Back in the good old days of QE, liquidity analysis was straightforward. The Fed pumped money into the markets via the conduit of Primary Dealer trading accounts and stocks and bond prices went up. When the Fed paused a couple of times, prices also paused, even came down a little. Then the Fed would start pumping again and up prices would go.
Easy-peasy. Non-subscribers, click here for access.
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We caught on to that game soon after the Fed started buying Treasuries direct from the Primary Dealers in March 2009. In fact, from the time I first started closely tracking the Fed’s daily open market operations against stock prices in 2002, we knew that there was a correlation. Non-subscribers, click here for access.
As a result, when they started QE, I was concerned that it would have a massive influence on the markets, creating a gross distortion with largely unknowable negative consequences. We then got to live the nightmare of central bank market manipulation for a dozen years. But at least it was easy to see and forecast cause and effect. Non-subscribers, click here for access.
From mid 2014 until late 2017 the Fed held steady. Then Janet Yellen began shrinking the balance sheet in late 2017, in what they called “normalization” and I called “bloodletting.” It didn’t work. The Treasury kept pedal to the metal in debt issuance and the market couldn’t handle it. This was despite the BoJ and ECB taking the handoff from the Fed. They printed like mad from 2015 through 2017 while the Fed was in pause mode. Non-subscribers, click here for access.
The ECB and BoJ got on board with “normalization in 2017-19. Stocks started to rebound after a hard selloff in 2018. Non-subscribers, click here for access.
Janet started the bloodletting in 2017, for which she gets no credit, and US stocks and bonds had a series of mild cases of diarrhea. That led to the September 2019 repo market “plumbing problem.” Yeah, it was a plumbing problem alright. The toilet got stopped up with TP—Treasury paper. Jay the plumber kneeled down and gave the market “Not QE.” It got quite a response. Non-subscribers, click here for access.
But the $400 billion of “Not QE” was a mere drop in the bucket compared to what was to come. The Pandemic Panic. The Treasury issued, and the Fed bought, a couple of trillion in new debt in the space of a couple of months. You see that on the left side of the chart. Then the Fed continued this new round of QE for another 18 months at a slower pace, despite the fact that it wasn’t needed. The US economy had already begun to recover and had gotten up a head of steam. Even the working poor got helicopter money. Of course, hedge fund operators continued to get paid, while Ma and Pa Saver continued to get zilch, i.e. ZIRP on their hard earned savings. Non-subscribers, click here for access.
All of that money printing made it easy to make money in the market. The Fed bought or financed almost all of the Treasury issuance. Fed credit begat animal spirits, private credit creation, and increasing leverage. Bulls were all geniuses, and bears were all idiots. Non-subscribers, click here for access.
It was easy because it was predictable. The Fed and Treasury always told us exactly what to expect in advance. More debt. More money. Non-subscribers, click here for access.
Now it’s not so easy. We’re still getting the more debt part of it, only the Fed ain’t payin for it any more. Nor are the ECB or the BoJ. Curmudgeons all. Non-subscribers, click here for access.
The Fed stopped QE and started draining money from the banking system with what we call Quantitative Tightening, or QT, in April 2022. Starting with the months where the Fed was ending QE, we had a bear market for 21 months. We see that in the center of the chart. Non-subscribers, click here for access.
Then, recovery began in October 2022 despite the fact that the Fed was still curmudgeonly. We see that on the right third of the chart. Non-subscribers, click here for access.
Just how did they accomplish that levitation act? The Fed had a trick up its sleeve. This report tells and shows exactly how it works, and how we know exactly when it will stop working. Non-subscribers, click here for access.
Subscribers, click here to download the report.
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Lee Adler