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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.


  1. The Fed will be rolling over approx. $200B in UST this year, $200B next year, and $400B in 2018. QE never ended if the $4.5T Fed balance sheet remains static. Half of all new UST issuance in 2016 will be bought by the Fed.

    "Inevitable and growing imminent" is pretty strong language Chris. This gets us to the discussion of Fed intent. Why did the Fed raise rates? The numbers did not justify it, but I can tell you what happened politically since then. has seen Trump surge. Tax cuts and infrastructure spending to juice the economy anyone?

    It's going to be hard for the Fed to expand the balance sheet another 450% over the next 7 years. NIRP is not necessarily a given, and I see IOER getting reduced to near zero, eliminating most excess reserves from the Fed before we see NIRP.

    Great analysis btw. I believe individual's risk portfolio should now be more "risk-off" until we see a reversion in monetary policy. The divergent monetary policy seen with the Fed v. ECB, BOJ, and PBOC creates a very strong ceiling effect on equity prices in the US. King dollar is still that for now...

    1. Anon - all good points. True, QE has never truly ended and actually remains via rollover purchases while the Fed is hiking rates. QE and rate hike together.

      You could be right on the political front playing trump to the interest rate policy. Still, with the US running relatively piker deficits compared to '08-->'14, no QE, and rising rates...the dollar could become very scarce (aka, strong). The implications ain't good...not that QE or NIRP are good but they extend and pretend vs. strong dollar policy potentially bringing the pot to a boil.

    2. It was aptly named POMO instead of TOMO for a reason.

      Permanent Open Market Operations

  2. Great article. If I can ask, you mention "not selling", but what about the dollar? A lot of "real assets" seem awfully cheap, and add to it, other currencies.

    Doesn't a buying spree of some sort before another round of QE, seem logical? IIRC, The dollar experienced a similar run up in value before falling after the first round of easing.

    Appreciate any help!

    1. Anon - yeah, my best guess is a U-turn in rates in 2016 and potential re-implementation of QE. But as above comment notes, this is an election year and our silly season could trump (sorry for the pun) all.

  3. So, for a complete n00b like myself, are you saying that very close in the future, oil prices will rise because it is inevitable that the Fed will introduce QE4?

    Or am I completely misunderstanding you? Can I get an idiot's guide to what was said please?

  4. Very good analysis, with regard to your wondering why the rates were hiked: maybe it is just a credibility issue, how could you explain more QE in the future if a growth fairytale was never supported by a rate hike? IN other words a rate hike confirms that QE works, but a downturn will require a new narrative: that we need bigger QE to get better results, that previous QE worked, but was too small to achieve stronger numbers etc... regards Damo

  5. Great stuff. With many admitting now that QE was a failure for the overall status of our future (except the Wallstreet crack addict institutions and top 1% that profit from buoying of markets), how do they think they are going to get away with even more QE and/or implementation of NIRP? These loons are going to take the world down hard at some point for their own short term gain, and it will only get worse as it is prolonged. Interest rates need to rise slowly IMO, let the deleveraging occur in a controlled fashion. It will get worse before it gets better, but it has to be done. Some big institutions may fail, so be it. The people will hopefully demand that we go the Iceland route this time, not the drunken sailor route again! However, I won't hold my breath with the phychopaths running things and the dumbed down populace that keeps allowing them to run a muck. My money sits on the sideline for now. We'll see if this rally has any legs and if I regret this...I smell more manipulation just as they admit openly in China. Their debt game has to end at some point and come back to what the fundamentals are showing us. It is a crazy and sad world we live in these days...good day to you.

    1. Nice thoughts all... but the truth is 'They' are the 1% who benifit from all the central bank nonsense. They will CONTINUE to inrich themselves while the tax donkeys suffer. Trade accordingly.


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