Understanding the fundamental impacts of quantitative easing and the Fed’s psychology (including its
limitations, deficiencies and inconsistencies) serves as a guide to what the Fed’s next moves will be and
what the impact will be on financial markets. A black swan event is difficult to predict but often
rationalized in hindsight as being more predictable than it actually was. Subprime was so obvious in
hindsight. Not dissimilarly, the Fed digitally created $3.6 trillion dollars, which increased the dollar value
of financial assets and allowed for a significant expansion of the U.S. credit system (25% net increase
from pre-crisis to today). It will seem obvious in hindsight that when the Fed begins to remove that $3.6
trillion of “temporary” accommodation, the value of financial assets will fall (reverse order of operations)
and the instability of the credit system will reappear, far quicker than the market expects. The risk is
misunderstood and mispriced.
The following pages explain these risks and why the market believes this time is different. The analysis
begins with a more in-depth review of relevant historical periods, beginning with the period known as
the Great Moderation, continuing with an assessment of the current economic landscape and concluding
with a recommendation of how best to protect wealth.