It seems all the central banks, drunk from the eggnog, are in the Christmas spirit of giving, as the taps seem to now be open and the market is being flooded with even more liquidity over the next two weeks. After the Fed FOMC December press conference where all commentary regarding the repo market and liquidity shortage into year-end was avoided, the NY Fed yesterday published its latest weekly statements regarding weekly repurchase operations for the period December 13 - January 14.
The report is a shocking discovery to the market. According to the statement, the Fed will offer two-week term repo operations 2x per week and a longer-maturity term repo that spans year end. The amount in this operation will be at least $50 billion. On December 31 and January 2, the overnight repo offering will increase to at least $150 billion to cover the change in overnight liquidity. What all this means is that taking all the extra repo liquidity injections together with Treasury bill buying, the Fed is now injecting a total of $500 billion in liquidity in the next 30 days -- it is gargantuan. If that is not QE4 or QE-infinity, I am not sure what is.
Since the repo market was in rocky territory in the middle of September, the Fed is trembling in fear with flashbacks of September 2008 (when the Global Financial Crisis and Lehman crisis started with a blowout in overnight repo rates), and rushed to the party immediately to flood the market with cash. Act first, ask questions later was the approach.
With the rate at which the Fed is pumping liquidity today, its balance sheet will reach $4.5 trillion by mid-January from $4.066 billion today -- the chart is vertical. For the first time, the Fed's balance sheet is now positive on a year over year basis. Since early September it grew by $334 billion. In just three months, 48% of the mere $700 billion in shrinkage (which spanned two years) has been unwound. What they are scared of is mind boggling.
For anyone who still believes fundamentals matter, here is a stat to shake your core a bit. In 2018, the Fed hiked by 100 bps, global EPS grew by 8%, but global equities fell 11%. In 2019, the Fed cut interest rates by 75 bps, EPS grew just 1%, and equities rose 20%. Job done.
It's that simple, when liquidity is pumped in the market, it makes its way back to risky assets, namely equities, as even more cheap money is leveraged and invested back into the market. This obviously does nothing for the "real economy" but just keeps financial assets inflated even more to avoid the doomsday scenario. As they say, don't fight the Fed.
It is not only the Fed that is boosting the market with liquidity. The ECB balance sheet has now hit a fresh lifetime record high as Christine Lagarde presided over her first press conference yesterday. Total assets rose by another 11 billion euros in QE to 4.709 billion euros as she keeps the printing press on. The ECB balance sheet now equates to 40.7% of eurozone GDP vs. the Fed's 18.9% and Bank of Japan's 103.5%. So rest assured, there is still room to improve if we are to follow Japan's model. Well at least the U.S. Fed tried to bring it down by $700 billion last year during Quantitative Tightening, a noble venture no doubt, only to give in almost immediately as rates turned sour, running with its tail between its legs.
We are building towards an even bigger problem at this rate, as the only way to keep the growth going is to keep printing more and make sure rates never go up. If they do, the entire system crumbles. Perhaps a visionary central banker, or one who is not scared of having their name go down in history as the "brave one," would err to take the side of short-term pain over long-term gain and stop this madness. But no one is that brave in the central banks to pull the plug on this never-ending debt party.
Investors and traders may think that the Trade War actually matters, tracking every headline and tweet. In all earnestness, the Trade Wars that started in 2018 have done absolutely nothing other than to shake the system and disrupt supply chains. Its main aim was to coerce the Fed to stop Quantitative Tightening and keep the taps open for monetary stimulus.
In 2018, when the world economy was growing at a respectable rate, there was no reason or justification to stop raising rates. Trump knew that. Causing a dislocation and uncertainty in trade caused severe shock to an already weak system. Today Trump has announced plans to roll back tariffs on 50% of $360 billion worth of imports of Chinese goods and to delay the increase in tariffs on December 15 as part of a gesture to get Phase 1 signed. Trump needs a win, whatever win, for his election campaign. The market rejoiced and cheered.
China is now just going to go back and buy what it did anyway before these Trade Wars started, no change in Intellectual Property rights or technology transfers or changing of domestic reforms; all hard issues being pressed by Trump. Nothing achieved! But who cares, it was not about the Trade Wars anyway, it is about a system that needed more liquidity by all central banks to fuel the growth even more.
We can debate ad nauseum the merits of this trade deal and what it will achieve, it really does not matter. Right now, we are awash with free liquidity in the system and have a Fed that will not raise rates until inflation is a real problem -- which is a green light to buy risky assets. We are officially now in a goldilocks period, when growth is going to pick up as the Trade War saga comes to a draw and free liquidity will generate inflation -- a double whammy for equities, commodities and risk assets. It is a perilous time for bonds and they will be at the mercy of equity inflows.
The U.S. Fed wants inflation and will do anything to get it. The elephant in the room (Trade Wars) is now dealt with for now. Global growth will start to show a pick-up in numbers as the data comes in and commodities will shoot even higher as an asset class. But be selective, as not all commodities will rise. Copper, which has the tightest supply fundamentals, will squeeze the most; it is a barometer of Chinese and global growth. After all it was just trading $6400/tonne earlier this year, and $7000/tonne last year before the Trade Wars started. Copper equities provide the best way to play this theme via Kaz Minerals (KZMYY) , Freeport $ (FCX) , and even larger ones like Antofagasta (ANFGF) and Rio Tinto $ (RIO) .
