Hussman Sides with Powell: It's Not QE4

Mish

A debate over a sudden dramatic surge in Repos is raging. Is it or isn't it QE4?

Organic Growth

On October 9, Powell discussed "Organic Growth" of its balance sheet.

“Going forward, we’re going to be very closely monitoring market developments and assessing their implications for the appropriate level of reserves,” Powell said at a news conference. “And we’re going to be assessing the question of when it will appropriate to resume the organic growth of our balance sheet.”

Not QE

On October 10, Powell commented on Not QE.

“I want to emphasize that growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programs that we deployed after the financial crisis,” said Powell.

In no sense, is this QE,” Powell said in a moderated discussion after delivering his speech.

Quacks Like QE

Peter Schiff chimed in what what I believe to be the consensus view: Powell Can Call It What He Wants, But It Quacks Like QE

As the reliable American folk wisdom states: if something "looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck." In this case, Powell can call the new Fed program anything he wants, but it certainly quacks like QE.

Hussman Sides With Powell

In One Tier and Rubble Down Below John Hussman made the case that Powell is correct.

There’s a broad misunderstanding that the Fed’s recent repo operations somehow represent “quantitative easing in disguise.”

Not quite.

The essential feature of QE was that the Fed purchased interest-bearing Treasury bonds, replaced them with zero-interest base money, and created such a massive pile of zero-interest hot potatoes that investors went absolutely out of their minds to seek alternatives, resulting in a multi-year bender of yield-seeking speculation.

With that understanding, it should be clear why the Federal Reserve’s recent repo facilities do not, in fact, represent a fresh round of QE. The difference is that the repo facilities replace interest-bearing Treasury bills with bank reserves that are eligible for the same rate of interest. This swap does nothing to promote yield-seeking speculation. Now, the psychology around these repos has certainly been good for a burst of investor enthusiasm and a nice little can-kick. But that enthusiasm isn’t driven by actual yield differentials – as QE was – it rests wholly on the misconception that these repos themselves represent fresh QE.

Balance Sheet, Monetary Base, Excess Reserves vs QE

To better understand and explain what Hussman is saying, I created the above chart.

I based my QE boxes on Yadeni Chronology of Fed's QE and Tightening.

Hussman mentioned "Treasury Bonds" but the Fed bought various durations. I used the 10-year Treasury Rate as a proxy in my chart.

If one wants to nitpick, zero-interest base money is not perfectly accurate as interest on excess reserves was slightly above 0% as shown by the green line.

That tiny correction aside, the Fed did suck up bonds yielding over 3% at time and replaced then with reserves yielding just over 0%.

As Hussman points out, someone has to hold those cash reserves at all times resulting in the "hot potato" environment in which those earning 0% desperately tried to get rid of the cash.

This only "worked", using the term loosely, because asset prices were rising. If at any time, asset prices fell for a prolonged period, cash at near-0% would not have looked so bad.

Effectively, with its policy, the Fed blew another massive bubble.

Just Don’t Call it QE

Subadra Rajappa, head of US rates strategy at Société Générale, also sides with Hussman.

That’s the distinction between QE and just increasing cash reserves in the system. It’s a communication challenge. It’s a very nuanced difference which could easily get lost,” said Rajappa as quoted by the Financial Times.

Organic Growth

Let's return to the top.

If you accept what Hussman is saying, this isn't QE, but is sure the heck cannot be called "organic" growth either.

Organic growth looks like slow upward movement in monetary base, not the explosions in monetary base and asset growth.

Mike "Mish" Shedlock

Comments (12)
No. 1-7
thimk
thimk

ok i get it. But any financial system that requires massive amounts of short term, rapidly deployed liquidity speaks volumes .

Pater_Tenebrarum
Pater_Tenebrarum

File under "idle semantics". As I said to Mish: Who cares what it is called, the result is an explosive increase in the money supply! And it's not bank lending that's behind that, because bank lending growth continues to slow down. So the economic effect is exactly the same as with "QE". It walks like a duck, quacks like a duck, guess what: it's a duck!

CautiousObserver
CautiousObserver

Hussman: “This swap does nothing to promote yield-seeking speculation.”

Not sure I agree with this observation. Were it not for the Fed soaking up recent treasury issuance with new money, the Treasury might have difficulty placing its debt without yields rising. Whether the Fed replaces Treasuries with zero-interest base money or below-market-interest base money that costs more than zero, they are still suppressing yields in both cases and they are still exerting upward pressure on asset prices in both cases. The distinction may be one without much difference.

Since the Fed coined the term "QE," I suppose it is their prerogative to give it whatever Byzantine definition they choose. This is probably a good reminder that we ought to all be calling their rapid balance sheet expansion what it really is: "Debt Monetization."

Terpolska
Terpolska

My understanding is that what Powell is doing is attempting to keep the interest rates from rising. QE would be implemented to spur economic growth, right? Please correct me if I am wrong.... I don't play the market.I just follow really smart people like Mr.Shedlock...:))

Scooot
Scooot

If I understand correctly Mr Hussman is suggesting the Feds actions in the repo market are not synonymous with QE because they are replacing interest bearing T Bills with interest bearing base money, whereas QE is replacing term interest bearing Treasuries with non interest bearing base money.

However to my thinking this ignores the purpose of the Fed actions. The market is already short of the required liquidity when the repo process takes place, in other words they’ve already spent it, most likely on assets that are or have generated returns far in excess of the tiny amount they’d receive from interest on Deposits with the Fed. They’ve spent it on the same assets that they piled into when QE was in action. So it’s the same, albeit with slightly different timing. That’s my thinking, am I missing something?

flashlight joe
flashlight joe

"“In no sense, is this QE,” Powell said in a moderated discussion after delivering his speech."

But then: "When things become serious you have to lie." - Jean-Claude Junker

And: "Deny, deny, deny." - Bill Clinton

benign
benign

The only thing keeping interest rates off the zero bound is the Fed paying interest on excess reserves. The relationship of rates to BASE/GDP dominates at all terms. Paying interest on the banks' excess reserves is at taxpayers' expense, started in about 2009, and is obscene. See https://osf.io/preprints/socarxiv/ve3uw/

Martin Armstrong reports that the primary dealer traders are saying the Fed barely has short rates under control, that they "want to go up" to cover risk.


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