Juggling Dynamite

Happy September!!

Starting now, the US Fed is to run off its balance sheet (reduce liquidity in the banking system via ‘Quantitative Tapering’) by $95 billion a month–double the amount they were supposed to have been withdrawing (QT) since the start of June.

In reality, though, rather than shrink its holdings by $45 billion a month for June, July and August, the Fed reduced by a total of $52 billion ($17 billion per month). So, this month, stepping up to $95 billion will not be doubling the QT rate to date but rather a 5.5x increase in the liquidity withdrawal rate.

Hedgeye analyst Josh Steiner makes some lucid observations about this in Still Feeling Bullish?:

So, as a reminder, the Fed has QT’d to the tune of $52B in total over the last 3 months (a ~60bps reduction in its securities holdings) and the S&P 500 is down ~4.1% over that timeframe. In the four months between now and year-end the Fed is supposed to QT by $380B, a roughly 450bps reduction in securities holdings.

No doubt, tightening resolve will eventually crumble with housing, commodity, stock and corporate debt prices. But, with the US midterm elections coming up on November 8 and consumer price inflation (lagging indicator) recently measuring at 40-year highs, inflation is the primary bogey now. Propping up asset prices is a distant and conflicting goal to that.

Dave talks about where we are now, including an update on Dave’s recession call, what he thinks about inflation, and how the Federal Reserve will react. Raoul also gets Dave’s view on what markets will do and whether he agrees with Raoul’s “buy bonds, wear diamonds” call. As ever, a conversation between Raoul and Dave is a must-watch, even if their views don’t match your own. These are difficult times, and we need to account for all possible scenarios. Recorded on July 28th, 2022. Here is a direct video link.

Wishing a safe and enjoyable Labour Day weekend to all!! Winter is coming!

Danielle was a guest with Jim Goddard on Talk Digital Network, talking about recent developments in the world economy and markets. Here is a direct video link.

Forty percent of the consumer price index (CPI) is goods (half of them imported to America). The US dollar at a 20-year high against major trading partners is a massive disinflationary force for US consumers. At the same time, it’s demand-crushing for other importing countries and non-US debtors who today owe record amounts of US dollars.

The chart below (courtesy of Liz Ann Sonders) shows the rapid easing in commodity shortages (blue) and pricing (yellow). As usual, inflation and the urge for central banks to tighten monetary conditions will follow these impulses lower, at a lag.