On Aug. 4, the Managing Director and the head of Global Fundamental Credit Strategy at Deutsche Bank issued several statements in the aftermath of last week's market sell off and market decline that led to a losing month on all exchanges. Primarily focused on the U.S. central bank and last week's policy change to taper another $10 billion from QE, Reid announced that virtually the entire five year market rally has been due to the Federal Reserve's money printing and vast increase to their balance sheet.
Since the U.S. central bank began a policy of Quantitative Easing in 2010 in the aftermath of the credit crisis that nearly brought down the entire global financial system, equity markets have risen almost exactly in tandem with Fed money printing, as noted in this chart provided by Zerohedge. Additionally, when you look at every instance where the Fed halted liquidity into the markets, primarily in the terms after QE1, QE2, and Operation Twist, you will see that the stock markets declined to levels initially determined before the central bank's mew programs started.
The risk sell-off we've seen in recent weeks frustrates us a little as the chart we've published most this year has pretty much predicted that tougher times would come around July. We've been paying it a lot of attention for over a year now but decided to wait until the autumn before we raised the warning flags. The chart in question (included in today's pdf) is the one showing the Fed balance sheet and the S&P 500 (as a proxy for risk generally). As you can see, since the Fed balance sheet was used as an aggressive policy tool post-GFC, the graph suggests that the S&P 500 is well correlated with the size of the Fed balance sheet with the former leading the latter by 3 months. Given that the Fed have recently signalled that they will likely be finishing expanding their balance sheet in October, 3 months before that was July. This is important as virtually all of the mega rally in the last 5 years has come in the Fed balance sheet expansion periods. The other periods have been more challenging for markets. - Financial Times
To put into perspective just how immense and how reliant upon Quantitative Easing the stock markets really are, a recent release of just how much central bank liquidity has gone directly into equities shows that out of the entire global market cap for all stock markets around the world, central banks own $29 trillion of the $54.75 trillion market.
Jim Reid is dead on in his assessment that as the Fed goes in its direction for monetary policy, so go the equity markets. And with rising inflation, a dearth in the velocity of money in the economy, and a greater move by the East towards a rejection of the dollar and reserve currency, it is no longer surprising to see that the Dow, S&P 500, and other global stock markets are beginning a steady decline downward after the Fed has nearly finished the tapering of its massive QE3 program.