Taking nothing away from Trump's tweeting ability to tank the Dow for a day, or even the longterm effect his increasing with full employment a deficit budget by 25% over a recession budget. There WILL be a debt crisis, but as Trump predicts, it will be after he's gone. But the current Dow trends stem from quantitative easing.
How Long Will The Fed's Reverse-Quantitative Easing Last?
"The stock market has been going up since the credit crunch of 2007/2008 because liquidity has been pumped into the system and made the value of assets go up as the cheap credit has driven participants to seek out assets that will appreciate faster than the interest they have to pay. This is how QE (quantitative easing) saved the global economy and a lot of people’s homes and jobs.
"Now that rescue cycle is deemed over, the Federal Reserve has decided to (and has been encouraged to) reverse the QE, to get its assets and liabilities downsized. From a QE high of $4.5 trillion they have shrunk the balance sheet down to $4.1 trillion.
"It is no coincidence that this process started in earnest this January and coincides with the U.S. stock markets going into cardiac arrest or at least changing its never-ending upward trend into a serious of vicious slumps and rallies. (emphasis mine)
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the Fed's balance sheet:
Federal Reserve Board - Recent balance sheet trends
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Again from the Forbes article:
"The trouble is if the Fed is to get its balance sheet back down to 2008 levels of approximately $1 trillion at the advertised rate of $50 billion a month it will take 3-4 years of reverse-QE and ever-increasing tightening to get there."
Before the mortgage crisis, the Dow was around 14K and the Fed had about a billion in assts. The Fed started buying Treasuries and Mortgage Backed Securities in 2009 (Dec 08). The Dow cratered then at around 7200. (I can't link a user generated dow chart, but if you know how to get to yahoo, you can get your own)
I think the question is what will the Dow be when the Fed pulls out two .... or even three trillion in bonds. I believe the 700 million or so the Feds gotten off it's balance sheet mostly just reached maturity ... and ceased to exist. The Fed didn't pay actual money for them. If the fed starts selling ... it could get mighty interesting fast. If the Fed owns a security that pays 2% interest, and if the fed rate is 2.5% .... that security is worth less than its face value. Again, the Fed has no real reason to fear selling at a loss because it's all paper money. But somebody may be willing to pay real money to buy a security paying 2% interest on ten thousand dollars for ... say .... nine thousand dollars.
That's not good news for the stock market, but it might be good news for the bond market
How Long Will The Fed's Reverse-Quantitative Easing Last?
"The stock market has been going up since the credit crunch of 2007/2008 because liquidity has been pumped into the system and made the value of assets go up as the cheap credit has driven participants to seek out assets that will appreciate faster than the interest they have to pay. This is how QE (quantitative easing) saved the global economy and a lot of people’s homes and jobs.
"Now that rescue cycle is deemed over, the Federal Reserve has decided to (and has been encouraged to) reverse the QE, to get its assets and liabilities downsized. From a QE high of $4.5 trillion they have shrunk the balance sheet down to $4.1 trillion.
"It is no coincidence that this process started in earnest this January and coincides with the U.S. stock markets going into cardiac arrest or at least changing its never-ending upward trend into a serious of vicious slumps and rallies. (emphasis mine)
-------
the Fed's balance sheet:
Federal Reserve Board - Recent balance sheet trends
-----
Again from the Forbes article:
"The trouble is if the Fed is to get its balance sheet back down to 2008 levels of approximately $1 trillion at the advertised rate of $50 billion a month it will take 3-4 years of reverse-QE and ever-increasing tightening to get there."
Before the mortgage crisis, the Dow was around 14K and the Fed had about a billion in assts. The Fed started buying Treasuries and Mortgage Backed Securities in 2009 (Dec 08). The Dow cratered then at around 7200. (I can't link a user generated dow chart, but if you know how to get to yahoo, you can get your own)
I think the question is what will the Dow be when the Fed pulls out two .... or even three trillion in bonds. I believe the 700 million or so the Feds gotten off it's balance sheet mostly just reached maturity ... and ceased to exist. The Fed didn't pay actual money for them. If the fed starts selling ... it could get mighty interesting fast. If the Fed owns a security that pays 2% interest, and if the fed rate is 2.5% .... that security is worth less than its face value. Again, the Fed has no real reason to fear selling at a loss because it's all paper money. But somebody may be willing to pay real money to buy a security paying 2% interest on ten thousand dollars for ... say .... nine thousand dollars.
That's not good news for the stock market, but it might be good news for the bond market