A Massive $34 Trillion in Stimulus… What Has It Done?


 The "great unwind" is here…   After months of speculation, the Federal Reserve formally made the announcement this week. It will begin to "taper" its $4.5 trillion balance sheet in October. As the Wall Street Journal reported…  

The Federal Reserve indicated Wednesday… it would begin shrinking its portfolio of bonds next month, starting to close the books on an unprecedented and sometimes controversial policy experiment…   Beginning in October, the Fed will end its practice of fully reinvesting the principal payments of maturing into new bonds and instead allow $10 billion in holdings to roll off without reinvestment every month. Those amounts will increase by $10 billion each quarter to a maximum of $50 billion.

The central bank also said it expects to raise rates at least one more time this year. And Fed Chairwoman Janet Yellen used the occasion to confirm that the era of "easy money" is ending. More from the Journal…  

"The basic message here is U.S. economic performance has been good," Fed Chairwoman Janet Yellen said at a press conference after a two-day policy meeting that ended Wednesday. "The American people should feel the steps we have taken to normalize monetary policy… are well justified given the very substantial progress we've seen in the economy…"   Ms. Yellen said there was a "high bar" to resume reinvestments, and the Fed would only do so in the event of a "significant shock that's a material deterioration to the outlook."

 We remain skeptical…   The Fed and other central banks have thrown the monetary "kitchen sink" at the global economy. Yet growth remains tepid at best. And the price inflation they've been so desperate to create has yet to show up.   Despite its rhetoric, even the Fed doesn't know what will happen as it begins to remove this unprecedented stimulus. Maybe it's right… Maybe the economy will continue to grind higher even without support.   We believe the Fed's confidence is misplaced… And we're apparently not alone.   Strategists at Deutsche Bank believe that the Fed tightening – the beginning of what they've called "the great central bank unwind" – could ultimately trigger the next financial crisis. From their recent report titled "The Next Financial Crisis"…  

When looking for the next financial crisis, it's hard to escape from the fact that we're seemingly in the early stages of the "great unwind" of global monetary stimulus at the same time as global debt remains at all-time highs following an increase over the past decade – at the government level at least – which has been unparalleled in peacetime history…   You slowly become anchored to believe the current situation is normal as it's persisted for so long now. However, it's anything but normal. Since the financial crisis, $10 trillion plus has been added to the balance sheets of the four largest central banks with over $14 trillion of assets now owned.

 
The following chart puts those figures in startling perspective…      
 But the analysts also note that even this chart doesn't tell the full story…   If you also add in the record growth in government debt in the U.S., U.K., eurozone, and Japan, you get a total monetary and fiscal stimulus of nearly $34 trillion since the financial crisis. And what do we have to show for it? More from the report…  

In the end, $34 trillion of stimulus and [quantitative easing] has delivered only very low growth, subdued inflation, and sky-high asset prices around the globe. This is unprecedented territory and how can anyone estimate what the fallout will be when we normalize again?…   History would suggest there will be substantial consequences of the move especially given the elevated level of many global asset prices… [Even] if the unwind stalls as either central banks get cold feet or if the economy unexpectedly weakens, we will still be left with an unprecedented global situation, and one which makes finance inherently unstable even if we are currently living in the lowest volatility markets on record.

They also worry that if this unwind fails, central banks will be left with little of their usual "ammunition" to stimulate the economy again. Like us, Deutsche Bank fears we could see even more extreme measures next time around…  

Could the next recession be the one where policy makers are the most impotent they've been for 45 years or will they simply go for even more extreme tactics and resort to full on monetization to pay for a fiscal splurge? It does feel that we're at a crossroads and the next downturn could be marked by extreme events given the policy cul-de-sac we seem to be nearing the end of.

 
 Of course, none of this means a crisis is imminent… And even our own Stansberry Research analysts disagree about what likely comes next.   As regular readers know, Steve Sjuggerud believes the "Melt Up" will push stocks to explosive new highs before the bull market finally ends. On the other hand, Stansberry Research founder Porter Stansberry believes a devastating bear market could be just around the corner.   If you're among those who aren't sure what to make of today's market, we urge you to take a few moments to check out our colleague Dr. David "Doc" Eifrig's new presentation…   As you'll see, he just made a major announcement this week… and revealed what could be the second-biggest call of his publishing career. It involves a way to "have your cake and eat it, too"…   In short, Doc says you can use a few simple options strategies to safeguard your portfolio against the bear market Porter has predicted… and simultaneously position yourself for more upside if Steve is correct and the Melt Up continues.   If you have any money in the market today, you owe it to yourself to learn more. Click here for the details. (This link does not lead to a long sales video.)   Regards,   Justin Brill  
Editor's note: If you're uncertain about what's going to happen with the stock market, you're not alone. That's why Dave just went "on the record" with what may be the second-biggest call of his publishing career. See what he's saying – and learn about a special, limited-time offer to join his Retirement Trader service at a steep discount – right here.


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