{"id":11324,"date":"2014-11-12T02:13:49","date_gmt":"2014-11-12T07:13:49","guid":{"rendered":"http:\/\/goldstocksforex.com\/?p=11324"},"modified":"2014-11-12T02:13:49","modified_gmt":"2014-11-12T07:13:49","slug":"will-the-stock-market-collapse-when-qe-is-withdrawn","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2014\/11\/12\/will-the-stock-market-collapse-when-qe-is-withdrawn\/","title":{"rendered":"Will the stock market collapse when QE is withdrawn?"},"content":{"rendered":"<p>This chart in <a href=\"https:\/\/wibiq.westpac.com.au\/wibiqauthoring\/_uploads\/file\/Australia\/2014\/November\/Northern_Exposure_United_States_November_2014.pdf\">Westpac&#8217;s Northern Exposure chart summary<\/a> implies that US stocks rely on Fed balance sheet expansion (QE) for support.<\/p>\n<p><img data-recalc-dims=\"1\" loading=\"lazy\" decoding=\"async\" class=\"aligncenter\" width=\"525\" height=\"373\" title=\"Fed Securities Held Outright v. S&amp;P 500\" alt=\"Fed Securities Held Outright v. S&amp;P 500\" src=\"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2014\/2014-11-12-westpac-spx.png?resize=525%2C373&#038;ssl=1\" \/><\/p>\n<p>The curve shows an almost perfect fit. There are just two things wrong with it. First, the scales on the left and right sides of the chart are not proportionate: the scale on the left compares a 9 times increase to a 3 times increase on the right. Second, while the Fed has expanded its balance sheet to more than $4 Trillion, a large percentage of that money has washed straight back to the Fed &mdash; deposited by banks as excess reserves.<\/p>\n<p><img data-recalc-dims=\"1\" loading=\"lazy\" decoding=\"async\" class=\"aligncenter\" width=\"525\" height=\"349\" title=\"Fed Total Assets and Excess Reserves\" alt=\"Fed Total Assets and Excess Reserves\" src=\"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2014\/2014-11-12-fed-assets-reserves.png?resize=525%2C349&#038;ssl=1\" \/><\/p>\n<p>The impact on the working monetary base (monetary base adjusted for excess reserves) is far smaller: a rise of 66% (or $544 billion) over the past 7 years.<\/p>\n<p><img data-recalc-dims=\"1\" loading=\"lazy\" decoding=\"async\" class=\"aligncenter\" width=\"525\" height=\"349\" title=\"Fed Total Assets minus Excess Reserves compared to Working Monetary Base\" alt=\"Fed Total Assets minus Excess Reserves compared to Working Monetary Base\" src=\"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2014\/2014-11-12-fed-assets-mbase.png?resize=525%2C349&#038;ssl=1\" \/><\/p>\n<p>A chart since 1985 shows nominal GDP (GDP before adjustment for inflation) normally expanded between 5% and 7.5% a year outside of recessions. But NGDP has not recovered above 5% after 2008. This may be partly attributable to lower inflation, but the Fed would clearly want to see NGDP above 5% &mdash; roughly 3% real growth and 2% inflation.<\/p>\n<p><img data-recalc-dims=\"1\" loading=\"lazy\" decoding=\"async\" class=\"aligncenter\" width=\"525\" height=\"349\" title=\"Working Monetary Base Growth compared to NGDP\" alt=\"Working Monetary Base Growth compared to NGDP\" src=\"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2014\/2014-11-12-monetarybase-ngdp.png?resize=525%2C349&#038;ssl=1\" \/><\/p>\n<p>We can also see that growth of below 5% in the working monetary base is often precursor to a recession, 1995\/1996 being one exception. The second is when the Fed took their foot off the gas pedal too early, after QE1 in 2010, but were able to resume in time to head off a major contraction. They have been far more circumspect the second time and are likely to maintain monetary base growth North of 5%. Too sharp a slow-down would be cause for concern.<\/p>\n<p>When we calculate the ratio of total US stock market capitalisation to the working monetary base [blue line] it is apparent that market response to the increase in monetary base is far more cautious than it was in 1998\/1999.<\/p>\n<p><img data-recalc-dims=\"1\" loading=\"lazy\" decoding=\"async\" class=\"aligncenter\" width=\"525\" height=\"349\" title=\"Working Monetary Base Growth compared to NGDP\" alt=\"Working Monetary Base Growth compared to NGDP\" src=\"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2014\/2014-11-12-marketcap-mbase.png?resize=525%2C349&#038;ssl=1\" \/><\/p>\n<p>With Forward Price to Earnings Ratios for the S&amp;P 500 and Nasdaq close to their long-term average (<a href=\"https:\/\/wibiq.westpac.com.au\/wibiqauthoring\/_uploads\/file\/Australia\/2014\/November\/Northern_Exposure_United_States_November_2014.pdf\">Westpac Northern Exposure, Page 118<\/a>), I consider the likelihood of the QE taper precipitating a major market collapse to be remote.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>This chart in Westpac&#8217;s Northern Exposure chart summary implies that US stocks rely on Fed balance sheet expansion (QE) for support. The curve shows an almost perfect fit. There are just two things wrong with it. First, the scales on the left and right sides of the chart are not proportionate: the scale on the &hellip; <\/p>\n<p class=\"link-more\"><a href=\"https:\/\/thepatientinvestor.com\/index.php\/2014\/11\/12\/will-the-stock-market-collapse-when-qe-is-withdrawn\/\" class=\"more-link\">Continue reading<span class=\"screen-reader-text\"> &#8220;Will the stock market collapse when QE is withdrawn?&#8221;<\/span><\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[31,57,34],"tags":[2234,2340,2485,2827,2831],"class_list":["post-11324","post","type-post","status-publish","format-standard","hentry","category-the-fed-banks-interest-rates","category-stock-markets","category-us-canada-countries-regions","tag-market-capitalization","tag-monetary-base","tag-nominal-gdp","tag-qe","tag-quantitative-easing"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.2 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Will the stock market collapse when QE is withdrawn? - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Will the stock market collapse when QE is withdrawn? - the patient investor\" \/>\n<meta property=\"og:description\" content=\"This chart in Westpac&#8217;s Northern Exposure chart summary implies that US stocks rely on Fed balance sheet expansion (QE) for support. 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First, QE increases the supply of money in financial markets when the proceeds of Fed purchases are credited to sellers' accounts in the commercial banking system. Second, it reduces the supply of Treasuries in financial markets, driving up prices and reducing long-term\u2026","rel":"","context":"In &quot;Banks &amp; Interest Rates&quot;","block_context":{"text":"Banks &amp; Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"Fed QE & S&P 500 Index","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-05-12-fedassets-spx.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-05-12-fedassets-spx.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-05-12-fedassets-spx.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":8778,"url":"https:\/\/thepatientinvestor.com\/index.php\/2013\/11\/22\/why-does-qe-taper-spook-the-market-if-it-will-have-no-real-impact\/","url_meta":{"origin":11324,"position":1},"title":"Why does QE taper spook the market if it will have no real impact?","author":"ColinTwiggs","date":"November 22, 2013","format":false,"excerpt":"Question received from CG about the impact of QE and Fed taper: I'm not arguing against the data presented on the graph, but if true that most of the QE bond purchases are being parked by banks in interest-bearing, excess reserve deposits at the Fed, why do the markets get\u2026","rel":"","context":"In &quot;Banks &amp; Interest Rates&quot;","block_context":{"text":"Banks &amp; Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"US Household Debt","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2013\/2013-11-18-us-excsresns.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2013\/2013-11-18-us-excsresns.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2013\/2013-11-18-us-excsresns.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":13713,"url":"https:\/\/thepatientinvestor.com\/index.php\/2013\/11\/06\/is-the-market-in-a-bubble\/","url_meta":{"origin":11324,"position":2},"title":"Is the market in a bubble?","author":"ColinTwiggs","date":"November 6, 2013","format":false,"excerpt":"As global growth recovers we expect equity markets to be buoyed by improvements in both earnings and dividends, with strong momentum over the quarter. There is much discussion in the media as to whether various markets are in a \"bubble\". Little attention is devoted to the fact that bubbles can\u2026","rel":"","context":"In &quot;Market Insights&quot;","block_context":{"text":"Market Insights","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/market-insights\/"},"img":{"alt_text":"US Household Debt","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2013\/2013-11-18-us-excsresns.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2013\/2013-11-18-us-excsresns.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2013\/2013-11-18-us-excsresns.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":19510,"url":"https:\/\/thepatientinvestor.com\/index.php\/2019\/11\/30\/sp-500-betting-on-qe\/","url_meta":{"origin":11324,"position":3},"title":"S&#038;P 500: Betting on QE","author":"Colin Twiggs","date":"November 30, 2019","format":false,"excerpt":"The S&P 500 continued its cautious advance in a shortened week due to Thanksgiving. Expect retracement to test the new support level at 3000. I believe that the latest surge has little do with an improved earnings outlook and is simply a straight bet that Fed balance sheet expansion (QE)\u2026","rel":"","context":"In &quot;Banks &amp; Interest Rates&quot;","block_context":{"text":"Banks &amp; Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":19322,"url":"https:\/\/thepatientinvestor.com\/index.php\/2019\/10\/23\/fed-losing-control\/","url_meta":{"origin":11324,"position":4},"title":"S&#038;P 500 bearish as Fed forced to expand","author":"Colin Twiggs","date":"October 23, 2019","format":false,"excerpt":"Juliet Declercq at JDI Research maintains that the normal business cycle has been replaced by a liquidity cycle, where market conditions are dictated by the ebb and flow of money from central banks. Risk will remain elevated for as long as natural price discovery is suppressed and risk-reward decisions are\u2026","rel":"","context":"In &quot;Banks &amp; Interest Rates&quot;","block_context":{"text":"Banks &amp; Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":19688,"url":"https:\/\/thepatientinvestor.com\/index.php\/2020\/01\/25\/irrational-exuberance\/","url_meta":{"origin":11324,"position":5},"title":"Irrational Exuberance","author":"Colin Twiggs","date":"January 25, 2020","format":false,"excerpt":"I believe this warrants a separate post: The market is running on more stimulants than a Russian weight-lifter. Unemployment is near record lows but the US Treasury is still running trillion dollar deficits. While the Fed is cutting interest rates. And again expanding its balance sheet. More than twelve years\u2026","rel":"","context":"In &quot;Banks &amp; Interest Rates&quot;","block_context":{"text":"Banks &amp; Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/11324","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=11324"}],"version-history":[{"count":0,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/11324\/revisions"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=11324"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=11324"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=11324"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}