Markets Are Still Dancing To The QE Two-Step...But Is the Music About To Stop?

Authored by Chris Hamilton via Econimica blog,

Just a quick thought about what is driving the US stock market.  The chart below shows the Wilshire 5000 (representing all publicly traded US equities in red), the Federal Reserve balance sheet (black), and excess reserves held at the Federal Reserve Bank by the largest of private(?) banks (likely a majority of these reserves held by foreign banks).  What you may notice is the rise in equities since '09 correlating with the rise in the Federal Reserves balance sheet until QE ended.  Then a momentary pause in equities during 2015, and another strong leg higher since.  That strong leg higher correlates nicely to the drawdown in the excess reserves held at the FRB, particularly since 2016.

The chart below shows these dynamics since 2008.  The Federal Reserves purchase of $3.6 trillion in new "assets"...and the continual rise in excess reserves banks hold at the Fed until September, 2014.  As the reserves and QE ceased rising and were essentially flat, the market began rolling over.  However, by late 2015 banks began withdrawing those excess reserves and putting them to work...and the equity markets positively responded.

Finally, a close-up of the dynamic since 2013.

But as the Fed is now raising rates, and banks are paid billions in IOER (interest on excess reserves) to do nothing with that money (IOER's is the Fed's only means now to raise explained HERE)...the excess reserves sitting fallow at the FRB have again begun to rise (chart below).

Absent further QE or banks drawing down their trillions in excess reserves...maybe investors should check the color of that swan flying overhead about now?!?  Invest accordingly.


bentaxle xtremers9 (not verified) Sun, 07/02/2017 - 09:22 Permalink

Forget QE. Search "plunge protection team," or "working group on financial markets." Then one step's a global 24 hr plunge protection thing for when "markets" are "dysfunctional" (sorry, crashing embarrasingly for politicians,) e.g EU securities Markets programme: But you could have looked all this up yourself. Must try harder to do your own thinking.......

In reply to by xtremers9 (not verified)

GooseShtepping Moron Sonny Brakes Sat, 07/01/2017 - 21:29 Permalink

The Middle Class destroyed itself by willingly dancing to the Fed's tune; nay, by calling the tune. James and Martha Babyboomer were all to happy to act like McMillionaires, to spend beyond their means, to destroy the cohesiveness of the culture, to saturate their lives with cheap Chinese crap, and then to demand a bailout when it all started falling apart. The Middle Class ain't no innocent victim here. They deserve everything they're getting.

In reply to by Sonny Brakes

karenm SeanJackP1 Sat, 07/01/2017 - 19:56 Permalink

CB's purpose is to rob the masses. They do that through creating booms and busts, both of which they profit from. They dont create cycles, they enhance them, exxagerrate create said booms and busts. So, when they are lowering rates, its to exxagerrate the boom, and when they raise rates, its to exxagerrate the bust.....This time they want a mega bust, which is why the FED has made sure there's loads of dry powder building up via multiple rate raises first. Those raises are wreaking havoc in the real economy, but the markets are still supported by the FED, tho they deny it....Hint...they lie constantly. Don't believe anything they tell you, not stats, forecasts, nothing. All lies

In reply to by SeanJackP1

SeanJackP1 karenm Sat, 07/01/2017 - 20:08 Permalink


"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered.... I believe that banking institutions are more dangerous to our liberties than standing armies.... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

In reply to by karenm

red1chief Sat, 07/01/2017 - 18:52 Permalink

When things start to tank the central banks will ease. There will be no limit until it causes goods inflation. Until then more wealth redistribution to the top .01%.

Crypto-World-Order (not verified) red1chief Sat, 07/01/2017 - 18:58 Permalink

Hope you didn't put much money on that bet, Dawg. These fuckers are going to print hard enough to wake the dead. They'll print like mo'fos, print like mad men, print like fly pimps. Print until their eyes bleed. They will print via the swaps, via bank bailouts and mergers, via fixed Treasury yields, via real honest-to-God negative interest rates, via loans to banks on no collateral, via payroll tax reductions, and in the end via actual fiat paper instruments which they might very well drop in bails from actual mutherfucking helicopters. They will not give two figs what anyone thinks. Here is why. Because this is the Goddamned end of it my friend. There is no accounting beyond this point. There will be no history of it. No one to take notes of rates of exchange, or of the graft and violence, nobody to worry about the deficit or the GDP or the national debt of any nation large or small under the blazing Goddamned sun. End. Of. It. Does anyone bitch about how Rome totally debased their coinage at the end? Hell no. But whoever did it had enough to hand and grabbed some land with a nice vineyard and sat back and waited for the Middle Ages to start 700 years further on. And that's what a singularity is about. Anything that passes through is striped of all meaning. Nothing we think is important now will remain so beyond the event horizon. Nobody will remember, nobody will write about it, nobody will be held to any standard. Ever for evar. So yeah, they'll print like the mad crazed terrorists they are. Because they have nothing to lose, and maybe something to gain. Maybe a dollar. Maybe a day. Maybe a slim chance to escape with some of the loot. Whatever the fuck advantage they see in it, for themselves and their elite crap wanking buddies, they will full-on-full-time-fucking do it to advantage. Watch for it, Dawg. It's totally on this time, on like Donkey Kong. And when the dust is settled in a generation hence it's going to have become another unbelievable episode among the ages of men.

In reply to by red1chief

elephant Crypto-World-Order (not verified) Sat, 07/01/2017 - 20:33 Permalink

Here's my question about the scenario you imagine:  Who is it that it printing until the lights go out?  It is the people who own the banks, and their proxies, the central banks.  They own everything already.  Everyone is indebted to them.  If they print to infinity, the indentured servants can buy their freedom with inflated dollars worth nothing.  How would that benefit the bankers?  No, I think the Jefferson quote about alternating inflation with deflation to rob the masses is still in play.  If the people know it is going in only one direction forever, no one gets hurt.  It doesn't make sense to me.

In reply to by Crypto-World-Order (not verified)

elephant rejected Sun, 07/02/2017 - 00:30 Permalink

Here's where that idea breaks down for me.  Inflating asset prices goes hand-in-hand with hyper-inflation.   This means that debtors, mortgage holders, etc.  will be able to pay off their debt with the equivalent of one or two year's savings.  That would be great for the majority of people in this country... to the detriment of debt holders.  I don't see that happening.  

In reply to by rejected

turkey george palmer elephant Sun, 07/02/2017 - 03:08 Permalink

They simply believe the reserves can now be loaned out at higher interest rates. I believe the banks have suckered yield chasing pension funds and I durance companies and possibly Arabs Chinese and whoever else into owning all this debt so that as it devalues the banks will make new loans at higher interest to government to generate higher income. If inflation does come back they will get burned a little but they believe they can raise rates fast enough to make gain profits. Government will still borrow and possibly quite heavily causing a higher jump in rates. I suppose the dollar will want to strengthen even though the debt is going to 30 trillion. Or more. Idk

In reply to by elephant

Atomizer Sat, 07/01/2017 - 19:24 Permalink

Tyler, I know you read this. If you recall, John bailed me out of my PW issue. It was actually my fault, had a setting shutdown, forgot to release it. John out of Austin, TX Is a great guy.If you need more money, open a patreon account. Flooding this bullshit ads even gets around my browser. I'll go for a cigarette or something until the site stops dancing around. It only happens during peak times in United States.Even the guy from Austin said it's a trainwreak, however..out of his jurisdiction. That's why I gave you the Mexican jumping video. It jumps all over the place in peak viewing. FYI. We love you, no worries. Look into it. Mexican Jumping Beans Explained - YouTube  

Cash Is King Sat, 07/01/2017 - 19:24 Permalink

Interestingly I just watched the Big Short & during lulls (product explanatory) I jumped on to ZH and saw NJ was the 4th State to announce publicaly their political & financial condition is in the shitter too. Could this be the beginning of round 3? Dot-Com, 7 yrs later housing crash & market melt down and now, 8 yrs down the road the States that have run out of options and can't possibly honor all their obligations are going to need a bailout. Is this the final stage when pitted against one another we refuse to bail out the States that spent & promised with reckless abandon? I'm getting the quest dealing once again.

The good news? The banks have 2 T in reserves earning interest which they could dump into markets & prop them since they owe us from last time.

The bad news? The good news is a moral fairytale & you watch, mark my words, then their excuse will be that they ARE fiduciaries and have an obligation not to endanger their clients or shareholders. Funny how things always circle back on themselves.


Cordeezy (not verified) Sat, 07/01/2017 - 21:21 Permalink

The music can't stop, and it will never stop.  We keep the music going by having faith in the system.  Once the Billions that are living in the system lose faith, that is when it stops, but there isn't and adequete alternative now, so it will continue until aliens invade probably.  

Blankfuck Sat, 07/01/2017 - 22:34 Permalink

NO NO NO, THE FED RESERVE FUCKERS WILL HAVE A PLAN F (they printed and manipulated markets to letter F already)  F PLAN will be the double butt fucking to the poor and middle class of the grand ole UGLY SUCKERD AMERIKA (USA)SEE THE FED FUCKERS WANT TO OWN EVERYTHING INCLUDING YOU, YOUR FAMILY-EVERYTHING But the stupid AMERICA-CANNED have their heads up  asses watching tv, sports playing video games,kniting, drugging, drinking.WHEN THE LITTLE PEOPLE WAKE UP, THEY NEED TO TAKE BACK THIS COUNTRY-REVOLOUTION STYLE.

J J Pettigrew Sun, 07/02/2017 - 08:15 Permalink

Pounding rates below the inflation rate for 9 years......and bitching about inflation being too low..HOW ABOUT rates being TOO LOW?  Theft from an entire generation to pad the billionaires and those who run the Fed from beind closed doors, right Lloyd?

wholy1 Sun, 07/02/2017 - 10:43 Permalink

yo all you so-called/"labeled" investors, traders, financial ANALyst/portfolio mgrs/economists, gov-agent/[selective] enforcers, barfly LIEyers/gov PERsecutors, POLLUTicians/legisTRAITORS, corp-owned disinfo media mavens, Sillywood Hollyweirds/insanetainers and other turd-pond bottom-feeders: what the HELLo do ya'll contribute to REAL PRODUCTIVE ENTERPRISE ???  How about . . .  NUTH'N / NADA / ZILCH !  P-A-R-A-S-I-T-E-S margined to the max and fixated on the [paper] “birds in the [phantom] bush”. Exciting times watching for the ” ‘Quickening’s’ Witching Hour ” when even ESF, NOT]Federal[NO]Reserve and other CB interventions can no longer mitigate such things as illiquidities due to run-a-muk U-N-F-U-N-D-E-D bankster lending fees/coupon amts on both current and new borrowing/fiat debt issues, US Treasuries redemptions and derivative defaults.  And all those gov "pensions", just like the other “birds in the [phantom] bush” - POOF!  Just wondering how ya'll will feel about "big-bro-gov" when it does the big "bail-in" on ya.  Bring it on, bring it on – hoo-wah!