It isn’t QE.

“It” is a reference to the latest increase in the Fed’s balance sheet. And “it” simply doesn’t constitute the resumption of large-scale asset purchases. The Fed isn’t “buying” anything. They’re extending loans. And policymakers aren’t trying to compress risk premia or otherwise rekindle the wealth effect.

I don’t subject myself to financial agitprop and, relatedly, I don’t spend a lot of time on finance-focused social media. But from what I can gather based on reader feedback, there’s a lot of misinformation floating around.

The simple chart should suffice when it comes to dispensing with whatever “new QE” narratives exist out there, but people like their narratives and aren’t so easily disabused of them.

If you’re buying risk assets on the assumption that Fed balance sheet expansion (regardless of the cause) is bullish, that could be a mistake. Or so says Morgan Stanley’s Mike Wilson.

“Many are interpreting [the increase in the Fed’s balance sheet] as another form of QE and are having the Pavlovian response that such programs are always good for equity prices,” Wilson said Monday. “We do not think that is the right interpretation.”

He explained why. It’s not complicated. You could write it yourself. Hopefully.

“Inflation did not appear after the first wave of QE used during the GFC because the velocity of money collapsed during that period… in spite of the fact that the percentage increase in the Fed’s balance sheet dwarfed what we experienced during COVID,” Wilson wrote, noting that back then, Ben Bernanke was “simply filling holes left on bank balance sheets.”

During the COVID stimulus, the middle man was cut out — money went directly to bank accounts (stimulus checks) and businesses (PPP loans which, by virtue of being forgivable, were basically grants).

“These fiscal programs were overdone, in our view, and the result was that M2 moved sharply higher because the velocity of money remained stable and even increased slightly,” Wilson went on.

If you ask Wilson, recent turmoil in the banking sector is likely to mean a renewed deceleration in velocity (note the “for how long?” annotation in the bottom pane above).

Bottom line: He thinks M2 growth is likely to decline further. It’s already contracting, you’ll recall. “It appears to us like the velocity of money this time is more than offsetting the increase in the Fed’s balance sheet [and] as a result, M2 growth is still decelerating and is now the lowest in at least 60 years,” Wilson said, projecting M2 based on high frequency Fed data.

If that’s correct, it’ll be a drag on growth more broadly in due course (“soon,” in Wilson’s view) and in “a way that is not priced into many equities.”

He drove it home: “We don’t view the… bank funding program as a form of QE that will ultimately be stimulative for risk assets [and] in fact, a continuation of money market flows combined with a build up of the TGA due to tax payments may actually begin to serve as a headwind for risk asset liquidity.”