Though eclipsed by the Trump boisterous trade headlines, the Federal Reserve’s whispered announcement of large-scale capital injections deserves credit for the quick market turnaround. While Fed speakers do not want you to call their newly-activated $60 billion a month purchase program Quantitative Easing, it most surely is, regardless of intent. Given the steady declines in most economic indicators, present conditions appear vulnerable to recession…without intervention. Will this mini QE be enough to once again kick recession down the road? Unclear this go around, given the heady headwinds. But it certainly has been enough to lift investor sentiment and bring fearful cash back into equities. We need more data to sound the all-clear, but a wash of liquidity like this should float markets higher… for now.
The Full Story:
On Friday, October 11th, Trump trumped the front page with his photo-op China trade deal, but it was the Fed’s two-page “Statement Regarding Monetary Policy Implementation” on the back page that ignited a 500-point rally in the Dow. For those of you who may not have turned past the fold, per the statement:
The Federal Reserve will purchase Treasury bills at least into the second quarter of next year in order to maintain over time ample reserve balances at or above the level that prevailed in early September 2019.
In accordance with this directive, the Desk plans to purchase Treasury bills at an initial pace of approximately $60 billion per month, starting with the period from mid-October to mid-November.
Consistent with this directive, the Desk will roll over at auction all principal payments from the Federal Reserve’s holdings of Treasury securities. As Treasury bill holdings mature, the principal payments will be rolled into new Treasury bill securities.
Translation: We are going to print $60 billion a month in new money to buy securities while fully reinvesting proceeds from maturing securities for an indefinite period.
While the Fed may have carefully scripted their talking points to play down accusations that this constituted a new Quantitative Easing program, don’t bite. At $60 billion a month, this amounts to an annualized figure of $720 billion in addition to the $200 billion done recently. At a $920 billion annualized pace, give or take, this approximates another $1 trillion in stimulus. Those of you that have hung around with us recently know that we have been predicting another $1 trillion stimulus package to help offset mounting economic weakness. After all, monetary and fiscal authorities have responded to every other bout of economic weakness since 2008 with stimulus at or above this level.
As clearly illustrated in the leading economic indicators chart above, we have had one recession and 2 near recessions since 2008. In each occurrence, the Federal Reserve and/or The President have counterpunched with stimulus of $1 trillion or more. In 2008 Obama passed the $800 Billion Recovery Act, while the Fed took rates to zero and injected $1.3 trillion in liquidity….and it worked! Until it didn’t. So, in 2011, the Fed restarted the printing press and injected another $600 billion with QE2, initiated a $400 billion duration “twist” operation, and doubled down with another $1.6 trillion injection through 2014…and it worked! Until it didn’t. So, in 2016 voters elected Donald Trump and his $1.5 trillion tax cut…and it worked! Until it didn’t. So, today as the leading economic indicators again flash recession warnings the US Federal Reserve has announced a shadow round of quantitative stimulus. Will this jumpstart the economy? Unclear, but QE programs do tend to jumpstart stock prices.
Clearly, QE1, QE2, QE3 boosted share values and when we stopped printing in 2014, the Europeans restarted their printing presses to compensate. The Japanese have been printing all along. Do note that in late 2017 the Fed began reversing QE or “quantitative tightening” which broke the liquidity uptrend and the markets uptrend. Will the new QE program drive stock prices higher? It already has. Will it continue? Not without assistance. The market has reacted in a predictably Pavlovian style equating QE with higher asset prices, but economic headwinds this go-round have grown quite stout. Before sounding the all-clear, we need more color from the Fed, more earnings season releases, more economic data, and a subsequent recovery in the leading economic indicators series depicted above. This information will waterfall between now and November 8th. For now, investors can breathe a little easier knowing the plunge-protection team has returned to the scene.
Have a great Sunday!