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Central Bankers — Keeping The Wheels On The Bus - Tim Taschler (01/04/2019)

Central Bankers — Keeping The Wheels On The Bus - Tim Taschler (01/04/2019)
By Tim Taschler for Sprott Thoughts 5 months ago 5008 Views No comments

April 01, 2019

Pic Credit: Rich, Bob. “Cartoon of the Day.” Hedgeye. 14 June 2018.

The Fed is now done with interest rate increases for all of 2019. It currently plans on raising rates only one more time in 2020 and plans to taper the draining of its balance sheet (QT program) from $50 billion per month to $15 billion per month in May. And all QT sales will end in September.

So now the big central banks are all on the same page, blaming those nasty “external forces” for economic slowdowns:

1. US on pause, blames ‘external forces’

2. ECB launches TLTRO, blames ‘external forces’

3. BoJ downgrades outlook, blames ‘external forces’

4. China launches fiscal easing, blames ‘external forces’

Simply put, the days of quantitative easing are back, and we’re not even in a recession yet.

Graham Summers, Chief Market Strategist at Phoenix Capital, summed it up nicely:

As for heading for a recession, the 3-month and 10-year yield curve went negative last week.

Source: StockCharts.com. March 22, 2019.

Furthermore, the 2-year and 10-year yield curve is getting close.

Source: StockCharts.com. Date: March 22, 2019.

David Rosenberg, Chief Economist & Strategist at Gluskin Sheff, conducted a great interview with Real Vision where he said:

“And this is going to be a year — this is the first year of five years where more than a trillion dollars of corporate bonds are going to be rolling over and rolling over at interest rates that were higher than they were at the time of origination. And we have another situation where half of the investment-grade market right now, which is $3 trillion worth, is in triple-B credit. So these are called potential fallen angels where you potentially could get pushed into junk-bond status, which is a pretty big deal if that were to happen.
OK, well, when you actually look at what’s called a shadow Fed funds rate and you look at it on a balance sheet adjusted basis, so the nine hikes plus what they’ve already done on balance sheet downsizing, the net effect has been the equivalent of 340 basis points of Fed tightening.
And historically, that has been enough to tip the balance towards a recession. It’s at least as much as what the Fed did back in 1990, ’91. It’s pretty well in line with what the Fed did back into the 2001 recession. So this is a fairly, I would say, a fairly aggressive Fed tightening cycle, especially when you consider that there really wasn’t much in the way of inflation. They’ve already done a very big shift in terms of tone. So right now they’re talking the talk. And then the second half of the year, they’ll be walking the walk. And I think they’ll be cutting rates.

So it’s hard not to conclude that the global economy and US economy are rolling over. At the same time, Foreign selling of U.S. Treasuries in December hit record high-data, when foreigners sold $77.35 billion in US Treasuries after net sales of $13.2 billion in November, the largest since January 1978 when data collection began.

Foreign Purchases of U.S. Treasuries. Source: Richard Leong, Thomson Reuters. Date: February 15, 2019.

How will this play out going forward? A slowing US economy will probably force the Fed to reverse course and lower interest rates and start buying bonds again, expanding their balance sheet. If that happens, I would expect bonds, metals and commodities to do well as the market prices this into the markets. Once the Fed actually starts cutting, things will change and get trickier for all market participants. However it comes to pass, it is probably time to pay attention to all investments as they might become “trades.” The buy-the-dip and buy-and-hold players will be challenged as central bankers try to figure out just how they can manage to keep the wheels on the bus.

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