This is when Bullard Usually Says the Fed Should Restart QE

“Capitulation,” that’s what I heard a lot today. “Stocks have hit bottom,” was next.

Last time there was a real case of “capitulation” was in March 2009 when the S&P 500 had been cut nearly in half. Today, the market is just a tad shy of it. But it was a chaotic day of alternating panic selling, forced selling, and panic dip-buying. And the dip buyers got their fingers burned.

The S&P 500 plunged 5.3% at the open, and soon the dip buyers where all over it. By early afternoon it looked like they might push it into the green when the bottom fell out again. It closed down 3.94% for the day, 8.0% for the year, and 11.5% off its peak in May. So it’s finally and officially in a “correction” – defined as down 10% or more – for the first time since 2011, at least for a day.

The Dow had one heck of a ride from being down 1,000 points at the open to shooting up 500 points in minutes, working back toward the green before losing its grip. It ended the day down 3.6%, at 15,871. November 2013 was the first time it had hit that level. So folks are rediscovering the nerve-rattling possibility of losing money in the stock market.

The Nasdaq, after a vertigo-inducing 400-point plunge, shot back up into the green, then plunged again, and ended the day down 3.8% or 180 points.

The Five-Day, 10% Rout of the S&P 500

This chart by Doug Short of Advisor Perspectives shows the increasing intensity of the turmoil of the last five trading days during which the S&P 500 plunged 10%. Volume soared and ended today at 114% above its 50-day moving average. Maybe that’s why some folks called it “capitulaltion”:


Retail investors suddenly woke up to this scenario.

After years of making money the easy way, they’d been lulled into a false sense of security as every minor downtick was immediately followed by a rally. Already rattled from last week’s selloff, they tried to log on to their brokerage accounts to do some panic selling of their own, and they did it in such numbers that some had trouble logging on and executing trades, the Wall Street Journal reported, naming two online brokers specifically, Scottrade and TD Ameritrade.

A spokeswoman for Scottrade said that trading volume had spiked by 230% in the morning. A spokeswoman for TD Ameritrade talked of “historic activity, “significant increase in normal trading volumes,” and slowness from many market participants, including other brokers and market makers.

Many stocks got totally hammered: 1,322 stocks on the NYSE and 765 stocks on the Nasdaq hit new 52 week intraday lows, 2,087 stocks in total, including Apple, which had plunged 10% before CEO Tim Cook ingeniously sent an email to Jim Cramer, telling him that everything was hunky-dory in China, where Apple gets a big part of its business. And Apple shares jumped.

It was that kind of day. Chaos, yes. Murky dealings, yes. Bloodied dip buyers, yes. Capitulation, not so much. However, we’re expecting a rally topped off by a majestic short squeeze in the near future.

After years of racking up easy profits, when everyone believed that everyone believed that central banks could pump up markets forever, and thus they could, it suddenly turns out that markets can’t be pumped up forever. China has set the tone. And now contagion is spreading around the world.

$1.8 Trillion in US Household Wealth Evaporated

No telling how many trillions of dollars the global stock market rout has sent back from where they’d come: the ether. But Steve Goldstein, D.C. bureau chief of MarketWatch, tried to do “some back-of-the-envelope math” to figure out how many trillions evaporated in the US, given that households and nonprofits held $24.1 trillion in stocks as of March 31, according to Federal Reserve data. And he found that, through mid-morning, “a cool $1.8 trillion” in US household wealth had evaporated, most of over the past five trading days.

“This will probably be the worst quarter for stock-market destruction since the third quarter of 2011, when $2.8 trillion was wiped away,” he wrote. That was during the last correction that ended when the Fed buckled under Wall Street’s pressure as the S&P 500 was down 19%, and stepped back into the fray and pumped up the markets with more QE.

Back then, the turnaround point wasn’t capitulation. It was the Fed.

So what’s missing now?

This is usually the point in a selloff when you’d expect St. Louis Fed President James Bullard to come out of the woodwork, get on Bloomberg TV, and muse about inflation and jobs and emerging markets or whatever. “These are important consideration for a central bank,” he would normally say at this point in the stock market rout, adding, “And for that reason I think that a logical policy response at this juncture may be to restart QE.”

Bullard pulled this sort of feat off successfully in October 2014, using similar words about “delaying” the end of QE, after the S&P 500 had dropped 7.4%, and folks were fretting at the time about a free-fall. That day, Bullard became a one-man stock-market manipulation miracle. Markets instantly turned around.

And now, Wall Street is clamoring for a repeat performance. But Bullard must have caught some heat from the powers that be because he – and other Fed heads – have remained stubbornly silent about restarting QE, though that’s what everyone wanted to hear, but they talked about everything else that no one wanted to hear.

Energy stocks have gotten eviscerated. Natural gas drillers have been hit the hardest. One is already in bankruptcy. A much larger one is finalizing a prepackaged bankruptcy filing. And now the bonds of Chesapeake, the second largest natural gas driller in the US, after Exxon, are plunging. Read… Whose Capital Is Getting Destroyed in US Natural Gas? 

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  18 comments for “This is when Bullard Usually Says the Fed Should Restart QE

  1. CrazyCooter says:

    Anyone who has been paying attention for any length of time understands the Fed is screwed and they have no policy choices left … that aren’t … desperate. They can’t cut rates, they can’t raise rates, their balance sheet is bloated, they have eaten huge portions of some segments of bond markets, and so on.

    I am of the strong opinion that capital controls are next. Call it CC1. Because it won’t work and will be followed up with CC2, CC3, and so on until such a time as … well, it won’t be pretty so let’s not go there.



    • Nick says:

      That would be nuts — if there is one lesson to take away from China, it’s that corrective measures don’t work if they reek of desperation. My ‘capital control’ I assume you mean laws against withdrawing money from banks or from transferring it out of the country; for the US to even consider that would cause an economic crisis several orders of magnitude greater than what is happening (which is not a crisis).

      • CrazyCooter says:

        Well, walk down the path of “what will the Fed do” and make a list. Anything you can think of … and none of it will work.

        If they QE, what are they going to buy? All of it? They already own huge portions of certain issues. Sure, they can buy, and maybe they will, but it won’t fix anything, the problem will get worse … and everyone kind of has this figured out now … and they risk losing their credibility (to those who still think they have any).

        The Fed has to stand by and watch this crash, and once folks realizing they are just “standing by”, it will be a bloody panic. Pensions are going to get destroyed … and that is the darling of very active voter blocks.

        I am kind of stuck in my opinion (for the moment) because cashless has been thrown around a lot lately … that is a capital control in my book. Bail ins have happened twice in Europe, so there is a building knowledge of how that process works. There is no way the FDIC can back stop all the bad banks out there, so folks will at some point run on the banks and try to get cash … just like happens everywhere else.

        Maybe it doesn’t happen this year or next, but I am looking at “exit strategies” and I just don’t see anything appealing at all.

        If I am missing something, please share!



    • Mark says:

      As I said yesterday and many times before markets will go in brief correction and UP. UP way UP. You read crap you make crap.
      Happy investing.

      • Mark says:

        They are making money on the spread by briefly crashing it and hiking it back up again fake imposter Mark. They are doing this because this is the only way they have left to make money, everything else is dead, growth is dead, GDP is dead, manufacturing is dead, retail is dear.. etc.. etc.. etc.. Eventually there will come a time when it really will crash and no one not even YOU will see it coming and I hope you lose your pants when it happens.
        On that note I’m going by a different name as not to be associated with you.

      • Wolf Richter says:

        That sucker rally sure didn’t last long, though. DOW after being up over 300 points ends day down 200 points.

        True, there are “brief corrections” but there are other things too, such as downdrafts that can last years or decades. Don’t count on them not happening again.

    • illumined says:

      Actually Cooter they can cut interest rates again. Believe it or not it’s possible for interest rates to go negative as they have already done so in Denmark and Sweden.

  2. Vespa P200E says:

    QE to oblivion!

    Each round of QE has produced less oomph and last QE III (?) lasted too long. Sadly only monetary tool Fed has is QE and another round may result in more harm when the market sees that it has little to no impact on literally last bullet on silly Fed playbook.

    Helicopter Benny indeed left a most opportunistic time knowing sxit was going to hit the fan. Well Janet – you wanted the job lady and you will be know as bumbling incompetent Fed Chairwoman that brought the market to its knees. Be careful what you wish for!

    • CrazyCooter says:

      Wolf, I would love to see a write up on what percentages the Fed owns of what issues and kind of walk us through what the Fed could buy if they decided to QE again. I know some of their stuff is maturing off their balance sheet and it isn’t clear they are rolling Treasuries and stuff, but I recall ZH covering they owned so much of a segment (10Y?) that it would be problematic if they bought more due to the lack of high quality collateral for banks (another issue folks might not appreciate about QE making a mess of).

      I don’t think they can QE again without throwing gas on the fire so to speak … but perhaps I am wrong.



  3. Michael Gorback says:

    Bullard didn’t say anything because it was Ray Dalio’s turn to call for QE4. “We Believe That the Next Big Fed Move Will Be to Ease (Via QE) Rather Than to Tighten.”

    Or Suze Orman, who tweeted “Fed Chair Yellen, help us out.”

  4. Julian the Apostate says:

    Nothing will happen until Janet shakes off her no doubt very bad hangover. But she will awaken to the cat stomping around the bedroom and in a fog will show up late for ‘work’ and do something. Given the track record of the Fed it will be the wrong thing and behind the curve. Let’s see, Crash and burn now, or hyperinflation later? Hmmm…

  5. Julian the Apostate says:

    “Hang on little lady. Hell is coming for breakfast.” -Lone Wadi in The Outlaw Josey Wales

  6. unit472 says:

    Friday on CNBC I heard a guest just after the close of trading opine “if people can’t make money on the stock markets where can they make money”. He had a point. What would become of people like him if the Fed’s casino became as empty as an Atlantic City one.

    Not to worry, even before the PBOC was told by the Politburo that what China needed was even more credit expansion, the dogs of Wall St were returning to their vomit determined to reflate their punctured balloons. Where else could they go? What else can they do but slop up the undigested remains of their previous meals.

    • What says:

      Real estate.

      If I was a rich person from China, seeing the markets drop like that would make putting my money in something safer a big priority. One sure investment, US real estate.

      I wonder home much higher home prices in the Bay Area will rise.

  7. Crazy'olTom says:

    Have you been able to see the Fed’s Balance sheet totals? I’ve lost the link.
    If it’s staying close to 4.5 Trillion, they are rolling over most of those CDS full of Garbage?

    Charles H.S. suggests that the China-US$ carry trade is dying, just like the ’98-’99 Asian Currency crisis.
    Do you know if the Fed intervened back then? I recall Ben stayed away.

    The Fed stopped QE in Oct 2014 and the market has survived.

    Why would Yellen step in where Bernanke feared to tread?

    • Wolf Richter says:

      The Fed has been rolling over its maturing bonds. Only some are Treasuries. It also holds a lot of Agency debt and other stuff. Here is the link:

      Note that its holdings are valued at cost, including its gold holdings which it obtained I don’t remember when …. but a long, long time ago. It’s worth a heck of a lot more today than the amount on its balance sheet.

      To your last question: My gut feeling is that Yellen and maybe most Fed heads really want to stay away from QE. They can see what it has done, even if they don’t admit it publicly. Some Fed researchers are now admitting it in various papers they produce. So that’s a sign. I think QE is over unless there is a huge crash.

  8. ERG says:

    Maybe – just maybe – those who has been boasting about the ‘strength’ of the American economy should be able to see that a 2 percent GDP (B*lls**t!) with the Dow at 17,500 is one thing and a 2 percent GDP (still B*lls**t!) with the Dow at 9,000 is another.

Comments are closed.