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

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

“The bond market. Now hold that thought because bond volatility is key to liquidity creation. More bond volatility will increase the size of the haircut that credit providers give on collateral. And collateral is US Treasury's or, let's say, high quality debt. Most of that is US dollar-based, let me say as an aside. So number one is that they're trying to reduce bond market volatility. Secondly, they're reducing duration in the system. And what they're doing is they're issuing shorter duration debt instead of longer duration debt. And that is something which is likely to force investors to take more risk in the markets. The third thing they're doing is they've said that they will target the money market funds with bills that they issue. Now, if you look at the quarterly refinancing statement the Treasury has put out,”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“What you've got now in the US, what you have in the Eurozone and what you were going to get more and more worldwide is a yield curve control, but it will have a different appearance to the more traditional yield targeting. So what you're getting in terms of the US market, just consider these statements. The first one is that the Treasury is talking about bond buybacks. In other words, they will go into the market, they will buy bonds in the secondary market, they will reduce the supply of off-the-run treasuries, which tend to be less liquid and tend to trade at a lower price high yield than on the run treasury is freshly issued treasuries of similar tenor. And they will replace those off the run with newly issued bonds to increase liquidity. Now, what is the purpose of doing that is to try and improve the liquidity and reduce the volatility.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Because it has redefined very subtly Qt and QE to mean the amount of treasuries that it holds on the balance sheet. If the stock of treasuries goes up, that's QE. If they come down, it's Qt. That's a cute definition because it facilitates the Fed having its cake and eating at the same time, because that never used to be the definition. The definition used to be plain and simple whether liquidity was increasing or not. So the Federal Reserve can now claim, I mean, truthfully they can claim that they are operating QT because the stock of treasurers is being rolled off, but at the same time, which they're not saying, is that the amount of liquidity being injected into the market is actually going up.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“saw around February, March following the SVB and other bank failures, CSFB, another example First National, et cetera, that fed liquidity began to rise. In other words, there was support directly given to the banking system through primary credit. And you can see, in fact, on your chart, the effect that has had on Nasdaq, it's almost moving one for one with Fed liquidity injections. Now, Nasdaq is a very good barometer of this because basically Nasdaq in sort of, let's say, in bondspeak or in finance speak is a long duration investment and long duration investments are very sensitive to the liquidity climate. So basically that's what's been happening with the Fed. Now, what the Federal Reserve is doing, let's sort of drill into the detail here, is it's claiming on the one hand that it's still doing...”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Happening to bank reserves, essentially it stopped going down. It had started to flatline, and that was in the wake of the British guilt debacle, which you recall happened following the new Prime Minister trussy's budget statement in September of 22. That was a disaster. The point that we made there was that if that debacle in the British sovereign debt market, the guilt market, had happened in the US Treasury market, would have all been toast. In other words, there'd have been a global financial crisis. You don't get that sell-off in a key sovereign debt market without there being disruption. And that spooked, we think monetary authorities worldwide. Janet Yellen voiced concerns. And pretty much since that point, U.S. bank reserves are flatline, which is more or less telling us that federal liquidity was moving sideways. Following that flatlining,”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“At but basically, what you've got to look at is the asset side of the Fed balance sheet. You've got to subtract from that factors like the TGA, the Treasury General account, which absorbs liquidity if the Treasury builds up deposits at the Fed. The reverse repo pool, which is another absorber of liquidity, and a third factor, which is becoming more and more important are operating losses that the Federal Reserve is making on its portfolio. Not mark-to-market losses, but the operating losses, in other words, when it's paying up more in interest than it's receiving on the stock of bonds and notes. So these are the factors that we look at in terms of Fed liquidity. What is happening to that Fed liquidity? It's basically going up. We first flagged in October of last year, 2022, that the decline in Fed liquidity, which is equivalent to looking at what”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Those, which is what the central banks are doing, and there's really two central banks that kind of matter in this. One is the US, Federal Reserve, and the other is the People's Bank of China. The others are smaller or bit part players, not to say they can't affect things, but they really will probably be enthralled to the Fed all. They'll be operating policy pretty similar to the Fed, and I'm talking here of the BOJ, the ECB, or the Bank of England, for example. Now, what is the Federal Reserve doing and what is the Federal Reserve doing to this balance sheet? The first thing to sort of disabuse people of is the balance sheet is not the key liquidity aggregate to look at, okay? What we look at is something we term Fed liquidity, which is a concept we defines a few years ago, which is basically looking at the effective liquidity-creating components of the balance sheet. Now, there's a lot of talk on Twitter about what are the right things or wrong things to look at.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“But I'll come back to the Fed question in a tick. The first thing is that we look at central banks. So central banks are a primary source of liquidity. On top of that, you've got what the private sector does, and that includes banks. I didn't include shadow banks. A lot of that lending is based on collateral. So one of the things you've got to try and detect is what is happening to collateral? What are the haircuts that credit providers are giving on collateral? And that is something that will determine liquidity in the system. And let me stress again, we're looking at financial market liquidity here. We're not really thinking about liquidity in the real economy. In actual fact, if money is in the real economy, it is not in the financial markets. So in actual fact, one of the things we kind of want for strong financial markets and strong financial liquidity is a weak real economy. So hold that thought. The third thing is, as you rightly say, is cross-border flows. And that's another factor which I come on to. So if we go back to the first...”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Right. So there's three factors bank credit, central bank liquidity, and then cross-border transactions. And I think those get more complicated as you go down the list. What's going on with the, let's just start with the Federal Reserve balance sheet, a very simple model. One factor analysis is, oh, when the Federal Reserve is doing quantitative easing and its balance sheet is going up, that's adding liquidity. When it's doing quantitative tightening, its balance sheet is going down. That is removing liquidity. The Federal Reserve continues to do quantitative tightening, although its balance sheet did spike up in March and April as it extended loans to banks via the discount window and its new bank term funding program. So what's been going on has the net net added or taken away liquidity since we spoke in January?”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT
“Okay, well, the short answer is liquidity matters. It's the most important thing for investors really to watch and track. The reason the market's gone up is very clearly to do with more liquidity, and that's the key factor. What is liquidity? Let me start by saying what it isn't. It's not a measure of interest rates. It's not conventional money supply. In terms of our definition, which is a long-standing definition that basically goes back to the time that I was at Solomon Brothers back probably two decades or more ago, it's looking at the flow of money through global financial markets. So it's the cash and credit that is available for purchase or investment in assets. And it's the key measure that drives asset prices.”
2023-06-22 · Forward Guidance · Michael Howell: "QE Is Coming Back, Big Time" · IDENTIFIED FROM THE TRANSCRIPT