Fear Is Not a Factor – Ep. 454

May 13 – 15, 2019

Recorded March 26, 2019

Feigned Attempt to Shrink the Balance Sheet

I am finally back on land, having spent 9 days at sea, at the Investors Summit at Sea.  I’ve been doing this annually now, this is my 7th time doing that. I am now back, technically one calendar year older.  I want to catch up a little bit on what happened in the market later last week.  I did do that one podcast from the ship following the complete capitulation on the part of the Federal Reserve, basically calling off all of the rate hikes that anybody thought may have been coming for the remainder of the year.  Also calling off their feigned attempt to shrink the balance sheet – quantitative tightening.  The balance sheet will barely shrink between now and the end of the summer, when it will stop shrinking altogether; if they can even keep up the pretense for that long.

Nobody Appreciates What the Fed Has Done

If you remember, when I was forecasting that this was going to happen, at the very beginning, in fact even before the Fed began to shrink its balance sheet, before the Fed raised rates for the first time, I said that if they ever tried to normalize interest rates, if they ever tried to shrink the balance sheet, they would ultimately abort the process – that they would fail in their mission. They could not complete the journey. It would create a huge problem for the Fed, which up until this point, it hasn’t happened yet. Nobody really appreciates what the Fed has done.

There Will Be an Excuse

A lot of the people in the investment community are still buying at face value what the Fed is saying. But remember, when I said the Fed was going to announce that it was going to stop the rate hikes or call off quantitative tightening, I said at the time, that they were going to come up with an excuse. That the Fed was not going to tell the markets the truth about why it had aborted this mission – it was just going to make up an excuse. The Fed had to pretend that they could actually do this – that they were going to normalize interest rates, that they were going to shrink their balance sheet but something prevented them from doing it.