The FOMC’s Garbage Grinder

This week the Dow Jones saw its fourth post March 23rd bottom BEV Zero on Thursday, with the first of these four happening on November 16th.   There is a pattern here; the Dow Jones goes on to a new all-time high, and then (or so far) it takes a break for a week or so before it does so again.  If you skip down to the Dow Jones 15 Count Table below, this pattern is clearly evident.  Not a market mania, but good market action for the bulls.

C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 687\Chart #1   DJ BEV 2007 to 2020.gif

Of course for decades the Dow Jones hasn’t gone on to new all-time highs without a little help from its friends at the Federal Reserve Open Market Committee; the FOMC.  These “open market operations” at the FOMC “monetize” debt, and then “inject” the resultant effluence back into the financial system to lubricate it and to “stimulate the economy.” 

It’s very “scientific”, so much so that unless someone has a degree of no less than a BS in economics, the FOMC won’t even let them into the room with the garbage grinder where they do all of this sophisticated monetary stuff.  Well, that’s what my barber told me.

They “injected” an additional $53.48 billion into the financial system this week, as seen in the chart below.  In an economy whose markets have trillions of dollars of market capitalization, that doesn’t seem like much.  But during the 1990’s high-tech and the 2000’s mortgage bubbles, the FOMC had to monetize only about $3.5 billion * a month * to keep those parties going.  We’re dealing with banks and their fractional reserve system, where every dollar deposited by wage earners in a bank or the FOMC can be used to create many additional dollars in credit – bank loans.

The plot below is the data found in the $Bils column in the table; the actual weekly change in the FOMC’s portfolio of US T-debt.  In the first week of April 2020, the FOMC “injected” a whopping $418 bil into the financial system.

C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 687\Chart #2   Wk Cng Fed Holdings.gif

The next chart’s plot is based on the table’s 10Wk M/A column, a ten week moving average of the data.  The FOMC’s current Not QE-4 at its 10Wk M/A peak in May 2020 was about four times that of Doctor Bernanke’s first QE at its 10Wk M/A peak in May 2009.  The current Not QE-4 reflated the Dow Jones from a -37.5% market collapse back up to a new all-time high in just eight months.  That’s pretty impressive, but looking at these QEs, why in 2020 did it take eight months, instead of eight weeks or eight days to reflate the Dow Jones when the FOMC was “injecting” monstrous levels of “liquidity” into it?

C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 687\Chart #3   Wk Cng Fed Hold 10Wk MA.gif

Let’s look at the Federal Reserve’s balance sheet holding of US T-debt (Blue Plot) in my next chart.  The effects of all these QEs (and one QT) on the Federal Reserve’s balance sheet below are very pronounced.  

At the peak of the credit crisis in the autumn of 2008, the total portfolio of US T-debt held by the FOMC was about $480 billion dollars.  In April this year the FOMC “monetized”$418 billion dollars in a single week!  Now that is what I call “policy making”, but looking at the QE-1’s 10Wk M/A peak in May 2009 (chart above); its $50 billion.  That’s about 10% of the Fed’s total holding of US T-debt from just over a half year before – a 10% increase is a lot!  But that’s what it took to turn around the global financial system, then in a state of collapse.

Just last May when the Not QE-4’s 10Wk M/A peaked at $200 billion, the Federal Reserve’s holding of US T-debt was $5,605 billion dollars.  So the $200 billion “injection” was about only 3.56% of the Federal Reserve’s total holding of US T-debt.  That’s significantly less than the 10% from QE-1, but it’s a massive increase nonetheless.  In terms of the Federal Reserve’s total holdings of US T-debt, this year’s Not QE-4 is not as large as the QE-1 from 2009, but then last March’s market decline was nowhere as bad as it was in October 2008.

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