The Stock Market in times of ‘taper’ (I)

It is known as a “taper” to a monetary policy action that involves the gradual reduction of the increase in the quantity of money or QE (quantitative easing) by the central bank. As we know, due to the pandemic, an enormous QE is being carried out in order to avoid liquidity problems, facilitate credit and keep the production centers alive to be able to resume activity after the crisis, at which time it must return to “normality “monetary.

Of course, huge interventionism of all kinds, not just monetary, has created unwanted effects, such as the huge asset bubble or the inflation of raw materials and consumer goods, an inflation that at the moment is more an inflation of costs that demand, damage that the FED (US central bank) sees as temporary. Regardless of what we think about the latter, we will work with that hypothesis, since it is the one that guides the FED and, according to that criterion, today, it does not intend to fight inflation, but simply to continue with its initial plans.

To analyze all this today we will start with a quick review recalling the political pasts contrasting them with the current one., and then see what happened in the stock market in the last “taper”, leaving for another time the valuation of the current stock bubble.

Temporary indefinitely

This is how contradictory the monetary policy of our time has ended up being thanks to the enormous incompetence of those who have carried it out. It must be said that if the Gross Domestic Product and the balance sheets grow in a healthy wayIt will take technological disruptions aside, more money, so that, except for emergencies, QEs will have to be done every so often; what happens is that when the order is dysfunctional and it is not wanted, due to greed and corruption, to change it, all are emergencies; that is the environment that savers have to deal with, those beings detested by the caste that governs us.

In the previous graph you have the data of almost 20 years of the account that collects the total balance of securities held by the FED. We did a summary of these actions in the article “The Stock Market in the times of Trump and Powell”, which we will not repeat, and in which the error of the QT (“quantitative tightening” or monetary contraction) stands out; Later, when the pandemic occurred, we analyzed the actions of the FED to deal with said catastrophe in “The FED Panic and a Savage Government”, where we analyzed the QE4 and its relationship with the Macro Balance and, once again, it was seen that Powell is an incompetent of a major brand, a character who, unfortunately for all and given his affinity with the peculiar Calamity Yellen, the Secretary of the Treasury, and with the Democratic Party, it is very likely that he will be renewed in the position, next 2022, until 2026.

Explosion of liquidity

One of the crises that Powell did not see was that of the repo market, which we saw in “The repocalypse and the next financial crisis”, a key instrument in the US interbank market. This crisis came largely because, just after winning Trump, Yellen announced that she would contract the amount of money (QT). Yellen was not renewed but Powell followed with the bad idea, being about to produce a crash stock market; since then it goes to the hail of the “great” American bankers (Goldman, Morgan, etc.)

Of course, After the pandemic, it was also necessary to inject liquidity into that market (previous graph), now at rest, so that among the “traditional” QE (first graph), the “repos” and other “window” operations, those of all life (rediscounts, etc.), the total assets in the hands of the FED almost doubled and already amount to about eight trillion (continental) dollars.

As a consequence of the above, there has been an unprecedented increase in the quantity of money, measured by the M2, which you can see in the following graph, produced such an enormous alteration of the “natural” trend of the quantity of money (line dotted blue with arrow) like none of the previous QEs; further, bank reserves have skyrocketed, which are the ones in the FED, since not all monetary expansion stays in the market.

It should be noted that before the FED reported surplus reserves (above those of the legal reserve, which are very low), but not since last October, a serious lack of information and that, like the discontinuance of the MZM, are another example that things are done wrong, but Of course, if the one in charge is an ignorant upstart who may not have made a number, the normal thing is to get worse. Here it is not valid that “I surround myself with competent people”, which either, because you have to have criteria when selecting them. Of grief, but let’s continue.

The Stock Market and life

The fact is that only with the data of the surplus reserves, I already had plenty of arguments to, for six months, warn that no further quantitative expansion is necessary and thus anchor inflation expectations well, lest you produce an inflationary spiral, but, logically, who does not know cannot do pedagogy. Anyway, let us pray that this spiral does not occur, we do not have to do a QT and raise rates to repress the debtors and make a “taper” similar to the previous one, thus the M2 (previous blue graphic line) I would go back to the secular trend (dotted line; it is extended 12 months), which will take about four years, nothing more and nothing less.

According to the report for the first quarter of 2021 of the Credit Suisse Research Institute, the United States represents 55.9% of the world market capitalization, followed by Japan with 7.4%, China 5.1%, UK 4, 1%, France 2.9%, among others. That is why we focus on USA where the most important index is the S&P 500, whose percentage revaluation since 2013 is shown in the previous graph; in it you can see the key points and the lateral translation that he made during the previous “taper” (yellow oval), an evolution that I believe, at the moment, could be a good baseline scenario for the stock market strategy, with 4,000 points as the first control mark in the event of a corrective breakout.

Of course, other factors intervene in the current stock market evolution, such as fiscal policy, in which Biden, with his recipes, intends, among other things, to erase the tax cuts of Trump or, above all, of the huge overvaluation of the current bubble, subject that we will deal with in the second and last part, just after the next meeting of the Federal Open Market Committee, appointment in which the monetary measures are announced and that is scheduled for the 15-16 of this month. Until then, good luck with your investments.

Source: Vozpópuli by

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