Market Lab Report - Financial tricks "QE-Lite"

by Dr. Chris Kacher

US, UK, and EU recession on the way

The US and UK tend to move together with the US leading when it comes to economic cycles. This also applies to the rest of the world even when one looks back through the centuries. While the world is more interconnected than ever, connectivity has always existed which explains why global recessions are not coincidental.

The Bank of England recently hiked interest rates by 0.75 percentage points to 3%, the biggest rise since 1989. The BoE warned the UK is facing its longest recession since records began, saying the county would face a "very challenging" two-year slump with unemployment nearly doubling by 2025. This is in keeping with past recessions in the US and UK as unemployment always soars from major lows over at least several months as recession takes hold. By raising rates, the BoE is trying to bring down soaring inflation as the cost of living rises at its fastest rate in 40 years. The issue is that this has little impact on supply-side inflation which has been a significant contributor to inflation.

For homeowners in the current environment of rising rates, owners coming off fixed-rate deals could see their interest payments increase by around £3,000 a year if they need to take out a loan that is 3.5 percentage points higher. UK shadow chancellor Rachel Reeves said families could not withstand such high rate rises "when we've got rising food prices, rising energy bills and now higher mortgage rates as well."

The global macro environment which is arguably the worst over the last century naturally includes the US.

Financial tricks

But with the Fed suggesting less aggressive rate hikes, the dollar and 10-year Treasurys may have peaked for at least a little while.


A lower overall yield would suggest lower inflation just as rising yields predicted higher inflation so far this year. But Powell's hawkish testimony about a higher terminal rate means more interest rate debt will need to be paid on the still near-record levels of debt that exist. So the Fed will then have to print money to service the debt, much as we saw happen in the UK with the BoE. This financial trick by central banks enables them to hike rates while also doing a "QE-lite". The US Treasury pumped $165 billion into the economy since the start of Oct, just as we were heading into midterms. This more than cancels out the Fed's $90 billion per month "QT".

That said, due to the prolonged higher terminal rate, and yes, it's lower than before after Thursday's CPI but still high nevertheless, this form of money printing to service higher rates of interest might be like a Chinese water torture, a slow process where markets drag for a time. Maybe we see a lot of chop-and-slop ahead without any firm prolonged trends in either direction especially since Thursday's CPI came in below estimates across the board. CME Fed Futures now puts odds of a 50 bps hike in Dec followed by a 25 bps hike in Feb, or a lower terminal rate of 475-500 bps.

So the "uncle" moment of capitulation where markets engage in a firm downtrend much as we saw in late 2018 may be further down the road. Indeed, the Fed may be able to coast along in this manner for many months. But ultimately, the massive QE bubble still needs to be unwound so expect a major market low at some point, perhaps sometime in 2023 if 1930-32 and 2000-02 are any guides, unless of course, we get a black swan which forces the Fed to print like they did post-2008 or in 2020 from the pandemic.