THE WOLF STREET REPORT

And then the Stock Selloff Starts All Over Again.

Since the Christmas Eve selloff-low, the S&P 500 has risen 13%, including a 5% jump on December 26. But last week, the rally petered out and stocks ended flat. And now it gets complicated, with stock-market bulls hoping and praying for the Fed to “reverse” course to sustain this rally, and with the Fed having other ideas (11 minutes):

But for the markets: “No Data is Good Data, Read…  We’re Flying with Eyes Partially Closed into Turbulent Markets & Economy

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  68 comments for “THE WOLF STREET REPORT

  1. nearlynapping
    Jan 27, 2019 at 8:11 pm

    Fascinating analysis of the Fed’s future direction. Look forward to watching it all play out.

    • Caliban
      Jan 28, 2019 at 3:22 am

      QE created populist anger. QT angers Wall Street. The Fed is now damned if they do and damned if they don’t. Good luck to them.

    • Rick
      Jan 28, 2019 at 8:34 am

      Already bought the pre-market dip. Will add more into noon if indexes fall further. Otherwise will sell and rake in the routine daily profit. Nothing more predictable than buying the index dip in the US “market”. Same story, different day.

      • Sadie
        Jan 28, 2019 at 11:04 am

        Rick, could you provide a past example of a one day trade with your entry and exit price on a specific stock/index etf or options contract?

        Thank you

        • Rick
          Jan 28, 2019 at 5:31 pm

          Sure. Today for example: I bought FAS premarket at 56.50. I added to the position at quarter to noon at 55.86. I sold out at 3:30 at 56.86. About 1.20 % profit. Not mind blowing, but do it a hundred times a year and your return is very nice. My entries weren’t even good today. I still made money though. US stocks are simply not allowed to just fall all day long. Today is a textbook example of how losses get cut in half by close. It’s very predictable.

  2. Iamafan
    Jan 27, 2019 at 8:39 pm

    10-4 on the MBS. Since it’s guaranteed by the US government then the Fed should be able to dump that hot potato. Since most of them mature at least 2030 and the mechanics of passthrough makes it inaccurate, then maybe the Fed can swap it with Treasuries with the Treasury. The Fed can hold purely Treasuries after that and that part can be the liability replacement we are looking for. Think of this as super SOMA with a twist. The Treasury gets to create more Treasuries.

    The remaining excess reserves still need to be extinguished by roll-off. This can eliminate the acrimonious IOER payments and the Fed can target monetary policy with SOFR instead of EFFR. With LIBOR ending 2021, it’s like hitting 2 birds with one stone.

  3. Jake Bodhi
    Jan 27, 2019 at 9:23 pm

    Smartest site on the web

  4. 2banana
    Jan 27, 2019 at 10:06 pm

    It seems the Fed is now painted into a corner.

    Can’t do much more QE unwind, can’t lower rates that much (they hardly raised them), unwinding what they can will lead to higher longer term yields (but avoiding a true yield inversion), the markets now live or die by the nuisances of Fed words…

    It’s madness.

    • Lemko
      Jan 28, 2019 at 2:01 am

      Markets live or die by Moody’s downgrades, people running the show are likely waiting for a political catalyst event to give moody’s the order to downgrade IG’s, so media can spin the upcoming destruction on that, with all the current rhetoric around taxing the rich to socialism, wall street is gonna time it well to take heat off them… People who trade and are into the economy know exactly what’s up, but the average voter won’t have a clue about the degenerate things happening past few years in Credit Markets

      With amount of CDS and over 6 Trillion in IG, Fed would need a 2 Trillion instant QE and few hundred billions in bail outs, with 1 T a year for next 2-3 years after that just to not have apocalypse in credit markets

      QT will end in March if political events deteriorate, which is highly probable at this point… Cut rates in June once full blown recession is activated by that time, and QE5 towards September, end of year is my prediction

    • gary
      Jan 28, 2019 at 7:35 pm

      nuances

  5. Iamafan
    Jan 27, 2019 at 10:26 pm

    Fed on MBS:

    Several participants commented on the possibility of reducing agency MBS holdings somewhat more quickly than the passive approach by implementing a program of very gradual MBS sales sometime after the size of the balance sheet had been normalized.

    What does that mean???

  6. Iamafan
    Jan 27, 2019 at 10:39 pm

    Well that didn’t take too long to confirm my guess. Please read:

    https://www.reuters.com/article/usa-fed-balancesheet/us-fed-seen-swapping-mbs-with-treasuries-baml-idUSL1N1ZO1EH

    U.S. Fed seen swapping MBS with Treasuries – BAML

    • Jan 28, 2019 at 1:31 pm

      So the Fed will exchange longer term (riskier) private mortgage paper for (safe) short term government paper? I may be jumping to the wrong conclusion here, is the economy ready to move forward on its own?

      • Iamafan
        Jan 28, 2019 at 2:54 pm

        They are both guaranteed by Uncle Sam, so they are safe.
        But here’s the difference.
        Most of the MBS that the Fed holds matures (later than) 2030 ish.
        They are not comfortable about the duration risk of keeping MBS that long, even if they can wait till it matures. (Maybe they don’t want to wait.)
        Managing T Bills is easy since they mature within a year. You can simple reinvest them if needed.
        Duration risk increases with length and with increasing interest rates.

        • Jan 28, 2019 at 4:33 pm

          You equate MBS with short term treasuries? Risk is a matter of duration? The Keynesian epitaph. TBills are on the balance sheet to facilitate lines of credit at the discount window, (in this phase of monetary inflation you drop one ball and try to juggle the rest, -liquidity recycles -and the show goes on) its old monetary policy, such things seldom work.

  7. Kasadour
    Jan 27, 2019 at 11:11 pm

    The FED is hoping that if they merely appear dovish, talk dovish-like using dovish words, that it will be enough to lull the cry babies back to sleep. The FED is so stuck.

    • Bobber
      Jan 28, 2019 at 12:18 am

      I think the Fed turned dovish to prevent the December stock market crash from continuing into January. Now that there’s been a big rebound, the Fed will likely back off the dovishness. The Fed is likely trying to manage stock prices down over time, knowing the bubble cannot be sustained.

  8. Memento mori
    Jan 27, 2019 at 11:37 pm

    Wolf will be proven wrong before the summer, not only the FED will stop QT but it will definitely be on QE mode again and forget about rate raises this year. One would think that by now, any reasonable adult that has experienced the last 10 years knows the fed “raison d’etre”, support the stock market no matter what. They call this the new normal, get used to it.

    • Kasadour
      Jan 28, 2019 at 12:20 am

      You’re right- the FED will cave to the cry babies in what I believe will spark a spectacular domestic “Gilets Jaunes” movement, by any other name, to rebel and corner the 1% that benefit from FED QE policy.

      Central bank around the world have only gotten away with theft of the periphery working class because the working class didn’t understand the complexities of the scheme, but those days are over and the gig is up.

      The FED is hoping to buy itself time by confabulating a dovish tone. I doubt it will by very much.

      • timbers
        Jan 28, 2019 at 6:38 am

        Well, that Gilet Jaunes moment in the U.S. already happen. Tt was called Occupy Wall Street. And we know how that ended:

        The President ordered a massive co-ordinated 18 city attack on political expression with the DHS to crush it. Freedom of information requests have since revealed the FBI created an assassination list of Occupy leaders (the President was already known to have an Assassination list for some time he personally worked according to glowing reports from his staff), and the President rounded up and bound and immobilized for days Occupy leaders till they urinated and dedicated on themselves (torture).

        The French will need to learn to kill and crush their political protests like we do here in America, so that their leaders can continue to cut wealth taxes and impose taxes on working people like are doing now.

        I don’t think American frogs are brave enough, or aware enough, of the slowing heating pot they are in. Occupy was brutally crushed. It will be again if needed.

        • RD Blakeslee
          Jan 28, 2019 at 9:50 am

          Wow!

          I guess we are comforted by the second amendment, so as the country goes from bad to worse, us to-be-shot can shoot the shooters?

          I’ve some good news for us: the AI drones to be employed to shoot us can be shot and disabled, too!

        • MC01
          Jan 29, 2019 at 2:51 am

          I have read some crazy stuff over the past week, but this is worth of a medal.

          The Occupy Wall Street and Gilets Jaunes movements are radically different in nature. The latter in particular has been boiling under the surface for many many years now. Regardless of how long it will last, the causes for it are unlikely to be eliminated in the short run, at least not in the present political climate (this goes both ways: neither the politicians nor their electors really want to tackle this).

          Also I take you have never seen the French riot police in action from up close? Part of the reason the movement is lasting so long is because around week five, when street protests were starting to wind down on their own, the aforementioned French riot police started acting like they have been doing since 1968.
          It was a tragic mistake, but if you know French politics it was sadly bound to happen. Since then, failing meaningful concessions from the government (which however wouldn’t address the root causes of the protests but could buy some time), all bets are off the table because how do you defuse this thing?

        • timbers
          Jan 29, 2019 at 12:54 pm

          Thanks, I did not know of the French police being that brutal. My impressions came mostly from earlier accounts before that you mention, when I think the French police were less aggressive.

          However, I think the Occupy Wall Street and Gilet Jaunes are not dis-similar at all, and are motivated for the same reason – governments in U.S. and France are pursuing nearly identical policies of redistributing income from working class to corporations and the rich.

        • Atu
          Jan 30, 2019 at 8:38 pm

          Yes, the french police are amongst the most aggressive in Europe in terms of crowd control. If you noticed the story of blogger Rodrigues losing an eye while filming. He was well known and always pacifist. Well he accounted a stingball grenade thrown at his feet AND a rubber bullet to the face ( those rifles are highly accurate Swiss , but use French unrated hence more dangerous ammo from Alsetex) in a direct personal attack. Even I found that hard to imagine and figured exageration, but no

          https://mobile.twitter.com/Qofficiel/status/1090335514446741504

          Many protestors have lost their hands from glif4 canisters which are tnt based, many blinded by rubber bullets. French law was changed not long ago to allow sniper fire during protests, they position snipers now and there is footage documenting this. I think only the Spanish in Cataluña have resored to this level of crowd control, and there it was a case direct open threat to national sovereignty (with an exagerated police reaction to it).

  9. Willy2
    Jan 28, 2019 at 2:06 am

    – Disagree. The FED shrank its balance sheet by some $ 400 billion. But in spite of that rates came down in the last months of 2018. Seems the FED is not very good in manipulation of interest rates. Seems a force called Mr. market is more powerfull.
    – There is an interesting dynamic here. The FED´s balance sheet went from about $ 800 billion to over $ 4 trillion. It did so by creating money “out of thin air”. But when the FED would shed all the assets/sell the assets into the markets then the FED would end up with over $ 4 trillion in cash.
    – I could see a “Swiss National Bank” (SNB) scenario unfolding for the FED. The SNB bought A LOT OF shares of Apple. But the shares of Apple took it on the chin. And it meant that the SNB lost A LOT OF money. Replace the word “Apple” with the words “Mortgage Backed Securities” and smart people know precisely what could be in store for the FED.

    • Jan 28, 2019 at 9:27 am

      The Fed doesn’t end up with “cash” as it sheds its assets. This money — the proceeds from the asset roll-off — is destroyed and disappears in the same manner in which it was created when the Fed bought the securities. This just reverses the process of QE.

      • RD Blakeslee
        Jan 28, 2019 at 10:31 am

        Is anybody keeping count of how many times you’ve been obliged to re-explain this simple concept?

  10. OutLookingIn
    Jan 28, 2019 at 3:56 am

    Really, when it comes right down to the crunch, the Fed has only two ways out and both are none too good.
    Its either debt default, or high inflation.
    Both result in the destruction of money, with the final being plenty of worthless money, which is no different from having not enough money that retains value.
    Empirical evidence points to inflation, as being almost always the choice.
    Those countries holding excess reserves in US dollars, know this is to be a probable direction and have been hoarding gold to protect their sovereign wealth.

    There is a possible third solution. FDR did it in 1934.
    Revalue gold and in doing so, revalue the US dollar by printing “new dollars” then exchanging them for “old dollars” at a ratio of 10:1
    This will most likely be the course of US monetary policy at the onset of “The Big Reset”. A likelihood of gold confiscation exists.
    I see China has suddenly pegged the yuan much higher in gold.

  11. asherz
    Jan 28, 2019 at 4:41 am

    Last 3 comments are spot on. I disagree with Wolf. Jay Powell came on the scene as Volcker Jr. December stock market changed that quickly. Three Fed Fund raises in 2019 now maybe one and probably none. QT now stands for QUIT. It’s largely over and will not get anywhere near the $2.4 T Wolf expects. MBS roll off will be replaced by short term Treasury paper. Longer maturities will be maintained and at some point a QE redux will see increases in those holdings to keep L-T rates low.
    The stock market has been built on a house of cards or rather printing press currencies. Trillion dollar annual deficits and a growing $22 T national debt foretells a very rough ride in the years ahead. Physical Precious metals the safe harbor.

    • Unamused
      Jan 28, 2019 at 6:44 am

      =>The stock market has been built on a house of cards or rather printing press currencies.

      That’s one side of it. Leveraging equity markets with cheap debt is enabled by the financial sector’s ability to bleed the real economy. It can do that unsustainably and still make ‘economic growth’ appear positive by making the financial economy increase faster than the decline of the real economy.

      =>Trillion dollar annual deficits and a growing $22 T national debt foretells a very rough ride in the years ahead.

      True that. It’s rather like extracting the wealth out of an asset-rich brick-n’-mortar retailer by loading it up with debt – customers, creditors, vendors, investors, and pension funds be damned. For nations, the process is further abetted by institutionalised tax evasion, ensuring the unabated increase in debt. Greece, and Toys ‘R’ Us, were just for practice. It was bad enough to legalise loan-sharking without subsidising it too, but that’s the business model.

      =>Physical Precious metals the safe harbor.

      Not even that. The only ‘safe harbour’ is to be at the very top of the food chain. Everybody else is on the menu. Resort to precious metals only makes you that much tastier.

      If you think this has a happy ending, you haven’t been paying attention.

    • Jan 28, 2019 at 9:35 am

      “…anywhere near the $2.4 T Wolf expects.”

      No. I said this was the floor, the absolute lowest level below which the Fed cannot go for technical reasons, as outlined. I expect for QT to end quite a bit ABOVE that level.

      • Sadie
        Jan 28, 2019 at 11:59 am

        Good report Wolf. There are two options for the Fed concerning MBS, the first is letting them mature and not replacing them. The second possibility is for Fed to sell those that have a longer maturity timeline. If this were to happen they would need to receive and asset to replace them. For the US government to get out of the GSE mortgage subsidy business they would need to sell/trade mortgage assets for some other asset to the private sector. When the Fed is selling they are reducing liquidity. When the Fed is buying they are increasing liquidity. When the Fed is allowing time assets to mature without being replaced they are destroying the money/assets they created.

        As for treasuries, when the Fed allows them to mature and is not replacing them AND we have a government that is increasing its spending/debt the government will need to attract more buyers of its debt AND interest rates are a factor concerning the US government’s ability to sell their paper/treasuries. It’s going to get interesting to say the least…

        • Iamafan
          Jan 28, 2019 at 4:26 pm

          I think you have brought up a problem with MBS. Since they are pass thru payment securities, the can “mature” faster than comparibly dated Treasuries since homeowners can move and change their mortgage.

          This has a unique problem for the Fed since they want to keep a steady balance of MBS and will be forced to buy new ones. Therein lies the problem since the new ones are mostly 30 yes term. So the Fed inventory remains long “forever”.

          This won’t happen with short-term T bills. The Fed gets to decide reinvestment often and can keep it short term. Think about like doing a 4 week T bill reinvested many times.

    • RD Blakeslee
      Jan 28, 2019 at 9:53 am

      Is anybody keeping track of all these learned predictions? One thing’s for sure: Everybody will remember poor Wolf’s – right or wrong …

      • Unamused
        Jan 28, 2019 at 11:56 am

        Kassandra was fated to always be disbelieved. Not her fault. It was in the script.

    • Bobber
      Jan 28, 2019 at 11:56 am

      I think the changes will come from the legislative side. In a few years, taxes on the wealthy will increase significantly, by either a wealth tax or a higher top marginal income rates, or both. At that point, the macroeconomic problems caused by wealth concentration are mitigated and high GDP growth returns. The stock market will drop to reasonable levels as people start buying durable goods and services rather than stocks. Elevated demand and production will allow interest rates would return to normal levels so that people can adequately save for the future. It would be a return to organic growth as in the 1950’s and 1960’s, without the white hoods.

      Did anybody else notice how talk of a 70% income tax (top bracket only) and 1% annual wealth tax on any savings over $50 million quickly gained support? By the time Trump is done, there will be so much political backlash that these significant tax changes will largely push through in one form or another. When the pendulum swings too far in one direction, it comes back hard.

      These tax changes would be very easy to implement now that they have sophisticated tax reporting in place, including provisions to track and report foreign bank accounts. There will be no place to hide wealth from that high taxation that is to come.

      The mere threat of these tax changes may even cause many wealthy to start spending or investing their wealth in active ways, for the benefit of the economy. What is the point of hiding away vast wealth if it will only be taxed away? The Fed as been trying to implement such a “use it or lose it” policy with interest rate suppression, but legislatures can do a much better job with a wealth tax that targets only the wealthy. The Fed’s interest rate suppression had too many side effects, and small guys were hurt in the process.

  12. Iamafan
    Jan 28, 2019 at 7:08 am

    Let’s get the numbers right. Last January 24 H.4.1 report says:
    Check it yourself here:
    https://www.federalreserve.gov/releases/h41/current/h41.htm

    In millions …
    Liabilities before Bank Reserves is 2,483,017.
    Of this currency in circulation is 1,704,945.

    Additionally. Bank Reserves is 1,611,716.
    Note that only about 192 billion of that more than 1.6 trillion is Required reserves. The difference is the excess (about 1.42 trillion). The Fed pays interest on both required and excess reserves under the authority given to it by Congress.

    The Fed currently has:
    MBS 1,628,895
    Treasuries 2,220,115
    Total Securities 3,851,419

    Note that this (3.85 trillion) is more than the 1.42 trillion in excess reserves.

    The difference of about 2.43 trillion is what the Fed really needs. Wolf is correct in this one.

    Reuters is qouting that BofAML is claiming the Fed will swap its MBS holdings for short term Treasuries. That’s in line with Wolf’s ideas.

    But that still leaves the current 2.2 Trillion Treasuries still there. If the Fed does not roll this off, then they have to keep on paying interest on this reserves. Less money is remitted to the Treasury as Unamortized premiums on securities held outright5. Instead the money goes to the banks Unamortized discounts, on securities held outright5

    Therefore if the Fed wants to end paying the banks interest, then excess reserves have to drop. The existing maturity roll-off program (max 30 billion) has to continue.

    Lastly remember that LIBOR is ending in 2021. We have a replacement for LIBOR at the Fed called SOFR. It is based on secured collateral – Treasuries. LIBOR is unsecured and based outside the USA. The Fed will need to keep more Treasuries for repo purposes also.

    So definitely, the Fed’s balance sheet will increase from what it was before QE (less than 900 billion). This is a given. Next time, let’s do the math. It leads to a better discussion.

    • Sadie
      Jan 28, 2019 at 6:46 pm

      Good comments on LIBOR. When it goes away here in the US it will need to be secured by an asset such as treasuries. Will LIBOR continue to be used by other countries? If so, the US dollar will be the only currency supported by a real underlying asset such as a US treasury (actual market price discovery—which is not the case for LIBOR) . I’ve read where all the future legal contracts based (already in force – think of businesses) on LIBOR are going to be a legal nightmare. Currencies based on LIBOR contracts such as the EURO could end up at a disadvantage.

  13. Hugs
    Jan 28, 2019 at 8:04 am

    Tariffs to the rescue. I remember when everyone got a raise every six months. Boarder has to be brought under control. Can’t have a million new welfare cases a year. Cut off immigration, raise wages 16% a year, inflation 8% a year, automate. Continue till trillion dollar deficits mean less than 100 billion deficits did in the 80’s. US stock market (manufacturing, technical training, automation, police/security) will boom. World stock market will be mixed.

    • MaggieD
      Jan 28, 2019 at 11:12 am

      “Tariffs… *to the rescue*”?! Immigration panacea? Are you, ummm, sure you’re on the right site, here?

    • WT Frogg
      Jan 28, 2019 at 1:13 pm

      Hugs: Until you learn the difference between boarder and border you might want to stick to Zero Hedge type sites. Just a thought.

  14. Atu
    Jan 28, 2019 at 8:24 am

    I took the trouble to point out a potential error in the analysis, underlining via a kunstler post at zh the mechanics of money creation by the fed, where M1 (currency and deposits) are created and destroyed by loading assets (including treasuries), the implication being there is no lower limit due to currency, and that being because by unloading treasuries M1 shrinks by a similar amount. If that is correct, and given that you clearly are intent on informing people with honesty, it surprises that that comment is still in moderation…maybe a long weekend for you? We (certain commentators) are not here to put you down or be picky, nor claim perfection, just discuss openly and try to help furnish a clearer picture of “reality”…which means honest pov must be allowed to be presented and discussed, even if they clash with yours. To not allow that amounts to private censorship and purposeful disinformation, which is what it is no matter if in the public or private realm. Unlike us anonymous writers, you do have a reputation to uphold and that is understood, but the reality is we are all learning, and that includes yourself or any top fund manager or analyst. I see how much you put yourself out with this site, so I sincerely do not mean to put you off, nor make you publicly eat humble pie, that is too easy for people just to sit and snipe. However that is the nature of debate, and the moral of informing, if there is an error a person should openly correct so that others also might. It matters, it is not an ego thing – I am anon remember, and have no reason to look to detract from your work. Like previous comments I will post this and forget (except to check that it has been accepted) .

    Afaik your view of a lower limit might be right, but it conflicts with other opinion.

    • Jan 28, 2019 at 9:51 am

      Atu,

      The link you posted was about “money supply” and different types of deposits. This is an unrelated and very different concept than “currency in circulation” (the point here) though they sound similar. Currency in circulation is the amount of physical dollars stashed in the entire world, most of it overseas. It is unrelated to “deposit” (a “deposit” is by definition NOT currency in circulation). The discussion of “money supply” — and posting a link to an article about money supply — is OFF TOPIC, and very confusing because they sound so similar but are not similar, and therefore it’s very misleading.

      Your own comment showed that you confused them.

      I’m very picky about commenters dumping unrelated off-topic links into the comment section. If you want to make a comment like this, fine, but don’t send readers to an unrelated article.

      And now you’re griping about my moderation and call it “censorship” — I’m really allergic to this.

      • MaggieD
        Jan 28, 2019 at 11:19 am

        “Pricky?” Not! I mean, you’re hardly Rhadamanthus for making sure that the guardrails work on your sophisticated and, frankly, refreshingly integral financial site. It is precisely bc of balanced moderation and pragmatic, relevant information that this site is a breath of fresh air!

        • RD Blakeslee
          Jan 28, 2019 at 12:17 pm

          right on! Wolf’s limited my macroeconomic counter culture posts, when referred to by reference on another site…

          The ideas themselves are rarely canned.

      • Atu
        Jan 30, 2019 at 8:25 am

        No, I did not confuse them and know full well the difference (and lack of) between physical currency and demand deposits and time deposits. Let me put this another way then, using federal reserve data which I guess is acceptable no ? Also you are discussing money supply in your presentation so how is it possible to not discuss money supply ? The purchase and shedding of treasuries, the effect on rates, choice of rates, is all ultimately money supply.

        Look, I am not here to test you though what I write may do so. Maybe you can therefore equate these three fed charts and say how they fit into the theory of there being a currency floor:

        https://fred.stlouisfed.org/series/TREAST

        https://fred.stlouisfed.org/series/WCURCIR

        https://fred.stlouisfed.org/series/WSHOMCB

        Crossing the points of expansion and contraction of the assets and liabilities does NOT match the currency floor theory.

    • Iamafan
      Jan 28, 2019 at 2:39 pm

      Let’s follow the bouncing ball of Money Creation

      1.) Treasury auction of Note/Bond debt, primary dealer buys it = Money Creation. Debt creation is usually money creation.

      2.) Dealer sells the security to Fed (QE), Fed pays for it by debiting excess reserve account. = NO Money Creation since the Dealer does not use the Reserve to create more debt. There might be a tiny money creation is the dealer make a profit in selling to the Fed since they can use this to lend.

      3.) Note/Bond matures, Treasury pays holder (the Fed) but remits payment back to Treasury. No Real Money Creation. Money In, Money out. Treasury gets back what it paid the Fed.

      4.) Fed reduces Dealer’s Excess Reserves by same amount. No money creation or destruction. Just an accounting entry.

      So tell me WHY does money get destructed at all?

      Now if the Fed sold unmatured notes, that is a different story.

      The portion of the Treasuries that get reinvested IS money creation because that is MORE DEBT in the Treasury side.

      Can you follow it?

  15. nofreelunch
    Jan 28, 2019 at 10:09 am

    Wonder how many people actually think it would be acceptable to go to QE again because of a recession before finishing QT from the last recession? According to Keynes theory, it needs to be finished off, since the government “relief” is supposed to be cyclic, not cumulative. I suppose the idea of slowing QT is that there won’t be a recession any time soon, but I’ve heard that before. Reminds me of the line from Full Metal Jacket: “It’s a huge sh_t sandwich and we’re all going to have to take a bite.”

  16. Jan 28, 2019 at 10:36 am

    If we did hit a bear market rally that just fizzled out, months of bad home sales are potentially being released after the government shutdown finally ends, and the Fed announces a plan to completely phase out it’s MBS holdings…
    It sounds like a compelling case to bet on homebuilders dropping. I’ll see if that plays out.

  17. ken
    Jan 28, 2019 at 10:41 am

    excellent insight into the current monetary situation…this is why in tune in as knowing what the Fed and other central banks are up to is key going forward

  18. economicminor
    Jan 28, 2019 at 11:14 am

    Wofl, I was wondering > the Fed reducing the MBS balance sheet faster? Will that put upward pressure on mortgage rates?

    I would think so but as this is such a complex world I defer to you with so much more expertise.

    • Jan 28, 2019 at 12:42 pm

      I think it would have a bit of an effect because a lot of money is invested in sectors (remember that “diversification” is the newest panacea for portfolios).
      That means it would soak up some of the money destined for mortgage debt.

      My guess is that the Fed plan would be to keep reducing at 1/2 MBS and 1/2 treasuries for a while, then shift later from “QT” to “rebalancing” where they would offset additional MBS sales by purchasing more treasuries. That’s what I would plan in Powell’s position at least.

    • Jan 28, 2019 at 2:09 pm

      Theoretically yes. In the reality of the markets, who knows.

      Another thing in that department is that the White House is trying to get the government out of backing the mortgage market via Fannie Mae and Freddie Mac. I’m not sure how this will work out, since Congress is typically opposed to any such moves. But if this happens — if the government actually stops backstopping Fannie Mae and Freddie Mac, and only private companies guarantee 30-year fixed rate mortgages without government backstop, and they have to make a profit — well then, I think this would have a bigger impact on 30-year mortgage rates than the Fed’s eventual pulling out of the MBS market.

      • Lisa
        Jan 29, 2019 at 12:09 pm

        Would like to add a comment and really a question to you as to whether my concerns are even relevant or not. My concern is rooted in the fact that there has to be some balance-to-risk, to establish any balance-to-value, and any balance-to-monetization-in-action for a dynamic economy, versus a stagnant, or depressing economy to be measurable.

        I think you have mentioned an extremely serious area about what I will label as “privatizing MBS-debt repayment responsibility”. By removing any government backstop, MBS obligation theoretically is no longer a phase of the general “inflationary trend options” that can occur by interest rate adjustment by the FED. MBS obligation is basically an offset of money flows VS land(real property) valuations.

        When the inflationary trend, whatever they may be, is generalized throughout the US economy, and dispersed gradually, and up-to- globally, any debt accumulation is shared by all demographic classes. Of course, in reality, the poor are dumped-on due to
        the fact that they can only consume, and only at low-limits based on reduced earnings for present and future generations.

        With “governmental backstops” I think the important consequence is that the real effects on transfer-of-wealth, is slowed and limited. With more effective broad monetary policy, then there are slower effects on disparities in real transfer-of-wealth.( I am not presently even approaching any aspects of the present disparity in the present or most recent economic cyclical trends. I am also not approaching any monetary policy effectiveness.)

        All of the focus on market trades seem to me to really be misplaced focus of economic debate. Shouldn’t we be more concerned about “real wealth transfer” VS essentially “NO effective wealth transfer opportunities on any level of transaction within the economy”?

        Presently, Public Corporate entities have decreased at least 40% in the open-market over the last 10+ years. The new trend is only closed, private corporate entities, with no opportunity for public to invest, control, nor share in any money-making activities. Any mom-pop entrepreneurial opportunities have limited effect on the overall economic trend cycle. Barriers to opportunity to any business start-up exist for 80% of US population. Significant large public corporations have little real assets to back their stock prices on the markets. What percentage of “ownership” is real ownership of real asset VS debt on the attempt-to-own any real assets, (property or financial vehicles labelled as an asset)? The process of vehicle-to-ownership is NOT ownership of anything real.

        Basically, the division of even any “opportunity to value”, and “opportunity to wealth-transfer” is eliminated because there is absolutely no balanced value in any real assets, which is ultimately LAND, REAL ESTATE VALUATIONS( or other tangible assets, rather than just “money as an exchange medium or vehicle). So any companies that would be selling “RISK” vehicles would be selling these vehicles with absolutely no real asset valuation to support any risk being sold in the markets as a dynamic inter-acting whole economy.

        One of the most significant problems with MBS is even identifying who the real owner is of “any” MBS product. A second most significant problem with MBS is the amount of leverage of option debt, and any other types of debt VS basic original value of the underlying properties that makeup any MBS package.

        Fidelity Funds and a few other investment corporate entities are petitioning the SEC for a new trading exchange for “retail investors”. These companies already have privatized significant portions of their “ownership” of their funds/investing(speculating) vehicles. These companies already trade their private funds against the people that have invested in the “public ownership” of the funds that are essentially owned by companies like Fidelity, Schwab, ICE, NYSE etc…. I expect that the only effect will be a roll-over of the MBS into these new vehicles, as the risk offset that balances then just more book(s) based only on debt-vehicle monetization, rather than any balance of any real assets VS debt creation activities.

        As noted in THE HIDDEN WEALTH OF NATIONS, In the past five years, the amount of wealth in tax havens has increased over 25%—there has never been as much money held offshore as there is today. This hidden wealth accounts for at least $7.6 trillion, equivalent to 8% of the global financial assets of households. https://www.bibliovault.org/BV.landing.epl?ISBN=9780226245423

        World GDP in nominal terms is $87.1 trillion. It seems to me that there is more gain towards world wealth transfer to be increasingly held in tax havens, which is really a skimming of real wealth AWAY FROM the greater global economy. This is depletion of real wealth that then effectively limits any opportunity for any further dynamics within the global economy. No wonder there’s a global slowdown?

        Ownership of anything REAL is being exponentially transferred to smaller and smaller groups, down to individuals. Then there is only sale of possible-opportunities-to-attain-ownership-that-can-NEVER-be realized. (kind of like the dynamics in the acting out of the conceptual dramatic model for the movie POLAR)

        IF, and that’s a big if, only PRIVATE companies gradually assume any RISK during any opportunities for transfers of any wealth, then I think that establishes an even wider, and riskier ability for the private companies that initially assume any MBS risk to effectively DIVIDE the entire global market structure to a further imbalance, where the majority of so called investment vehicles, primarily 401K, and pension funds focused on direct stock purchases of any still operating “PUBLIC” corporations, available for purchase by the public citizens, which probably already have no REAL GAAP accountable value.

        The privatization process is taking-away any of the real wealth that is being created by economic dynamics, and any attempts to balance any imbalances in that dynamic process, even by effective financial policies and controls. The access to any opportunity to create wealth is being diminished.

        The policies, good or bad, are fighting a NO-WIN battle. There is no real redistribution of wealth within the micro and macro economies to allow for ANY balance of the BOOK(s). There is only a withdrawal and secreting of any gains. I hazard to guess that this dynamic is really supporting a greater growth in the BLACK-MARKET activities globally, especially as evidenced by immigration systems that have developed to monetize “opportunity” to any “wealth creation dynamics at all”. I think we are already at a level that the only way to examine the macro economy, and individual economies is to simultaneously evaluate intrusion of the illegal, black-market economies and the dynamics on any real remaining economy dynamics of the legally or illegally constrained and identified citizens. There isn’t much MSM or AltM debate about Public and Black Market dynamics.

        I think that what you have just glanced on (MBS- securitization by FED VS Private) is the foundation that is very significant to the financing of the real ACCOUNTING and BOOK BALANCE for the TREASURY etc. We just keep getting distracted from the real necessary topics by so many of the superficial dynamics of economic activities.

        I’m just trying to develop my thoughts here, and don’t know if there is any validity of what I have started to probe of this topic. I don’t think the topic is political, but a fundamental support mechanism for money flows within the economy. Without Fed “ownership” of something of value- presently the MBS, there would be no real asset to allow any accounting process, credibility, or validity to verify any economic process.

        The present disconnect that has already occurred would become a totally independent and invalid accounting of only a debt process with no mirroring of any real economic dynamics.

        There has to be a debit/credit balance statement of something. I’m actually addressing concern that any GAAP reporting is basically reporting about nothing anymore. When there is absolutely no tangible real value left, then how can any of the reporting reflect anything that is approaching valid? Every bit of tangible responsibility has been legally subtracted from corporate charters and their activities. So, I think we have reached a stage where it is not even possible to write about any economy, or macro and micro economies. What used to be state economies have fractured into specific corporate realms with their own economies and dynamics affecting mass population subgroups.

        We can only write about specific independent and sovereign corporate groups, and their subsequent operational dynamics within and exterior to their veils of secrecy. We can’t write about people that live in Germany, or people that live in the state of New York. We need to start changing our writing to recognize that today it is only certain corporate entities, their leaders, their populations and then dynamic interplay with other sub-groups of populations that are NOT identified within their internal hierarchies or employment churn, dynamics that are creating or allowing any economic activities.

        You are either “in” or ”out” of GOOGLE, APPLE, MICROSOFT, etc…., not their stock, but your personal “identity”. You are no longer a citizen of any state, but your identity is based only on who employs who, and only if you are employed by one of the most influential corporate organizations.

        The most general population groups are grouped by the major “tracking” corporations or governments that effectively control any type of individual physical movement, and personal associations. The Federal government is not essentially controlling any aspect of the economy or citizens. Specific corporations are controlling any economic activities possible for any citizens everywhere.

        That is a significant conceptual difference.

        The corporate controls over “access to opportunity” denies the need to have any economic activity be sourced to reflect real growth or non-growth dynamics at all. Valuations become fictional assets only based within specific “corporate narratives”. Any company speak does NOT have to be truthful at all, it can be any narrative, and sold to everybody, for at least some time frame. That is a completely different economic operational paradigm compared to human generation up to 2019. Not only, the POTUS can sell lies, but anybody and everybody can sell lies, and make money, because any “truth” or any “validity” is absolutely no longer necessary.

        How long can that “sell” dynamic last? We have been and are in the process of discovering and navigating the unmapped territory. The old adage of “buyer beware” will be of increasing significance. Is real wealth of any significance, if the real systems of the economies are based on operational dynamics that reflects the dynamics of nothing? So, I am concluding that in the past, our operational dynamics reflected the dynamics of something, not nothing.

        Privatising MBS will allow financing of financial products further based on the dynamics of selling nothing.

        Not-privatising MBS requires the FED to maintain that the MBS reflects some valuations based on real tangible real assets, this requirement then maintains an economy and trading of subsequent financial products based on some real physical tangible goods, products, or assets.

  19. Jayq9
    Jan 28, 2019 at 11:18 am

    Great comments and insight in the podcast as usual. Especially about how you mentioned the ‘floor’ for the Fed balance sheet and how that will impact its actions.

    Conversely there doesn’t seem to be a ceiling for the Fed’s balance sheet and as some posters have alluded to above…why won’t the Fed restart QE if/when the market starts going down?

    I’m not saying that will happen but rather why don’t you think it will?

    We saw that powell was under pressure on all sides just a few weeks ago and walked back his comment of being on ‘auto pilot’ for the balance sheet as well as in the number of rate hikes for 2019.

    If we saw a repeat of the selloff in the 4th quarter of 2018 soon but now starting from a lower level in the markets then why wouldn’t the fed restart QE? I have to think another big selloff would result in even more layoffs and highly visible ones at that beyond what we’ve seen for Tesla and the auto industry.

    It sounded like you rule out QE5 but is there a scenario where you could see something like that actually start up again?

    • Jan 28, 2019 at 2:12 pm

      In terms of a QE “ceiling,” the Bank of Japan is showing us that the sky is the limit :-]

  20. timbers
    Jan 28, 2019 at 11:43 am

    It’s possible Wolf’s right regarding more QT. Yet it’s hard not to be skeptical for those who’ve paid some attn to the Fed these past 10 so years.

    It’s also hard to read the tea leaves being given us by the pro-QE, pro-zero rate doves that the corporate media is, with every statement being construed as dovish – weather it is, or not.

  21. MaggieD
    Jan 28, 2019 at 11:51 am

    I just can’t believe that the Fed can get away with transmogrifying itself from the sanity of normalizing interst rates and responsibly squashing the QE helium, to again flipping off mean democratizing price discovery with *another* QE and Japan-bound rates – all in the span of 4 or 5 months! Doesn’t the market need retail investors – or is it really just a rank matrix of “snoballing” racket and hedge money laundering; won’t retail investors rebel after more than a decade of wealth oligarchy welfare?

    And I honestly hope somebody answers this question: is it really necessary for our tax dollars to be used by Fed fluffers to mollify markets; is there a structural reason, like “breaking the markets for real” if a historic mean regression crash occurs, thereby resetting things and normalizing trading again?

    And finally – I keep seeing the gargantuan numbers of debt monetization, notional and real, and the ostensible chasm that exists because of it; the ubiquitous mantra has been, for 20 years, that “we can’t continue to go on like this or else;” yet, the crashes happen and then the parabolic gluttony begins anew. Can anybody tell me it really matters about the debt if they just keep moving the shells? Does anybody really believe that in our lifetime this prophesied debt apocalypse will happen?

    • Bobber
      Jan 28, 2019 at 12:13 pm

      Of course the debt corrections will happen. There has been a systematic increase in debt for years, necessarily accompanied by a systematic reduction in interest rates to keep the economy growing at above natural levels of growth. Now that debt is too much to handle, and rates are rock bottom, the game is over. There must be debt defaults, or high inflation, progressive taxation, or other forms of wealth transfer. The economy will live on and prosper after these events, but the current beneficiaries of the system are going to take a bath. Everybody will feel some temporary pain as part of the changeover.

      I wouldn’t call it a “debt apocalypse” though. It would be more like temporary withdrawal symptoms of an addict.

    • Jan 28, 2019 at 8:01 pm

      These things are always local,
      When your neighbor un-employed its a recession
      When your un-employed its a depression
      ….
      IMHO lots of ppl in USA are hurting bad, most ppl on this site appear to be doing fine, when I was a 1970’s teen, even with 21% INT rates, I did fine making $2/hr, had a motorcycle, apt, and GF; high int didn’t effect me in the least.
      Now is so much different, back in 1970’s college was almost free, now kids enter debt-slave peonage from the start, in 1980’s any fool could start a company, now with every service ‘free’, only those capitalized by deep-state ( google, fb, amzn,…) live well and free;
      In 1970’s we saw gold go to moon, then by 1980’s it lost 94%;

      Now is closer to 1937, but what does it mean? If you have cash (gold), saw it coming, left the USA years ago, then probably ‘life is good’.

      DEBT on a PONZI (USA-Scale) is quite different than the personal debt peonage found in USA, and most of the world where morons are enticed by the same ‘bankers’, even in the third world some ppl choose to be shackled by debt, and eventually have to sell their children into ‘slavery’; My most serious long term prediction of USA, is watching the west too, fall into the eventual debt cesspool, where they too auction their children off to eat.
      We don’t have much choice on our GOV debt the political leaders can make Ponzi FIAT and fill them selves to the gill, but we little ppl can choose to make debt or live-free; I still know there are many good places on earth and USA ain’t one of them.
      The debt will not ‘collapse’ the RESET will only benefit the ‘connected’;
      In our lifetime? Yes, look around if you have planned you life, then life is good, but for those who used debt to live paycheck to paycheck, then they are doomed in their lifetime. ( Armageddon is local)

      QE/QT are just words, the FED has already caused the USD to lose +97% of its value since 1913; The GOV will continue weaken FIAT currency, this is what they do, the only change is the rename the ‘vehicle’; Will they end QE/QT? Who cares, they’ll continue to do it under a different name, so … “What difference does it make?”

      The political west will never create a rigid monetary system, its politically a non-starter for the kleptocratic class that owns the world. The East will follow whatever system is best for their ‘commerce’.

      How can progressive taxation amount to much? When the owners of the left/right, dem/repug paradigm control the system? Just the theater of ‘tax revenue’ continues the circus-act that the GOV actually pays itself with tax-revenue, it hasn’t for years; CIA/NSA ‘Deep-State’ have for years ran printing presses to generate as much cash as they need to feed projects off-budget ( & Cocaine/Opium Sales worldwide ) , now everybody does it, there are so much 100 USD Franklins floating on the earth, that nobody has a clue on how many there are.

      The USA can continue the PONZI and most don’t care, because China/Russia just want to do business, they don’t care what color is the casino-chip (FIAT), so long as it can be traded for oil/gold at the counter.
      The USA job of Reserve Currency, is a tough job that nobody on earth wants, it leads to wars, murder, unemployment, and wholesale imprisonment of said population; Like Trump’s “WALL”, its not to keep browns out, its to keep debt-slaves enslaved. In time the USD will be so diluted that ppl will want out, to work and make ‘real money’, but how will they get out? With the ‘wall’?
      Not much little ppl can do, except get out, before you can’t, now is much like 1938 Germany, and if you waited post 1932, then you lost everything. Smart men left, greedy fools stuck around and saw their family raped, robbed, and murdered.

  22. Jan 28, 2019 at 1:50 pm

    The Fed doesn’t need QE to provide liquidity. They can also raise rates and provide liquidity and maintain stability. None of this happens in a vacuum, and with the EU being forced to withdraw liquidity, likewise Asia, they might have enough ammo using REPO (tools at the short end of the curve) and POMO to keep the US economy going, but not to maintain our status as global hot money destination. Back of the napkin all stock gains since the 16 election are on the table.

  23. Sporkfed
    Jan 28, 2019 at 7:58 pm

    If the Fed does swap longer term MBS for shorter term Treasuries,
    doesn’t that mean they are predicting higher long term rates in the near future ? If so, the stock market should dip and home sales should slow.

    • Iamafan
      Jan 28, 2019 at 8:34 pm

      Yes they already did, right?
      I think from the “populist” view, ordinary people really do not care much about the size or composition of the Fed’s balance sheet.
      What irritates them is the continuance of TBTF policies such as paying interest on reserves. It just dosen’t look good,

  24. C
    Jan 28, 2019 at 10:45 pm

    Been following CiovaccoCapital’s weekly charts. Downward slopes.
    https://www.youtube.com/watch?v=s6iOUG7bHtQ

    AAII Sentiment for the week: Bullish.
    https://www.aaii.com/sentimentsurvey/sent_results

    Already bought some stocks on the correction, so will wait for the a breakout — or break down!

  25. Michael Gorback
    Jan 28, 2019 at 11:35 pm

    “nothing goes to hell in a straight line”

    From 1929 to 1932 there were 6 rebounds between 19% and 52%. Unfortunately there were 7 dips ranging from -30% to -49%. You could have bought the dip all the way down.

    I’m sure that with every wobble the Fed will wobble too. Hard to argue for QT when the market’s down 30% and hard to argue against it when it’s up 52%.

    What were those two mandates again? I don’t recall propping up the stock market on the list.

  26. secant
    Jan 30, 2019 at 5:50 pm

    Wolf – Here is to hoping you give us your views on the latest Fed meeting. It would seem like the market is blackmailing the Fed with a “Pee Pee Tape”…amazing to see the speed of reversal. The DOW dropped almost 100 points soon after the fed had showed a grimace on his face, after he was told the DOW was up 500 points. Seems to me he knows if the markets blaze up another 10 to 20% from here, he is going to lose control. I’m guessing he knows a recession is inevitable at this point 6 to 18 months out, and is going to do everything in his power to stop it, but most importantly, not take blame and lose independence and control of the central banking system. Vegas gambling has more predictable odds…=)

    • Jan 30, 2019 at 8:45 pm

      My views are now posted. But I didn’t get into the market’s reaction. The article was too long as it is :-]

  27. Mr. Knoss
    Jan 30, 2019 at 7:41 pm

    Everyone should now be 150% (margin) in stocks.

    The Federal Reserve has spoken. earnings won’t matter, the GDP won’t matter. The Fed Put is here to stay.

    Convince me why a 150% investment in SSO would be a bad idea.

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