Wednesday, January 20, 2016

QE, Treasury's, the Dollar, and Oil...all Tied Together

Can we be serious for a hopium or green shoots.  Just data and reality all around whats come of the world since the Fed began its taper in February of 2014 and completed its QE program in October of 2014.
The chart below highlights the month QE began, Dec 2008, is also the month oil prices bottomed.  The period that QE ended is the period where oil prices began collapsing.   Perhaps worth some thought?!?
It was in February of 2014 the Fed began its long discussed "taper" reducing it's $85 b/mo purchases of MBS and Treasury's by $20 billion increments.  The cuts to monthly purchases continued and by October of 2014, the Fed had fully ceased it's purchases that had amounted to $4.5 T since Dec of '08.

The implementation of QE in December of 2008 marked the bottom to oil prices.  As QE began in Dec '08, oil prices consistently rose and surpassed $100/b by 2011, maintaining $100+ for the entirety of QE.  However, by July of '14, oil prices began falling as QE was winding down.  By September 2014, oil lost $100 just as QE petered out and the fall since in a post QE world has been spectacular.

It was also the Fed's ZIRP policy either which also caused the massive overcapacity of oil via cheap credit (lower for longer) which allowed "marginal "US and Canadian producers to bring nearly all new oil to the global market from '09 til present thanks to shale and tar sands.  Details here.

QE and US Treasury Purchases:
As the Fed ceased QE, foreigners entirely followed suit and have entirely ceased (net) their purchases of US Treasury debt after having been the primary buyer from '09 through 2014.  This has shifted all net new Treasury buying to the "domestic public" (domestically based insurers, pensions, banks, private individuals).  Why foreigners have ceased accumulating US Treasury's is a very important question.  The nations running dollar surplus' (BRICS, etc) ceased accumulating Treasury's in July 2011 (as the debt ceiling debate was resolved without resolution).  BRICS no longer recycling their dollar surplus' and have in fact been net sellers since July '11.  The only foreign bid remaining are banking centers, aka BLICS (Belgium, Luxembourg, Ireland, Cayman Islands, Switzerland).  These are banking centers with no dollar surplus' but access to central bank swap lines.  Based on this, it seems the dollars future and the US's ability to run infinite budget deficits is in serious question.

Over 5 years from '09 through '14...the Fed and Foreigners cumulatively purchased $4.1 trillion or about 75% of all Treasury issuance.  But further, the Fed + foreigners bought nearly all the bonds and notes leaving only the shortest duration, most liquid bills for domestic buyers.  In the past year, the domestic public is doing all the buying (with a small assist from the Intra-Governmental holdings).  Strangely, rates did not rise when the buyers of nearly 3/4th's of all US debt stepped away from the table.  The Fed's stated rationale for QE (artificially pushing interest rates down to spur economic activity) was shown to be a farce.  Instead, the true intent became clear.  Pushing up asset prices across stock markets, commodities, and real estate (thus maintaining banks solvency, holding said mortgage debt).

With QE...
  • Russell 2000 rose from 850 to 3000 or + 350% (March '09-March '14)
  • Oil rose + 400% (Dec '08 until late 2014)
Without QE...
  • Russell 2000 has fallen -17.5% since taper onset in March '14
  • Oil has fallen about 80%.  Oil fell below $100 in Sept '14 and presently bottom diving.
The Fed's policies have created an addict that needs ever lower rates and greater monetization to allow debt service, "growth", and masking the massive overcapacities across nearly every segment of the worlds economy.  Why they determined to go through the farce of the taper and an interest rate hike is truly a mystery (to me).

What is not a mystery is that more QE and NIRP are inevitable and growing imminent.  It is for this reason alone I do not advocate selling everything or much of anything.  A free market is not imminent and further grotesque and destructive bubbles are the only "play" the Fed knows...whether they can succeed this late in the game is unknowable but the fact there is no level of organic demand that can avoid a depression unlike any we have ever seen is obvious.

For those wondering how we got here with CB's gone wild...I think it really is as simple as a model based on infinite growth in a finite world was never a good idea.  But how bad an idea we wouldn't know until we hit some finite limits.  Here it is.