For the first time, the Janet Yellen set into motion firm plans to reduce the size of its $4.5 trillion dollar "balance sheet." Such a process has been talked about for years, but many were convinced, myself included, that it would always just be talk. The balance sheet consists of Treasury and mortgage-backed bonds that the Fed amassed during the experiment with quantitative easing between 2009 and 2014. During that time, the Fed injected liquidity into the financial markets by creating money to purchase more than $80 billion per month (at times) of such securities. These efforts pushed down long term interest rates, drove up bond and real estate prices, and set the stage for a massive stock market rally that had little to do with underlying economic fundamentals. Despite several informal hints over the years that these stockpiles were being reduced through bond maturation, the war chest has not decreased in size by one iota. However, the Fed has admitted that these ponderous holdings will limit its ability to stimulate in the event of future recessions. As a result, it wants to shrink the balance sheet down to a more manageable size now, precisely so it can expand it again during the next recession.
To do this, the Fed must essentially perform quantitative easing in reverse. It must sell, or force the Treasury to sell, treasuries and mortgage-backed securities into the current market. This process will reduce the Fed's balance sheet while drawing free cash out of the economy, thereby unwinding prior stimulus. The Fed even told us how large the reductions will be...and it's a lot. Much in the way that the Fed "tapered" out of its QE program back in 2014, gradually reducing the $85 billion of monthly purchases by about $10 billion per month, the Fed anticipates a similar approach to what is, in effect, a "quantitative tightening" campaign, or QT for short. It will start by allowing it's balance sheet to shrink by $10 billion per month (total) of mortgage and government bonds, and will gradually increase the reductions to $50 billion per month, or $600 billion per year. Those are very big numbers that will provide very real headwinds to the economy and the financial markets.
But it's important to realize that the Fed envisions doing this at a time when Federal deficits are likely to be rising steeply . In the next few years, the Congressional Budget Office estimates that Federal budget gaps will be in at the $700 - $800 billion dollar range annually (hitting $1 trillion by 2021 or 2022). These assumptions of course do not factor in any potential any tax cuts, spending increases, or recessions (I think we are likely to get all three). So this means that in a few years, the Treasury will have to sell $600 billion of additional bonds into the market annually to repay the Fed while at the same time selling $800 billion or more to finance its current deficits. That may create some traffic problems. Should we assume that there are enough buyers to step up to the plate, especially if yields stay as low as they are? It's not likely.
With so much supply hitting the market at once, bond prices will have to fall (and yields rise) in order to attract buyers. This will amplify the tightening effect that these sales are meant to generate. Higher yields will also add a tremendous burden to the U.S. Treasury. With outstanding Federal debt already at $20 trillion, every percentage point rise in rates translates into approximately $200 billion more per year in debt service costs, which also must be borrowed. After the Fed announcement, Mick Mulvaney, the Director of the Office of Management and Budget admitted that quantitative tightening from the Fed had not factored into the Administration's long-term budget projections.
There is much going on before market make a correction, so pay extraordinary attention to your investment and retirement accounts to protect them from the coming crash becoming a Wealth Preserver Member.
In our September InsidersPower newsletter, we detailed that the end of Socialism was coming and a global sovereign debt crisis was going to lead the way. The sovereign debt crisis is what led to the great depression and it is what is started again at the end of September 2015. It is expanding rapidly throughout the world now.
The latest polls show that most people who voted for Trump are satisfied. When the same questions have been asking about Hillary, the opposite response appears. The polls are actually showing that Trump would win a greater margin today than last year. This is interesting for it is confirming the collapse in socialized government with that began on September 30st, 2015. It was the start of the collapse in confidence in government. This cycle should intensify starting in 2018 running head long into 2020.
This is all good for the volatility in markets we see ahead. This is the same trend that produced BREXIT and just wiped out all mainstream parties in France.
Should you keep your money invested? Where should you invest? What should you buy? Should you own Gold? Should you own Stocks? The traditional Buy & Hold theory is going to wipe out millions of peoples retirements just like it does at the end of every debt cycle in history.
This is the video press conference in its entirety from the committee actually investigating everything.
Yes, there was no “wiretap” of Trump Tower. While the New York Times is desperate to cover everything up and focus only on that single word "wiretap" to claim Trump has no proof, behind the curtain everyone knows that Trump was spied on.
What is going on is the committee “invited” people with information within government to come clean and present info directly to the committee. To the shock of everyone, that is happening!
So people do not want to go down with the ship and they will give up others who have been leaking info to the New York Times and the Washington Post, which have been the mouthpieces for the Democrats and the anti-Trump movement.
So, this will get much more interesting as we move forward. Keep in mind that more confidence in government is undermined, include the mainstream media, the more likely we will see government bonds collapse.
Politics is the driving force in the current economic cycle.
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Livio S. Nespoli has been a broker, registered investment advisor, and financial publisher since 1985.