The markets have had a nice rally since the pit of the correction in December. As a doomster calling this slump for most of last year my premise has been that reverse-QE or QT as it is known, will do the exact opposite to QE which is deflate the stock that has formed.
If you can look at the Nasdaq chart and not see a classic stock bubble then you can stop reading now.
Bubbles can always be steeper and go higher but they are created by and need a unique driving mechanism which in this case was QE. When the driver breaks the bubble dies:
It is the QT process that is driving this bear market. It is hitting real estate, its chopping down growth in emerging economies and now everywhere, it is chilling the carry trades responsible for pushing up asset values. Its effects are leveraged and compounding.
QT is meant to run on autopilot at $50 billion a month, but there is good news. Since the ‘almost crash’ of December QT has slowed dramatically.
These are the numbers:
The Federal Reserve have stated they are ‘listening to the market’ and will adapt to changing circumstances which is obviously a big improvement from QT’ing on ‘autopilot.’
So the question becomes are they prepared to stop it entirely, reverse it, slow it, truncate it, stop/start it?
My original what/ifs were, will we get a sideways market for a couple of years as the Fed does a QT balancing act or will be get a proper crash?
Last December established that a sideways market will be hard to maintain and it would seem that QT at full blast is more than the stock markets can support. Too much QT will crash the markets. That obvious, but what is too much. That will change with circumstances but it seems $50bn is close or beyond that level.
A market trend is emerging which is bearish and could become established as the long term market tendancy.
So the call is, can/will The Federal Reserve tweek QT to keep the market in the upper bound sideways trading or will the crash continue. The current diagonal downward direction is unlikely to be sustainable because people will start dashing for the exit if they feel the market is going to fall all year to below 20,000, causing a crash.
From my perspective if the market can go up from here the chances of a crash diminish but if we get a fall then the chance of a crash go up dramatically. Right now the crash outcome is more likely by far than a range bound sideways market.
As such Im positioned for a crash.
Beyond this, money making situation, the strategic question is, should the Federal Reserve have a multi-trillion dollar balance sheet or not? When the Federal reserve is the ultimate economic regulator of the US and to a significant extent the world, is it too much for it to have $10-20,000 dollars of assets/liabilities per American on its balance sheet. I would say that was just fine, but politically its seen by many segments as a really bad thing.
I have felt for a long time that there is not enough money supply in the system to feed the new world of ever increasing technological leverage brought by technology. If there is not enough money you will get Asian style deflation. In the current QT environment money is being sucked out oftyhe system by being immobilised into instruments less liquid than previously held and far from cash. This is probably a bad thing and if it continues it will leave its mark as such.
The good news is that if this idea is correct there is plenty of room economically to change direction and for the Fed to stop shrinking its balance sheet. Whether this will happen is unanswered and until further notice QT will remain the stock markets driver until it ends. Like ‘there is no news only Trump,’ ‘there is no market only QT.’
Ironically the political right wants to audit the Fed, shut the Fed and are definitely keen to have the Fed unwind its post global financial crisis balance sheet. Back on planet earth QT and the crash it will likely spark is one of the few tools to available to seriously crimp President Trumps re-election prospects. This makes the trend chart particularly interesting.