Fed Balance Sheet Weekly Update: 17/3/11 – the clean-up operation continues…
An update of the weekly Fed Balance Sheet (proportions) chart:
The peculiar thing about post-2008 monetary policy is that it’s not just about quantity, it’s also about quality. The means by which the Fed has rigged the game of speculation in money has been to alter the quantity of stuff backing the dollar as well as the quality of stuff backing the dollar. In more politically correct and jargonistic terms; the Fed has unconventionally altered the composition of its assets while engaging in balance sheet expansions. This is why I post the (above) weekly Fed balance sheet chart of the Fed’s Assets (% Total Assets). People don’t look at the Fed’s balance sheet like this, so – as a contrarian – I’m sitting up straight and watching carefully.
Taking a look at the above chart. We can see that the effect of QE2 has been the resurgence of conventional government bonds & notes as the core of the Fed’s Balance Sheet (and the simultaneous recession of MBSs as a % of total assets). For me, this is an uncommon form of de facto tightening that has the potential to trick people into the wrong positions. The Fed initially engaged in this new form of monetary policy as a way of reducing the burden of certain institutions’ liabilities compared to their assets. Indeed, as they were fixing the game for the worst of the bunch, most institutions came out solvent. But – since 2009 – have the positions of these institutions really changed all that much? What if we go back to the old dollar again? Isn’t that what QE2 is – partially – doing? Can zombies die?
It’s like a guy who looks left while crossing the road when he should be looking right: eventually, he gets hit, only he doesn’t know what hit him. As a contrarian investor, this is potentially golden. Indeed, the bullish momentum has been strong, fierce and dogmatic: a difficult thing to oppose emotionally. Likewise, the mass of conventional analysis on money says that this is ‘ultra-loose’ monetary policy: a difficult thing to oppose intellectually. So, with the recent turbulence experienced off the back of the news out of Japan, will the consensual thinkers get hit by the metaphorical speeding car behind them?
Recommended: Charting the Federal Reserve's Assets - 1915 to 2012