When QT was brewing and while it was running, I have been writing that I expect the US indices to run in a sideways channel if the Federal Reserve pulled off QT without crashing the market.
You can read a couple of these pieces from the past here:
From May 2018
From October 2018
From early 2019
The thesis was the Federal Reserve would attempt to normalize its balance sheet by navigating the Dow and S&P between these tramlines as it took cash out of the global economy. The stronger the stock market the more liquidity it would suck out and the weaker, the less it would drain. It would avoid crashing the market but on the flip side the markets were unlikely to go anywhere on the upside.
This turned out to be a good model and when the markets started to crash the Fed telegraphed the end of QT and brought QT to a close even earlier than expected. The Fed appeared to have taken out a bit too much money from the global system and the world economy and the US economy were heading for a slump well before the Federal Reserve was able to shrink its balance sheet by much.
What transpired was the Federal Reserve is permanently on the hook to manage a massive balance sheet and cannot get it down to low ‘good old days levels,’ ever. It has taken this bravely and put a nice gloss on it. However it now seems a vast balance sheet is systemic and most likely must grow hugely going forwards.
What has transpired is private sector banks which used to create money supply by leveraging their deposits by ever increasing multiples have been restricted from creating money using fractional banking leverage so now the Fed has to do this magic itself. This is good and bad news. The good news is, the private sector does no longer need to be trusted to not abuse the money supply system to the point of collapse as per 2007, but the bad news is rather than let the market define the demand and supply of money, it is now down to a small committee of humans at the Federal Reserve to get the balance right. Committees have, over time, been shown to be a fragile system for navigating complex economic matters, so a distributed flawed system has now been replaced by a centralized flawed system. WCGW! The mean time to failure? Who knows?
However in the short to medium term QT is dead. What is more QE is back.
The Federal Reserve chart show all you need to know.
And the S&P 500 charts confirms the asset value lift from this new liquidity with the index breaking out of its upper bound.
Unless some shock strikes, the indices are in for a bull run.
As an investor you simply have to be long. A breakout like this could be extremely powerful and the downside is limited.
How far does this Bull run?
Its hard not to see it running a long way, unless it is immediately choked off.
To me I can see a final move of this ‘never-ending’ bull market ahead and that this is not just a rally, but a final run to a bubble denouement.
Its not confirmed in my mind, but if we rally too strongly from here then I will start preparing for a bubble move.
If we bubble there will be a lot of money to be made…… and lost.
I hope this doesn’t happen, but you have to pay attention to what the market is telling you and as we all know market booms turn ultimately into bubbles. At some point a bubble bust happens.
We need to keep this in mind now.
At least the first half of that story will be fun and we are all strapped in for the ride if it comes. Its almost a generation since the last bubble, so many won’t know to get off. At least we will.