Even as the stock market is hitting all time highs, this is quickly becoming a major problem…

Fed Balance Sheet Problems
January 10 (King World News) – Peter Boockvar:  Of all the Fed speak yesterday, it was the comments from the Dallas Fed President Robert Kaplan to Reuters that was most noteworthy I believe and should be paid heed to. Now a voter in 2020, he’s the first Fed member that is expressing some concern with the side effects of the epic increase, in terms of rapidity, in the Fed’s balance sheet. However termed, it’s hard to argue against the belief that the increase has had a dramatic impact on asset prices. He said “I’m going to be wanting to actively explore options that would allow us to restrain from here growth in the Fed’s balance sheet. I do think the growth in the balance sheet is having some impact on the financial markets and on the valuation of risk assets…I want to be cognizant of not adding more fuel that could help create further excesses and imbalances.”

If these thoughts are shared by others, it will be important for Jay Powell at the FOMC meeting at the end of January to directly address this. When their printing press is a hammer, every single financial plumbing and economic problem looks like a nail and the Fed needs to get away from this. Their actions don’t happen in a vacuum and just by saying ‘this is not QE’ doesn’t mean there are not major ripple effects. Expect to hear a lot more about the possibility of a standing repo facility replacing the $60b per month increase in their balance sheet. To this Kaplan said it “might allow us to be more efficient with the overall size of our balance sheet, and it might also change banks’ thinking about their need to hold reserves.”..

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I want to also reprint what Boston Fed President Eric Rosengren said last September and who expressed this multiple times last year as he dissented on every single rate cut. “There are risks of tailwinds and costs to monetary policy being too accommodative. Additional accommodation is not needed for an economy where labor markets are already tight – and risks further inflating the prices of riskier assets, and encouraging households and firms to take on what may be too much leverage.” 

Well, we certainly got higher asset prices after 3 rate cuts and a dramatic increase in the Fed balance sheet but as I’ve argued many times, when rates are already so low moving them even lower loses its effectiveness in moving the needle on actual economic growth and just creates financial bubbles instead. How have the 3 rate cuts last year done in encouraging business borrowing? Nothing because businesses already have so much debt. Here’s a chart of commercial and industrial loans outstanding which stand at the lowest level since June. 

Businesses Already Have Too Much Debt

The only economic data of interest overseas was the industrial production figures from France, Spain and Italy. All were slightly better than expected. Growth for the Eurozone in 2020 is only about 1% after a similar pace of gain in 2019.

Gold Pullback
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