October 3, 2023

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It must be said that all banking professionals had predicted that QT would not last and QE would start soon and that is why stocks were not going to fall further in winter 2022.

I thought this is unlikely as the central banks will be sloppy but will still take a reasonable course with the tightrope and after more stock market pain will stop it at some point for good.

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Now these bankers did not predict their own demise as the reason for this end of QT (quantitative tightening) but here we are. How unfortunate

Here is a chart of the Federal Reserve balance sheet:

About half the tightening that has plagued the stock market has been reversed by QE moves. This is probably bad news for inflation and probably good news for the market.

What does it mean to move forward? This means tightening is over for the time being and inflation is unlikely to come down anytime soon.

As we have seen, the banking system is not going to collapse, but there are going to be a lot of corrective actions ahead to rectify the situation.

Of course, many people are going to predict hyperinflation but it is not going to happen.

I know what’s going to happen, waves of randomness. The fog of war will be there for some time, but I am betting on a positive outcome which means normalization in a short time.

The problem right now is, too much money but in the wrong places.

All that money in the Fed’s ‘reverse repo’ didn’t help the Silicon Valley banks, because their government debt was a few months old, so they could stave off implosion. Make no mistake, a few months ago the world would have thrown money at them if they had asked for cash.

The post-Covid world is fragile.

Here’s the dam of money sitting on the US economy:

There is too much cash in the system, as seen in too many assets on the Federal Reserve’s balance sheet, but it cannot be drawn down without hitting the ceiling. You can see the tip of that iceberg in the reverse repo. The plumbing is going to get adjusted and it’s going to get spicy.

So what is the wise thing to do?

It’s probably the same thing for central banks and investors. Do nothing but pay attention to what is necessary for stability.

We can expect a lot of volatility.

If there’s going to be a rolling banking crisis, in many ways the safest place to be is in stocks; If it isn’t, you would expect the stock to automatically hold.

I am currently a blue chip bank as the money in reverse repo is in their cash reserves and this is not the case in 2008.

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