What Happens When the Fed FINALLY Reduces Its $4.5 Trillion Balance Sheet?
From the Insights column of our Interest Rates Pro Service

By Elliott Wave International

So, there we have it. Deflation has started.

The Federal Reserve announced last month that they would start to reduce their $4.5 trillion balance sheet in October, thereby starting the process we call Quantitative Tightening (QT). As expected, they are aiming to do it gently and quietly, by not reinvesting bonds as they mature, starting with sums of around $6 billion of Treasuries and $4 billion in Mortgage-Backed Securities (MBS). The scale of non-reinvestment will gradually increase. Once in full swing, the Fed's balance sheet could reduce by up to $150 billion each quarter.

Conventional analysis might conclude that the Fed's balance sheet reduction (deflation) would be bad for US Treasuries and MBS -- after all, those are the instruments not now being bought by the Fed. Notwithstanding the fact that we dismiss that sort of causality thinking anyway, we're not conventional analysts, and take a different angle.

As the Insights column of our Interest Rates Pro Service alluded to last month, the Fed's QE program has crowded out investors in the US Treasury space. The market supply of US Treasuries was reduced by the Fed's program and so it forced bond investors to buy other instruments, such as corporate bonds. Now that more US Treasuries are going to be available for investment, those funds may be tempted to switch the corporate bonds they hold back into ("safer") US Treasuries. The unintended consequence of QT, therefore, may well turn out to be a widening in corporate bond yield spreads.

So, what to look for? Our Bond Market Monitor tracks corporate bond spreads on a daily basis, so the first sign of stress can be seen there. We will be keeping an especially close eye on the trend of the Bloomberg Barclays Global Aggregate Credit index yield spread because, as our chart below shows, it may have found solid support at the old 2014 low.

Elliott Waves and the Market for Bonds – James Bonds

Do you love James Bond? Robert Prechter’s new book, Socionomic Studies of Society and Culture, says audiences’ answers change with the stock market. See for yourself in the following excerpt..

Chapter 10
By Mark Galasiewski and Chuck Thompson

Bond films’ popularity first peaked with Goldfinger in 1964 as social mood and the markets approached a positive extreme. Then the negative mood trend of 1966-1982 impacted Bond filmmakers, making them introspective, doubting and cynical. Ratings suffered as the bear market wore on and bottomed with Never Say Never Again (1983), shortly after social mood registered a negative extreme in 1982.

A trend toward positive mood in the 1980s and 1990s returned the films to popularity. Low ratings for two Bond movies in the late 1990s were anomalous, but Bond bottomed with stocks in 2002. In 2006, the rating for a new version of Casino Royale registered an all-time high in tandem with all-time highs in both the Dow and global real estate prices.

James Bond is equipped with fast cars and high-tech gadgets. He has a talent for outwitting the best criminal masterminds in the world. When it’s time to pack a punch, he has the muscle to take down his opponents. But one thing he can’t control is filmmakers’ motivation and the public’s appetite for his fast-paced, good-guy/bad-guy films. For that, Bond needs a healthy dose of positive social mood.

______________

Suppose you could understand why stars who rule the airwaves and movie screens one minute can be catapulted to obscurity the next. And why genres of TV shows become popular overnight. How and why trends fluctuate in the attendance of sporting events. Socionomic Studies of Society and Culture rewrites the book on what makes pop culture popular. Each chapter unveils how you can understand—and sometimes even anticipate—trends in areas from fast cars to superstars and from sex to the cineplex.

Socionomic Causality in Politics is one of two new books from Robert Prechter, both of which are available exclusively on Amazon. For a limited time, get special pricing: Visit http://amzn.to/2xdob7u (Socionomic Causality in Politics) and http://amzn.to/2xVAXGy (Socionomic Studies of Society and Culture) to order.

This article is syndicated by The Socionomist, a publication of the Socionomics Institute. The Socionomist is designed to help readers understand and anticipate waves of social mood. Copyright © 2017 Socionomics Institute.