Email of the day on the Fed's balance sheet
Comment of the Day

July 14 2022

Commentary by Eoin Treacy

Email of the day on the Fed's balance sheet

You are sending out comprehensive information that I am not finding anywhere else, addressing multiple markets, which is quite helpful for me as an investor. So that brings up two questions: First, I wonder if you agree that the Fed has already reduced its balance sheet by about $1 trillion dollars? (As I heard recently from one analyst, which, given the rise in the dollar could explain the decline in values of multiple assets...) And, second, given the drop in so many assets: Bitcoin, gold, stocks, uranium recently, metals on the LME, to name a few, are we already actually in a recession, even though not officially labeled by the powers that be, is this, in fact a recessionary event we are proceeding through regardless on any official labeling, in your opinion? 

Eoin Treacy's view

Thank you for this question which may be of interest to the Collective. The Fed only began reducing the size of its balance sheet in July. They are starting at a pace of -$47.5 billion and plan to double that to $95 billion in the autumn. The bulk of global quantitative tightening so far has been achieved through the strength of the Dollar.

My Dollar denominated chart of central bank total assets has contracted from $33.23 trillion in February to $30.29 today. That’s a strong background reason for why we have seen such a large correction in asset prices over the same timeframe.

At present the Dollar is quite overbought so there is clear scope for a period of consolidation and not least as the Euro tests the psychological $1 level. That should lend some support to asset prices in the very short term.

However, I am reminded of the adage “it’s a recession when your friend loses his job, and a depression when you lose yours”. I continue to see stories about the red-hot jobs market, but I am personally aware of several companies who went from full-on expansion mode in January, to firing people in the last month. Many tech companies are rescinding job offers and slowing hiring. Here is a link to Sequoia’s slide deck from their May meeting advising partner companies to trim spending.  

The short answer is yes. This market activity bears all the hallmarks of a recession and central banks are not done with tightening yet. Joblessness is trending higher, but it is not yet at levels that would prompt the Federal Reserve to change course.

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