QE or Not QE: The Consequences Are The Same

It may look, swim and quack like one, but Federal Reserve Chair Jerome Powell insists that the Fed’s recent reinflation of its balance sheet past the $4 trillion mark isn’t quantitative easing. Oh no, he says, just because the Fed’s portfolio recently rebounded to $4.175 trillion at the middle of January, up from a six-year low of $3.76 trillion since the beginning of September, doesn’t mean that the Fed is back to its old QE ways, which had pushed the Fed’s balance sheet to a steady $4.5 trillion between 2014 and 2018 when it started to shrink.

But QE by any other name is still QE.

At least one voting member of the Fed’s monetary policy committee has expressed some concern about the recent boost in the Fed’s balance sheet – more than $400 billion in just the past four months.

“The Fed balance sheet is not free and growing the balance sheet has costs,” Robert Kaplan, the president of the Dallas Fed, told reporters at a recent Economic Club of New York event, according to the Wall Street Journal. “Many market participants believe that growth in the Fed balance sheet is supportive of higher valuations and risk assets. [That’s Fed-speak for a bubble]. I’m sympathetic to that concern.”

For the past 12 years, ever since the financial crisis in 2008, the Fed has swollen the size of its balance sheet – its holdings of U.S. Treasury and government-insured mortgage-backed securities – from less than $1 trillion to more than four times that. Its first burst of bond-buying took place in 2008, during the depths of the meltdown when its portfolio more than doubled in less than a year. It then gradually increased to more than $3 trillion over the next five years, at which time QE took it to $4.5 trillion, where it held steady until 2018, when the Fed started to allow its holdings to run off as they matured, until its recent policy U-turn.

And what was the direct result of all that buying? Continue reading "QE or Not QE: The Consequences Are The Same"

The Fed's Newest Service: Portfolio Insurance

Every generation believes that they know more than the previous generation. Then, as they get older, they slowly start to realize that their elders aren’t as dumb as they thought. It's normal.

What's different today is that we seem to think, or at least many people do, that not only are we wiser today than everyone who has come before us but that humankind has been doing everything wrong for the past 5,000 years or so of civilization. Whether it's morally wrong to eat meat, or how many genders there are, or who can marry who, or whatever, it seems that we've been misguided since the beginning of time.

This attitude also manifests itself in the economic sphere. Based on the Federal Reserve’s recent actions, they appear to believe that everything we knew or thought we knew about economic cycles and bull and bear markets has been all wrong. Thousands of years of boom and bust cycles could have been eliminated, apparently, if only the proper monetary policy fixes had been applied.

Quite clearly, the Fed’s new mandate is that if economic growth starts to sputter, or the stock market moves beyond a correction, or some international crisis – Brexit, Megxit, Iran, North Korea, trade wars, you name it – threatens to upset the applecart, it will immediately turn its monetary policy tools into high gear.

Before now, economic growth and stock prices were pretty much allowed to take their own course, with some attempts to smooth out the worst excesses. It was considered to be both normal and healthy for markets and economies to go up and down periodically, as long as the general trend was upward. Now, however, that appears to be not only quaint, old-fashioned thinking but just plain wrong. There is no reason, the thinking goes, for us to suffer any economic pain as long as we have the policy tools to avoid it. Continue reading "The Fed's Newest Service: Portfolio Insurance"

If It Ain't Broke, Don't Fix It

As loyal readers of this column may have noticed by now, I've been pretty supportive of the Trump Administration. However, I do part ways with it when it comes to financial regulation and the dismantling of the Consumer Financial Protection Bureau.

Some of the reforms enacted by the Obama Administration after the global financial crisis, namely the Dodd-Frank Act, may have overdone it a bit in terms of increased bank regulation. And certainly, the CFPB under its former director, Richard Cordray, grossly overreached in how it regulates and punishes lenders, often unfairly. Still, that doesn't mean we need to go back to the days before the financial crisis and plant the seeds for another one in the future.

Senator Elizabeth Warren, despite her recklessly pandering and unworkable ideas like wealth taxes and Medicare for All has been right on reining in the banks. While Dodd-Frank did impose some needed restrictions on what banks do, it clearly hasn't done enough in some areas – like curbing criminal behavior – and the rollbacks enacted by the Trump Administration go in the wrong direction. Besides, the banks have managed to make plenty of money under these restrictions.

Right now, two banks, JP Morgan Chase and Bank of America have well over $2 trillion in assets, while two others, Wells Fargo and Citigroup, are just below that mark. Wells Fargo would have gone over that level except for the fact that it is restrained from growing its assets by an unprecedented Federal Reserve order due to its many scandals over the past several years. Those are pretty dangerous levels if you ask me – certainly Too Big to Fail dangerous.

But one of the worst ideas the Trump Administration is pushing now is returning Fannie Mae and Freddie Mac to the private sector. Essentially, it would re-establish the status quo ante the 2008 financial crisis. Continue reading "If It Ain't Broke, Don't Fix It"

Good News Is… Good News

If you're a bond investor, maybe you should be praying for impeachment after last Friday's November jobs report.

Granted, based on other indicators, including GDP, leading indicators, and others, the economy is not as strong as it was at the beginning of this year. But it’s still in pretty good shape, as witnessed by the 266,000 jobs that were added to the economy last month.

The immediate reaction in the bond market was a sharp drop in prices and a concomitant rise in bond yields. In other words, good economic news is bad for bonds. By the same token, a strong economy pretty much squashes the idea of the Federal Reserve lowering interest rates anytime soon, which is also negative for bond prices. If anything, if this keeps up, the Fed’s next move may be to raise interest rates again, not lower them, which is the prevailing view in the financial markets at the moment.

So that would indicate that the bond investors’ best hope is for the Democrats to be successful in impeaching Trump and as quickly as possible and push the economy in the other direction.

Of course, as some of us might remember from our junior high civics or American government class (do they still teach that in schools?), impeachment is not the same thing as removal from office. President Clinton and President Andrew Johnson were both impeached, but neither was removed from office, having prevailed in the subsequent trial in the Senate. (That’s the part most giddy news stories about the current impeachment drama leave out). But then again, the entire Democrat strategy is really about generating as many headlines as possible with the words “Trump” and “impeachment” close together, as if that’s good enough.

So impeachment isn’t such a great political or electoral strategy. Neither is it a good bond investment strategy.

Let's get back to the jobs reports, which was described variously as a “blowout” or “blockbuster” or words close to that. Continue reading "Good News Is… Good News"

Ignorance Is Bliss

Are the financial markets not paying attention? Or is that a good thing?

I keep asking myself those questions while I watch the major U.S. stock market indexes soar to new heights on a regular basis, while bond prices retreat – and yields rise – after hitting crisis levels early in the year.

The markets are saying: everything is just fine. The economy is humming along, consumers are spending, everyone who wants one can get a job, but just in case, the Federal Reserve is keeping interest rates low and monetary policy accommodative. How can things possibly get any better?

But are we getting a little too comfortable?

Stock prices are rising, and bond prices are falling even as the main Democrat presidential hopefuls try to top one another with the most profligate government giveaways they can think up – Medicare for All, free college tuition, student loan forgiveness, free health care for illegal aliens, reparations for slavery, you name it – while their peers in the House are trying desperately to drive President Trump from the White House, so they don’t have to face him on Election Day next year.

To say that there is a huge disconnect between the political world and the financial world is a huge understatement.

At some point, will investors look over this depressing – and rather scary – landscape and take their chips off the table? Or do they really believe that all of this silliness will eventually blow over and Trump – whom the financial markets seem to like, or at least are comfortable with – will arise victorious after the impeachment witch hunt plays itself out and the current field of Democrat presidential wannabes thins out? Continue reading "Ignorance Is Bliss"