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Neel Kashkari Appeals To "QE Conspiracists": Show Me How The Fed Is Moving Stock Prices...

January 17, 2020

Things are starting to get surprisingly heated at the Fed, now that not only Wall Street strategists, and traders but also Fed presidents are starting to tell the truth about how the Fed's "NOT QE", which sorry but we will call it by its real name QE 4, is pushing stocks to ridiculous nosebleed record levels (as one can see by the relentless meltup in the S&P over the past four months), at valuations that are now higher the dot com days.


It all started when, in a moment of bizarre honesty, Dallas Fed president and former Goldmanite Robert Kaplan admitted in a  Bloomberg interview that the expansion of its balance sheet was helping to lift asset prices. Commenting on the Fed's massive liquidity response to the JPMorgan-precipitated repo-market crisis (it's not just our view that Jamie Dimon caused the repo crisis), which triggered not only the first Fed use of repos since the financial crisis, but also $60 billion in monthly T-Bill QE, Kaplan said that "my own view is it’s having some effect on risk assets", adding that "It’s a derivative of QE when we buy bills and we inject more liquidity; it affects risk assets. This is why I say growth in the balance sheet is not free. There is a cost to it."


This interview followed just days after one of Wall Street's most closely followed strategists, Morgan Stanley's Michael Wilson wrote a report in which he said that "as the Fed has expanded the size of its balance sheet, we have been of the view that the resultant excess liquidity has been beneficial for stock prices and multiples. The potential impact of the Fed on equities has been a central feature of almost all our client conversations the last few months. Most clients suspect that there is some positive impact, though the transmission mechanism and quantification of that impact are hard to pin down, limiting confidence in its durability now that asset prices appear ahead of the fundamentals (Exhibit 1). Since the Fed has rarely expanded its balance sheet at the pace it has been on since October there is limited history to analyze, but we found some evidence that periods of balance sheet expansion have lined up with above average equity returns."


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