Sooner or later (my bet is sooner) investors and speculators will realize that the Fed is currently the only major buyer for US stocks and bonds - at least indirectly, if not directly since the US central bank is prohibited from buying shares (other central banks aren’t, e.g. the Swiss National Bank has a portfolio valued at over $95 billion in stocks).
What do I mean by indirectly? Simple: the Fed has flooded the system with $3 trillion, ballooning its balance sheet from $4.2 to $7.2 trillion in mere weeks. By comparison, it took 20 years for the Fed’s assets to rise from $1 trillion to $4 trillion (Chart 1). To be clear, that’s fresh dollars circulating in the system.
(Note: There is a parallel observation to be made on Chart 1; after dealing with the Credit Crisis in 2008-10 by doubling assets to $2 trillion, the Fed kept printing money and reached to $4.5 trillion. It’s no wonder stock prices, bonds, real estate, etc. kept rising and rising.)
So, asset prices are being boosted by the Fed’s printing presses for a long time now. The latest injection is, therefore, not unusual - it’s just spectacularly enormous.and furiously fast. I think, dear reader, you understand why I say that the Fed is, essentially, the only buyer.
What would happen if the printing presses stopped, or if they started running in reverse? How long would it take for trigger-happy speculators to realize there’s no one else left to buy their overbloated portfolios? To quote one of my (very) old posts, how long before people realize they own trading sardines rather than eating sardines? (RIP Sandra K. 😢).
It’s very early days to conclude that the Fed is reversing course, but the last few weeks have seen its balance sheet shrink, if only modestly (Chart 2).
More to follow as data become available on this, the Moral Hazard to end all moral hazards..
What do I mean by indirectly? Simple: the Fed has flooded the system with $3 trillion, ballooning its balance sheet from $4.2 to $7.2 trillion in mere weeks. By comparison, it took 20 years for the Fed’s assets to rise from $1 trillion to $4 trillion (Chart 1). To be clear, that’s fresh dollars circulating in the system.
Chart 1
So, asset prices are being boosted by the Fed’s printing presses for a long time now. The latest injection is, therefore, not unusual - it’s just spectacularly enormous.and furiously fast. I think, dear reader, you understand why I say that the Fed is, essentially, the only buyer.
What would happen if the printing presses stopped, or if they started running in reverse? How long would it take for trigger-happy speculators to realize there’s no one else left to buy their overbloated portfolios? To quote one of my (very) old posts, how long before people realize they own trading sardines rather than eating sardines? (RIP Sandra K. 😢).
It’s very early days to conclude that the Fed is reversing course, but the last few weeks have seen its balance sheet shrink, if only modestly (Chart 2).
More to follow as data become available on this, the Moral Hazard to end all moral hazards..
Chart 2
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