Hey There Income Hunter,
Well, well, well.
The numbers show that the Fed is already slowing removing liquidity from the system …
It’s a very slight reduction so far, but it has begun.
Is the Fed trying to drag its heels to get a look at more data? No doubt about it and by the time we get to the FOMC meeting on July 27, they may have to totally reconsider.
There are tremendous opportunities as I anticipate a fully-scale pivot by the Fed away from tightening due to a deeper slowdown than currently forecast.
What’s more, I don’t think it’s that far off, but the timing and strategies to apply need to be well thought out.
Look, the Fed only has one option and I will give you all the details and winning strategies. J-Pow and co. are helpless against inflation and recession … and now is the time to go for it. I hope to see you Wednesday.
But first …
Today we’ll take a look at how they got to this point and how they might find the cover to pivot back to QE.
Easing Does It
The Fed originally created QE after the housing crisis in 2008. Interest rates were near 0% and the Fed needed alternative ways to stimulate the economy.
Ben Bernanke took credit for inventing QE …
Although a couple of months later I am sure he wished he hadn’t.
You see, he made one fatal mistake. As an independent entity, the Fed had to go through the banking system in order to inject money into the economy.
The problem was the banks were not obligated to loan the money to their customers. They also had the ability to use the funds for market making purposes.
So, why would they lend into a recession when they could put the markets? Ol’ Ben did not quite think that one through.
It’s easy to understand, then, why the markets went up 600% from 2008 to the peak in 2021. All that stimulus simply inflated stock and bond prices.
Here is an illustration of the QE policy moves over the last 10-years.
Where Banks Balance Sheets Are Today
- Fed owns a quarter of all outstanding Treasury debt & 1/3rd of agency mortgage-backed securities.
- The European Central Bank and Bank of England each own just shy of 40% of their government bonds.
- The Bank of Japan, which is unique in having no intention of stopping its purchases, owns nearly 1/2 of Japanese government bonds.
The problem with QT today is that the bonds the Fed is selling into the system are not in demand.
It’s actually the opposite, with an inflation that could last years, the bonds and the currencies will devalue over time …
Plus, investors can not get compensated enough for holding assets that return less than what the inflation rate wipes away like a tax on their returns.
The other major issue is we are entering a serious recession that the Fed is denying just as they did the inflation.
There is no doubt they are doing QT as you can see below …
My concern is will this tightening during a recession extend and/or deepen it? I say yes – and I think the Fed will be forced to pull back before they complete the process.
Bring It Home
If you are unsure on what the Fed’s ultimate plans are for QT this time around here is the plan …
For Treasury securities, the QT cap will initially be set at $30 billion per month and after three months will increase to $60 billion per month.
For agency debt and agency mortgage-backed securities , the cap will initially be set at $17.5 billion per calendar month and after three months will increase to $35 billion per month.
This month will be a real test for markets. QT, plus another rate hike and earnings that are forecast to be subpar provide some headwind, for sure.
Live and Trade With Passion My Friend,
Griff