Whatever happens later this afternoon following the Fed's tapering announcement (although I have stated and shown repeatedly that the taper has already begun), I thought it would wise to look at the taper in the context of a historical perspective. You say there is no historical perspective, well you would be wrong. Back in 1999, Alan Greenspan floated $40 billion in monetary supply for the sole purpose of providing extra liquidity to avert any problems potentially associated with the change in the calendar. Yes, I have harped on this before, but today I will show this event visually. Below you will find the chart of the year-over-year change in the monetary base versus the similar perspective for the NASDAQ for the period between January 1999 through late-2000.
See a pattern here. An overheated market whose upward acceleration was goosed by extraordinary monetary stimulus subsequently crashes after that stimulus is removed. I would not be as bold as to predict an impending market crash here and now, as no one is predicting an outright reduction in the monetary base. However, if a $40 billion reduction in monetary base led to a 10%+ crash in the NASDAQ, what sort of volatility could one expect with $10 billion to $15 billion a month reduction in stimulus?
See a pattern here. An overheated market whose upward acceleration was goosed by extraordinary monetary stimulus subsequently crashes after that stimulus is removed. I would not be as bold as to predict an impending market crash here and now, as no one is predicting an outright reduction in the monetary base. However, if a $40 billion reduction in monetary base led to a 10%+ crash in the NASDAQ, what sort of volatility could one expect with $10 billion to $15 billion a month reduction in stimulus?
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