The Fed’s Bloodletting Means That You Must Follow This Strategy To Profit

But here’s the problem. The Fed is Wall Street’s bank, its financier. The Fed stopped providing its support for Wall Street’s game, in October of last year. Since then the Fed has slashed $373 billion in assets off its balance sheet. It has promised to continue to do so at the rate of $50 billion per month until the balance sheet has reached a “normal” position.

Historically, “normal” means keeping bank reserves at the minimum necessary for the banks to have the no more than the required reserves as a percentage their deposits. I’ve done a back of the napkin calculation that would take until roughly May 2020 for that to happen. A few Primary Dealer spokesmen have made similar estimates. No doubt, big selloffs make them cry for the Fed to stop the spanking sooner, but the Fed now has a strict daddy who seems inclined not to listen.

When the Fed sheds assets, it also gets rid of the reserve deposit liability that was created when the Fed originally bought the asset. The flip side of that reserve is money in the financial system.  Now that the Fed is redeeming those assets, those reserve deposits are also being extinguished. So there’s less and less money in the system. The Fed has pulled $373 billion out of the system so far. Between now and May of 2020, the Fed will pull another $900 billion out of the banks.

That’s a lot, and its especially gargantuan when you consider that the Fed had been adding over a trillion dollars a year to the banking system at times from 2009 and 2014, outside of a couple pauses, and the taper in 2014. This is a huge negative swing.

Now, the Fed’s two main cohorts, the ECB and Bank of Japan are also all but out of the money printing business, while the Fed is slashing away.

Here’s Why Markets Rally Despite Tight Money

Sure the markets rally sometimes. There are huge speculators and hedge funds who have massive short positions, which they buy back quickly when they have big profits to protect. They are notoriously hair-triggered. And as I pointed out the other day, the more often a trading range is crossed, the thinner it becomes. So when the short covering starts, the upside fireworks can be pretty impressive.

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