TLDR

Welcome to ‘no pivot but maybe a few small adjustments’ 2024.

The pivot as it was initially conceived, i.e., a 300 to 400 basis point cut over a short period of time, is not going to happen.

There’s literally nothing ugly enough to compel the Fed to make that kind of move.

Risk markets have started to get the joke and the timing and magnitude of Fed cuts is being repriced (albeit, still more than twice the three 25 basis point cuts the Fed had pencilled in for this year).

Instead, and in place of a material policy pivot, an incremental $400 billion in ‘stealth liquidity’ has been added to markets in the past year. It’s happened in the shadows but it’s what has preserved the Fed’s hopes for a ‘soft landing’.

And as the country heads into an election year, Treasurer Yellen has ~$730 billion in extra stealth liquidity to spray around and buy votes for her boss.

That and other incremental liquidity flowing into markets will continue to drive equity and crypto prices, but for the correction we are seeing now.

While these injections might not be called QE (quantitative easing) they have the same effect. And as I predicted and have been writing about for years, the QE Infinity train to nowhere somewhere off the coast of Japan can never really stop. It’s the same train with a new paint job and slightly different carriages.

And if you want to see how much new freight it’s taken on board, read on.

The QE Infinity train to nowhere somewhere off the coast of Japan never stopped, because it can’t…

I’ve been watching (and writing about) net liquidity flows into markets for many years now.

These flows have taken many forms including quantitative easing (QE), yield curve control (YCC), debt monetisation, manipulation of repo/reverse repo accounts, BTFPs and bailouts, discount windows, and the shredding of excess reserve requirements.

Through these and other means, more than ample reserves have been made available to markets with a promise that if things go pear, the Fed and Treasury will pick up the tab.

So how do we measure the speed and effect of the QE Infinity train to nowhere somewhere off the coast of Japan?

Well, for a proxy we can identify reserves held back from the market by the Fed and Treasury, and deduct those from the Fed’s balance sheet (total assets). That gives us net liquidity available to markets and can be compared over time to get a fix on whether liquidity has been ebbing or flowing.

And the greater the flow of liquidity, and/or the rate of flow, the higher/quicker risk assets go up in price.

I’ve been making these calculations since December 2022. Back then, the Fed’s balance sheet stood at $8.5 trillion (just under it’s all time high of ~$9 trillion). After adjusting for money held back in Treasury and reverse repo accounts, net liquidity was $5.9 trillion.

And it was the same in February 2023 when I checked again, even though there should have been less liquidity after nearly a year of so-called QT.

Put another way, the QE Infinity train to nowhere, somewhere off the coast of Japan was still chugging, with the only difference being a new paint job and a few new acronyms.

But somewhat insidiously and from the shadows, liquidity actually grew for the rest of last year.

We can prove it by repeating the same calculation today and comparing that to the February 2023 result.

But first, let’s have a look at the flows in this chart 👇👇👇 which shows the Treasury General Account (TGA) and the overnight reverse repo account.

I’ve turned them into indices just to demonstrate the direction of flows.

The green line shows decreasing reverse repos, and therefore more liquidity in the market. The incremental reduction in reverse repos was a ~$1.6 trillion.

The blue line shows increasing reserves held in the everyday disbursements account of the U.S. Government. It includes income from taxes, fines and issuance of treasuries and is of course net of government spending.

As it builds up, more potential reserves are held back from the market.

The incremental increase in that account since February 2023 was ~$380 billion.

Not shown is the balance sheet run-off over that period, totalling ~$900 billion.

Doing the math: $1.6 trillion in incremental reserves/liquidity less $0.38 trillion + $0.9 trillion held back from markets leaves ~$300 billion to $400 billion in incremental liquidity added since February 2023.

So, other than for an increase in the federal funds rate, no quantitative tightening has occurred, and since February 2023 there’s actually been a c.$400 billion expansion in liquidity. I’d call that proof of QE Infinity and it’s why share prices went up in 2023.

And if we add that incremental liquidity to what was already in the general spendings account, Treasurer Yellen now has ~$730 billion at her disposal to spend in an election year.

The train keeps chugging along. And despite the illusory tightening the Treasury and Fed tag team will continue to lubricate markets in 2024 and the train to nowhere will power on to debasement nowhere, at the same driving stocks, crypto and real asset prices higher.

Short of major bank failures or a major dislocation in the plumbing, there will not be a 300 to 400 basis point pivot this year, but there may be a few rate cuts/adjustments as the Fed seeks to get inflation to target, sustainably.

U.S. elections will occur November 5, 2024, meaning Treasurer Yellen has 9 months to spend ~$730 billion, even while the Fed continues its illusory jedi mind trick balance sheet run-off.

Everything points to continued stealth liquidity fuelling markets because that paves the way for the soft landing promised by Yellen/Powell and keeps the collateral base intact.

Final thoughts

Once we’re through the current price recalibration in risk markets, we will probably see buoyant U.S. equities in 2024.

In Europe, Madame Lagarde is still trying to bring inflation under control and rate cuts appear to be further out. At the same time, more fiscal stimulus is on the cards to get German manufacturing going again. Positive.

Emerging and commodity importing markets are hoping for USD weakness so they can fire up manufacturing and construction. Positive.

In Australia, we are a season or two behind the U.S., the interest rate trajectory is more complicated, and we’ve joined Japan in a sort of economic winter, characterised by slowing growth (GDP) and slowing inflation as I had predicted.

That wintery feeling, plus a still strong USD, a still impotent China and ongoing uncoordinated ESG mandates means investment in some energy, materials and industrial projects in Australia will probably remain highly selective and challenging for a while longer.

In support of that, we’re seeing a repricing in lithium, rare earths, nickel. copper and even oil & gas.

Yesterday, we witnessed a major barbequing of miners exposed to these minerals. Quite a gang was invited, including once market darlings Chalice and Liontown Resources as well as newcomer Kali Metals and diversified players like Mineral Resources and BHP (via Nickel West) and privateer Wyloo.

Today, nickel, copper, lithium and even uranium are still stewing in their juices. Some company CEOs have come out with their new narratives. Others have been silent.

On top of that we’ve recently seen First Quantum shut down its nickel operations, and Panoramic Resources (also nickel) crawl into Voluntary Administration as the Indonesia/China alliance hits home.

This bloodletting in battery and green energy transition minerals/materials will probably continue as the ‘no pivot’ gets repriced, China looks for its mojo, greenwashing flashes up on ASIC’s screen, and most importantly, while the USD remains strong.

Corporately, expect M&A of the desperation and strategic varieties, along with the withdrawal of financing terms in mineral sectors where new consensus price forecasts prove insufficient to carry a project. There will be a few of those. The insolvency and turnaround community might have a bumper year, as might vulture and event-driven investors as they savour the volatility/opportunity.

And last but not least, keep an eye on Hancock Prospecting as its future facing minerals strategy unfolds this year. It’s sure to impress.

See you in the market once the falling sword hits terra firma.

Mike

No big pivot but heaps of stealthy liquidity in 2024

TLDR

The QE Infinity train to nowhere somewhere off the coast of Japan never stopped, because it can’t…

Final thoughts