Authored by Pater Tenebrarum via Acting-Man.com,
Drain, drain, drain…
“Master!”, cried the punters,
“we urgently need rain!
We can no longer bear
this unprecedented pain!”
“I’m sorry my dear children,
you beg for rain in vain.
It is I who is in charge now
and mine’s the put-less reign.
The bubble dragon shall be slain,
by me, the bubble bane.
That rustling sound? That’s me…
as I drain and drain and drain.”
[ed note: cue evil laughter with lots of giant cave reverb]
– a public service message by the Fed chieftain, rendered in rhyme by yours truly
Money from thin air going back whence it came from – circling the drain of a ‘no reinvestment’ black hole strategically placed in its way by the dollar-sucking vampire bat Ptenochirus Iagori Powelli.
Our friend Michael Pollaro recently provided us with an update of outstanding Fed credit as of 26 December 2018. Overall, the numbers appear not yet all that dramatic, but the devil is in the details, or rather in the time frames one considers.
The pace of the year-on-year decrease in net Fed credit has eased a bit from the previous month, as the December 2017 figures made for an easier comparison – but that is bound to change again with the January data. If one looks at the q/q rate of change, it has accelerated rather significantly since turning negative for good in April of last year.
Below are the most recent money supply and bank lending data as a reminder that “QT” indeed weighs on money supply growth rates. It was unavoidable that the slowdown in money supply growth would have an impact on asset prices and eventually on economic activity.
Note that in the short to medium term, the effects exerted by money supply growth rates are far more important than any of the president’s policy initiatives, whether they are positive (lower taxes, fewer regulations) or negative (erection of protectionist trade barriers). The effects of changes in money supply growth are also subject to a lag, but in this case the lag appears to be over.
Any effects seemingly triggered by “news flow” are usually only of the very short term knee-jerk variety, and they are often anyway the opposite of what one would normally expect – particularly in phases when news flow actually lags market action (see the recent case of disappointingly weak PMI and ISM data). The primary trend cannot be altered by these short term gyrations.
TMS-2 growth (y/y); 12-month moving average of TMS-2 growth; total US bank lending growth (y/y). Current growth rates are at levels last seen at the onset of the 2001 and 2008 busts.
TMS-2, total stock: between October and November, month-on-month growth has ceased entirely.
Instead of total Fed assets, we show a chart of securities held outright this time – which include the “QE” portfolio. The data in the chart are up to 02 January, so this is a slightly more up-to-date figure than the one shown in the table.
Securities held outright by the Fed: interestingly, these peaked only in 2017 – almost three years after the official end of QE3 – total Fed assets already peaked in January 2015.
For a while the S&P 500 Index kept rising while the monetary base was essentially flat-lining with a downward bias (note: portions of the liabilities side of the Fed’s balance sheet are included in base money and inter alia reflect the QE portfolio, mainly in the form of excess reserves).
This has changed again in the course of the recent downturn in stocks, which have now “caught up” with the decrease in base money. Normally one would not expect this correlation to be overly tight, but in this case it actually makes sense, since QE and QT have a direct effect on money supply growth rates. In light of the fact that inflationary bank lending growth remains anemic, QT is currently a major driver of money supply growth (or rather, the lack thereof).
Monetary base vs. SPX
Lastly, here is a potentially useful table from a Nomura research report which we pinched from Zerohedge: it shows the estimated weekly USD amounts of QT drains in 2019. It may be worth paying attention to these dates in order to find out to what extent these drains impact risk asset prices and whether they do so with a lag or immediately.
2019 QT schedule. This may prove useful to traders.
Conclusion
As long as the Fed keeps draining excess liquidity from the system, money supply growth rates are unlikely to recover. Expect elevated market volatility to persist over the medium term, with a downward bias.
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