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Investors Should Be Terrified Of The Imminent Liquidity Shock

We are now entering a very dangerous period for asset prices and the global economy. The Fed plans to drain more than $1 trillion of liquidity from the financial markets by the end of 2019. That’s not just taking the punch bowl away. It’s more like pumping the stomach of a chronic alcoholic.

The ECB also seems to be preparing to taper its aggressive Quantitative Easing program. If the Fed and the ECB go forward with these plans, global liquidity will dry up. That could send the price of stocks, property, bonds and commodities (including gold and oil) tumbling. It could also send the global economy back into severe recession.

Quantitative Easing reflated asset prices and the global economy. Quantitative Tightening is very likely to deflate them. The consequences could be dire. Investors need to be alert to these risks.

The latest Macro Watch video makes projections for the total assets of the Fed, the ECB, the BOJ, the PBOC and the BOE out to the end of 2019. Combining the total assets of those five central banks creates an excellent proxy for global liquidity. What we find is that Global Liquidity is about to dry up.

This analysis also suggests that the Dollar will surge. When the Dollar strengthened by 22% between June 2014 and March 2015, the negative repercussions were soon felt all around the world. Commodity prices, the currencies of the commodity producing countries, world trade, corporate profits and global stock markets all fell. The same pattern should be expected to recur if the Dollar strengthens again now.

Global Liquidity Shock

For all the details of this extraordinarily dangerous reversal of monetary policy, log in to Macro Watch now and watch Global Liquidity Shock. The video is 17 minutes long and contains 26 downloadable slides.

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  1. Hi Richard, First of all can you explain your thinking behind the assumption that the PBOC’s foreign exchange reserves will begin to expand again gradually from now until 2019? The capital flight by wealthy Chinese in the order of .5 Trillion or more annually appears to be continuing unabated. Thanks.

    Secondly, Can the Fed shrink it’s balance sheet while supporting general credit growth?

    Third, can you explain the mechanism that the Fed will use to actually liquidate its holdings as it shrinks the balance sheet? Who will they sell the assets to?

    Finally, will a reduction in the Fed’s balance sheet by your estimated 25% reduce the amount of profits the Fed sends annually to the US Government as general revenue? How will this affect fiscal policy and credit markets?

    I look forward to your input. Have a great weekend!

    Jack from Toronto.

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