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Marc Cuniberti: Quantitative Tightening

Marc Cuniberti
Columnist

Although the markets have halted their brutal day after day erosion on occasion, the brutal sell off on June 9 and 10 seemed to confirm the general direction is still downward.

Obviously there is still plenty to be concerned about. The markets fall has been attributed to the Feds increasing of the overnight interest rates, which also effect borrowing rates economy wide. The rate increases to date and the expected rates to come have had and will continue to add trepidation to investor mindsets. The rate increases are implemented to rein in the worst inflation in 40 years.

The Feds have a two part plan to address inflation. The first part is the aforementioned interest rate increases.



The second part is called Quantitative Tightening. Although the counterpart to Quantitative Tightening is Quantitative Easing, which encompasses the Feds buying debt instruments from the banking institutions which floods the banking system and hence the overall economy with cash, Quantitative Tightening does the exact opposite. In Quantitative Tightening, the Feds dump the debt instruments they have on their books onto the bond markets.

Being larger than the stock market, what happens in the bond market effects everything else. Bonds are debt from public and private companies, financial institutions, governments and home mortgages, to name a few. The bonds the Feds own include government debt and mortgages.



The Feds Quantitative Tightening program — which will soon be implemented — includes the sale of 95 billion dollars worth of bonds a month until further notice. No small amount to be sure. The Feds have been on the buy side of bonds over the last few decades or more, totaling in the area of a trillion dollars.

Now on the rare sell side of things, the markets have yet to see the effects of what the Feds selling bonds will do in the short, medium and long term.

What we do know is when the Feds were buying, it was in response to a multitude of economic whirlwinds which included the Dot.com crash, 9/11, the 2008/09 crisis and the COVID-19 virus. As a result of their buying, the markets plowed through these events only to end up much higher soon thereafter. Now having to instead sell debt, going forward it will likely be a huge negative for the markets and economy in general.

This analyst is of the opinion that the bond sales (QT) will not go over well with the bond and stock markets once the selling begins. After all, the markets and economy are already under stress from supply side issues, labor shortages and inflation. In essence, the Fed may be tightening into a weakening economy. A double whammy to be sure.

In the early 80s, the Feds faced a similar situation. High inflation coupled with a stagnating economy. Called Stagflation, the Feds chose to address the inflation part of the equation and left the markets and the economy to twist in the proverbial wind.

Paul Volcker, the Federal Reserve chief back then, raised interest rates 3% in one day. The world did not take it well and it put so much strain on the consumer, they burned him in effigy on the streets of Washington.

There is little argument that an interest rate increase of that magnitude would flatten world markets and the U.S. economy due to the much higher debt levels that exist on all platforms, both in the consumer and business arena.

The current economic environment unfortunately reeks once again of the dreaded stagflation which reflects inflation amidst a weakening and increasingly stagnant economy.

Although Jerome Powell is the current Fed chief saddled with the unenviable job of putting the pieces back together this time around, I hope he can resurrect the spirit of Houdini to assist him. Otherwise our “problem” might seem more like a predicament.

For those of you that don’t know, problems have solutions. Predicaments only have outcomes.

“Watching the markets so you don’t have to.”

This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, SDSU, and California Insurance License #0L34249. His website is moneymanagementradio.com, and was recently voted Best Financial Advisor in Nevada County. 530-559-1214


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