After a year of easing in reverse-QE or QT as its called, the Fed has all but announce they plan to stop soon. The reason is simple, the long planned balance sheet normalisation can’t be done without crashing the world economy.
So the new normal is a Federal Reserve with a mountain of other peoples debt on one side of its balance sheet and a load of its own on the other. On a per head basis that balance sheet is similar in scale to the nett assets of an established working family. That is just one reason the Federal Reserve wanted to be shot of it. Like all mountains they can come tumbling down into the valley and sweep everything away.
It doesn’t do to run these kinds of per citizen calculations, its hard on the sanity. The $22 trillion dollar national debt divided into the population is an even more unsettling number and its only going to get forever bigger in size and proportion.
This is the dilemma of big government and their big interventions.
The Federal Reserve has all but admitted it is stuck with its massive balance sheet. As I wrote in previous pieces this was always an option and it is now apparently, the option.
Remember with 2-3% inflation and 2-3% growth that balance sheet will halve in real terms in a decade or so.
In politics and economics chronic is much better for everyone than acute, so its probably a good thing.
The trouble is, having crumbled on threatening to burst the equity and housing bubble, will the Fed crumble on pressure to get back to inflating that bubble?
Actually that will become evident quick because if QE restarts it will be in the weekly figures that showed this week that the Federal Reserve actually increased its balance sheet, which you can be forgiven in seeing as QE.
So the situation changes from a call between a crash and a sideways trade, to a sideways market and a break out rally.
The politicians will absolutely push for the later but the sideways market is now the main chance.
This means you buy the dip and sell the rally.
The Federal reserve is all but guaranteeing the market again and the trend is in.
This:
Becomes:
Interesting to most people is the idea that mortgage bonds will continue to be sold down but that the QE will be rolled into Treasuries. This makes sense as the US deficit is set to explode and this will be in effect the government buying its own debt and extracting the value out of real estate values. From a financial stability point of view, it’s a solid policy, because the Colbertian tax paying Geese will once again not notice they are getting plucked and better to buy your own debt than risk all those other ‘foes’ deciding your papers interest rate of ‘nuppence is not so alluring.
So is this new normal sustainable?
The answer is yes. If stock market prices do not rise then in a world of even minor inflation, the market is going down. This will enable the current series of asset bubbles to deflate gently in real terms. This is what regulators are meant to do, keep things smooth.
We on our way to talking about Quadrillions of dollars? The only question is, will it happen fast or slow.
Is the crash now dead? No. The markets will always crash but perhaps the QT crash has been cancelled. However QT is not over yet, nor are the clown cars of international politics anywhere near done careering around the circus, but the risk of a QT created crash looks to be dead. If themarket swoons because of some outrage, it is now implicit, liquidity will appear from the Fed to drive the necessary carry trades to hold the market in line.
It not safe to jump go back into the markets with both feet, but the Sword of Damocles is gone. It is time to start looking for value and what to buy when the next dip comes, which now the good news is in the public domain, might be any minute.