It really is hard for me to figure out why the bond and equity market reacted as it did yesterday after the Fed made the following statement:
“It likely would be appropriate to begin reducing the Federal Reserve’s securities holdings this year.”
The fact that the Fed stated they intend to announce every three months the sale of huge amounts of bonds to reduce their $4.4 trillion balance sheet AND the bond (and stock) market immediately lifted is beyond my comprehension.
Was this a planned co-ordinated action of the People’s Bank of China to try to sustain investor confidence in US Treasury bonds? After all, PBOC holds most of the Treasury debt among their so-called $5.0 trillion assets and it too had been selling because debts in China are now close to 3x GDP, as Moody’s pointed out this week in their downgrade.
Or, maybe it was support from the Bank of Japan or the ECB, which each hold 4.5 trillion in these so-called assets (i.e., other people’s debt).
Yardeni Research illustrates the phenomenal growth in central bank debt in the past three years.
http://www.yardeni.com/pub/PEACOCKFEDECBASSETS.pdf
Simply amazing.
And since these central banks are now also buying equities, it’s going to be interesting to see their balance sheets contract in the trillions of dollars in the aggregate when the great market crash happens, and it will happen. Won’t hurt these central banks; but, my heavens, that crash will obliterate the values of most independent investor portfolios and send gold soaring.
As I see it… but then … I still cannot see why the market reacted as it did yesterday afternoon. Unless of course the other central banks stepped in, in which case that would only be a temporary holding action.
In any case, the Goldminers today are likely to get sold down again, showing that yesterday afternoon’s trading was an aberration.
The global financial system is getting closer to ruination and we can blame the central banks for that.
