the FED’s Monetary base … update

We have been tracking the Monetary base for a few years now as the FED went through its QE 1, QE 2, Operation Twist, and current QE 3 liquidity programs. As you are aware the Base, if you have been following our updates, has been unfolding in its own Elliott Wave bull market pattern.


Notice the Base has already completed four Primary waves, with a divided Primary III, and is currently in its fifth Primary wave. We did some Fibonacci calculations, using the previous waves, to project a potential high for its bull market. They are posted in the lower right corner. With the Base currently at $3.105 tln, it is already close to the first target of $3.143 tln. Since QE 3 is opened-ended, with no definitive end date. We are using the Fibonacci numbers to help determine when it will end. With the FED purchasing $85 bln in Gov’t Bonds/Mortgage backed Securities per month, our first target will be reached by month’s end. The next target, $3.330 tln, would appear to be about two months away, end of July. The third target, $3.486 tln, could be reached by September. And the fourth, $3.788 tln by January 2014.

Many have wondered if the stock market is rising because of this massive increase in liquidity, or just because of an economic recovery. Others suggest the bull market in equities will continue even after the liquidity ends. While many are speculating on these scenarios we took a look back into history, to a similar period in time — the 1930′s.

During the last deflationary Secular cycle the stock market collapsed into 1932. Those in charge of financial/monetary policy chose austerity rather than liquidity. Our international trading partners started sending Gold to the US, in exchange for USD’s. This Gold went directly to the FED, since we were on a Gold standard then, increasing the Monetary base.

The stock market then bottomed in July 1932 and started to rise. In 1933 after FDR took office he: closed the banks for a holiday, called in all the Gold in the country, opened the banks, started many new government spending programs, then re-priced Gold to $35/oz. Initially the Monetary base fell, but started to increase again as the US remained on the Gold standard. Gold was flowing in from our international trading partners. And, US equities were now in a liquidity driven Cycle [1] bull market.


For nearly four years, all this Gold went to the FED increasing the Monetary base. Then in December 1936 the US Treasury Department, fearing inflation, started sending the Gold received into the Treasury, rather than to the FED. When the Monetary base started to decline, the stock market topped in March 1937 and entered a Cycle [2] bear market. The Treasury, realizing their error, re-routed the Gold back to the FED. But it was too late. The economy had already contracted and World War II was on the horizon. Notice the five Primary waves into that top in 1936.

The last point we would like to make is about the FED’s exit strategy. Ever since the FED started the first liquidity program, QE 1, in October 2008. Later expanded dramatically in March 2009. There has been talk by the FED, and others, of an exit strategy when, optimistically, quantitative easing is no longer needed. The market’s fear, when the open ended QE 3 ends, the FED will start decreasing the size of the Monetary base initiating an economic recession or worse.


Historically, ever since the FED was created in 1913, there has never been an exit strategy. In fact, the Monetary base has grown, and grown, and grown for nearly a century. With the exception of the US Treasury’s policy, a fiasco in 1936, the Monetary base has never really contracted much at all. At best, it has just gone sideways for a while before ramping on up again.

Conclusions: The FED’s massive liquidity build up has been driving risk assets higher, currently mostly stocks, since March 2009. When this build up ends, either due to the FED’s actions or the Government’s. The stock market will enter a Cycle wave [2] bear market just like it did in the late 1930′s. Then after some period of consolidation in liquidity, possibly a few years, the Monetary base build up will begin again. An exit strategy is not required. Simply because the economy will not allow an exit to be implemented. What is already in the monetary system will remain in the system. In fact, after the bear market gets underway, additional liquidity will be required to get the economy going again. Welcome to the century of quantitative easing.

About tony caldaro

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74 Responses to the FED’s Monetary base … update

  1. Pingback: weekend update | the ELLIOTT WAVE lives on

  2. theyenguy says:

    There be many who have no knowledge that Jesus Christ, is at the helm of the economy of God, and that He in dispensation, Ephesians 1:10, has brought Liberalism to fulfillment and completion and is now introducing Authoritarianism as the world ‘s paradigm for economic and political experience.

    The final phase of the Business Cycle got fully underway on Monday 20, 2013, with the trade lower in Elctric Utilities, XLU, and Mortgage REITS, REM, such as IVR, on the rise of the US Interest Rate, ^TNX, to 1.97%, the steepening of the 10 30 US Sovereign Debt Yield Curve, $TNX:$TYX, seen in the Steepner ETF, STPP, steepening. and the trade lower in Greece, GREK, and its bank, NBG, as well as the trade lower in the US Dollar, $USD, UUP.

    The end of Global ZIRP, as well as the termination of the world central banks’ monetary authority is confirmsed with the parabolic trade lower in China’s Electrical Utility, HNP. Investors derisking out of Biotechnology, IBB, such as AMGN, SGEN, ALXN, REGN, CELG, RGEN, and BRMN, as well as out of US Homebuilding, ITB, such as DHI, PHM, and LEN, reflects that the monetary policies of the US Federal Reserve are no longer stimulative, but rather have crossed the rubicon of sound monetary policy, and have made “money good” investments, bad. Yes, another bust just like 2008, has commenced, only much, much worse this time.

    Earlier in the month, with the commencement of competitive currency devaluation on Friday May 10, 2013, specifically with the world’s individual currencies excluding the US dollar, trading lower, and with not only Aggregate Credit, AGG, trading lower, but also the highly indebted Electric Utilities, XLU, as well, the world pivoted from Liberalism’s age of investment choice, to Authoritarianism’s age of diktat; the epoch of inflationism ceased, and the epoch of destructionism commenced.

    In compliment of the currency traders, who have started a sell of the world currencies, the bond vigilantes have gained a nascient control of interest rates, as is seen in their call of the Interest Rate on the US Ten Year Note, ^TNX, higher to 1.95%, and a steepening of the 10 30 US Sovereign Debt Yield Curve, $TNX:$TYX, seen in the Steepner ETF, STPP, steepening.

    A see saw destruction of fiat money, that is currencies, credit and stock wealth is going to commence soon as the world central banks’ monetry policies have crossed the rubicon of sound monetary policy, making “money good” financial assets bad.

    In the age of Authoritarianism, the only forms of genuine wealth, will be diktat and physical possession of gold, that is gold bullion or bullion in online trading vaults such as Bullion Vault.

  3. fionamargaret says:
    perhaps Bernanke will ADD to his program!

    • tony caldaro says:

      CRB has been in a bear market since 2007
      thanks Fiona

    • CB says:

      thanks Fiona. Frankly I am a bit confused when I read ‘generally’ about “commodties” as a group…there is some accumulation in crude oi nowl, nat gas doin fine also…so there will always be “:the good, the bad and the ugly”…takesa lot of work to investigate the details to actaually make money in specific groups…

  4. Be Careful shorts.According to rumours. Bernanke to show up at the press conference tomorrow in a Tesla.

  5. Tony,love the line
    “Historically, ever since the FED was created in 1913, there has never been an exit strategy. ”
    People who think there is an exit don’t understand human mentality.
    Have you ever met a rich person who is satisfied with his/her goal of 1 Ferrari or 1 million dollar mansion and then wants to exit? The person will keep complaining and trying to accumulate more and more till eternity unless some kind of natural cause ends it.
    The only way QE would end if some large natural cause happens in which humans have no control,till then,keep accumulating and keep smiling. :)

    • tony caldaro says:

      Or Congress decides the economy has recovered and wants to balance the budget.

    • CB says:

      Smart Sharad, Warren Buffet…but no I haven’ “met” him (yet..:P ),
      He certainly gets it that money is only one currency in life; besides a peson’s net worth is basically the expression of their self-worth so most accomplished people will stop getting “needy”at some point and start giving their worth away)… but you’re right Buffet is not like 99% of folks…

  6. CB says:

    Hi guys,
    Can anyone recommend what, in ur opinion, the optimal default setting would be with IB for getting stopped out on long positions to minimize slippage? I’ve been using “last,” but I am pretty disappointed with all the slippage I am getting from time to time. TIA.

  7. pbnj123 says:

    Sad to her about Ray Manzarek
    Didn’t know him but felt I did – the Doors of Perception – on the other side now :-(
    Sad day

    • mkmason2013 says:

      Oh geez, Ray M. passed away! I know he was in his 70′s. Don’t know if he had any specific health problems, but with all those guys did in their youth, no telling. It’s a very sad day. He was a truly creative musician.

  8. pio27 says:

    I have 2 questions.
    In you opinion does Bernanke send the market to 1700 by friday?
    and you opinion on how the VIX is acting?

    • tony caldaro says:

      Bernanke has already accomplished his goal … return to 2007 highs.
      Mission accomplished.
      The VIX is acting quite normal.

    • tommyboys says:


      You’re not hardly the only one that thinks it.

      • pio27 says:

        Either way the market never goes down.

      • tommyboys says:

        It did in ’08-’09. Fell 50% in 18 months. It’s taken 4 years to get that back. Taking out the all time highs after 3 attempts in a decade “may” just be the kick off to a new secular bull. Won’t know for a while but this is the kind of one-sided market you’d expect in that circumstance. It has happened before.

  9. Leetired says:

    If anybody likes Gold they’re giving u a better in today..not a recommendation just an observation ;) Toot

  10. Leetired says:

  11. Anonymous says:

    yes I see that , but this site here -> says that on TUESDAYS in 2013 were statistically GREEN days on the market. Very interesting.

    Nice post by the way, the market is still getting dirty money, and ramped up for a crash later. So why not enjoy the ramp up for now.

    • tommyboys says:

      No law says it has to crash later. We’ve been through a dozen years of crashes so we’re al conditioned to think this way – nothing in stone however…

  12. H D says:

    Last time red Tuesday was Jan 8 for 10 handle dip. just sayin….

    • H D says:

      that was DOW HH and SPX not!

      • H D says:

        obviously the evil plan would be a flat to trap bears again. taking SPX yesterdays low

      • H D says:

        Hay it’s better to b evil, errr I mean lucky, than good. 1661.49 didn’t even overlap. BBL

      • H D says:

        JMHO, the 5 waves from 1648.60 oversold completes potential pattern, would need 2-4 TL break confirm. Ext have been the play for 5 months. This would look different.

    • tommyboys says:

      Never know what life altering technology is coming just a few short years down the road that may inspire a new version of the 2000 tech bubble in the markets!

  13. alexhartley1 says:

    Thank you Tony for all these wonderful reports. The clear, precise and easy to understand nature of them makes them so useful to people like me. It’s great that you’re helping so many of us. I truly appreciate it. Alex

  14. njlin says:

    Hi Tony,
    Thank you for your great work agian! You said “The market’s fear, when the open ended QE 3 ends, the FED will start decreasing the size of the Monetary base initiating an economic recession or worse.” Do you mean when QE3 ends, the US will enter an economic recession (and the stock market will enter a Cycle wave [2] bear market)? Is it possible that the explosion of China’s real estate bubble instead of the end of QE3 leads to the US economic recession (and a Cycle wave [2] bear stock market)? Thanks!

  15. M1 says:

    Tony, my last question:
    How many waves could be counted from 1913 ?

  16. thoth8 says:

    Tony awesome work! Thanks! Perhaps the exit strategy from massive debt will be to launch another war and create new currency?

  17. M1 says:

    Hey Tony. I knew you were “cooking” something real special. This report is awesome.
    My question: If the Monetary base has grown, and grown, and grown for nearly a century why there are people with less and less money ??

  18. sdsteve says:

    Well the FRN backed by our military unsustainable debt and consumption, likely wont last much longer… And if we do need to use the military I cant see that working out too well either…

    Thats why I cant agree with your count but you have been right and I have been wrong…

  19. mike7x says:

    Thanks Tony! Great stuff. Are you still looking for the FED’s liquidity build up “ending”, and a Cycle wave [2] bear market “beginning” (as stated in your Conclusion) some time in the “first quarter of 2014″? (Note: You don’t have to state the exact date yet…unless you already have one. Haha) :)

  20. CB says:

    Thanks Tony. The same tools as in Japan, the same fiat money system rules, and the same leaky baloon and why would anybody expect a different result now?” Is the world simply assuming that Bernanke’s IQ is somehow higher than the combined IQ of the previous and current BOJ governors and it’s gonna do the trick.. ..they’re just re-distributing income between the various groups in societydepending on where they are able to create inflation…this is all gonna lead to widespread discontent & more police state everywhere…command and control…

  21. pimacanyon says:

    actually, QE is NOT the cause of the monetary base expansion. The cause is the fractional banking system. The charts above are plotting this data (from the Fed’s website):

    “The Adjusted Monetary Base is the sum of currency (including coin) in circulation outside Federal Reserve Banks and the U.S. Treasury, plus deposits held by depository institutions at Federal Reserve Banks. These data are adjusted for the effects of changes in statutory reserve requirements on the quantity of base money held by depositories. “

    • tony caldaro says:

      The FED buys bonds from its Primary dealers by giving them a credit.
      The credit is then applied to the “deposits held by depository institutions at Federal Reserve Banks”.

      • pimacanyon says:

        yes, but that bond buying program has been going on for only a few years, since 2009. There was only one other time when the Fed did a QE and that was in the late 1940′s or early 1950′s. Your chart and text make it sound like the Fed has been doing QE for 100 years. Not true.

        As I said, the expansion of the money supply has been brought about by the fractional reserve banking system (of which the Fed is certainly a critical component!), where the banks create money out of thin air by making loans with money they do not have. They have to keep a small fraction of the money that have loaned out in “reserve”, hence the term “fractional reserve”. So if a new bank can lend out 10 times the amount of capital it has, it increases the money supply by 10 times. As the bank’s capital grows it can continue to create more money by loaning out 10 times the amount of capital is has (that keeps growing). That is what is responsible for the growth of the money supply, not QE. QE is minor player, playing a bit part, in a much larger story.

      • tony caldaro says:

        Did not imply the FED has been doing QE for 100 years.
        In fact, they have only been doing it since 2008.
        Operation Twist was first done in the 1940′s.
        The fractional banking system, agree, has helped increase the base over the century.
        However, it has not done so since 2007, since banks have contracted.

  22. pas1968 says:

    Hi Tony,
    You said;
    When this build up ends, either due to the FED’s actions or the Government’s. The stock market will enter a Cycle wave [2] bear market just like it did in the late 1930′s.
    So are you expecting the above to occur? & when?

  23. mkmason2013 says:

    Great primer on Fed actions (and it’s actually all TRUE). My sincerest thanks to Tony and Team!

  24. va89blog says:

    Thanks for this. You summarize what I’ve been thinking all along that the Fed really can’t end QE as we’re in the same liquidity trap Japan is in. The monetary base expansion is eye popping. Explains why a $1 in 1913 (when the Fed was created) is worth about $0.03 today. Ray

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