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.


Another Fed Stimulus Program Ending Soon ?
click for larger chart


10 Indicators to Watch for Another Spring Slide
Jeffrey Kleintop
LPL Financial March 26, 2012

Category: Bailouts, Federal Reserve, Markets, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

29 Responses to “Window Dressing or Something More?”

  1. Petey Wheatstraw says:


  2. machinehead says:

    ‘ 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.

  3. Patrick Neid says:

    Marty Zweig lives!

  4. Mike in Nola says:

    @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.

  5. rd says:

    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.

  6. NoKidding says:

    “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.

  7. flu-cured says:

    “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.

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

  9. Mike in Nola says:

    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.

  10. ssc says:

    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..

  11. [...] 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 [...]

  12. theexpertisin says:

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

  13. ilsm says:

    “A tale of two bubbles”.

    Mme LaFarge is knitting.

  14. ilsm says:

    “A tale of two bubbles”.

    Mme LaFarge is knitting.

  15. rktbrkr says:

    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.

  16. Finster says:

    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.

  17. dougc says:

    So what is the fed’s endgame, foreigners and individuals are losing interest in buying government debt. If the fed doesn’t, interest rates would have to significantly rise. We are running deficits of almost 9% of GDP and the economy is growing at a nominal rate of about 2.5 percent and appears to be slowing. Tax receipts are down yoy so deficits must be financed by borrowing. QE4……..20 are the only delaying tactic available.

  18. Concerned Neighbour says:

    What percentage of government debt must the Fed own before the masses are convinced this is a banana republic? I’m already convinced…

    BTW, another negative print on real income in February released this morning. After all losses were systematically wiped out yesterday afternoon, I wonder how much the market will rally on yet another sign that a bolder, bigger, and more blatant bubble is being blown.

  19. Moss says:

    We now have a permanent moral hazard multiplier. The Central Banks balance sheets are now the defacto put. The Banksters, and the other asset managers are calling the shots. The tail is wagging the dog. I am convinced that the Fed has the ‘Wealth Effect’ high on it’s list of to-do’s.

    If the Fed does not embark on another program for the 1%, masked as a benefit for the real economy, the rules of the game will have changed. The Fed’s balance sheet is totally fungible even if the assets on it are dubious.

  20. derekce says:

    BR is so right on this. I know I’ve been conditioned like a Pavlov dog to buy when the Fed starts leaking the next QE plan. I’m guessing Bernanke is trapped when inflation moves up with no growth. Stagflation paints the Fed in a real corner.

  21. b_thunder says:

    “The Fed and Wall Street have evolved into a dysfunctional relationship” – REALLY?

    This chart says it all:

    The Fed created the 2009-2012 (and counting) asset bubble, in which 93% of gains went to top 1%. But if you ask that top 1%, the vast majority won’t see anything “dysfunctional” in the distribution of wealth. For the 28 year old traders 6- and 7-figure bonuses is the norm.

    “The Fed has been %#$$y-whipped by a bunch of tantrum throwing 28 year old traders” – truth, but only partially true. The Fed and Geithner were %$#&y-whipped by Jamie Dimons, Llloyd Blankfeins, and Steve Schwartzmans. The 28 year olds only do as they’re told by the execs who have the Red Line to the Fed.

  22. econimonium says:

    I actually think that the Federal Reserve gives not one whit about the market and is driven by employment/inflation numbers as it’s supposed to. The market is simply doing what it’s supposed to do…look for yield. If I graph the Federal Reserve’s programs against the inflation data, you find correspondence there also and, I believe that’s the only thing now that tells you where they’re headed.

    I’m naturally suspicious of any attempt to rationalize what the market is doing given any policy at all. I prefer to do what you suggested and stick my finger into the wind based on a few well honed trends over the years. Because there’s always turds and there’s always gems in any market, regardless of what is happening. Let the 28-year olds think they know, trade that way, and then blow up when they hit 30 as I take the other side of their trades when it’s time ;) They’ll be replaced, of course, by another group that thinks they have it figured out. Lather, rinse, repeat.

  23. Pocket QQ says:

    Well, First off, It is an election year.

    Second, Distribution is a psychological process. It takes time to play out.

    My proprietary algo’s show we entered a distributional phase approximately 2 weeks ago. That doesn’t mean we can’t push higher for awhile, just that the psychological worm is beginning to turn.


  24. lalaland says:

    Maybe this: or this:

    is why the Fed has done it’s deeds? If anything, I think the way the market reacts causes the Fed to hesitate (oil futures, anyone); I bet they wished there was a way to decouple the market from QE.

  25. Greg0658 says:

    “I actually think that the Federal Reserve” wants the music to play on so they can have a job, their health care, their pensions, and a reason To Be tomorrow morning, as they prepare for the workcation next week. What every red blooded American wants.

    now excuse me – my mom needs a ride to buy a half billion dollar lottery ticket or 5 .. Ugh – same odds, long lines and if you win – a PILE of headaches (with kind of a $#)

  26. Cooter says:

    You Americans are so self centred! Only one comment referencing the fact that GLOBAL CENTRAL BANKS are tag teaming the markets. QE1 QE2 LTRO Yentervention PBOC BoC Operation Twist they have all printed and Bernanke is only one of the players.

    Ritholtz, you are great, but I would love to read a global version of TBP that keeps the American role in capital markets to a global perspective. Any recommendations?

  27. DrungoHazewood says:

    “I actually think that the Federal Reserve gives not one whit about the market and is driven by employment/inflation numbers as it’s supposed to.”

    Ah to be young and naive. Bernanke has said he wants to juice the wealth effect. And what about March 2, 5 &6 when things began to turn seriously chaotic? Fridays and Mondays are rarely down and when they are, not by very much. Well we got a WSJ QE leak of course. Just a coinikidink. I’m with Josh Brown who thought the FED was sending a VERY clear message.

  28. rd says:


    Unfortunately, I think only ZeroHedge has a truly global perspective, although somewhat manic-depressive.

    Naked Capitalism also tries but they don’t really look at numbers and charts, more the overall structure and legal/ethical issues.

  29. Greg0658 says:

    I got thinking on this post – if a smaller # of # hits pays out and at what scheme .. this site came up with a presentation I thought you’all might like …
    the least # of # hits = “Match 0 out of 5 White numbers and match the Mega number (Payout = $2)”

    oh and no word from mom – & no line to buy where we went – had a fillin slip for us to use