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.
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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.
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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).
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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.
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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.
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What To Expect During The Next Stage Of Collapse

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By Brandon Smith, Zero Hedge

For years now at Alt-Market (and Neithercorp.us) I have carefully outlined the most likely path of collapse to take place within the U.S., and a vital part of that analysis included economic destabilization caused by a loss of the dollar’s world reserve status and petro-status. I have also always made clear that this fiscal crisis event would not occur in the midst of a political vacuum. The central banks and international financiers that created our ongoing and developing disaster are NOT going to allow the destruction of the American economy, the dollar, or global markets without a cover event designed to hide their culpability. They need something big. Something so big that the average citizen is overwhelmed with fear and confusion. A smoke and mirrors magic trick so raw and soul shattering it leaves the very population of the Earth mesmerized and helpless to understand the root of the nightmare before them. The elites need a fabricated Apocalypse.

Enter Syria

I have been warning about the Syrian trigger point for a very long time. Syria’s mutual defense pact with Iran, its strong ties to Russia, the Russian naval base off its coast, the advanced Russian weaponry in it’s arsenal, its proximity to vulnerable oil shipping lanes, all make the nation a perfect catalyst for a global catastrophe. The civil war in Syria is already spreading into neighboring countries like Iraq, Jordan, and Lebanon, and if one looks at the facts objectively, the entire war is a product of covert action on the part of the U.S. and its allies.

The U.S. trained, armed, and funded the insurgency using Al Qaeda operatives. Saudi Arabia has sent funding and arms as well. Israel has aided the rebels using air strikes within Syria’s borders (even though this means that the Israeli government is essentially helping their supposed mortal enemies). This war would NOT be taking place today without the express efforts of the West. Period.

If one takes more than a brief examination of the Syrian insurgency, they would find an organization of monsters. Wretched amoral wetwork ghouls whose crimes have been thoroughly documented, including the mass executions of unarmed captured soldiers, the torture and beheading of innocent civilians, the mutilation and cannibalism of dead bodies, and the institution of theological tyranny on a terrified populace. The U.S. created and unleashed these demons, and now, we the people are being asked by the White House to support them through force of arms.

But What’s the goal here…?

The goal, I believe, is to utterly transform the world’s political, economic, and social systems. The goal is to generate intense fear; fear that can be used as capital to buy, as the globalists call it, a “new world order”. Syria is the first domino in a long chain of calamities; what the Rand Corporation sometimes refers to as a “linchpin”. As I write this, the Obama Administration is moving naval and ground forces into position and clamoring in a painfully pathetic fashion to convince the American public that 90% of us are “wrong” and that a strike on Syria is, in fact, necessary. It appears that the establishment is dead set on starting this chain reaction and accelerating the global collapse. So, if a strike does occur, what can we expect to happen over the next few years? Here is a rundown…

1) Many U.S. allies will refrain from immediate participation in an attack on Syria. Obama will continue unilaterally (or with the continued support of Israel and Saudi Arabia), placing even more focus on the U.S. as the primary cause of the crisis.

2) Obama will attempt to mitigate public outcry by limiting attacks to missile strikes, but these strikes will be highly ineffective compared to previous wars in Iraq and Afghanistan.

3) A no fly zone will be established, but the U.S. navy will seek to stay out of range of high grade Russian missile technology in the hands of Syria, and this will make response time to the Syrian Air Force more difficult. Expect much higher American naval and air force casualties compared to Iraq and Afghanistan.

4) Iran will immediately launch troops and arms in support of Syria. Syria will become a bewildering combat soup of various fighting forces battling on ideological terms, rather than over pure politics and borders. Battles will spread into other countries, covertly and overtly, much like during Vietnam.

5) Israel will probably be the first nation to send official ground troops into Syria (and likely Iran), citing a lack of effectiveness of U.S. airstrikes. American troops will follow soon after.

6) Iran will shut down the Straight of Hormuz sinking multiple freighters in the narrow shipping lane and aiming ocean skimming missiles at any boats trying to clear the wreckage. Oil exports through the straight of Hormuz will stop for months, cutting 20% of the world’s oil supply overnight.

7) The Egyptian civil war, now underway but ignored by the mainstream, will explode due to increased anger over U.S. presence in Syria. The Suez Canal will become a dangerous shipping option for oil exporters. Many will opt to travel around the Horn of Africa, adding two weeks to shipping time and increasing the cost of the oil carried.

8) Saudi Arabia will see an uprising of insurgency that has been brewing under the surface for years.

9) Gasoline prices will skyrocket. I am predicting a 75%-100% increase in prices within two-three months of any strike on Syria.

10) Travel will become difficult if not impossible with high gasoline costs. What little of our economy was still thriving on vacation dollars will end. Home purchases will fall even further than before because of the extreme hike in travel expenses required for families to move.

11) Russia will threaten to limit or cut off all natural gas exports to the EU if they attempt to join with the U.S. in aggression against Syria. The EU will comply due to their dependency on Russian energy.

12) Russia will position naval forces in the Mediterranean to place pressure on the U.S. I feel the possibility of Russia initiating direct confrontation with the U.S. is limited, mainly because countries like Russia and China do not need to engage the U.S. through force of arms in order to strike a painful blow.

13) China and Russia will finally announce their decision to drop the dollar completely as the world reserve currency. A process which already began back in 2005, and which global banks have been fully aware of for years.

14) Because of China’s position as the number one exporter and importer in the world, many nations will follow suit in dumping the dollar in bilateral trade. The dollar’s value will implode. China, Russia, and the war in Syria will be blamed, and global banks including the Federal Reserve will be ignored as the true culprits.

15) The combination of high energy prices and a devaluing dollar will strike retail prices hard. Expect a doubling of prices on all goods. Look for many imported goods to begin disappearing from shelves.

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