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Markets Are Sick. QT Is Dead
"Signs of sickness are growing in markets," Nomura's Charlie McElligott said Tuesday.
It was a generalized assessment, but McElligott was prompted by the Bank of England's latest bond market intervention, which found Andrew Bailey stepping into linkers citing "the prospect of self-reinforcing 'fire sale' dynamics" and the associated "material risk to UK financial stability."
I should emphasize that if central banks are publicly talking about "self-reinforcing 'fire sale' dynamics," it must be
Presumably similar problems are brewing in Europe, where institutions have had to create yield in a negative rate environment, and are now seeing rates rise, though lagging behind US and UK.
There is a simple solution. Central banks should stop using qt, period. Use traditional rates policy. There is no necessity to mess with a balance sheet unless you hit the zero bound.
Even if qt is never mentioned again we’ll be having this same discussion I’m the future over the rate of qe
*in the future
Okay, let’s get pragmatic about this.
Suppose breakage forces the Fed to stop tightening well before 4%. In other words, the next hike is the last.
What do you want to own and not own?
Gold/gold stocks for the case of reals declining. Intermediate to long ust bonds for deflation/recession. Lighten on stocks in preparation to add later for the upturn
Would you expect stocks to have a downturn, rather than an upturn, on the breakage and Fed ceasefire? Or does it depend on what breaks and how quickly it gets mended? And which sector, style, characteristic of equity for the upturn?
So if QT ends before target inflation because markets are breaking, what was the point of this exercise? The markets aren’t breaking because of QT, they were already broken before QT started (4 months ago in the US). This is demonstrating how dependent on Fed intervention the markets all are. To break that dependence things have to break and normalize. Either the Fed is committed to fighting inflation or its not. So now we end QT, inflation becomes permanent and then we try another growth cycle? More zombie corps pop up, large corps go back into consolidating and buying back stocks, and housing prices begin rising again. Awesome, can’t wait.
Buy high and sell low isn’t a good long term strategy, which I think aptly characterizes recent Central Bank QE pivots to QT, not to mention ongoing stock buybacks that too often climb with the market then dry up as it falls. I’ve been worried about liquidity issues in any number of arenas as a primary concern, but now much of the issue is permanent, compromised market functioning (e.g., ETFs more liquid than their components) and how much is just crappy risk-return dynamics? The TINA dynamics that made negative nominal yielding debt irresistible have given way to a marked disinterest in 3, 4, 5 percent yields when the inflation boogeyman staring through the window at the party. So how much of this is structural, and how much might the cure for low demand be simply lower prices?
As commentators above have mentioned, QT isn’t strictly necessary if you’re just running off the balance sheet. Lots of govvies are relatively short/medium term.
But also. Raise taxes? That’s the second leg of the Keynesian recommendation of “spend to get out of jam”… Esp. on the richest people? Your budget will thank you and you can pay down a chunk of the debt, preserving capacity and achieving normalisation.
But of course everyone hates taxes so much you cannot get a hike approved, even if it only applied to a small percentage of the population.
That’s no way to run a modern economy.