In a presentation from the always thorough Jeff Gundlach, the slide shown below stood out.

The equity boosting effect of stimulus has grown smaller and smaller with each pass. This is what we call "the law of diminishing returns."

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As we wrote in the Dec. 13 live feed pre-open commentary (posted at 8:27 a.m. ET):

S&P futures are down slightly this morning, but the heavy action is in gold, down more than $22 per ounce (129 basis points), and silver (down 91 cents, or 270 basis points).

Why would gold and silver be down sharply after the Federal Reserve apparently fulfilled bulls' wishes for bold action and 'QE4?' Perhaps because a world in which interest rates are held at zero, even as austerity increases and the wealthy cut back spending, is a deflationary and gloomy one.

Bulls want to say, 'Hooray, the Fed is

Gold and silver are breaking down again, and Treasuries are showing signs of life.

Precious metals gapped lower on Tuesday, showing a continuation of the weakness first displayed last week.

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Long bonds, meanwhile, managed to reverse higher, increasing the odds of an upside breakout from a bullish weekly consolidation pattern.

The major indices look vulnerable here, especially from a weekly perspective. The Dow, for example, is showing a bearish wedge pattern in the context of a broadly intact downtrend.

This also fits the pattern in multiple sectors and industries, where near term momentum has either gradually stalled or run into resistance.

Another example of price action at resistance is the euro (EURUSD), which is now challenging the $1.31 level for the third time since September. Third time the charm? Perhaps not.

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Fiscal cliff negotiations remain a black box. Bulls hold out hope that a

Hugh Hendry, the amusing Scotsman who runs Eclectica Asset Management, hates gold stocks. He won't buy them under any circumstances. Which is interesting, considering Hendry is partial to macro doom forecasts, and has made large amounts in years past betting on gold.

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The gist of Hendry's anti-gold stock argument, which he summed up at a recent Economist conference, boils down to political risk. In a nutshell, the ideal scenario for gold is also the nightmare scenario for gold stocks, politically speaking, because so many mines are in politically vulnerable jurisdictions.

Think of how Venezuela and Argentina have treated the oil majors, courtesy of Hugo and Cristina.

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Now imagine how much more tempting such treatment would be, on the precious metals side, were gold to rise above $4,000 per ounce.

If the yellow metal does what gold bugs think it could do, the copycat

A few weeks back, we asked, "What if Recovery is Actually Bearish?" The note led off with Seth Klarman's definition of a "Twinkie" market - a government manipulated, blatantly unnatural concoction stuffed with artificial ingredients.

So now, as the Twinkie market fades away, this seemed a touch ironic:

Hostess Brands Inc said it will ask a U.S. bankruptcy judge for permission to liquidate if enough striking workers do not return to work by the end of Thursday to let the maker of Twinkies and Wonder Bread resume normal operations.

Wednesday's announcement escalates a bitter dispute between the 82-year-old company and the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union, whose members constitute about one-third of Hostess' nearly 18,000 employees.

A union spokeswoman said the union would have no immediate comment…

- Twilight for Twinkies? Hostess Says it May Close

More evidence for the Twinkie fade: The Fed

A few years back, top value investor Seth Klarman called this a "Twinkie" market - an unnatural concoction stuffed with artificial ingredients.

The twinkie manufacturers, of course, are the world's central banks. Whenever things have looked terrible, the CBs stepped in with stimulus and jawboning. (Hence the 'artificial ingredients.')

The routine intervention of the Central Banks, plus the Greenspan Put transitioning to the Bernanke Put, have further led to an underscoring of the "bad news is good news" phenomenon, which in recent years has worked like this:

• Good news is good news because things are getting better.

• Mediocre news is good news because it means CBs keep rates near zero.

• Bad news is good news because it increases the odds of more stimulus / more intervention.

As the senior Rothschild once said, "Permit me to issue and control the money of a nation, and I care not who makes its

The 50 day moving average is a closely watched barometer of market health.

There is nothing magical about the 50 -- or any other moving average, for that matter -- other than broad popularity (which fulfills aspects of self-fulfilling importance) and the 50 EMA's utility as a decent statistical proxy for bullish/bearish transitions.

In a Global Macro Notes from October 15, we noted the two major indices -- Dow and S&P-- would have to hold the "Maginot Line" of their respective 50 day EMAs. They did that, which was market-positive, even managing to surge off the line, thanks to uber-bullish housing starts. But what macro data giveth, macro data taketh away…

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And thus, Thursday's ugly jobless claims, coupled with trouble in the house of Google and growing fears of a crappy earnings season jammed up against a 'fiscal cliff', led the Dow and S&P

Earnings whiffage is starting to pile up … multiple bellwether names are coming in light or otherwise missing estimates. Microsoft (MSFT), McDonald's (MCD) and General Electric (GE) three of the latest offenders …

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It's GOOGLE (GOOG), though, that could really weigh heavily on speculative spirits after Thursday's earnings release debacle and ugly slide. GOOG is considered a market champion, a tech juggernaut perhaps second only to AAPL, and this kind of follow-up to the recent run has to be disconcerting indeed.

The FT has a very good summation of the current environment:

Bulls may have been able to shrug off disconcerting Google results if they were a tech outlier. But they have come alongside poorly received numbers from bellwether Microsoft, Intel and IBM.

Consequently, caution on the sector, and a wariness about the overall US earnings season to date, has seeped into trading on

Lloyd: Come on, give it to me straight. I drove a long way to see you, the least you can do is level with me. What are my chances?

Mary: Not good.

Lloyd: You mean not good, like one out of a hundred?

Mary: I'd say more like one out of a million.

Lloyd: …

Lloyd (ecstatic): So you're telling me there's a chance!

- From "Dumb & Dumber"

One of the great reads of the past few years is "The Big Short," the Michael Lewis chronicle of the subprime crisis and some of the fascinating players who profited hugely from it. In the section on Dr. Michael Burry - and the book is a must-read for that section alone - we get agonizing detail on what Burry went through as a too-early subprime bear.

One of the points driven home in the

"Winter is coming."

- Ned Stark, Game of Thrones

Proverbial winter may be descending on heretefore "risk on" central-bank-driven markets. This would make sense given:

• central bank stimulus fade via law of diminishing returns
• corporate cost-cutting / fat-trimming profit boost used up
• record corporate profit margins in mean reversion jeopardy
• mounting concerns for earnings quality and top line revenue
• fresh crisis concerns emanating from Europe
• major bellwethers like AAPL showing meaningful weakness
• technical deterioration hitting the major indices
• potential bottom and resurgence in USD

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If we had to pick just one instrument to gauge risk-on / risk-off sentiment at this point, it would probably be the 10-year treasury note (IEF).

A resurgence in U.S. treasuries would indicate capital flight from risk assets, and renewed fear of economic crisis (ahem, Europe, cough) and general global slowdown.

Continued bullish action in treasuries would

Winston Churchill is perhaps the most quotable world leader of all time. There are many tales of his memorable remarks.

One such story, possibly apocryphal, regards the bulldog's regret at partnering with the Russians to defeat the Germans in World War II.

On comprehending the awfulness of Stalin, and the mistake of letting him consolidate power, Churchill reportedly exclaimed: "We have killed the wrong pig!"

In our estimation, all the recent hand-wringing over Western debt levels - see "Hey Bill Gross" for reference - is tantamount to killing the wrong pig.

The pig to be focused on at this point is protectionism risk, not excessive concern over safe-haven debt-to-GDP ratios…

Consider the following (via WSJ):

The world's two largest advanced economies, the U.S. and Japan, face growing long-term risks from investors fleeing trouble spots around the world, the International Monetary Fund warned Wednesday.

Safe-haven flows into

We like to pick on Bill Gross every once in a while. He is a billionaire who loves to "talk to his book" -- i.e., tout Pimco's trading positions -- so he can certainly take it.

An example from last year, "The Bond King Gets Desperate," is newly relevant, given the bond king's latest commentary.

In last year's write-up, we took Gross to task for saying America is like Greece. He's saying it again -- that America comparable Greece -- and it's still just as silly.

The latest Pimco Investment Outlook (Gross' monthly commentary vehicle) is called "Damages."

It is full of quotable soundbites, like ready-to-dip chicken McNuggets, such as stating Uncle Sam is addicted to "budgetary crystal meth."

Here is the Greece part (which got a lot of Armageddon types excited):

How can the U.S. not be considered the first destination of global capital in

A few weeks back, Mario Draghi "saved" the euro by pushing through a program of unlimited bond buying. Just this sort of extreme measure was required to convince investors the euro is not going away.

We know that Draghi's actions were effective, furthermore, based on not just the sharp drop in Spanish and Italian bond yields, but Germany's horrified reaction.

In order for the euro to truly be out of harm"s way, the confirmation of an aggressive printing press mandate - an emergency debt monetization measure - had to be implied. This is what Draghi achieved, causing Bundesbank President Jens Weidmann to mutter about "the devil's work."

But here's the thing. Draghi and the ECB (European Central Bank) can offer up printing press palliatives, but they cannot save the euro from democracy.

When austerity begets unrest, in other words, there is no central bank action that prevents protesters

The term "Black Swan" became extremely popular after Nassim Taleb introduced it in his book and the 2008 meltdown graphically illustrated the concept.

As it became part of the Wall Street lexicon, the term was abused to the point where all sorts of low probability scenarios were referred to as "Black Swans." This irritated Taleb to no end as it missed his main point - the Black Swan as he described it is unpredictable, the Rumsfeldian "unknown unknown" that you don't see coming.

The idea of the Gray Swan - a riff on the Black Swan - is a potential catastrophe that is not only foreseeable, but likely to occur at some point given a confluence of drivers. The challenge with a Gray Swan is that you don't know the actual timing. There is just a strong sense it could happen sooner or later. Many potential macro-level crises fit the

Malinvestment is one of the most useful concepts in Austrian economics.

As Wikipedia puts it, malinvestment refers to

"investments of firms being badly allocated due to what they assert to be an artificially low cost of credit and an unsustainable increase in money supply, often blamed on a central bank."

Here is a typical chain of events (as laid out by yours truly):

1) Stimulative monetary policy creates falsely optimistic market signals.

2) Private investment firms act aggressively on these false signals.

3) As a result, the private sector "malinvests," i.e. allocates badly.

4) Capacity is increased prematurely, supply ramped up excessively, etc.

5) When the stimulus wears off, the economy is in worse shape than before.

6) Overhang of excess debt, capacity, supply etc. serves as a dead weight.

7) Struggling to ignite growth, the authorities order more stimulus.

8) A speculative bubble ignites instead, furthering the malinvestment.

9)

September 17 - some great stuff via John Hussman's weekly market comment:

… Meanwhile, it is probably worth marking down September 13, 12:30 PM Eastern, S&P 500 1438 as the point when the Fed finally went all-in, much to our relief - allowing the market to presume unlimited QE, and removing the constant anticipation that the Fed would draw the last arrow from its quiver to kill off every prudent element of our economic system. As Bernanke noted at his press conference, the Fed has been down to two main tools given that interest rates are effectively zero: "balance sheet action, and of course, we can restructure those - change those in various ways. The other type of tool is communication tools. And we could - we continue to work on how to best communicate with the public." So the Fed has now left itself with nothing but talk.

With the summer officially over, traders are returning to a challenging environment.

Equity indices are within striking distance of 52-week highs, having spent the summer grinding higher on incredibly light volume. At the same time, the global economy is teetering on the brink of recession, with a number of serious macro risks lurking.

The political spectrum creates just as much uncertainty as the economic picture (can one really separate the two?) as politicians around the globe struggle to come up with credible solutions to the various situations.

In Europe, Germany is now entering a recessionary environment, and yet the country is expected to be instrumental in bailing out their debt-ridden neighbors. Chinese politicians have limited resources to fight an increasingly likely hard landing. And in the US, the Fed is trying to determine whether another round of quantitative easing would be worthwhile.

Sentiment has been steadily moving higher

Consider this article a plea for assistance. Would someone with a PhD in economics, or better yet, deep-level training in Fed Speak, step forward and help this simple caveman trader solve a true "conundrum" of Alan Greenspan caliber?

It has to do with Charles Evans, President of the Federal Reserve Bank of Chicago. On Monday, Reuters ran a headline story, Fed's Evans: Buy Bonds Until Jobless Rate Falls.

Here is the gist:

The Federal Reserve should launch a fresh round of monetary stimulus immediately, buying bonds for as long as it takes to produce a steady decline in the jobless rate, a top Fed official said on Monday.

Without a change in policy, the unemployment rate, now at 8.3 percent, was unlikely to fall below 7 percent before 2015 at the earliest, Chicago Federal Reserve Bank President Charles Evans told reporters in Hong Kong.

"I don't think we should

It's the last week of what has turned out to be an incredibly light-volume summer, with equities quietly grinding higher for months…

The blue chip indices are still very close to 52-week highs, but last week's action raised some questions in terms of how sustainable this mild bullish action really is.

Both the Dow and the S&P 500 had ugly reversal days on Tuesday. The Dow after coming within 8 points of hitting a new high, and the S&P after hitting a new high earlier in the day.

Both indices not only closed at the low of their daily trading range, but also took out the lows of previous day's ranges - tracing out an unusually volatile day considering the placid action of the last few weeks.

Small caps followed a similar path, with the Russell 2000 Index (IWM) clearing the July high, only to finish lower on the

As we anticipated in "Knee-Jerk Fed Reaction Doesn't Add Up," faulty stimulus hopes based on the Fed minutes quickly evaporated, leaving markets meaningfully lower within 24 hours (with the exception of precious metals, which have gone vertical in recent sessions).

We are "stimulus skeptics" through and through, not for moral reasons but simple logistical ones.

Simply put, historical evidence suggests that, the majority of the time, stimulus is a form of malinvestment (Malinvestment is an Austrian economics term, referring to capital that has been invested or allocated badly).

Basically, when you try to juice the economy through artificial means, driven through artificial government channels, the guiding hand of the free market is negated.

As a result, the stimulus being applied flows to the wrong places, creating signal distortions and generally making things worse off than they were in the first place.

This

The dominating factor in Wednesday's trading was the release of the Federal Reserve minutes. Based on interpretation of the minutes, the Fed is closer to pulling the easing trigger than might have been anticipated.

Here is the money paragraph (via BI):

A number of them indicated that additional accommodation could help foster a more rapid improvement in labor market conditions in an environment in which price pressures were likely to be subdued. Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.

You can see the real time reaction via 5-minute charts for the euro (EURUSD) and Japanese yen (USDJPY).

EURUSD surged higher on the Fed minutes, and USDJPY tanked, reflecting immediate weakness in the dollar in both cases as the probability of near-term easing was adjusted upward.