The Magic Number Is Revealed: It Costs Central Banks $200 Billion Per Quarter To Avoid A Market Crash

By Tyler Durden, ZeroHedge

We have all seen it countless times before: visual confirmation that without the Fed’s (and all other central banks’) liquidity pump, the S&P would be about 70% lower than were it is now.

Most recently, this was shown last Friday in “Another Reminder How Addicted Markets Still Are To Liquidity” in which Deutsche bank’s Jim Reid said:

The recovery from the lows after Bullard spoke yesterday is another reminder how addicted markets still are to liquidity. Indeed in today’s pdf we reprint and update a table from our 2014 Outlook showing the various phases of the Fed’s balance sheet expansion and pausing over the last 5-6 years and its impact on equities and credit. We have found that the relationship broadly works best with markets pricing in the Fed balance sheet move just under 3 months in advance. We’ve also included our oft-used chart of the Fed balance sheet vs the S&P 500 to help demonstrate this. So end July / early August 2014 was always the time that this relationship suggested markets should enter a new more difficult phase. So we still think central bankers hold the key to markets going forward and there seems to be a hint of change in the Fed.
db%20fed%20bs%201_0
Another view was shown over the weekend, in “The Chart That Explains Why Fed’s Bullard Wants To Restart The QE Flow” which shows that when the Fed’s excess reserve firehose is turned on Max, stocks surge; when it isn’t – as has been the case recently – they tumble.
20141018_taperingistightening_0

So now that “best Keynesian practices” are out of the window, and everyone has once again turned Austrian, and only the “flow of money” (either inside or outside) matters, the question is how much do central banks need to inject to keep the stock market from crashing, let alone continuing to levitate. Luckily, Citi’s Matt King has just done the math, and the answer is…

Here is his answer:

We think the markets’ weakness owes more to an almost belated reaction to a temporary lull in central bank stimulus than it does to any reduction in the effect of that stimulus in propping up asset prices. Figure 5 shows the rolling 3m combined liquidity injection by the Fed, the ECB, the BoE and the BoJ, plotted against the rolling 3m change in spreads. While the relationship is not perfect – liquidity flows across asset classes and across borders, and there are announcement and confidence effects in addition to the straightforward impact on net supply – it is this, not fundamentals, which we would argue has been the major driver of markets for the past few years (Figure 6 shows the same series plotted against global equities).
citi%20liquidity%20injection%201_0

In case anyone missed it, and in case there is still any debate about this issue which we first explicitly stated nearly 6 years ago and were widely mocked by the all too serious intelligentsia, here is the key sentence again:

 “it’s the liquidity injections, not fundamentals, which we would argue has been the major driver of markets for the past few years.

And with that piece of New Normal trivia behind us, we continue:

For over a year now, central banks have quietly being reducing their support. As Figure 7 shows, much of this is down to the Fed, but the contraction in the ECB’s balance sheet has also been significant. Seen from this perspective, a negative reaction in markets was long overdue: very roughly, the charts suggest that zero stimulus would be consistent with 50bp widening in investment grade, or a little over a ten percent quarterly drop in equities.
Put differently, it takes around $200bn per quarter just to keep markets from selling off.
citi%20liquidity%20injection%202_0
If anyone ever needed any confirmation of what we said in June 2012, that “The Stock Is Dead, Long-Live The Flow: Perpetual QE Has Arrived“, now you have it, and only qualified but quantified. Because to translate what Matt King – Citi’s most respected strategist and the only person on Wall Street to warn about the Lehman collapse and its consequences before it happened, just said – if and when the global central bank liquidity tracker ever drops to $200 billion per quarter or less, the market will crash.

By The Numbers: 20 Facts About The Collapse Of Europe That Everyone Should Know

20130110-123920.jpg

By Michael, The Economic Collapse

The economic implosion of Europe is accelerating. Even while the mainstream media continues to proclaim that the financial crisis in Europe has been “averted”, the economic statistics that are coming out of Europe just continue to get worse. Manufacturing activity in Europe has been contracting month after month, the unemployment rate in the eurozone has hit yet another brand new record high, and the official unemployment rates in both Greece and Spain are now much higher than the peak unemployment rate in the United States during the Great Depression of the 1930s. The economic situation in Europe is far worse than it was a year ago, and it is going to continue to get worse as austerity continues to take a huge toll on the economies of the eurozone. It would be hard to understate how bad things have gotten – particularly in southern Europe. The truth is that most of southern Europe is experiencing a full-blown economic depression right now. Sadly, most Americans are paying very little attention to what is going on across the Atlantic. But they should be watching, because this is what happens when nations accumulate too much debt.

The United States has the biggest debt burden of all, and eventually what is happening over in Spain, France, Italy, Portugal and Greece is going to happen over here as well.

The following are 20 facts about the collapse of Europe that everyone should know…

#1 10 Months: Manufacturing activity in both France and Germany has contracted for 10 months in a row.

#2 11.8 Percent: The unemployment rate in the eurozone has now risen to 11.8 percent – a brand new all-time high.

Continue reading

Spain Will Exit The Eurozone First—This Year

By Gonzalo Lira

20120409-212958.jpg

In the LiraSPG Scenario “When The Euro Breaks”, I discussed what would happen to the euro and the eurozone when those countries—unable to continue under their massive debt burdens—began exiting the European monetary union.

One of the assumptions I made was that one of the smaller nations of the eurozone would leave the monetary union first, thereby encouraging one of the bigger nations to follow their example and leave as well. I postulated that the small country would likely be Greece, and that the large country would probably be Spain.

From this exodus, I analyzed what would happen to the euro vis-à-vis gold and the rest of the world’s currencies—namely, that the euro would suffer a staggered loss of value against commodities and other currencies: An initial drop-and-recovery when the smaller nation exited the eurozone, followed by a sustained drop when the big nation exited the monetary union.

The Scenario was written and published on the LiraSPG site in May 2011.

Since then, I have changed my mind: I no longer think that a small country will exit the eurozone first, followed by one of the bigger countries.

I now think that Spain will exit the eurozone first—precipitously and without warning—and that the impact on the euro will be much more sudden and dramatic than I had earlier thought.

In this SPG Supplement, I will explain my thinking. First I will discuss the general European situation; then the Greek debacle, and how the European leadership has lost sight of what salvaging Greece was supposed to be about; then the current Spanish situation, how it is unsustainable, and how the new Rajoy government’s only escape—politically and economically—is to default and then exit the eurozone.

Plus Ça Change, Plus C’est La Même Chose

There has nominally been major changes in the European political situation since the Global Financial Crisis of 2008—which in fact have proven to be minor: To wit, the Italian, Spanish, Irish, Portuguese and Greek governments have been replaced by the opposition, and the French government of Nicolas Sarkozy looks like it will fall in this coming May’s elections. Of the replacement governments, the Italian, Greek and Portuguese are dominated by “technocrats”—that is, austerity hawks that will genuflect to Brussels’ and Frankfurt’s desire for the debtor countries to pay every last pfennig back to the bond holders.

Excuse me, did I say “pfennig”? I meant “euro cent”.

I can prove quite easily that the political “change” has been totally cosmetic because the economic prescriptions remain the same: On the one hand, austerity for the smaller countries (Greece, Portugal, Ireland), coupled with surreptitious bank bailouts by the European Central Bank (ECB) via Long Term Refinancing Operations (LTRO).

Keep on doing’ the same thing, you’re gonna get the same results: Since May 2011, Europe-wide unemployment has increased, to 10.8% across the eurozone; sovereign debt levels have increased both nominally, to €14.8 trillion ($18.35 trillion), and as a percentage of gross domestic product, to 113% of GDP; growth has slowed to a crawl in the big economies of the zone, with France projected to grow 0.7% in 2012 and Germany projected to grow 0.8%; while the economies of the smaller countries have been and will continue to shrink, with Italy projected to be flat in 2012 and Spain to shrink by 1.5% to 2.5%.

Why Greece Used To Matter

Everyone has been paying attention to Greece for so long—and all the European bureacrats have been trying to save Greece from sovereign insolvency for so long—that everyone has forgotten why Greece mattered.

But as I said in the Scenario, saving Greece does not matter in and of itself: After all, it’s tiny—less than 2% of the total GDP of the eurozone.

Saving Greece mattered—past tense—as a sign to the rest of the eurozone and to the financial markets that the European bureacrats—namely the ECB, the European Commission (EC) and the International Monetary Fund (IMF)—were willing and able to guarantee the sovereign debt of all the members of the Eurozone.

The European monetary union never explicitly stated that all the eurozone nations would back up the sovereign debt of any of the member nations. This collective guarantee was tacitly assumed—but never explicitly agreed upon.

When Greece got into trouble with its sovereign debt, the idea was to salvage it not because Greece was a large piece of the eurozone, but as a sign that the eurocrats would honor the tacit promise.

In other words, saving Greece was never an end in itself—it was just a symbol.

Saving Greece was also supposed to scare away the bond vigilantes and anyone else who might think that the sovereign debt of any of the eurozone members was vulnerable to financial rape and pillage.

We saw how that all worked out: The failure of the ECB-EC-IMF Troika to “fix” Greece between 2010 and 2012 wasn’t just a political embarrassment. It undermined the markets’ belief that the eurocrats knew what they’re doing. They quite obviously don’t.

It doesn’t matter that—finally, at the last second—the Troika sort-of saved Greece: The impression remains that they’re the Gang That Can’t Salvage Straight. And the impression is accurate: If they did know what they were doing, they would have solved Greece back in May of 2010—completely and definitively—and we wouldn’t still be talking about Greece.

But we are. Which means that now, we’re also talking about other, bigger countries—
__like Spain.

Spain’s in Trouble

Spain’s GDP in 2011 was €1.05 trillion (US$1.33 trillion). In 2012, as previously mentioned, the general consensus is that it will shrink by between 1.5% and perhaps as much as 2.5%; a figure of –1.75% seems reasonable.

20120409-213729.jpg

Protests in Spain.

Unemployment in Spain is 24%. Youth unemployment (under 24 years old) is a shocking 53%. Both figures will rise during 2012 as the economy continues to contract. An unemployment of 30% by year’s end is within the realm of the possible. Hell, within the realm of the likely, even.

Total government debt is projected to be 79.8% of GDP in 2012—that is, €800 billion. Much more troublingly, the debt last year was “only” €680 billion—but that was still 21% higher than in 2010. So at this rate—assuming the status quo remains unchanged, and without factoring in the contraction of GDP—in 2013 the projected Spanish government debt could well rise to 90% of GDP.

(Throughout this Supplement, when discussing “government debt”, I am referring both to Madrid’s and to the autonomous regions’ consolidated debt situation.)

Private debt is an additional 75% of GDP—and let’s not even start talking about the delinquency rates—while the banks have a capital shortfall estimated at a mere €78 billion.

On top of all this—as if “all this” weren’t bad enough—is the issue of the outstanding Spanish debt—

—the nub of the problem.

Spain has redemptions totalling €149 billion in 2012. It will issue a total of €186, with an eye to extend the maturity of the outstanding debt. But even with these concerted efforts, in 2012, the maturity of Spanish debt will in fact shrink from 6.4 years to 6.2 years. Add to that, in 2011, interest payments totaled €28.8 billion—up from €22.1 billion the year before. Why? Because of rising bond yields: Spain is considered riskier—due to the Troika’s inability to finally “fix” Greece and Spain’s own obvious domestic financial issues—and thus Spain has to pay more to borrow money.

In other words, Spain has fallen into the classic “borrowed-short-but-my-income-is-long-and-on-top-of-that-my-loans-are-getting-more-expensive” trap.

Last week, April 4, Spain’s Treasury held a bond auction—and fuck-all was it nasty: Of the expected €2.5 to €3.6 billion, Spain barely managed to get bids for €2.6 billion—and the yield on the 10-year spiked to 5.85%, before settling at a still-way-high 5.75%.

Worldwide markets all got down on this auction—

—but here’s the thing: Spain has a lot more of these auctions coming up—on average one every two weeks.

They have to raise €186 billion in 2012.

And of the first of these, they had a quasi-failed auction.

Continue reading

Drop in Global Trade Signals Collapse Is Near

By Brandon Smith

Much has been said about the Baltic Dry Index over the course of the last four years, especially in light of the credit crisis and the effects it has had on the frequency of global shipping. Importing and exporting has never been quite the same since 2008, and this change is made most obvious through one of the few statistical measures left in the world that is not subject to direct manipulation by international corporate interests; the BDI. Today, the BDI is on the verge of making headlines once again, being that is plummeting like a wingless 747 into the swampy mire of what I believe will soon be historical lows.

The problem with the BDI is that it is little understood and often dismissed by less thoughtful economic analysts as a “volatile index” that is too “sensitive” to be used as a realistic indicator of future trends. What these analysts consistently seem to ignore is that regardless of their narrow opinion, the BDI has been proven to lead economic derision in the market movements of the past. That is to say, the BDI has been volatile exactly BECAUSE markets have been volatile and unstable, and is a far more accurate thermometer than those that most mainstream economists currently rely on. If only they would look back at the numbers further than one year ago, they might see their own folly more clearly.

Introduced in 1985, the Baltic Dry Index first and foremost is a measure of the global shipping rates of dry bulk goods, mostly consisting of vital raw materials used in the creation of other products. However, it is also a measure of demand for said materials in comparison to previous months and years. This is where we get into the predictive nature of the BDI…

In late 1986, for instance, the BDI fell to its lowest level on record, then, began a slow crawl towards moderate recovery, just before the Black Monday crash of 1987.

Coincidence? Not a chance. From 2001 to 2002, a similar sharp collapse in the BDI preceded a progressive drop in the Dow of around 4000 points, ending in a highly suspect (Fed engineered) illegitimate recovery. In 2008, the index fell to near record lows once again just before the derivatives and credit crisis hit stocks full force. To imply that the BDI is not a useful measure of future economic trends seems like an astonishingly ignorant proposition when one examines its very predictable behavior just before major financial downturns.

This is not to suggest that the BDI can be used as a way to play the stock market from day to day, or often even month to month. MSM analysts rarely look further than the next quarter when considering any financial issue, and that is why they don’t understand the BDI. If an index cannot be used by daytraders to make a quick buck in a short afternoon, then why bother with it at all, right? The BDI is not an accurate measure of the daily market gamble. It is, though, an accurate measure of where markets are headed in the long run and under extreme circumstances.

Over the course of the past month, the BDI has fallen around 65% from above 1600 to 726. Mainstream economists argue that the BDI’s fall in 2008 was a much higher percentage, and thus, a 65% drop is nothing to worry about. They fail to mention that shipping rates never recovered from the 2008 collapse, and have hovered in a sickly manner near lows reached during the initial credit bubble burst. By their logic, if the BDI was at 2, and fell to 1, this 50% drop should be shrugged off as inconsequential because it is not a substantial percentage of decline when compared to that which occurred in 2008, even though the index is standing at rock bottom. Yes, the useful idiots strike again…

Looking at the rate and the speed of decline this past month, it’s hard to argue that the current 65% drop is meaningless:

Continue reading

The Financial Collapse in Argentina planned by Globalists. Now It’s Europe’s Turn

Argentina tango lessons: Europe’s turn for financial danse macabre

By Adrian Salbuchi for RT

20111219-220533.jpg

Exactly ten years ago Argentina suffered a full-scale financial and governmental collapse. That was the end-result of over a decade of doing exactly what the IMF, international bankers, rating agencies and global “experts” told us to do.

Then President Fernando de la Rúa kept applying all IMF recipes to the very last minute, making us swallow their poisonous “remedies”.

It all began getting really ugly in early 2001 when De la Rúa could no longer service Argentina’s “sovereign debt” even after driving the country into full “deficit zero” mode, slashing public spending, jobs, health, education and key public services.

By March 2001, he had brought back Domingo Cavallo as finance minister, a post Cavallo had already held for six years in the nineties under then-President Carlos Menem, imposing outrageous IMF deregulation and privatization policies that weakened the state and led straight to the 2001 collapse.

Well, it wasn’t really De la Rúa who brought back Cavallo but rather David Rockefeller (JPMorgan Chase) and William Rhodes (CitiCorp), who personally came to Buenos Aires to tell/order President De la Rúa to name Cavallo… or else!

So, by June 2001, Cavallo – a Trilateral Commission member and Soros-Rockefeller-Rhodes protégé – tried to allay a default by engineering a new sovereign debt bond mega-swap which increased public debt by $51 billion, but did not avert total collapse that December.

What then? De la Rúa and Cavallo protected the bankers, avoiding a massive run on all banks by freezing all bank deposits. “Corralito” they called it – “the crib” – whereby account holders could only withdraw 250 pesos per week (at the time, equivalent to $250; after the 2002 devaluation, equal to $75).

Continue reading