The $11 billion increase in the System Open Market Account Holdings report for February 14 has caught the attention of a number of intelligent market watchers for obvious reasons. The Federal Reserve is purportedly in the midst of a significant balance sheet normalization process whereby they are (and plan to to continue) selling large amounts of Treasuries and agency mortgage-backed securities.

After amassing a portfolio of over $4.4 trillion, the Fed has used that massive hedge fund to artificially suppress interest rates and foster some serious asset inflation. The Fed was not alone in this quantitative easing experiment, with global central banks injecting close to $20 trillion in liquidity into the world financial system. For anyone paying attention, it’s not a mystery why home prices in Manhattan, Shanghai, London and Vancouver are grossly detached from long-term fundamentals like actual incomes.

This was the inevitable result of market tinkering from the economic hacks in the Eccles building, the ECB, the PBC,  Bank of Japan and others. There are very rational reasons why governments have laws against counterfeiting money. Apparently the PhD’s in the Eccles building and elsewhere believe they are immune to the laws of physics and human nature. Shocking, yes, I know.

As fate would have it, just before Fed chair Janet Yellen hit the exit, passing the latest bubble to Jerome Powell, the stock market seized up momentarily with a swift 10 percent decline. It was the first time the markets had even a whiff of volatility or even a noticeable decline in several years (something that is not normal to real market cycles of course). Not surprisingly, this mini market swan dive coincided with the Federal Reserve’s first noticeable balance sheet reduction at the end of January when the Fed rolled off $21 billion from the balance sheet. It was the first instance where the Fed rolled off both Treasury securities and MBS in any meaningful amountss in the same week.

This $21 billion draw-down was a small fraction of the monthly additions the Fed was making during their peak QE mania, but the market was throwing up all over itself with the removal of just a small fraction of that liquidity stimulus. Flash forward a few weeks to February 14 and amazingly the 10% decline was mostly reversed and markets were back to their bullish euphoria, or were they?

Rather than rolling off any holdings in their portfolio, or even holding it steady, the Fed added on to their pile of mortgage-backed securities just after the mini market swoon. One could get the impression that the geniuses at the Fed were a bit worried about a spike in yields or some significant damage to equity valuations that would likely follow those higher yields. Due to the structure and settlement of those agency MBS, the roll-off of those securities features some ups and downs, so the trend of lower lows and lower highs is what’s critical to watch. Since the inception of the normalization the roll-off of treasuries has been more consistent than the roll-off of MBS.

The absence of any treasury security reductions for two consecutive weeks combined with the $11 billion buildup in agency MBS immediately following the $21-billion draw-down at the end of January suggests the Fed probably knows it is playing with fire.

Intelligent people have noted there are some very big pension problems lurking in the U.S. economy, along with some obvious housing bubbles in various markets around the U.S. and globally as well. Any meaningful declines in the stock market put this new everything-bubble in jeopardy, including elevated U.S. home prices. From a Layman’s perspective it is easy to see why the Fed would want to prop up the stock market. For an institution that is mired in a huge credibility trap of their own making, elevated asset prices help to keep all of those economists and bankers in a job.

Now that household debt is at a new all-time high and the national debt has more than doubled since the global financial crisis, the Fed is pushing to raise interest rates. Go figure! Just when consumers across the country are enveloped in the warm embrace of cheap liquidity, the Fed is poised to take away the punch bowl. Who could possibly benefit from such a scenario? (rhetorical question of course). We know it certainly isn’t working-class Americans. Their real hourly wages only increased by a single penny last month.

I think it’s obvious we’ve already seen the first glimpse of the Fed’s response to volatility in the markets if their exit strategy doesn’t go according to plan. I think the Plunge Protection Team was up to their old tricks because the stakes are now higher than ever before. You can’t inject the markets with “cocaine and heroin” for years on end, and then not have consequences when you remove the daily dose of narcotic. Once you peel back the curtain, the economic fundamentals that have driven the “recovery” during the last 9 years are rather weak. I think the predators at the gate, including those within the Fed, understand this better than they are letting on.

It’s going to be interesting to see what it takes to unmask the latest economic boom as an elegantly orchestrated fraud built on a giant pile of debt. It only took a 10-year treasury yield of 5 percent to bring down our house of cards last time. The structure is entirely different this time, but the foundation could be weaker than the last edifice of greed constructed by Wall Street and the enablers in DC. The full economic cycle has been held at bay longer than many people (including myself) imagined was possible. That doesn’t mean the ultimate outcome has been averted. Quite the contrary. It is apparent the Federal Reserve didn’t fully appreciate (or didn’t care?) the consequences of their actions. I suspect their exit strategy will be equally disappointing.