The $4.5 Trillion Question

Published on
June 1st, 2017
24 minutes

The $4.5 Trillion Question

Presentations ·
Featuring Julian Brigden

Published on: June 1st, 2017 • Duration: 24 minutes

Julian Brigden returns to RealVision to ask the $4.5 trillion question: Can the Federal Reserve successfully reduce its balance sheet? In the context of this period of pause for the US dollar, Julian considers how bond and equity markets will react to the Fed’s unwinding of QE, as he looks ahead to the third and final leg of the dollar’s upward cycle. Filmed on May, 26, 2017.


  • JL
    James L.
    30 June 2020 @ 14:11
    What happened in this talk basically happened. QT started at bond yields crashed. Even more so the Fed's response to COVID reinflated the Nasdaq to all-time highs in the same way as QE.
  • BK
    Brian K.
    30 August 2017 @ 21:36
    " As I said I'm very worried that Trump who said 'I don't like rate hikes' will pick a replacement for Yellen who favours BS reduction over rate hikes. It will be a s*** show! " --Why wouldn't Trump pick someone who favors no balance sheet reduction and no rate hikes. I'd think Trump wants to go full Japan.
  • DC
    D C.
    29 August 2017 @ 22:34
    Can you detail out more specifically how you calculated the Long term structure of USD supply? That would be very useful. Thanks.
  • MS
    Matt S.
    5 June 2017 @ 08:25
    Am I the only who finds these new comment sections a bit of a mess? I read them from the bottom up, ie old to new. But by doing so, I am reading replies to comments I haven't even read yet! It's most confusing and awkward and it's hard to distinguish between a main comment and a reply - the little indent does little to help... : \
    • AM
      Artur M.
      5 June 2017 @ 15:29
      Agree! No formatting on text is kept by the form. The comment section could easy be improved
    • DS
      David S.
      4 July 2017 @ 00:36
      I am sure that anything can be improved, but the new system helps me follow replies on a single comment. I read comments from top to bottom and like to see the replies to individual comments. It saves me time in the thread. DLS
  • MA
    Mitsos A.
    28 June 2017 @ 19:39
    Hi Julian. Could you please address your liquidity concerns in the face of the over 2tln in reserves held by the US banking sector? In your view, how does that stock of liquidity factor into any contraction in balance sheet size and why does that not offer some type of buffer for the carry trade and general dollar liquidity over seas?
  • DJ
    D J.
    19 June 2017 @ 18:00
  • LM
    Lars M.
    16 June 2017 @ 12:35
    Best IM2 presentation yet. Really got me thinking.
  • DH
    Dale H.
    16 June 2017 @ 01:42
    This was very very good. Will watch again - and the earlier one.
  • AN
    14 June 2017 @ 23:48
    Julian is one of the best! Thanks. Any updates on the Dolar after the FED plan (dovish in my view) to reduce the balance sheet 10B a month (It would take more than 30 years to reduce to 1T!) or 50B /month about 6 years... at this rate we would have the risk off by the economic cycle and recession and not by tightening.
  • FC
    Fractal C.
    1 June 2017 @ 10:54
    Basically, IF the Fed starts shrinking the balance sheet. trades are long bonds, short equities and long dollar. Me thinks that the Fed is not going to reduce the balance sheet! In fact, they may do the exact opposite.
    • GS
      Gordon S.
      2 June 2017 @ 01:50
      And if they happen to try shrinking, they will change their mind very quickly! Especially if stocks crash?
    • PK
      Prafulla K.
      11 June 2017 @ 04:04
      can you explain why will the Fed shrinking balance sheet mean long bonds? Wouldn't the fed sell the treasuries that they bought during QE, result in an increase in oversupply of treasuries, therefore fall in prices?
    • PK
      Prafulla K.
      11 June 2017 @ 04:04
      can you explain why will the Fed shrinking balance sheet mean long bonds? Wouldn't the fed sell the treasuries that they bought during QE, result in an increase in oversupply of treasuries, therefore fall in prices?
  • DS
    Daisuke S.
    10 June 2017 @ 13:29
    Great insight. Happy to watch such a nice one.
  • bm
    bill m.
    6 June 2017 @ 01:08
    How do I cancel my subscription? The videos keep stopping. bill mccollough
    • MA
      Mujtaba A.
      6 June 2017 @ 15:05
      Used to happen with me a few months ago. Now its okay
    • BM
      Beth M.
      7 June 2017 @ 02:53
      Great insight ...thanks
    • DR
      David R.
      7 June 2017 @ 18:24
      Click on the icon of the guy in the bottom right, then enter your request. I had staggered videos too and was disappointed, but then I changed browsers for viewing and it's fine since then, except rarely if their server is really busy I guess. Of course you also need a good enough broadband connection. Hope that helps.
  • PT
    Pamela T.
    7 June 2017 @ 03:13
    Excellent analysis! Many thanks for sharing!
  • NH
    Neil H.
    5 June 2017 @ 17:38
    excellent as always. keep bringing Julian back
  • MS
    Matt S.
    5 June 2017 @ 08:14
    def one to watch again later! I'm sure it will all make sense by the 6th viewing...... ;)
  • FC
    Fractal C.
    5 June 2017 @ 01:43
    Julian, watched your presentation a couple of times over the weekend and here is my question for you. World GDP is about 50 TN dollars. If the world GDP slows down just by 1%, you are likely to see the world needling 500 BN less dollars and alleviating your current account deficit problem. Point I am making is that in a slowing GDP, we are perhaps going to see more QE and slow down of GDP causing Dollar to go down. Your thoughts please?
  • AM
    Artur M.
    4 June 2017 @ 17:31
    Dollar strength could also happen on political event in EU before even FED starts to shrink B/S. China is approching a singularity momment as is best expressed in virtual currenses or CH interbank rates Dollar weeknes could continue on US political chaos, that makes the country go in peices or out right revolution if left continue on the same track. And if nothing of that happen well FED may be the catalist but it's not a given that this is the only one. Neverless very good presentation. You can't explore all the possibilites/ probabilites in 20 min. Anyway next leg in USD will set of the next global panic
    • AM
      Artur M.
      4 June 2017 @ 17:40
      One more thing. Don't assume that asset prices will fall in US bc. of FED B/S contraction as capital flows will be the main key driver. Both the UST and US stocks can go up at the same time as happend last week due to rising dollar
  • DJ
    D J.
    4 June 2017 @ 13:03
  • AM
    Alonso M.
    1 June 2017 @ 18:11
    An outstanding presentation that brings everything together. Like many others, I am wondering if the Fed is giving us lip service with its shrinking balance sheet comment. They have acted like Lucy and have pulled the ball from under Charlie Brown's feet so many times that it's hard to actually believe what they say anymore. The weird part is they know they have a credibility problem, and it seems they may be willing to solve this problem by raising rates and shrinking the balance sheet regardless of whether it is currently warranted.
    • KS
      Kim S.
      4 June 2017 @ 04:41
      What they "say they will do" is intended to influence through verbage. So either ignore it, or try to interpret the verbage down to every word as is argued on CNBC. I ignore their lip service because it's not been worthy of prediction in the past.
    • KS
      Kim S.
      4 June 2017 @ 04:43
      We can consider what data the FED looks at, even if it's not the data the rest of us would use.
  • LC
    Liliana C.
    4 June 2017 @ 02:49
    Julian is always so thought provoking! Can I marry the man just to hear him all day? Brilliant!!
  • ND
    Nigel D.
    4 June 2017 @ 01:21
    My take away is that a shrinking Fed balance sheet will cause turmoil in foreign markets. But where does that capital go? During a crisis, capital typically flows into treasuries. Yields dropped during the '08 financial crisis and are declining in today's low growth environment. Does the market put capital into treasuries at a sub-2% yield? Or does it look towards gold or other hard assets? This is the million dollar question.
  • JC
    Joseph C.
    3 June 2017 @ 19:35
    Thanks for the thought-provoking video. One thing to consider with the yields going higher after the various QEs is that these moves were well-telegraphed to the market, and so the rates fell noticeably beforehand. What we see is more of a "buy the rumor and sell the fact". However, going into this reinvestment tapering, there seems to be very little selling in tens beforehand so it is unlikely we get a large market rally afterwards.
  • JM
    James M.
    3 June 2017 @ 16:22
    Excellent presentation thank you. 1. Is it possible for the FED to play the Japanese game and effectively never reduce the balance sheet or is this unlikely as the hold reserve currency status and the US populace are unlikely to accept the ramifications of such actions as the Japanese have since 1989? 2. If the Saudis except Yaun for oil in the future reneging on the PetroDollar deal to combat their ever decreasing market share(Especially considering Aramco deal) as China is now the biggest buyer of oil and Russia, Iran, Angola, Iraq, and Iran make up an ever greater share of China's demand coupled with the US frackers now supplying a lot of US demand and exports, does this exacerbate the USD liquidity problem?
  • NT
    Nicholas T.
    3 June 2017 @ 14:36
    Love Julians analysis here, but to me the takeaway is the Fed cannot and is unlikely to shrink its balance sheet much. I'm curious what probability he is attaching to this dollar spike scenario. To me it's low. I'd see another rise in the dollar to sell it and diversify further out of USD assets.
  • VK
    Viresh K.
    1 June 2017 @ 16:55
    Julian is so good.
    • VK
      Viresh K.
      1 June 2017 @ 17:02
      Wow, my assumptions were challenged in 2 minutes...
    • VK
      Viresh K.
      1 June 2017 @ 17:23
      One thing I'd like to say, do you believe the effects of BOJ and ECB QE is the same as the US? I.e. increases bond yields and investment into risky assets? I don't think this is the case, but happy to be proven wrong.
    • GL
      G L.
      2 June 2017 @ 14:45
      With regard to ECB QE leading to rising rates: taking the German 10yr as the benchmark, it is difficult to say. Taking the start of the SMP in 2010, 10 bund yields fell for the first 3 months, but then rose for the following 6 months before falling again, ending at a lower rate and the end of SMP than where it started at the programme's outset. Soon after the start of APP, bunds sold off before rallying - and are now flat compared to levels at the start of ECB QE. Also, rallying periods could just have been safe-haven flows as peripheral European debt sold off. Looking at Yield vs Inflation vs ECB balance sheet, and focusing on the APP period (Mar 2015-present) then the situation is a bit clearer: the yield spread to inflation has declined and gone negative as the BCB's B/S has grown. Also, since 2007, there is a pretty strong negative correlation between ECB B/S size and the yield spread to EZ inflation. Nevertheless, one must not ignore the fact that in the near aftermath of the start of both SMP and APP, 10yr bund yields rose, and have been essentially flat / range-bound through APP.
    • GL
      G L.
      2 June 2017 @ 14:47
      Really liked Julian's clear presentation. Perhaps he could comment on implications for European corp and sovereign yields in view of QE.
  • jh
    john h.
    2 June 2017 @ 14:40
    Julian, great presentation but it looks like situation could be changing. Would really appreciate your thoughts on this:
  • DW
    Daniel W.
    1 June 2017 @ 17:03
    How would you rate the possibility that FED really reduces its balance sheet in 2017? Below 50%?
    • PC
      Pedro C.
      1 June 2017 @ 17:34
      they will never do it
    • JO
      JOHN O.
      1 June 2017 @ 22:17
      Never say never, especially if we see a new Chairman with a different agenda.
    • JB
      Julian B. | Contributor
      1 June 2017 @ 23:20
      As I said I'm very worried that Trump who said 'I don't like rate hikes' will pick a replacement for Yellen who favours BS reduction over rate hikes. It will be a s*** show!
    • JP
      Jonathan P.
      2 June 2017 @ 01:17
      Julian, I like those frames. Where did you pick them up?
    • GS
      Gordon S.
      2 June 2017 @ 02:07
      Interesting thoughts. One thing I have also always wondered is: why is the contrary never considered? I.e. raising rates & expanding the balance sheet? Or has something like that happened in the past?
  • GS
    Gordon S.
    2 June 2017 @ 02:03
    Thanks for the great presentation! I have one general question about where offshore dollars of big American companies are? In what sense are these really offshore? Is Apple for example allowed to buy US treasuries with offshore capital? Are they maybe even “allowed” to buy their own bonds? In the goal to always further reduce taxes, I could very well imagine those companies doing exactly that. If not directly, then at least indirectly? Wouldn’t it make much more sense to lend yourself $100 billion dollars and pay zero taxes (interest doesn’t matter, since you pay yourself), than to repatriate and pay even “only” 10% in taxes? If that were the case, then maybe a repatriation tax plan would be ineffective?
  • JL
    J L.
    2 June 2017 @ 00:17
    Great update, how do you rate the chances of China and other big holders accelerating their sale of treasuries if they become bid in your scenario? Isn't it possible they would be interested in selling at a faster and at the same time more orderly manner, happy to offset any fall in yields?
  • GM
    Greg M.
    2 June 2017 @ 00:02
    Julian and Daniel Want are two of the smartest thinkers on realvision. Very information packed week!
  • AS
    Alex S.
    1 June 2017 @ 23:27
    It's guys like Julian Brigden that makes this website well worth it's pricetag. I was fretting about whether or not it was beyond my means to keep my subscription here, but as soon as I saw his face on a recent video I knew I wasn't going to leave ;) long live RealVision. it's nice to not be lied to on a relentless basis like you can bet on with conventional media outlets
  • SN
    Sean N.
    1 June 2017 @ 22:11
    Amazing summary. Must agree Julian is brilliant... always seems to be 6 months ahead of the curve. As well, he's one of the best at bringing together the big picture and laying it out in terms everyone can understand... a true sign of someone who deeply understands what they are talking about.
  • BL
    Bruce L.
    1 June 2017 @ 22:03
    "QE is actually nothing more than debasement of the currency" Dead right.
  • EH
    Eric H.
    1 June 2017 @ 19:48
    very high quality. thx RV & Julian!
  • AB
    Andrew B.
    1 June 2017 @ 19:42
    Absolutely brilliant video.
  • BR
    Brian R.
    1 June 2017 @ 19:41
    This presentation alone is worth the annual subscription to RVTV. Brilliant and very forward thinking.
  • WE
    William E.
    1 June 2017 @ 18:06
    As always Julian...Thank you!
  • RC
    Ronan C.
    1 June 2017 @ 18:02
    Clear and articulate delivery of simple concept. One of best presenters on RV!
  • BK
    Brian K.
    1 June 2017 @ 17:56
    Wow. Great stuff.
  • DM
    Daniel M.
    1 June 2017 @ 17:00
    This guy is the best of Real Vision.
  • dd
    darrell d.
    1 June 2017 @ 16:59
    Are we suppose to believe the ECB and BoJ rumours of tapper talk? It appears someone somewhere has to be in constants printing mode to keep all these risks plates in the air and spinning. I just don't see Central Bank exit from markets in our lifetime without dislocations.
  • AH
    Andrew H.
    1 June 2017 @ 14:45
    One question I do not think was touched upon, is the effect of other central banks printing while the US Fed stays level or contracts? I have to believe this has some effect on US equity and bond markets.
    • JB
      Julian B. | Contributor
      1 June 2017 @ 14:58
      Andrew yes it helps without Q. But think of it this way. As the reserve currency $ QE is heroin and BoJ or ECB QE at best methadone. Yes it works domestically but on an international basis the efficacy of their QE can be mitigated by FX moves i.e. ECB blows out the balance sheet by 20% but Euro drops 20% then in $ terms you have zip.
    • AH
      Andrew H.
      1 June 2017 @ 16:30
      So the key take aways will be to. Look for IR up in US, and more importantly balance sheet reduction. Will cause a rally in bonds sell off in risk assets, especially EM. This will be mitigated if the US does not raise or decrease balance sheet. Watch for US swap timing to determine "how late" the fed is to the rescue? Timing most likely over the coming six months. Could also trade currency hedged European/Japanese equities(as a USD investor).
  • IF
    Ian F.
    1 June 2017 @ 15:57
    This guy is spot on re: what QE really was. This was to drive the currency down. Richard Koo was in the midst of those G7 meetings when Bernanke proposed QE2 and said the world objected at the time (ex England). However since the Fed proceeded it allowed for other central banks to now do QE. This was always meant to drive down the currency, and now unfortunately the US is suffering for it.
  • PJ
    Peter J.
    1 June 2017 @ 14:25
    Hi Julian, great follow up piece, really enjoyed it and will need to re-watch to get all the detail. Will you be following it up at the backend of the year to see where your thinking will be going into 2018, once you know how the rest of 2017 pans out?
    • JB
      Julian B. | Contributor
      1 June 2017 @ 14:42
  • SJ
    Sophie J.
    1 June 2017 @ 14:11
    consistently mind-blowing
  • SA
    Scott A.
    1 June 2017 @ 12:38
    Fantastic presentation. Julian has guided me well. However, I am not sure the Fed will ever shrink balance sheet.
    • TM
      The-First-James M.
      1 June 2017 @ 13:37
      Neither is Julian by the sound of things... ;)
  • GH
    Gary H.
    1 June 2017 @ 13:17
    Very thought provoking. Thank You
  • RO
    Rodica O.
    1 June 2017 @ 13:09
    great work as always Julian !!
  • NY
    Nicolas Y.
    1 June 2017 @ 11:50
    This is one of the biggest US economy subject of 2017 imo.
  • MS
    Michiel S.
    1 June 2017 @ 11:29
    Thanks Julian, sometimes I need confirmation and now got it again from you! On your side and especially given the fact EUR-USD counts most in USD indexes.
  • PM
    Paul M.
    1 June 2017 @ 11:03
    Given this logic, should the FED not reduce its balance sheet, it's a dollar sell. Unfortunately, by the time this will be common knowledge, the USD will be trading at another lvl altogether.
  • JS
    John S.
    1 June 2017 @ 10:55
    In a word, Outstanding!
  • IB
    Ian B.
    1 June 2017 @ 10:45
    Different Class - as per usual...
  • GA
    Giedrius A.
    1 June 2017 @ 10:34
    Fantastic presentation. Thank you
  • MN
    Michael N. | Contributor
    1 June 2017 @ 10:34
    very good presentation. thank you