You know the saying: There’s more than one way to skin a cat.
Well, in the financial world, it’s important to remember that there’s more than one way for the Fed to run quantitative easing on the economy.
Because that’s what we’re seeing here. It’s obvious. The Fed is out there saying that they’re not running QE because they’re just buying repos and T-bills, not T-bonds to suppress longer-term interest rates.
But if you think about it, they are still printing money out of thin air and injecting it into the financial asset markets. By buying repos, Treasury Bills, and soon Treasury Bonds, the Fed is quite literally injecting money straight into that realm which creates more money chasing the same pool of assets.
It might not look like it on the surface, but there’s more than one way for the Fed to run QE.
This is exactly what Rodney and I have been tracking lately. In early September, the Fed suddenly injected $60 billion because repo rates had jumped up to 10% overnight. Banks weren’t lending, so the Fed had to step in.
And they’ve kept stepping in, to the tune of $256 billion. Now we’re in early February, and repos have dropped to $170 billion. That’s a big drop, upwards of $86 billion. At the same time, T-bills are going up, by about $82 billion in the last month. That’s more QE than ever. We may be heading towards a higher balance sheet, printing money faster than ever.
Meanwhile, stocks are running on a two- or three-week lag, and they’ve been sideways for the past three weeks. Our stock indicator with the Fed balance sheet suggests that we should see stocks go sideways or down, potentially by 3-5% through late February. If we can hold there and the Fed keeps buying these T-bills and T-bonds and repos stay where they are, we’ll start to see a strong stimulus behind stocks.
But that’s a big “if,” and it’s dependent on the economy staying where it is despite all the political turmoil. So far, that part has worked out. The Fed kept pushing through the Iran situation and appears poised to press on with the coronavirus (though the same can’t be said for Chinese markets). This makes us think that what’s been true for a while will continue to be so: As long as the Fed keeps printing more money net for any asset purchases, nothing will change unless something really, really bad happens.
The Fed’s policy is clear right now. Print about $80 trillion for T-bill or bond purchases a month. The wild card is whether repos require more printing, or whether they flatten out or go down. That is something we will keep tracking every week.
If the markets do keep going up on such continued rising stimulus of $80 billion a month on average, this “markets on crack” scenario will continue to accelerate. But it cannot go on forever and appears to be in that final blow-off stage, like late 1999 to early 2000, which will end badly.