Tuesday, April 18, 2017

Beware of QE Sheep?

Gerard MacDonell of the Beinn Bhiorach blog posted a nice comment, Fed Vice Chair Fischer on QE (added emphasis is mine):
He says that balance sheet contraction will be no big deal. QE itself was a big deal (very stimulative), but it's going away will be pretty much irrelevant. It is asymmetrical that way, as magical things are. And we all know QE works mostly through magic. Bernanke covers his tracks, just like our lord and savior does.

Fischer is particularly clear that the balance sheet contraction will not be so bad as the taper tantrum, which is pretty hilarious. During the tantrum, the forward stock of assets on the Fed’s balance sheet was actually rising, because Fed signaling was reducing the expected pace of ultimate asset sales to greater effect than it was dragging forward the date of the slowdown of purchases Hardly anybody mentions this because it wrecks the whole QE / tantrum story, which is aloof from any need for — you know — evidence.

But Ben Bernanke alluded obliquely to this when he said, correctly, that the taper tantrum was not about the size of the balance sheet. It was instead about the Fed being clear that it had turned hawkish and markets drawing an inference for the path of RATES. Not that things are so because Bernanke says they are, but I find it piquant that a big advocate for QE, like Bernanke, would so readily surrender such an important pro-QE argument. Good for him! Objective, if only safely in hindsight.

Again, this is not something mentioned in polite company. And now here comes Fischer to assure us that the tantrum will not happen again. The balance sheet contracting will have much less effect than its forward size slowing its rate of assent.

How could that possibly be? Umm, because the balance sheet never mattered much. But the willingness of academia, Wall Street and the media to swallow uncritically anything the Fed says is a sight to behold. I betcha few will even note any logical inconsistency in what Fischer says, although I would bet his most recent assertion is the right one.

That some of this crew would also believe in the supposed heroic skepticism and independent thinking of the so-called bond vigilante is richer still. Not so much mounted gun slingers as sheep. Baaaah Baaaah.
Apart from a few typos, this is a great comment. When Gerard focuses on macro and less on Trump, I love reading his views.

Is Stanley Fischer right about the balance sheet contraction? Of course not. Go utter such nonsense to Ray Dalio or George Soros and they will either laugh at you or rip you apart.

Balance sheet contraction at a time when the next economic shoe is dropping isn't exactly bullish for risk assets.

This is a tough environment to make money. Very tough. Just just ask Goldman Sachs:
In a statement, Goldman Sachs Chairman and CEO Lloyd Blankfein called the quarter "mixed" and that client activity was "challenged."

Unlike its competitors, Goldman's trading desks struggled in the first quarter. The bank's trading division had net revenue of $3.36 billion in the first quarter, down 2 percent from a year earlier and down 7 percent from the fourth quarter. Trading revenues in bonds, currencies and commodities was effectively flat in quarter while trading revenues for stocks were down 6 percent from a year earlier.

The hit to Goldman's trading in the first quarter is a rare misstep for a bank known to have some of the best traders on Wall Street. JPMorgan Chase, Citigroup and Bank of America's trading divisions all reported increases in trading last quarter.
Oh well, the good news is that the Fed's balance sheet contraction won't be a big deal.

Yeah right, if you believe that nonsense, you deserve to have your head handed to you.

As I stated in my last comment on the next economic shoe dropping,:
[...] early in the second quarter, high beta stocks are losing momentum and selling off. It's too early to tell whether we are in the early stages of a Risk-Off market but I still maintain that if you want to sleep well, buy US long bonds (TLT) and thank me later this year. In this deflationary environment, bonds remain the ultimate diversifier.
As far as QE sheep telling you that the Fed's balance sheet contraction is benign, ignore them and while you're at it, ignore all those bond bears and inflationistas telling you that rates are going to skyrocket. The reflation trade is doomed and those that think otherwise will get crushed.

Below, Federal Reserve Vice Chairman Stanley Fischer said he doesn’t see a replay of the so-called taper tantrum of 2013 as the central bank rolls out its plan for reducing its big balance sheet.

Remember the golden rule from my old friend, the combative economist at McGill: "Don’t believe anything until it’s officially denied." I would keep it even simpler, question everything, period.

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