QT or QE?

Well, we’re told the Federal Reserve has been engaging in quantitative tightening (QT) and thereby removing liquidity from markets.

And with the CPI and PCE both inching up again, we’re probably going to have higher rates for longer before we see a policy reversal (I feel like a broken record on this point) and together, higher rates and less liquidity are the Fed’s key tools to slay inflation.

But the reality is that the reverse has happened. Liquidity has not been withdrawn, rates are not terribly restrictive, and the QE Infinity train to nowhere never actually stopped.

And just like the Snowpiercer, this train continues to circle around nowhere which I guess is somewhere, but it’s just not clear where that somewhere actually is and who’s actually driving the train at any point in time.

As a refresher, QE or quantitative easing is a monetary policy tool where the Fed injects reserves into the banking system by purchasing assets from financial institutions and crediting their accounts at the Fed with reserves.

The process increases the overall level of reserves in the banking system and is a key mechanism to influence monetary conditions.

But QE has many faces and aliases and takes the form of numerous other programs that result in the Fed either directly or indirectly (via the Treasury) injecting liquidity into markets and lighting fires under risk assets, and these aliases are typically known by their two, three or four letter acronyms.

Whether it’s QEI, QEII or QEIII, monetising the Government’s debts and deficits, extending the Discount Window for some banks, rolling out a Bank Term Funding Program (BTFP) to backstop other banks, or something else – it all has the same juicing effect.

It all results in liquidity/reserves being made available to save, invest, lend, spend, borrow or buy back, etc., and it increases the money supply. With more money in the system chasing the same amount of assets (if not fewer) it also causes asset prices to go up.

Given that interest rate hikes (money costs more) and QT (less money around) were meant to reverse the over ample and loose effects of QE, you could be excused for thinking that liquidity has been withdrawn.

But the reality is that it has not.

And if you’ve been following my blogs (several of them) about Stealth Liquidity, you’ll know that the U.S. Fed and Treasury have been collaborating to inject new liquidity into the system - using a combination of the reverse repo facility (RRP) and the Treasury General Account (TGA).

Essentially, an additional half a trillion in reserves/liquidity has been injected into markets over the past 12 months to keep them juiced and to keep the debt, deficits and demographics monetisation machine going.

That’s why the QE Infinity train never stopped. It may not have been called QE, but it has had the same effect.

But the RRP is being progressively drained, so what’s going to happen after that bucket of liquidity is gone? Will QT finally happen?

Not in an election year

It seems to me that regardless of who wins the election, the QE Infinity train will power on under some other acronym, because:

• Biden is a spender, as is Treasurer Yellen. Election spending to buy votes (using the TGA) is one more way liquidity will enter markets, and this is likely to continue if the Dems are returned to power, in the form of making good on those promises, bank bailouts where required, and by other means. It’s all liquidity and rocket fuel for asset prices.

• If Trump is returned to the White House many suggest he will seek to curtail past Democrat expenditure, particularly the green sort. Others talk about how he will increase tariffs again, decrease immigration and possibly extend but not increase tax cuts. I get that, but when he was last in power, he regarded stock market/S&P performance as the primary scorecard for his presidency. Low interest rates, ample liquidity and high share prices are what he pushed for the first time. Why would he do it differently this time?

So regardless of who will become the next PROTUS, the QE Infinity train to nowhere will continue to circle around nowhere which I guess is somewhere, but where that somewhere actually is and who’s actually driving it at any point in time (Joe, Jay, Janet, the FDIC, the Don or someone else) who really cares, because we know it can’t stop otherwise debts and deficits won’t be financed/monetised.

And while that’s going on, more liquidity will juice markets as the train to nowhere accelerates.

QT? Yeah, nah, still waiting.

See you on board.

Mike