The great QE unwind is coming

MD: We here at MD know without equivocation that there is no role for a central bank to play in a “proper” MOE process (i.e. real money). So we are always interested in reading articles about what a central bank is doing or should be doing. We know in advance, both are wrong headed. Let’s see what we shall see.

Commentary: The great QE unwind is coming

By Said N. Haidar · · Updated

After ending quantitative easing in 2014, the Federal Reserve now plans to begin shrinking its balance sheet over the next several years by tapering the reinvestment of its Treasury and mortgage-backed security holdings.

MD: “Tapering” the “reinvestment”? The Fed doesn’t make investments. It has nothing to invest. It’s balance sheet is nothing but a list of broken promises from the treasury and crap taken off failed elite traders at face value … a record of counterfeiting. It has no way of removing them from its balance sheet. They only go away when the Fed goes away.

During the same period, U.S. deficits are projected to grow substantially — notwithstanding the possible enactment of any of President Donald Trump’s major proposed legislative initiatives, which would likely cause deficits to swell even further.

MD: What? US deficits? Have they made a trading promise and not delivered? Everything the USA government spends is counterfeit. All the taxes they collect goes straight to the money changers as tribute (they call it interest).

Increasing U.S. deficits will require the Treasury to ramp up bond issuance. As a greater risk premium will be required to attract new buyers to absorb both the U.S. primary deficit and the Fed’s reduction in its holdings, the U.S. yield curve is likely to steepen. Price concessions into Treasury auctions will likely increase as well.

MD: Ramp up “bond issuance”? They never repay the bonds. They just roll them over. That’s default. That’s counterfeiting. The buyer’s of those bonds claim the government must pay them tribute (interest). The buyers pay nothing for those bonds. When the bonds are rolled over, the buyers get back what they paid … nothing. In the meantime, they get tribute (interest). It comes from the taxes government steals from us. It’s just paper work. It’s a complete scam. You and I need not apply.

The European Central Bank, for its part, is increasingly expected to begin winding down its QE program in 2018. This is likely to bring steeper European yield curves, putting additional pressure on the U.S. curve to steepen further.

MD: Just how are they going to “wind down” the QE program? If they are talking about the crappy loans they bought from the scamming money changers at face value, who are they going to sell those to? The same money changers … right? For pennies on the dollar … right? Who will again claim they’re in trouble and demand a bailout … which pays them face value for something they picked up for pennies on the dollar. What’s not to love about that scam.

By communicating the end of QE in advance and increasing the rate of reduction gradually, the Fed hopes to avoid the “taper tantrum” that roiled markets from 2013 until early 2016, when U.S. equities, and global assets more generally, were subject to periodic risk-off episodes.

MD: Right. Bring those frogs up to boil slowly so they don’t jump out of the pot.

The aim of QE was to push flows into more productive investments — not just financial assets. Unfortunately, evidence for increased economic activity from QE is relatively weak.

MD: What do they know about investments … let alone productive ones? A proper MOE process leaves all that up to traders. And traders “will” deliver as promised … or they will not be allowed to create money. With a proper MOE process and real money, governments are quickly removed as the deadbeat traders they are. The interest collections they must pay are equal to the money they want to create. Net it out, they create zero money. Their counterfeiting game is over.

Yet QE did have an impact. It artificially flattened yield curves, weakened the country’s currency, allowed poorly performing companies to roll over debt and inflated asset prices.

MD: It had a huge impact. If turned losing trades into winning trades for the money changers. It’s a scam.

By depressing yields on government securities, QE encouraged yield-seeking behavior. Many analysts note that the growth of central bank balance sheets has been eerily correlated with the increased value of global risk assets and U.S. equities.

MD: See how arbitrary they view interest collections? We at MD know exactly what interest collections should be. They should always be equal to defaults experienced … at the moment they are experienced in real time.

In June, the Federal Open Market Committee raised interest rates by 25 basis points for the third consecutive quarter. The Fed did so, based on internal Phillips curve models, which predict that low levels of unemployment lead to increasing inflation. As the Fed starts to implement its balance sheet runoff, it may find it increasingly difficult to maintain its rate hiking cycle.

MD: Wet finger … place in air … ah … feels like 1/4% to me, how about you?

Balance sheet reduction is likely to commence in the fourth quarter for both U.S. Treasury holdings and mortgage-backed securities. The combined maximum rate of reduction is $10 billion a month but rising incrementally to a maximum $50 billion a month by the fourth quarter of 2018.

MD: Ok. They’re going to sell $10 billion dollars of face value junk … and what, get $1B in return … from the money changers … who just counterfeit the money for them in the first place? What an ugly joke!

While the Fed has previously tapered its purchases, and in fact ended purchases for brief periods twice, neither it nor any other major central bank that has engaged in QE has actually tried to shrink its balance sheet thereafter. What’s odd is that the Fed and other central banks have made claims about the efficacy of QE, but when the policy goes into reverse, they seem to think there won’t be any meaningful effect.

MD: Remember QE (Quantitative Easing) is a newly made up term. Debt monetization was no longer working … it was too revealing of what they were doing.

The Fed says it hopes the process will “run quietly in the background” and not amount to policy tightening. We shall see. I believe that Fed balance sheet shrinkage could have substantially greater effects on both bond markets and financial markets, generally, than conventional interest rate increases.

MD: Policy tightening? What policy? Tightening what? They will counterfeit whatever they need to to pay their employees, their suppliers, their money changers, and their dependents.

Since QE purchases ended, the Fed has continued to reinvest the coupon and principal payments of both Treasuries and MBS holdings. Starting in October, the Fed will likely reduce reinvestments of purchases of Treasuries by $6 billion a month, while reducing MBS reinvestments by $4 billion a month.

In 2018 the Fed will allow up to $180 billion of Treasuries and up to $120 billion of MBS to run off. Thereafter, it will allow up to $360 billion of Treasuries and up to $240 billion of MBS runoff.

MD: To “run off”? What does that mean? Where are they going to run off to? Is that a new word for “write off”?

This is likely to come against a backdrop of a rising U.S. deficit, which is projected to rise to more than $1 trillion by 2022 (vs. $500 billion in 2015). These projections, moreover, do not include the possible enactment of any of President Trump’s likely deficit-raising policies on fiscal spending, defense increases, infrastructure spending or tax cuts.

MD: Remember. With a proper MOE process and “real” money, there is no Fed. And money changers can’t exist with the time value of money locked at zero .. so there are no money changers. And the governments they institute can no longer be sustained with counterfeiting. Up until then, all this nonsense about deficits is just that … nonsense. It is just pushing fiction around a columnar pad. If we owe France a billion Francs, well, we’ll have to sell something to someone for a billion Francs … and being a deadbeat, it won’t be counterfeit dollars. How about the capital building?

In the Treasury market, increased supply at auctions will grow steadily throughout 2018, which will likely result in significant yield curve steepening. Rather than being used as a liquidity point for investors to buy large quantities of bonds, Treasury auctions will be more difficult to digest.

MD: This is all based on that old “improper” MOE process nonsense that perpetual supply/demand balance of the money is not needed. We’ll shoot for a 2% leak and deliver a 4% leak. Well, if you go into a restaurant and buy a steak … and then don’t pay for it, you will have hell to pay. If you pay with a credit card but don’t pay your statement, you will have hell to pay.

It is therefore likely that as net new issuance increases (accounting for the reduction in Fed purchases), we will see significant stress and concessions into Treasury auctions. This will coincide with the Congressional Budget Office forecasts of net funding needs approaching, or even exceeding, the levels that existed in 2009 and 2010.

MD: When the jig is up, the auctions will fail (at 10,000% interest). game over. Right now, they’re buying their own crap at these auctions … and creating new crap to do it.

After years of financial repression, with yields at historic lows and financial institutions on much firmer footing, and with an upturn in global synchronized growth, appetite for government securities is waning. Hence, we expect to see a steeper yield curve and wider MBS spreads.

MD: Yields are at historic lows because counterfeiting costs nothing.

More importantly we expect to see substantially more difficulty for the U.S. and European governments to issue debt at auctions and syndications. We might even see bond market vigilantes start to impose fiscal discipline on the U.S. government.

MD: Ah … “bond market vigilantes.” Ask Venezuela what they think about those guys. Here at MD where we know what “real” money is … and what Fed money is not  … we need to keep an air sickness bag close at all times.

Said N. Haidar is founder and chief investment officer of Haidar Capital Management, New York. This article represents the views of the authors. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I’s editorial team.

Leave a Reply

Your email address will not be published. Required fields are marked *