QE to QT

Despite the SP500 index being marginally positive for the first half of the year the economy continues to surge ahead. Jobs are going unfilled and homes are in short supply.s passed at the end of 2017. The economy has been overly stimulated by the tax cuts and fiscal-spending package that Congress passed at the end of 2017. Just as its effects are fading, the Fed will continue to push interest rates higher and shrink its $4 trillion

That shrinking in the $4 trillion balance sheet is where the QT (quantitative tightening or unwinding of extreme central bank stimulus) is starting to take hold. The Fed is on schedule to have $50 billion of debt they own “roll off” each month without replacing it.

As an article in Zero Hedge recently commented, “Thus far, the US stock market has held up relatively well. But this is where it gets really bad. The Fed will raise the pace of its QT program to $50 billion this month. And it’ s doing it at the same time that the ECB is dropping its own QE program to below $30 billion per month.

Put another way, this is the FIRST time since 2008, that global market monetary policy will be NEGATIVE: more money will be leaving the system via QT, than will be entering it via QE.”

Bloomberg writes, “Securities purchases from the Fed, European Central Bank and Bank of Japan are just $125 billion year-to-date, well below the $1.5 trillion run-rate of 2017, they estimate. That suggests markets are missing an injection of some $1.38 trillion thanks to policy makers changing tack. Liquidity will see an outright contraction in six to eight months, the strategists estimated — one reason they’re bearish on global markets even after recent declines.”

Higher interest rates are definitely beginning to provide some competition for stocks hovering close to all-time highs. The volatility we spoke about in our last letter continues along with stagnant index returns.

Higher interest rates are making the U.S. Dollar stronger which will hamper profits of corporations with international exposure.

The Fed is on track to raise interest rates two more times this year. Oil is the highest since 2014 and inflation is in your face every time you pull out your credit card. Tariffs and trade wars will also have unintended consequences.

We may be on the front end of the “Easy Money Era” which would be great. Kick ZIRP goodbye forever!

Enjoy the rest of your summer!

J. Brock Hamilton
July 2018