Something odd happened late in the day in Wednesday’s trading session, which prompted a number of people to mail in comments or ask a question or two. Since we have discussed this issue previously, we decided this was a good opportunity to briefly elaborate on the topic again in these pages.
A strong ADP jobs report for March was released on Wednesday, and the gold price dutifully declined ahead of it already, while the stock market surged concurrently. Later in the day, the Fed minutes were published, and their tone was definitely seen as very “hawkish”, at least by today’s standards.
Strange happenings alert!
There was quite a bit of talk about rate hikes and – gasp! – even about ending reinvestment of funds the Fed receives when debt securities in its QE portfolio mature. The merry pranksters also bemoaned the egregious bubble their own policies have given birth to.
According to Reuters:
“Most Federal Reserve policymakers think the U.S. central bank should take steps to begin trimming its $4.5 trillion balance sheet this year as long as the economic data holds up, Fed meeting minutes showed.
The minutes also showed “some participants viewed equity prices as quite high relative to standard valuation measures.” [duh…]
Here is a 15 minute candle chart encompassing Wednesday’s intra-day moves in June gold futures:
June gold futures, 15 minute candles. After at first declining in anticipation of a strong ADP report and hawkish Fed minutes, gold rebounded when said minutes were released – and actually sounded even more hawkish than expected – click to enlarge.
Talk about “balance sheet normalization” – with the added twist that “most” committee members seemed to think it was an idea whose time had come – apparently was indeed a bit of a surprise to market participants, who probably (and quite reasonably) assumed it would never happen. Not surprisingly, they have already gotten over the “shock” as of Thursday’s trading, but in this case, their initial reaction actually made sense.
An Endangered Bubble and Discounting the Future
What will happen, if the Fed actually allows its balance sheet to shrink by no longer reinvesting money it receives for maturing securities? Unless inflationary bank credit expands at a faster rate than the repayments, this will invariably result in shrinking the money supply. Essentially, it would be a reversal of QE – a part of the deposit money created by debt monetization would return to where it originally came from, namely thin air.
You have one guess what will happen to “risk assets” if and when free excess liquidity in the system begins to evaporate. Here is a hint: it will be time to wave good-bye to the bubble. Stock market traders actually had the right idea on Wednesday afternoon:
S&P 500 intra-day – the Fed minutes triggered a brief moment of quite apposite bubble doubt – click to enlarge.
Before we continue, we want to stress that we are using Wednesday’s odd market moves merely as …read more
Source:: Acting Man
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