I think a better way to put it is that QE doesnt change the spending power of whoever is exchanging treasuries for cash (for a non-bank seller). Afterall, whoever holds treasuries can always convert them to cash without any problem and spend it however they wish. The fact that this additional cash (with a commercial bank as an intermediary – reserves/deposits) came from the fed shouldn’t change the spending decission of the seller of treasuries. But again, it is certainly spendable money. In fact, that money probably gets “spent” on another financial asset, burdening the seller of that asset with the headache of what to do with the new deposit. And so the hot potatoe, the zero yielding cash, goes around among entities that don’t want to spend it on goods and services.
Money handed out by the treasury DOES change spending power of those receiving stimulus money. That money is almost certain to get spent on goods and services (and maybe some on dogecoin). But it is not the form of money that determines if it gets spent, it’s the change in the spending power of the receipient of the new deposit.
QE is generally used to create a market for treasuries and keeping the rates from increasing which in turn would drive up the cost of borrowing to buy an asset.
Repo bailed out banks caught by Mr. Margin before pandemic, as everyone ran to the USD(they knew it was a problem before anyone did)
I agree. QE definitely adds to spendable money. All it does is replace bonds with cash. Whoever or whatever sold the bonds will now have cash.
Casual Reader
2 years ago
I am a little confused about the categorical “QE money can’t be spent”. Isn’t the real answer “it depends”? Ok if a bank sells to the fed – swaps one asset (tsys) for another (reserves). But what if the seller is a non-bank? What if I, Joe Shmo, sell to the fed (I sell to the bank, bank sells to the fed)? Doesn’t the bank create a deposit for me (and they get reserves from the fed) which i can spend as i wish?
Look at the increase in deposits at banks during the depths of the crisis in March 2020 when the fed was buying 70bb of treasuries per day. Fed’s H8 report shows that total deposits in the system went up by 343bb for the week ending march 25th. Clearly the fed’s bids weren’t being filled by banks, otherwise we would see a decrease in treasuries and an increase in reserves, and no change on the liability side (deposits). Instead, 340bb of deposits were created in a week!!! A deposit is money that can be spent on whatever you wish, at least theoretically. I get it that it most likely it won’t be spent on pools and RVs right away as it is an asset swap in someone’s retirement account or some such. But I think it is false to say “QE money CAN’T be spent”. I think it is more nuanced and it depends on the mix of the seller’s motivations/preferences/constraints.
Cocoa
2 years ago
Seems convenient. Banks get free cash as Bond rates increase and prices decrease. When the economy goes into full reverse, they can get their bonds back in a bond bull market and make some profit? Rinse and repeat, since banks are not making any money lending anymore.
Excellent point. But why do you say banks are not making money lending anymore? Isn’t the monies lended out essentially “printed” monies if these loans are paid back that’s a pretty good profit?
You need someone to lend to…and if borrowers are not viable or the banks are scared witless again, they won’t lend. Please note that Wells Fargo is ceasing lines of credit for most customers. They would rather make money on credit cards than to loan in low interest environment with high risk, larger loans. Repo and Reverse Repo markets are a scam-essentially creates a fake market for US Treasuries when auctions start faltering. Banks know they can get payola guaranteed from FED if the FED crams cash down their throats, mops up the bank treasuries and notes and then takes the cash back and gives the bonds back to banks in a bond bull market. Banks know when it’s happening. Fed knows when they need to cattleherd buyers to sellers of bonds.Previous to this technique, FED had to crash stock market to scare bond buying. China and others have been dumping treasuries to shore up their own problems and they know there is a new market.
Captain Ahab
2 years ago
As I wonder about the impact of the next cash infusion from DBI (Democrat Boondoggles Inc), I’m glad we have President Biden, alka Captain Cluster F*(k at the helm to navigate the stormy seas ahead.
Inquiring minds what to know; Is this a good time to buy gold, or am I better off with crypto?
Quark711
2 years ago
Sentiment is wildly bullish for stocks and real estate, to name just two areas of excess. Coupled with “cash is trash“, makes me think we’re close to a top. I agree with Mish that at least initially (i.e., until the pain is too great), deflation is coming.
The financial media always has some BS “reason” for every move in every market, as if they know anything. Just once I’d like to see one of them say something like, “Today the DJIA went down 314 points because there were more sellers than buyers. I have no &#$^#% idea why!”
Thanks Captain Obvious. The point was sentiment extremes can help time major market turning points. When the holders of any financial instrument believe a market trend won’t change significantly, it’s certainly at least a yellow flag.
A perfect recent example is lumber. When it was topping in April and May there were all kinds of great reasons lumber just HAD to keep going up! Builders can’t keep up with demand! Real estate is exploding! Now it’s 3.5 months later and LBS is down 78%. Gee, I wonder what happened?! Could it be the “expert” fundamental analysts once again missed a major turning point?!
Bulls shouldn’t worry though. All those “experts” with all those reasons to be bullish can’t be wrong every time, can they? Of course they can’t. They have a shameless, default answer to explain every missed major turning point. “Nobody saw that coming!”
Implied in my comment was the quality of information available to sellers and buyers. Rapid and large price changes might reflect asymmetry of information, particularly with regard to expectations of future prices.
That said, fundamentals are still fundamental. Supply was decreased because of Covid, so that had an impact. Primarily, pent up demand for housing induced price shock for lumber. Overall housing demand is a function of the usual demand factors, income, population, prices of substitutes/complements, tastes and preferences, and expectations of future prices. So what changed?
In my view, the price shock was only to be expected post Covid, and it would be relatively short-lived, short of major migration away from certain cities.
Like lemmings, the uninformed always rush with the herd, making a demand/supply imbalance far greater. So yes, I agree with your ‘sentiment extremes’. IMHO, by the time the lemmings run, it is too late to get in/out of the herd.
Thanks for the follow-up. The reasons you noted for lumber’s price collapse are certainly reasonable now, after the fact. If you foresaw all or even some of them near the top, then kudos to you!
What I’ve observed through the years is the information available to the typical investor when it actually matters (!) is generally worthless, except as part of a contrary indicator. In every case near major market tops, the din from breathless bullish opinions and pronouncements, all full of “reasons” to support being a bull, is a cacophony. That’s the point I was trying to (poorly) make. When bullish sentiment gets extreme, pretty much everyone who wants to get in is in and I’m getting out. It’s difficult, because I’ve missed the end of some moves that went on much further than I thought, but when a market goes exponential, it eventually comes back below the point where it took off.
I never know exactly when the market will go down, and I most certainly have NO IDEA why it will go down, but go down it will, and afterward, that’s when the “whys” will be discovered. I’m old enough to remember gold and silver in 1980. My Dad got out a few weeks after the turn because he said “This is nuts! Cronkite is reporting the price of gold every night.” Not long after, he bought 30 year T-Bonds at 12.75%! His reasoning was pretty much the same. The move in rates wasn’t sustainable and he figured the US wasn’t going to go under, so why not buy some?
You’re SPOT ON with this: “Like lemmings, the uninformed always rush with the herd, making a demand/supply imbalance far greater. So yes, I agree with your ‘sentiment extremes’. IMHO, by the time the lemmings run, it is too late to get in/out of the herd.”
Yep! Those imbalances are the impact of emotions. Good ol’ greed (including FOMO) and fear is what really moves the market. I guess I’d have to add insanity. How else could a little electric car company be valued higher than the next six largest?
Roger_Ramjet
2 years ago
I think that a lot of the cash is coming from large money market funds, and not just banks. The Fed purposely included participation by money market funds with the Reverse Repo facility.
This is a no brainer for money market funds as the Fed is offering 5 basis points and pristine collateral (T bills) to back up the overnight loan. If the Fed did not include the large money market funds, you would probably see short term rates pushing into negative territory, which is a big no no.
I fully expect participation with the reverse repo facility to rise much, much further, particularly if the market turns nasty. The last thing the Fed needs is for a large money market fund to break the buck.
“If the Fed did not include the large money market funds, you would probably see short term rates pushing into negative territory, which is a big no no.”
Bingo
Casual_Observer2020
2 years ago
This is not going to end well. We already have inflation. I suspect we get massive deflation due to collapse of economy irrespective of what the the Fed does. Maybe the markets will go to the moon but that doesn’t mean anything for the economy. In fact derivatives spiking commodity prices will make the real economy worse. I see a repeat of the 1930s ahead.
Repo and Reverse Repo markets are a scam-essentially creates a fake market for US Treasuries when auctions start faltering. Banks know they can get payola guaranteed from FED if the FED crams cash down their throats, mops up the bank treasuries and notes and then takes the cash back and gives the bonds back to banks in a bond bull market. Banks know when it’s happening. Fed knows when they need to cattleherd buyers to sellers of bonds.Previous to this technique, FED had to crash stock market to scare bond buying.
China and others have been dumping treasuries to shore up their own problems and they know there is a new market.