It's D-Day for the Downfall of the "Easy Money" Market; Here's What We Can Expect from the Fed

We've talked at length about "The Great Unwind" and "The Downfall of the 'Easy Money' Market" over the past couple of months.

And through all of that time, I've told you that there was one date you needed to keep your eye on - Sept. 20.

Well, that day has finally come, and it only took me a few minutes on the web to prove just how ahead of the curve we were on this one...

You can't turn on the TV or open a newspaper today without hearing about this massive sea change.

The Wall Street Journal's front-page headline trumpets "The Fed Braces for the Great Unwinding."

And the top WSJ online story is "The Fed Is Braced for the Unwinding of Easy Money."

It's like they were reading our emails from July and August...

Or, as a good friend and savvy investor told me this morning: "You don't follow Wall Street's lead... but they do follow yours."

Not only does the media finally agree that this is a big deal, the market thinks so too. But it is signaling it in very subtle ways.

From the beginning, I've told you that I was going to guide you so that you're prepared for all the challenges and opportunities coming our way.

And now that we've reached D-Day for "The Downfall of the 'Easy Money' Market," I'm keeping that promise by sharing what we can expect from the Fed ahead of its big announcement later today...

The Fed's "Soft Landing"

The Fed has done a surprisingly decent job telegraphing its plan to "normalize" or "unwind" its balance sheet.

Telling the market what it plans to do months before it was ready to put the plan into action has given the market time to digest the idea. We have known what the Fed was planning to do, just not when.

Let's step back for a moment and remember what got the balance sheet to this bloated level.

From 2008 to 2014, the Fed bought up billions of dollars in toxic assets from failing institutions as well as trillions in government bonds and mortgage securities, pushing fresh money out to the country's biggest financial institutions, money that then made it back into the system through lending and other efforts.

Buying tens of billions of dollars' worth of bonds every month adds up - to a cool $ 3.7 trillion (give or take a few billion) between 2009 and 2014.

Right now, the Fed's "balance sheet" - the assets on its books - sits at a whopping $4.5 trillion.

Importantly, since the Fed stopped buying additional bonds of either type in 2014, it has kept the balance sheet at its ultra-inflated level by repurchasing existing bonds as they matured.

What the FOMC has announced as its "plan" is not to actually sell its assets (bonds), but rather it'll simply not repurchase the U.S. Treasury bonds and mortgage-backed securities at the rate in which they mature.

When they decide to pull the trigger, the Fed will reduce its reinvestment of maturing bonds by $6 billion of U.S. Treasuries (CQ) and $4 billion of mortgage bonds per month. Then, every three months, this $10-billion-per-month cap will grow by another $10 billion per month until the reinvestment cap reaches $50 billion per month.

That's the announced plan, should the Fed decide to stick with it...

The Fed hopes that the combination of not actually selling any new bonds back into the market and the phased approach of reducing expiring bond repurchases will create a "soft landing."

In short, the Fed would ideally like "The Great Unwind" to be very boring.

But the market has other ideas...

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What to Expect from the Fed

It's universally expected that the Fed won't raise interest rates today.

In fact, the Chicago Mercantile Exchange FedWatch Tool shows only a 1.4% chance that the Fed will raise interest rates by 25 basis points (or one-fourth of a percentage point):

In addition to no interest rate change, most analysts expect that the Fed will announce a start date for "The Great Unwind."

But as I've shown above, with only $10 billion of bonds allowed to "mature out" of the balance sheet per month, we'll really start with something more like "The Barely Noticeable Unwind."

That's why the market hasn't reacted in a negative fashion to the pending news.

But traders and investors don't think that this calm market demeanor will last.

The Market's Great Expectations

We've talked before about the volatility index, or VIX for short - otherwise known as the "fear index" because it is low when the market is complacent and grows higher when fear and uncertainty rise.

Right now, volatility is dropping leading up to the big Fed announcement:

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However, there is a virtually unknown measure of volatility that is telling a different story.

The VIX measures the volatility that traders expect over the next month. It does this by calculating the changes in options premium that traders are required to pay for near-term options.

But there's a little-known index that measures traders' expectations three months into the future. And that index shows that traders are paying a significantly higher premium for options that expire three months from now than for shorter-term options.

In short, this chart shows that traders expect volatility to return in the next two to three months with a vengeance.

In fact, this ratio of short- to intermediate-term volatility just peaked to the highest level it's been since 2012.

Take a look at this chart that tracks this ratio between one-month and three-month volatility:

Traders are betting that big changes in volatility are coming.

And with our 10-Minute Millionaire system, we'll be ready when they do.

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The post It's D-Day for The Downfall of the "Easy Money" Market; Here's What We Can Expect from the Fed appeared first on 10-Minute Millionaire.

About the Author

D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.

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