Good News And Bad News

It must be said that all the banking pros predicted that QT wouldn’t last and that QE would start soon enough and that was why stocks were not going to crash any further in the winter of 2022.

I thought this unlikely because the central banks would zig and zag but nonetheless get a fair way along the tightening path and pause it at some point for good after more stock market pain.

Now these bankers did not predict their own demise as the reason for this end of QT (quantitative tightening) but here we are. How ironic.

Here is a chart of the Federal Reserve Balance Sheet:

About half of the tightening that has crimped the stock market has been reversed by a QE move. That is probably bad news for inflation and probably good for the market.

What does this mean going forwards? It means tightening is over for quite a while and inflation is unlikely to come crashing down anytime soon.

As we have seen, the banking system is not going to collapse but there is going to be a lot of remedial work ahead to have the situation settle down.

Many, of course, are going to predict hyper inflation but that is not going to happen.

I know what is going to occur, waves of randomness. There will be a fog of war for some time, but I’m betting on a positive outcome meaning normalization in short order.

The problem is right now, too much money but in the wrong places.

All that money in the Fed’s ‘reverse repo’ didn’t help Silicon Valley Bank, with their Government debt a few months too old for them to be solvent enough to hold off implosion. Make no mistake, a few months back the world would have thrown money at them if they had asked for cash.

The post-Covid world is fragile.

Here is that dam of money sitting over the U.S. economy:

There is too much cash in the system, as seen as too many assets in the Federal Reserve’s balance sheet, but that can’t be pulled without bringing down the roof. You can see the tip of that iceberg in the reverse repo. The plumbing is going to get adjusted and that is going to be spicy.

So what is the smart thing to do?

For the central banks and the investor, it is probably the same thing. Do nothing except focus on what is needed for stability.

We can expect plenty of volatility.

If there is going to be a rolling banking crisis, then in many ways one of the safest place to be is in stocks; if there isn’t then you would expect stocks to hold their own.

I’m long blue chip banks at present because that lump of money in reverse repo is their cash reserves and this in no 2008.