Do you want to understand what the Fed is doing, but don’t have time to wade through volumes of tedious economics writing?
Well, now the pros at dshort.com have made all that possible. They’ve reduced 4 years of monetary policy into one chart that illustrates exactly what the Fed is up-to and who benefits from the policy. Here’s the link.
The chart shows how the Fed’s lending facilities, zero interest rates and $700 billion bank bailout (TARP) helped to put a bottom under a market that had fallen off a cliff. Then came the first round of Quantitative Easing (QE1) during which the Fed purchased $1.25 trillion in mortgage-backed securities (MBS), $200 billion in US Treasuries and $150 billion in agency debt (Fannie and Freddie) This massive infusion of liquidity triggered a sharp rebound in equities starting on March 9, 2009. It also transformed the Central Bank’s balance sheet into the largest waste treatment facility on planet earth.
By May 2010, the Fed’s adrenalin rush began to wear off and stocks began to sag once again. That led to a second round of QE, a $600 billion mainline injection which sent equities soaring until midyear 2011. When the markets tailed off in May, Fed chairman Bernanke initiated a third round of QE (Operation Twist) which buoyed stocks with another $400 billion in liquidity. Operation Twist is set to end in mid-June, after which Bernanke will undoubtedly find some excuse to launch yet another round of bond buying to keep stock prices artificially high. Many of the big banks and bond funds have already started buying up distressed MBS in anticipation of QE3. It’s not likely that Bernanke will disappoint them.
So, there you have it; 4 years of policy in one picture.
What I find so interesting about Bernanke’s policy is that no one (who follows the markets) even disputes what he’s doing anymore. You know, there used to be a debate about whether the Fed was “juicing” the market or not. There’s no debate anymore. Even the folks over at the Wall Street Journal seem to agree that fundamentals no longer matter. What matters is liquidity, boatloads of virtual liquidity provided gratis via the Fed’s printing operations. As one of the WSJ’s journalists noted just this week; stocks go “up when the whiff of government intervention is strong, (and) down when it recedes.” (“Sowing Seeds of the Next Major Crisis”, Wall Street Journal) And the way this plays out is that– even when the economic data is bad– stocks still climb higher if the Fed signals that more help is on the way.
Now check out this brief commentary by Northern Trust’s (former) chief economist Paul Kasriel who tries to answer the question: “Has the Fed Boosted the Stock Market?”
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