Fed’s flux capacitor, fluxing….

Well that didn’t take long.

The Fed slowed its bond buying a couple of months ago, but now it’s back to the future with the balance sheet once again over $7 trillion.

Still no price inflation to speak of.

Still plenty of asset inflation to see, literally everywhere.

Welfare continues, so too does democratised self-determination via Robinhood speculation with excess welfare/time off work.

Here’s the best example.

Where the Fed’s going, we don’t seem to need fundamentals.

It doesn’t care about fundamentals because that’s not the Fed’s mandate.

It will continue with QE Infinity and Guarantee Infinity until further notice.

This current course of action will see the Fed blow an even bigger bubble - buying more bonds, forcing prices up and yields down to encourage borrowing and investment, until price inflation slingshots around.

However, while people and small business are saving and hoarding due to job/work uncertainty and the virus, and if welfare payments continue we won’t see much price inflation for some time. Effectively, money down the drain.

But what we will continue to see is asset inflation, until there is an end to welfare and/or there is a price inflation slingshot after the lock-downs, and the Fed decides to go Van Helsing on us.

But let’s not get ahead of ourselves. Fed Chair Yellen tried it and we all know what happened.

How will new bond issuance effect the flux?

Impending bond issues from the U.S. treasury (to fund increasing deficits) will be interesting.

Either the Fed buys those new bonds, or they are made attractive to other investors such as other sovereigns and centrals in Europe, China and Japan.

That can happen in two ways. Either higher yields are offered at auction (er, that could be damaging domestically) or there is a weak USD to encourage other countries to look past the lower yield because they can win on the currency.

I am not sure which way this will go, but U.S. Fed Chair Powell has never said that Guarantee Infinity could not apply to the U.S. Treasury.

Stay safe and fluxing.

Best wishes, Mike.

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