Distortion & misallocation & wealth transfer

TVC:SPX   S&P 500 Index
The chart says it all.

3 trillion increase in balance sheet in 2 or 3 months...

Party will go on as long as the long-term interest rate remains low...

Distortion- The massive rally has been partially fueled by $l8 trillion worth of fiscal and central bank stimulus. Short-term lending rate cut to near zero and long-term interest rates dropped to near all time low caused by massive QE .

Massive QE has distorted the interest rate so that the cost of capital is kept artificially low to the point that company is justified to undertake many projects that would not yield any productive return under the normal circumstances

Evolution of Fed's QE-

Treasury/municipal bonds-> corporate bond ETF-> individual corporate bond-> Yield curve control (in potential development)-> Maybe... Individual stocks in the future...

Even though Fed's purchase of individual bonds and ETF accounted for just a small percentage of overall bond market, I can't help but wonder why the Fed included lower-medium grade/slightly speculative bonds and bonds issued by financially healthy companies such as AT&T , UnitedHealth Group , and Walmart ?... to name a few.

Easy credit has undoubtedly kept some zombie company afloat when it is probably better for them to die off.

QE and forward guidance have resulted in high commercial bank deposits. Fortunately, as long as the circulation of velocity remains low and producer can keep up with the demand of good and service, the economy will not overheat.

Misallocation of capital- It is no surprise that American household's wealth is increasingly tied to stock market & real estate. As a result, there is a negative correlation between household wealth and interest rate.

The increased household consumption that results from the perceived gain in the stock market & real estate driven by low interest rate is the main culprit of chronic trade deficit.

Oh yeah, FAANG now collectively accounts for roughly 20% of top stock marketcap...

If it does not convince you that stock market is overvalued, just look at the ratio of total market cap over GDP (currently at 147.2%) and Shiller PE which is 13.1% higher than the recent 20-year average of 25.8.

Wealth transfer-

Pension fund, endowment, mutual fund and hedge fund are having a field day.

Maybe just a handful of investment groups are dictating the movement of the market. BlackRock alone has more than 7 trillion of AUM . Goldman Sachs, Bridgewater and few other investment groups also each controls more than hundred billions of asset.

It is hard to image that the quick reversal in the market is caused by a bunch of retail investors and traders panic sold in March, then immediately FOMO back into the market only a few weeks later.


Great chart!

How do you get access to the US Fed balance sheet in Trading View? I was trying to do that yesterday. Thanks
+1 Reply
Libratus Dr_Roboto
@Dr_Roboto, Hi Glad you like it! It is in the indicator section. Just search for "fed" and the creator is NeoButane
Dr_Roboto Libratus
@Libratus, I was just reading something similar.

I find it interesting that the market was doing very well when the Fed started to wind-down in late 2017-2019. The trade war with China must have created a lot more economic damage then was publicized. You can see the market is in a sideways corrective cycle. You can also see the GDP was going to be down for the first quater, which would be first since 2009. Then "out of the blue" the Fed starts pumping again and the market takes off.
+1 Reply
Libratus Dr_Roboto
@Dr_Roboto, Sometimes, you wonder if Fed's obsession with keeping inflation and unemployment at "adequate" lvl is going too far. Last time I checked, the trade deficit with China was slightly down, but it only happened because the overall trade with China was down and import went down slightly faster than export. You can say we got the "surplus" we want...
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