, same in the EU, Bill said in the end, the will ease/print, they may call it something else, turns out they call it LTRO), now it’s China, “don’t worry, they will ease”. Bill closed his short only fund a few years back, and has been warning people against shorting after bursting of the credit bubble, his view was things are awful, but there will be unprecedented amount of printing that until that runs its course, short, in general, will not work, and he’s been dead on..

[...] hitting 6-week low – AP Gold climbs as dollar index plumbs one-month low – Reuters Window Dressing or Something More? – The Big Picture Treasuries Are Poised for Worst Three Months Since 2010 – Bloomberg [...]

As with most vehicles, it is not a good idea to oversteer.

“A tale of two bubbles”.

Mme LaFarge is knitting.

“A tale of two bubbles”.

Mme LaFarge is knitting.

Lets follow the money. The banksters offload their worst mortgages onto F&F and apy some minor settlements for defrauding them. F&F are stuck with zillions of underwater mortgages so Turbo Timmy proposes putting most of those losses directly on the backs of US taxpayers. Who absorbs the rest of the proposed mortgage writedowns? F&F are already brankrupt in effect if not in name. So the US absorbs 63% of the writedowns directly and the remainder indirectly? DeMarco is “acting” head, he won’t be acting for long if he doesn’t play ball according to Timmy’s rules.

http://www.bloomberg.com/news/2012-03-29/geithner-s-math-puzzle-beyond-numbers-for-demarco-mortgages.html

I’m unconvinced there is any emphasis on the S&P 500 in the FED.

Their domain is credit creation to non financial institutions and the government (what we percieve and use as “money”). Driving down long term borrowing costs encourages borrowing and credit creation, which is what the FED desires to counteract the credit crunch and credit destruction raging since the bubble popped in 2008.

That the S&P 500 rises with downward manipulated long term bond yields is a side effect for the FED. Inspiring confidence in the punters, but ultimately as irrelevant to the Baron in the castle as the clamour of the little guys tossing coppers outside.

Credit creation and fending off a deflationary spiral in asset prices, that could destroy bank balance sheets is what the FED is having its eyes on. Look at what’s financed and what credit is created against (or was created against) to see where the Central Bankers eye rests.