Fed’s liquidity flows are quietly fading. From an initial US$75 billion injection per day when the Fed announced
the launch of Unlimited QE in mid-March, the US central bank has reduced its daily buying to US$60 billion
per day, then announced a series of consecutive ‘tapers.’ It also shrinking average daily POMO to US$5 billion
last week, in its latest just published schedule and would in the coming week, to purchase ‘only’ US$4.5 billion
per day. Such is the case as the market rally to date has been defined by the five largest stocks in the index.
Compounding to this concern, corporations are issuing debt at a record pace to supplant liquidity needs to
offset the economic crisis. Risk of a market failure has risen.

In a lay-man term, a total of US$5.2 trillion of new money has been created and injected by the Fed. In recent
weeks, I started to observe some "kinks" that have been developing in the US banking data which could have
medium-term implications for the stock market. I noted that a reduction in the rate of change of US’s system
open market account (SOMA) and in the aggregate banking statistics as operated by US Fed Reserve New
York. Much of the relief money flowing to both consumers and corporations is being cancelled by paying
down debt. It represents a destruction of money creation.

If history is a good guide, when a similar situation happened in 2008, the SPX suffered a serious pull back. The
fact that credit money is now being cancelled instead of being created, and Fed has drastically reduced its QE,
it means we are increasingly vulnerable to short-term weakness in the market.

The underlying fundamentals for market are unequivocally poor. This is where things get murky. It would be
worth noting if whether Fed will be successful or not in providing sufficient monetary support to keep the
artificially inflated on-going crisis stock market going for few more rounds into this new unknown in the
coming weeks and months. It is said that Fed is stopping at nothing to save the economy and financial markets
or Fed is divined to keep making things ultimately worse with each successive “rescue” efforts given extreme
valuations, unsustainably tight credit spreads, high leverage and excessive risk taking.

Chee Seng, Wong
CIO, Athena Advisors
wong-chee-seng@outlook.com