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The Importance Of Fed QE In Charts

  • Written by Syndicated Publisher No Comments Comments
    June 18, 2013

    This chart shows how closely the S&P 500 has tracked with the increases and decreases in the Fed’s balance sheet since 2009 as it has let QE programs expire, and then rushed in with new QE bond and mortgage-related buying programs (QE2, QE3, QE-Infinity) when the economy and stock market stumbled.

    The following chart is courtesy of Jeff Grundlach, founder and CEO of DoubleLine funds ($55 billion under management).


    It does indicate the risk to the economy and market when the Fed eventually begins to dial back on its bond-buying, and then as it will eventually have to, actually reverses to selling the assets off its balance sheet.

    It also indicates why the Fed will be very reluctant to move beyond just talking about it to actually taking action, and why as I have been saying I believe that will not be seen until early 2014 (after Bernanke has been replaced by the next Fed Chair, probably Janet Yellen).

    If you’d like to see a number of other interesting charts on U.S. and global economies and markets that you’re not likely to see elsewhere, click on this link to an article by Mamta Dagkar on Business Insiders this morning http://www.businessinsider.com/david-rosenberg-global-concerns-charts-2013-6 . I suggest once you get to the article that you click on the ‘View as one page’ option.


    Fed will blow back next week against market fear Bernanke created.

    Global markets outside of the U.S. have declined sharply since mid-May when Ben Bernanke told Congress that the Fed could begin to dial back its quantitative easing as soon as in coming months.

    While Bernanke probably used the occasion to try to cool off overheating markets, he can’t afford to raise concerns among investors and consumers so much that the already stumbling economic recovery is jeopardized any further.

    So the Fed’s statement after its June FOMC meeting next week, and particularly Bernanke’s press conference afterwards (Wednesday afternoon) is widely expected to be devoted to reassuring markets that he did not mean what he said.

    He meant to say that dialing back QE would not be considered until the economy shows signs of being able to go it alone, and that’s not likely before at least early 2014.

    He will certainly disappoint markets again if he does not back-track from his earlier warning.

    But has damage already been done by taking some of the euphoria and confidence out of markets, and having investors looking at some of the conditions that have been created while they were focused entirely on the power of the Fed and its stimulus?

    Other Voices.

    Financial Times: “Storms over Japan and emerging markets; squalls in the U.S. and Europe. . . . . . Measures of market volatility are signaling some of the choppiest conditions since 2008. Higher volatility could prove as significant as actual falls in asset value, analysts warn. . . . . . Unless calm returns, unstable conditions could drive investors out of markets and undermine central banks’ global efforts to steer economies”.

    The Economist: “The prospect of less quantitative easing in America has rocked currency and bond markets in the emerging world. . . . . In the past month 19 of 24 emerging-market currencies have fallen in value against the dollar. The trigger was a remark in May by the chairman of the Federal Reserve, Ben Bernanke, that the Fed’s purchases of bonds might soon tail off. . . . It seems a violent response to what was an offhand comment . Mr. Bernanke did not suggest an immediate change of policy. An increase by the Fed in short-term interest rates, currently near zero, may still be years away. . . . Even so, markets look ahead, and even the prospect of a tapering probably marks the start of a long grind upwards in rates.”

    The Times of London: “The political deadlock in Washington has dented America’s growth prospects and threatens to derail the recovery in the world’s largest economy, the IMF said yesterday. The IMF criticized politicians for imposing harsh spending cuts that have significantly reduced growth prospects in the U.S.”

    The Wall Street Journal, Jason Zweig: “If you are an investor and aren’t on the verge of retirement, your fondest wish should be another whiff of fear that will tip even more assets into the bargain bin. . .  Investors should welcome the falling prices that make assets cheaper.” 

    To read my weekend newspaper column click here:  What If The Secular Bear Market Is Not Over-

    Subscribers to Street Smart Report: In addition to the charts and recommendations in the subscribers’  ‘Premium Content’ area of this blog, the new issue of the newsletter will be out on Wednesday in the subscriber’s area of the Street Smart Report website.

    Images: Flickr (licence attribution)

    About The Author


    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

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