YouSaid · the spoken record

Michael Howell

lines on the record: 110
first: 2023-06-22
most recent: 2023-06-22
sittings or episodes: 1
sources: podcast

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“Now, I haven't cheated on this chart by beginning in year 2000. The data goes back consistently back into the 1970s with a very similar relationship. And what it basically says is the flow of liquidity drives the term premium and it drives the slope of the curve. Now, the point about this narrative is basically what it's saying is that the yield curve is very distorted at the moment, not only because liquidity has been at a very low level, but it's also distorted by the fact that treasury issuance has been absent for the last few months because of the debt ceiling. And that's one of the factors that may well be causing a near-term scarcity of treasuries, which has been basically pushing yields down or certainly causing the curve to invert more aggressively. What I would point you to, Jack, is to look.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Well, it can be, but in actual fact, if you take a look at, and I'm going to point you towards another chart, if you take a look at page 47, what you'll see is the relationship between liquidity and the slope of the yield curve. Now, this is the actual data.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Correlated on this chart, I'll say that. And so all things being equal, I know things are never equal, but all things being equal, more negative term premium for bonds would lower longer-term interest rates relative to short-term interest rates. So would incline it to a lessward upward sloping or inversion of yield curve. And that's exactly what we have now, where the 210 spread is, wow, minus 93 basis points. So the two-year yield is 93 basis points higher than the 10-year yield. And by the way, shorter term interest rates, the three months, six months are higher than the two years. So the curve is ultra inverted. Isn't that a financial setup that's hostile to liquidity creation? Because you talked about how whether it's a good opportunity to buy bonds on an unlevered basis without borrowing money, but on an levered basis. I mean, to borrow money at 5% overnight money at 5% and to buy what a 10-year treasury yielding 3.7%.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“What you'll see is a chart which looks at the term premium on the US Treasury market in orange and the black line is looking at expected terminal policy rates. Now, if you look at that, what you can see is that's the blades of a pair of scissors. And as the black line goes up, so that orange line has gone down, and as the orange line goes up, it may well be that the black line comes down. And so add those two numbers together and you get the yield approximately the yield on the 10-year bond. And those two are not designed to be correlated in actual fact or negatively correlated. In fact, over the long term, they have zero correlation. The term correlation.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Because of recession fears, what you find is that term premier rise. So what you gain on lower rates, you basically lose on higher term premium. And if you take a look at a chart on page, I think it's 50 in your pack, what you'll see.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“That yield or that term premium is going to start to become less negative and maybe move back to zero, which is what you would expect. Now, if that's the case, that is going to put upward pressure on yields, even despite the fact that you may get the Federal Reserve cutting interest rates. So our point in the last couple of years has been, look, bond markets are likely to be a wash that they're at best going to trade sideways. Many people have been saying this is the best time to buy bonds. It's not. It's a decent time to buy bonds, but the best time to buy bonds is later in the cycle when the yield curve normally drops. This is a stage when you tend to get a yield curve that doesn't move very much, or if anything begins to steepen a bit. It's not the time when bond returns are normally at their best. The reason for that is that what happens is that even if policy rates occur.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“So, in other words, the yield is more. So the price is discounted. Now, if you look at the moment, it's completely upside down. And what's happening is that you're not paying a premium. You're getting, there's a big discount. So in other words, the term premium is massively negative. So we would argue it's about minus one and three quarter percent right now, which is pretty much at an all-time low. Now that is a staggering statistic. And why is that? The answer is probably because there is a shortage of collateral in the system. Now what that tells you is that if the treasury is going to start issuing a lot of debt in coming years,”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Well, I think that a lot of people make claims, understandable claims, that the amount of QE that's been going on in the last few years has heavily distorted financial markets. You know, it's a debating point, but I think where that is very valid is looking at the fixed income markets. And one of the biggest anomaly that I've seen in my career still exists in the US Treasury market, which is hugely negative term premium. Now, term premium are a wonkish concept. They are basically the additional amount you would pay or is normally paid by a bond investor above the expected role of a one, let's say a one, if you roll a one-year interest rate each year for 10 years, you get, if you like, an average interest rate or expected interest rate. But that's not the price or the yield that you would pay for the bond. You normally pay a big...”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“The average investor because they tend to think that it's always about strong economies and strong financial markets. It's not. You normally the stock market normally leads the economy. And part of the reason for that is that there's a release of liquidity around the trough of the economic cycle or just prior to the trough of the economic cycle. And that's maybe what we're getting right now. So all these factors are important to weigh up in terms of understanding how liquidity is moving.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Well, the answer is that corporations will require less money for working capital, that if you've got oil prices that are, you know, what, approximately half their peak last year, oil industry is a huge user of liquidity for stockpiles, transactions, whatever. That money is not going to be used. A lot of it can be tied up in shipping or transport, et cetera. Those working capital demands or use of liquidity for working capital comes right down. So there's funds available. They may set in treasuries, in corporations, but they're available for financial markets. And that's basically one of the mechanisms through which global liquidity can rise. The old adage is that strong economies don't always have strong financial markets. In actual fact, it's often the reverse, which is often a paradox to...”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“How does a real economy that's slowing release liquidity? You think of liquidity going up as bank lending goes up? We had a huge surge in bank lending in 2022. Again, I just want to repeat that. We had a huge surge in.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I mean, there's no question about that. I mean, I'm not going to sit here and deny facts. If that happens, then one's got to readjust the view. But I think the point that I would make is that one of the key drivers of liquidity, the pool of liquidity, is the slowing real economy. It's not just new sources of liquidity that you've got to take into account. It's also the release of liquidity from a real economy that's been slowing. And that real economy, you know, as we know, has been slowing. It may well bottom out in the next couple of months. That would be our expectation. But it's still releasing liquidity.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“I just want to return to that point about inflation. It's undeniable. So some of it is inflation on a year-over-year basis is just base effects. You know, one year ago, the price of oil was at $120, but even on a month over month effect, because energy and oil and gas, electricity is so volatile, the headline inflation, which is representative of what actually people pay has really plummeted, although people point out that core inflation does remain sticky. So if we were to get another upsurge in the price of oil, liquidity could fall again, right?”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“margin a capital shift towards Asia going on. And that's one of the things that you see in the data very clearly. Now, one of the anomalies, one of the strange things to say about what's going on in markets right now is the movement of general movement of funds into the emerging markets.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“There's actually one, maybe a little bit towards the beginning, which is, I'm going to find it for you now, page nine, which looks at capital shifts globally. It's regional capital flows. And what that's basically spelling out is the yellow line at the top flows into the US dollar effectively. The black flows flows into Europe. and the red is flows to Asia. I fully acknowledge the fact that there are still positive flows into the US. This is a monthly data as a percent of global liquidity in terms of what the axis is showing. That orange line at the top, or yellow orange line, is starting to lose momentum. And what you can see at the margin is that the red line is starting to move up. The black is also sinking. So what we would suggest is there is the...”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Buffy has made a brilliant call here by shifting some of his funds into Japan, catching it around the bottom. Great call as always. But other markets are going to start to do the same. And so what we've got to start thinking about is the effect of these capital shifts. And just to look at the capital shifts, I think there's a slide I put at the end.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“And then you've got as well what's going on is a major capital shift towards Asian markets. Now that's another factor which comes back to the cross-border flow element. That cross-border, those cross-border flows into Asia will be monetized by the central banks. And that capital shift is evident vis- ⁇-vis the Japanese stock market. That's going up. We've got liquidity indicators and there's some in the pack which show the liquidity movement into Japan. And I can give you maybe there's a chart reference if I can find it quickly. But basically what that's showing on page 17 is the Japanese liquidity cycle and the Nikkai 225 index. And basically that's showing why the Japanese market's going up. And if you believe that liquidity is going to continue to go up in Japan, then the market must rise pretty well.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“It has to come simply because you can't sustain an economy. Even a Chinese type economy with 20% util unemployment. It just doesn't. It just doesn't work. They're going to have to promote more growth. And I'm sure that's coming. We got the first inkling of it in the last few days anyway.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“That's what we got. Inflation is falling faster than the economy is shrinking, which means the market, the stock market, the PE is being rerated. And all the emphasis on the E we think is exaggerating the negativity about the market. What you've got to look at is not the E but the PE. And the PE is driven up by falling inflation and by more liquidity. And more liquidity is coming in a number of ways. It's coming because the Fed has switched off QT. It's coming because collateral is going to be used more efficiently as bond volatility drops and the collateral pool goes up. It's going to increase because other central banks are going to be adding liquidity. We haven't spoken about China yet, but China means badly to gooses economy. It's already have one go at it at the beginning of the year. It's cooled off, but it's going to do it again. They're going to have to do that. There's no question. There's no way out.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“The market should do. And the orange line is the year-on-year change in the SP. So think this through. If you've got an economy that is weakening, but inflation is falling faster, that black line goes up, right?”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Let's say the PMIs, and I'll describe this chart in a moment. In other words, the purchasing manager's indexes, the US ISM index, you know, people say there's a great predictor of the economy. Yeah, it is, okay. But also inflation matters. So what I've done in this chart is to take the New York Fed and the Philly Fed PMI questionnaires, the monthly ones, and subtract from that data the prices paid subcomponent. So in other words, what you're looking at is the differential between, let's say, output expectations and inflation expectations. So basically what this is saying is that if the economy goes up and there's no inflation, then that black line will rise and the orange line is the S&P one year later. So in actual fact, we've advanced that black line, pushed it forward 12 months. So it's predicting what...”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“To the right, the equity market holds up. And if you get fully inflation, in other words, if you're, say, let's going from 4% back to 2% or from 6% back to 2%, you can see there moving up that black line, you get a rerating of the market upwards. And that is what's going on. So the key here is understanding that dynamic. Now, if you flip on two pages, what you'll see is another metric that we like, and this is how we've defined what's been happening in the market. Everyone is focusing on”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Basically, the inflation rate. And if you look at the following page, there's a regression analysis, which I'm not going to win any statistical prizes for this because it's pretty basic. But what we fixed, what we fitted was a very simple regression, a cubic regression, which basically shows that dome shape. And what it indicates is the plot is showing inflation on the lower axis against the five-year cape on the y-axis, all those dots represent months over the period from 1890 to 2022. And that regression basically has a peak at around 2% inflation. So what that's saying is that in terms of valuing equity markets, there is a sweet spot around”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“It's the sort of standard long term metric of value that's used for the US stock market. And that is shown correlated against the US long bond. Now, everybody says, and it's termed the Fed model, that what you've got to do to judge the stock market is to look at bond markets. Well, what that chart is telling you is that bonds don't really matter that much. In other words, there's not an active arbitrage between stocks and bonds that are going on. It's in the textbooks, but it's not in the history books, right? Look at the right-hand chart, which is the same data on the cape, but what we put on there is the five-year average US consumer price inflation. Now, I would suggest that the correlation is much, much closer on the right-hand chart than the left-hand chart. So what really matters is...”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Are as the last print last month was down to just over 11 months. Now, the rate of decline on that estimate or that pass-through statistic has been more rapid than during the Volkup years. It took five years really to get inflation persistence down. And what you're getting now is it's happening quite quickly. And that is a very important heads up to how the market works because basically the market is driven by inflation. Now, if I give you another, I want to give you another way of looking at that. And if you take a look at slide 21, you can see maybe that indicator at work. And on slide 21, what we look at is data from Robert Chiller's database where we've basically taken, first of all, in orange. On the left, the cape using a five year estimate of average earnings.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“You can see that inflation shocks generally don't last very long until they do. And the big episode was in the late 1970s, early 80s, when Volcker came in to fix the problem because the inflation passed through was right up at over 50 months. So what that's saying is that if you get a shock to inflation in June, that's going to persist in the pricing structure. It's going to echo or have a ripple effect for basically 50 months. So you're talking about, you know. well over almost five years, four and a half years of problems. Now, if you look at where we got to in 2021, the peak was 31 months, almost three years. So inflation shocks were likely to affect or distort adversely inflation expectations for up to three years. And that was telling us inflation was becoming embedded.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“The PE, and that's the key question. In my estimation or my experience, what drives the PE is two things. One is rising liquidity and the second is falling inflation. Now, have we got falling inflation where we can dance on the head of a pin and say maybe yes, maybe no, but the reality is that inflation is going down. And we do a measure, which I think included in the charts, which is basically looking at what we think of as the inflation pass-through. It's a measure of inflation persistence. Now, what that inflation persistence measure is, is a very simple for those that are sort of statisticians and slightly wonkish. It's an autocorrelation coefficient, but it basically looks at the effect of shocks to inflation in the US system. And it basically says, how long do those inflation shocks last on average? Now, if you look back through the course of history, starting in the 1950s,”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Maybe one of your earlier questions, which is why has the market gone up, the market has gone up. Let's, for the simple reason that the discount factor, in other words, the PE has expanded. Now, if you look at how capital markets work, and let's take a very simple or straightforward example of the equity markets, people think of the equity markets as having two moving parts. An E which represents earnings and a PE, which is the multiplier applied to earnings, which gives you your price. Now, the focus of economists is 100% on the E, right? And what they're telling you is that the E is going down big time. But that's not how markets work. Markets work on the PE. 80% of the movements in the S&P or any major index is about movements in the PE multiple. So what we focus on is what's driving...”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“I don't think there has to be any sort of subterfuge necessarily. I think what they'll do is basically just buy treasuries and they're going to have to do that. Maybe they're not going to stand on a soapbox and shout about it, but they'll do it. And the Federal Reserve has to come in and buy the debt. I mean, I may be wrong, but then you've got an even worse situation.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Coming back big time, but it will have to be real quantitative easing, not this shadow, not QE QE, right? Because that's one thing when we put up the chart of treasuries causing liquidity to go up. A lot of that, I mean, particularly 2020, was because the Fed bought all the treasuries in March and April of 2020, as well as mortgage-backed securities, agency mortgage-backed securities. How will they do this? Because the last not QEQE was in September of 2019, and they had the repo facility. In what way will they enact, you know, what facility will it be? Or will it be a facility that doesn't exist yet that they'll sort of make up?”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“A large share of that debt issuance. In other words, the Fed balance sheet goes up. Now, if you look at CBO projections of treasury holdings, currently the Federal Reserve is holding about $5 trillion treasuries. According to the CBO, by 2033, that will exceed $7 trillion. On our estimates, you're thinking of nearer $10 trillion. So QE is coming back big time.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“It was not funded by higher taxes. That is unusual. It was funded entirely by issuing debt and the central banks took that debt up. What we've got is a similar problem coming up because you've got another big spending program, which is being caused by effectively two things. One is aging demographics, which are forcing mandatory spending programs up. And you've also got the defense bill to pay. And if you look at CBO projections, congressional budget office projections, they've got a relatively passive forecast or projection for defense spending. If you get back to Cold War levels when America was spending at least 5% of GDP on defense, then you're starting to look at serious levels of debt issuance in the next 10 years, an average of $2 trillion a year, in fact, and the Federal Reserve will likely have to come in and take...”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Well, I think the answer is that we're in a liquidity cycle upturn. That liquidity cycle upturn will not be a straight line, but the next peak is likely to be 2026. And the point that we've been making is that, you know, after suffering a headwind, investors suffering a headwind over the last 18 months with liquidity being drained, what they're beginning to catch now as a tailwind, and that tailwind should last two to three years, if we're correct. Now, it may have more impetus because there is this threat, as I pointed out, that central bank QE has to come back big time to basically repair government or fiscal finances. And that's the other thing you've got to start thinking about. In other words, we're moving into a new era. The COVID crisis was a watershed in many ways, but it was a watershed in terms of the policy decision of how government spending was.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Yes, hopefully yes. We don't know for certain, but I mean, that's what everyone is endeavoring to do, as far as I can see.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Yes, and it's a great point about duration, how the longer duration the treasury, the more liquidity, the more it is for the market to absorb, whereas a one-month treasury is basically akin to cash. So if the treasury is issuing very short-term duration, that could reduce the liquidity drain. And also you said they're targeting the money market funds. Money market funds want that short duration paper, and also they could replace the reverse repo because a lot of money market funds invest in reverse repo facilities. So, you know, we can put up a chart of the Fed's reverse repo facility. Do you expect that to be drained as the Treasury issues all of this paper? And will that not be a liquidity ad, but will that negate or offset the liquidity drain of treasury issuance, if all of it comes from the RRP?”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“This is what we're talking about here is the domestic response. There haven't been meaningful amounts of swaps to foreign central banks, but clearly one that's a factor that could occur in the future. We understand that. But basically this is looking at what the, let's say the Fed and the Treasury are doing together because I would be very surprised if they're not cooperating on this. And if you look at what I described earlier, So it's come down a lot.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“All right, and so how is the Federal Reserve targeting this level? There's the level of its balance sheets, quantitative tightening, QT, it's going down. This line goes up when it lends with a discount window and the bank term funding program, as we saw that spike with SVB. What are the other facilities? In other words, why isn't this line going down more? What about the guilt crisis in late September of last year caused the Fed to do this pivot that you see? And did it extend swaps to other banks? Were those significant or is this purely domestic?”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Reserves, the dotted line is one standard deviation below that. And it seems as if that is coinciding exactly with what the academics say the minimum level should be. So maybe what you've got here is the Fed is targeting. Now, we don't know that, but all I would say is if it's yellow and quacks, it's a duck.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Which was not an afterthought, but was actually putting there well before the event, is the level of reserves that a number of U.S. academics, for example, Jonathan Wright, John Hopkins has basically suggested is the, let's say, minimum level of operating reserves for the US banking system well above what New York Fed estimates have been. And it so happens that if you look at that dotted red line, it is tracing out the path that one standard deviation below the level of reserves is also doing. So if you look at that, what you can see is it seems to me is that level of reserves is being targeted. The federal authorities did not want bank reserves to fall much below this threshold, plus minus rather one standard deviation. So they're giving...”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“according to the script written by the QT advocates, it was declining very neatly up until the end of September 2022 when it began to flatline. That inflection in September of last year, I think was triggered by the British guilt crisis. I mean, I'm willing to debate that, but that's my interpretation. And what you've seen is a flatlining right up until the bank crises in March, February, March this year. And with SVB, CSFB, First Republic, what you saw is a spike upwards in federal liquidity injections through primary credit availability, through lending other forms of lending to the banks, etc., maybe some rundown of the Treasury General account, but basically bank reserves have gone up. Now, the interesting point to draw out of this chart is that that dotted red line.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Well, the answer to the question is it maybe is twofold. I mean, one is to say that if those funds come out of the reverse repo pool, then it's not a drain of Fed liquidity. That's clear. And I'm saying if it's not certain, but the Treasurer is going to great efforts such as targeting sales towards the money market funds, the sales of bills that is, which would basically suggest that that's what they're hoping will happen. Now, if you look at that chart, this is US banks reserves. Now, arithmetically, because of the way the circular flow of money works, this is equivalent to Federal Reserve liquidity injections into the system. So what we're showing here is the orange line comes through as bank reserves. That orange line was declining, you know.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Ironically, it was actually good for risk assets because all the money that would have gone to fund the US government went into stocks and stuff like that. Maybe another was money leaving the banking system and it going into money market funds and maybe a little bit of that trickled into equities. Another is the operating losses of the Federal Reserve, the fact that they are earning on their mortgage-backed securities and treasuries that they bought in 2020 and 2021 or 2% and they're paying out five percent on to the banks in excess reserves and also in the reverse repo facility. I guess the question I want to ask you is why do you think this will continue? Because the US government not issuing debt and basically running out of money. That was a stimulated liquidity. But how will this issuance of US treasuries up to a trillion dollars? Wouldn't that be actually be a liquidity drain?”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“So there's a positive correlation between Treasury bill issuance and global liquidity that's somewhat paradoxical because all things being equal, issuance of treasuries drains liquidity from the system, I believe. So we'll get into that later. But Michael, so I wrote down just a few things that have propelled liquidity higher despite the fact that the Federal Reserve's balance sheet has actually declined, with the exception of March and April and the bank term funding program and the discount window. So if you were to put up chart of the S&P 500 and the Fed's balance sheet, there has been a little bit of a divergence, but adjusting for that divergence are several factors, many factors that you said. One is the fall in fixed income volatility. So the move index has gone down as we approach the later end of the rate cycle. Another perhaps you sort of hinted at is the TGA drain with the debt ceiling drama as the U.S. government was running out of money, that perhaps”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“The answer is yes and yes. It will go up. In fact, if you look at, I think it's the following slide in that pack, you'll see there's, if you like, a predictor, a useful predictor, which is actually looking at the correlation between global liquidity, the”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“To come back big time. And if you don't believe me, believe the Congressional Budget Office because you look at their latest projections and it's in black and white”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“The fiscal authorities have a huge challenge. And if you say that one third of US Treasury debt is currently owned by foreigners, of which China is a large part of that pool, China is likely not to be such a big buyer in the future, which is going to put more and more pressure on domestic finance of the US fiscal deficit. Now, people might say, well, okay, what about the private sector? What about households? What about pension funds? But the problem is you might need higher interest rates to lure them out. And if you get higher interest rates, you're basically sitting on a knife edge because higher interest rates means that the government budget deficit will skyrocket and just cause a compounding of this whole debt problem. So you've got to keep rates low, which is why I'm saying yield curve control in some form must come back. But the arithmetic looks terrible, which is why QE is slaying.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Squeeze dry, and we've got the challenge of AI, which is going to be, if you like, eliminating more and more high wage workers out of the tax pool and presumably making it easier to, let's say, avoid paying tax in various jurisdictions.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Up pretty strongly. So, what you've got is a very unusual set of unconventional monetary policies. And it's these unconventional policies which we're going to read more and more about in the coming years. And I think the thought to hold here when you're looking forward about what's going to happen is QE is coming back big time. Central banks have spent much of the last few months bailing out banks. What they're going to spend much of the next few years bailing out are governments. And the fiscal arithmetic simply doesn't work. Mandatory spending is slated to skyrocket in the next few years, notably in the US. But as I keep saying, the US is the cleanest shirt in the laundry here. All the others, all the other countries in much, much worse situations. And if you look at the tax base, it's already been...”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Reverse repo Paul as money on the sidelines that is not circulating. So effectively they're tapping into that. The fourth thing that happens is that there is by this debt issuance of both bills, bonds and notes is that collateral in the system will increase the pool of collateral. And actually what you see typically, which is maybe a puzzling at first sight relationship, is that there's a very close correlation historically with a supply of treasury bills in the US in the market and global liquidity cycle. And there's a chart in the chart pack that I think I sent you that I put there that is well worth contemplating. And if you take a look at the extrapolated increase in bill issuance, it neatly, if you like, dovetails with what we expect the global liquidity cycle to do anyway. In other words, it moves.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“They are slated to issue something of well in excess of a trillion dollars in treasury bills. This is a significant amount. It's way above what people would have normally expected them to do. There is talk that they're doing this because Treasury bills are very liquid and they're easy to sell. But actually more particularly, the attraction of a Treasury bill is they can target the money funds. The Treasurer have said they'll do that. They'll specifically look at issuing three month and six months bills which satisfy or feed the appetite of the money funds. And if the money funds take those bills up, the reverse repo pool will come down. So in other words, there can be funding without negative liquidity consequences because Fed liquidity will not reduce arithmetically because the reverse repo pool is shrinking and providing that liquidity. Think of the reverse.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT