I am putting this on your radar! Some things that go on behind the scenes should concern us all. This is from a weekly email from Luke Gromen, CFA from FFTT-LLC.com. This one caught my eye!

IMF confirms that the “Daisy Chain” – foreign Central Bank QE began in Q4 2022

Key Point:

There were two big developments last weekend – the OPEC surprise production cut and the IMF confirming that “Daisy Chain” foreign Central Bank QE began in 4q22; the OPEC production cut got all the press, but the confirmation of “Daisy Chain” QE might be far more important.

“The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.”

-Ben Bernanke, 11/21/02, “Deflation: Making Sure ‘It’ Doesn’t Happen Here.”

“The big buyers of USTs in 2022 are the vassal states UK, Canada, Australia, and Poland. It’s a classic daisy chain to window dress wider divestment as China, Japan, GCC states, and others sell. Daisy chains were popular among corrupt Savings & Loans in the 1980s. Each buys the other’s worthless debt as assets to look solvent to the supervisors while knowing they are all scamming. That’s what G7 looks like right now. They might get away with it for years, just like S&Ls.”

-Former Fed official Kathleen Tyson, via Twitter, 10/25/22

Japan confirmed on Tuesday that it made record interventions in the foreign exchange market in October, selling $48bn to support the yen. -Nikkei, 2/6/23

“‘Stealth intervention’ to support the yen fits with my suggestion around mid-October of New York Fed support for BoJ in exchange for two small islands now being fitted with US missiles for WW3. And BoJ reserves have been growing since as BoJ buys more USTs. Daisy Chain.”

-Former Fed official Kathleen Tyson, via Twitter, 2/7/23

Former Fed official Kathleen Tyson has been referring to what she believes was a post-October 2022 IMF meeting arrangement for certain nations to essentially “QE each others’ debt”, describing the arrangement as a “Daisy Chain.” After all, buying foreign sovereign debt is not QE (fraught with domestic political complications); it is “building excess reserves.”

How will we be able to tell if “Daisy Chain” coordinated QE of each other’s debt is being done? If total global FX reserves, as reported by the IMF’s COFER database, begin rising [in 4q22 v. 3q22], it will be strong circumstantial evidence that “Daisy Chain” is happening. -FFTT, 2/10/23

In an email thread and response to a quick note, Luke responded with the following:

Global FX reserves increase in 4q22 v. 3q22 was $344B, or >$100B/month in de facto QE.

Furthermore, USD and RMB reserves were flat Q/Q, while EUR, JPY, & GBP reserves were all up 7-10%, which then weakened USD substantially Q/Q (since those 3 are the key components of DXY index), which then adds an unquantifiable (but large) increase in overall liquidity as well.

The fact that it’s happening IMO smacks of desperation.

LG

The equivalent of $100 billion a month in de facto QE. Remember, the Fed was buying $120 billion per month ($80 bil in U.S. Tsy’s and $40 bil in mortgages). That program ended but ran far longer than needed… thus contributing to the inflation problem. Now backdoor QE smacks us uncomfortably in the face, given the Fed’s ongoing domestic QT/rising interest rate/fight inflation policy. An underhanded – back door way of softening the impact? What a mess.

 

US Economy

 

  • The February core PCE inflation came in slightly below forecasts (charts show month-over-month changes). The third panel shows the “supercore” index, which is closely tracked by the Fed.

 

 

  • The terminal rate is grinding toward 5% again, with a May rate hike back on the table.

 

 

  • Inflation expectations have been easing. But this trend could reverse if oil prices rise sharply (see the Energy section).

 

 

  • Household net wealth remains elevated, due to historically low debt levels, high cash, and relatively strong asset prices.

 

 

  • The ISM PMI report indicates a faster drop in US manufacturing activity in March.

 

 

  • The new orders index shows deteriorating demand.

 

 

  • Factories downsized their workforce.
  • Manufacturers are now cutting their inventories
  • The ISM Supplier Deliveries subindex dropped to 44.8, its lowest level since 2009, indicating that suppliers are responding rapidly to manufacturers’ needs as a result of deteriorating demand.
  • The ISM report points to slower GDP growth.
  • The March ISM PMI and soft consumer spending in February sent the Atlanta Fed’s GDPNow Q1 growth projection below 2%.
  • Commercial property prices are experiencing a sharp decline.

 

 

  • This chart shows available sublease office space.

 

 

  • Job openings declined more than expected in February.

 

 

  • This chart shows the near-term forward spread, the Fed’s preferred yield curve leading indicator. It is the expected three-month Treasury yield 18 months from now (market expectations) minus the current 3-month yield. Some Fed officials view this as a better indicator than the 10yr – 2yr spread (see research). The near-term forward spread is signaling a sharp economic downturn.

 

 

  • The March ADP private payrolls index surprised to the downside.

 

 

  • Input price inflation continues to moderate, …

 

 

  • … which points to lower consumer inflation, …

 

 

  • GDP estimates were lowered.
  • The 10-year/3-month portion of the Treasury curve is the most inverted in decades.

 

 

  • Initial jobless claims were above last year’s levels but still relatively low. The labor market remains tight for now.

 

 

  • What is driving the recent layoffs? Weaker demand has now become the dominant reason.

 

 

  • Adjusted for the aging population, US labor force participation rates are higher than reported.

 

 

Market Data

 

  • Top three stocks have been driving recent gains in the S&P 500.

 

 

  • Tech shares are trading at a substantial premium to the S&P 500.

 

 

  • Total US bank deposits continue to fall.

 

 

  • The S&P 500 Q1 return attribution by member:

 

 

  • The disconnect between earnings and GDP projections remains a concern.

 

 

  • Analysts expect corporate sales growth to continue over the next 12 months.

 

Source: @TheTerminal, Bloomberg Finance L.P.

 

  •  With margins shrinking, global earnings could decline sharply. Here is BofA’s EPS model.

 

 

Quote of the Week

 

“No amount of evidence will persuade an idiot” – Mark Twain

 

Picture of the Week

 

 

 

All content is the opinion of Brian Decker