It's Not China's Increasing Trade Balance - It's The Decreasing Of The Fed's Balance Sheet

If you're taking your clues for business information from the mainstream business/financial media, it would not be hard to assume there would be some confusion in your outlook for the future. On the one hand, all but 60 or so days prior, one would be hard-pressed to find a reason that the markets should come under any turbulence. Earnings were said to be great, and job creation was also going along splendidly and predictably. Amazon (AMZN) was to consume any and all other businesses, leaving a wake of destruction in its path, therefore this was all great news for stocks! After all, what was good for Amazon's share price was good for the world. Well, that's if you only take your measurements via the next-in-rotation fund-manager cabal, that is.

Prior to these 60 days? Well, let's think back a bit, shall we? The threat of all-out nuclear Armageddon? Don't worry, "just buy the dip" - think of it as "creative destruction" on a massive scale. Obviously, a good-for-stocks type scenario.

Plain old kinetic war? You know, like those that happen first around carrier battle groups as they pass within spitting distance of contested borders? Fuggetaboutit! Just buy, buy, buy, then buy some more.

Brexit? Schmexit! Who cares, Draghi's there to "Do whatever it takes," even if he has to lie about the process. European bank concerns? LIBOR blowouts? Real estate concerns? No, no, and hell no! Who cares, have you seen the gains in the FAANG stocks? They're just fantastic! And on and on. That is, till now.

Now suddenly, it's gone from Russia, Russia, Russia as the bogeyman of the hour to China, China, China! The prior, with all its murmurings of innuendo for war of some type, was seen as inconsequential to anything stock-related. And as for the latter? Even carrier battle groups (three in actuality) sent in a thumbing-our-nose styled provocation directly in China's direction was seen as "no big deal for stocks."

In actuality, many of us openly joked that these "markets" had become so laughable that all-out thermonuclear war would be just the thing to rocket us even higher. Why? Because bad news had become good, so catastrophic therefore should now be fantastic!

In the old days (i.e., just a decade prior), even the mere thought or possibility (i.e., war of any form) would send the markets barreling downward. Now, it was as if it was the only thing to send them higher. Crazy-town doesn't even begin to address just how far we've gone down the road once seen as "Just-nuts-ville." Now, we call it "home."

The real issue today (if one wants to be intellectually honest) that has these "markets" completely spooked is not the calls for adjustments to prior trade deals. Far from it. The real issue that is currently taking place that every so-called "smart crowd" talking head will not address, nor even mention for fear that in so doing exposes them as the intellectually dishonest cabal they are, is the one, and only one, constant that fits squarely for both causation and correlation comparisons. E.g., the now ongoing process of shrinking the Fed's balance sheet, aka Quantitative Tightening (QT). And it's only just begun.

Think this is far too general of an observation? Fair point, then as the Riddler of Batman fame would put it: "Riddle me this..."

"When does something not matter only when it does? And when does something matter, only when it shouldn't?"

Answer: When does QE turn to QT?

You see, when the Fed was printing and rolling over asset purchases, we were told this process was not the reason for the "markets'" assent. No, good earnings, good jobs reports, and on and on were the real reasons. And if you questioned it? You were maligned and denigrated across the spectrum. As a matter of fact, so important was the conviction in the Federal Reserve's commitment to the assumed "Put" that in all of 2017 there was only one, yes, only one trading day in all of last year with all its turmoil and global headlines where the "markets" faltered 400 points in a single day. And subsequently, this was erased in mere hours in a fashion reminiscent of the Servpro tag line, "Like it never even happened."

But then January rolled around, and with it, so too did something else. Only this time, it was the sound of a door swinging, i.e., Ms. Yellen exited stage left from the Eccles Building. Yet, what was interesting was what went along with her, i.e., the pretense that the balance sheet run-off wouldn't disrupt the "markets." Hint: largest point drop in the markets' history.

Let's see, Ms. Yellen says "See ya!" along with the "markets" getting their first glimpse that indeed the balance sheet reduction had begun. And what was the result?

Re-read "largest point drop in history." And the point swings have also suddenly reappeared. Over a dozen +400 and counting. And it's only April 8. Funny how that all seems to line up, is it not? "Just coincidence" is what I hear, if there's anything said in reference at all. Yet, if you listen carefully, the deafening silence screams everything one needs to know, i.e., it's all been nothing more than a hustle, pure and simple. Even snake oil salesmen of old would be impressed.

Shown below is the described scenario using what Silicon Valley refers to as "pictures."

To wit, here's the "market" reacting to all the uncertainty of 2017 with its geopolitical crisis, debt crisis, budget crisis, Russia crisis, North Korea, government shutdown fears, impeachment fears, tax reform fears, thermonuclear war fears, _________ (fill in the blank) crisis of choice. The result? Forget what I think, it only matters what you think, but here's the "picture" to describe it all. Pretty picture perfect, is it not? Again, the headwinds that were 2017 were far from inconsequential or relenting.

(Source)

Now let's see how the markets have behaved just these last 60 days or so since Ms. Yellen exited, along with the pretense (aka hope) that QT was probably still just a working theory. And for those who are suddenly shocked, that's correct, it's only been approximately 60 days since Ms. Yellen said her farewell and the "market" was greeted by a new "hello" in the realization that the balance sheet had indeed been allowed to contract. Once again, I'll let the "picture" do the talking. Again, to wit:

So let the mainstream business/financial media outlets parse and spin in a manner that would make a washing machine envious. It's all convoluted bunk in a flagrant attempt to hide both their complacency in following the blatantly distorted fairytale narrative for why these "markets" have been rising going on a near decade, along with trying to protect their so-called "smart crowd" guests that glam for the camera and microphone, making a Kardashian envious for tenacity. It's all falling apart, and not because of any "trade deal" or other proposed reason. It's all coming apart because the only story that mattered to the "markets" is itself unraveling. And that is...

"It's different this time." Until Jerome blinks.