It’s Official: The Fed is DRAINING Liquidity from the Financial System
Yesterday I warned that the Fed is “pulling the plug” on the markets.
The explanation for this is simple. The primary driver of the stock market since the March bottom has been the EXTRAORDINARY amount of liquidity the Fed has pumped into the financial system.
All told, the Fed has printed over $3 trillion and funneled it into the financial system since February.
THIS is what has pushed stocks straight up week after week.
Which is why everyone should be concerned that the Fed has STOPPED doing this.
Indeed, as I noted yesterday, the Fed has shrunk its balance sheet since the beginning of June.
It is not coincidence that the S&P 500 peaked around that date.
Which is why yesterday’s Fed release should give every investor “pause.”
Stocks Are on Borrowed Time Until This Trend Reverses
Yesterday the Fed revealed that it shrank its balance sheet by a whopping $88 billion. Of this, $46 billion was in currency swaps, which is to be expected. Which means…
The Fed drained $42 billion in liquidity from the financial system last week. This comes on the heels of the $24 billion the Fed drained from the system the week before and brings the Fed’s balance sheet back down below $7 trillion.
What do you think will happen to stocks when they wake up to the fact that the Fed isn’t providing weekly liquidity pumps to the tune of $25 billion or more?
Hint: It won’t be pretty.
More on this as the situation develops.
Editor, Money & Crisis