EC Peak Growth And Inflation

The last time the Fed announced a plan to taper its $85 billion per month QE program was back in May 2013. As a consequence, the S&P 500 dropped 6.5% in three weeks. But that relatively minor hiccup occurred because the stock market was extremely cheap in comparison to where it sits today. The Total Market Capitalization of Equities compared to GDP was just 103% at the time of the first Taper Tantrum. In sharp contrast, it is 205% of GDP today!  And Jerome Powel's $120 billion per month QE scheme is almost 1.5x the size of then-Fed Chair Ben Bernanke's money printing endeavor.

Also, during the two years prior to "The Taper Tantrum" (from May 2011 thru May 2013), the Fed's balance sheet increased by just $600 billion. This compares to the whopping $4.7 trillion of asset purchases that will have occurred from January 2020 thru the end of this year—assuming the Fed doesn't start reducing its purchases until 2022. Those trillions of dollars helped send asset prices to the thermosphere and have inflated a much bigger bubble than has ever existed before. Hence, this removal of monetary support should carry much greater significance this time.

Yet another consequence of the Fed's monetary manipulation is the effect it's having on the corporate bond market. U.S. corporate debt outstanding has surged to reach $10.6 trillion. That is a record high 50% of GDP. For context, this figure was just 16% of GDP back in 1980. Junk-rated debt yields are at the tightest spreads to Treasuries, and their yields are the lowest in history. Of course, the yield on Treasuries has been massively distorted by the Fed as well. In fact, the government was able to sell $40 billion in T-bills on April 29 with a yield of exactly zero. Yes, the bubble in fixed income is incredulous.

Asset prices have been driven higher precisely because of the near $5 trillion in newly minted money that was thrown at Wall Street over the past two years. However, sometime next year, we will learn what happens to these bubbles when the monetary speedometer goes from $5 trillion to $0.

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Michael Pento is the President and Founder of Pento Portfolio Strategies, produces the weekly podcast called,  more

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William K. 2 months ago Member's comment

Interesting and depressing and quite i agreement with what I have been anticipating, except the timing is a bit different. The question is about accountability and control. Who is willing to hold the federal reserve bakers accountable? And who is authorized to implement the firing squad to reward them for their efforts? The damage that has been set into motion is not able to be undone and so it will surely be a rough ride for a while.