Tag Archives: Fed balance sheet



We haven’t written lately about the fiscal/monetary situation because the trends are very long term in nature and our readers are primarily interested in restaurants/franchising and retail and shorter term considerations in that regard. We continue, however to follow closely macro fiscal/monetary developments and will publish items of note, as we have below.

A discussion in yesterday’s Grant’s Interest Rate Observer provides a vivid description of the Fed’s misplaced guidance, the extent to which they have exceeded all rational boundaries, and how increasingly dangerous the worldwide economic situation has become.

Reviewing just the last thirteen years of Fed “money management”:

Back in March of 2009, at the bottom of the ’08-’09 financial crisis, a staff economist (one of the hundreds) at the Federal Reserve Board surmised “whether it’s the purchase of Treasuries or Mortgage- Backed Securities (MBS) the Fed has at least a fighting chance of bringing down the level of long-term rates….and if that spills over into the stock market…. you potentially get a major stimulus to the real economy.” True to form, the stock market bottomed in March of ‘09 and the economy began a slow (about 2.5% real GDP growth over ten years) but steady recovery.

Ben Bernanke, Fed Chairman at the time, took a bow in February, 2011, telling the House Budget Committee that the Fed was not “monetizing” the public debt. He said: “that would involve a permanent increase in the money supply to pay the government’s bills through money creation. What we are doing here is a temporary measure which will be reversed, so that at the end of this process, the money supply will be normalized, the Fed’s balance sheet will be normalized and there will be no permanent increase, either in money outstanding or in the Fed’s balance sheet.”

Let’s see how that normalization process has been implemented:

On December, 2007, Fed Assets totaled $894.3B, twenty-four times the $37.1B capital base.

By 2011, Assets were $2.5 Trillion, forty-eight times the capital base.

Today Assets are $8.9 trillion, two hundred twenty times the capital base. (of $40B).

People: In the real world, this would not be considered a healthy situation. It wouldn’t take much of an unexpected development to wipe out the remaining capital, putting an economic entity in severe jeopardy at the least.  We don’t know whether the $8 trillion of presumably marketable securities is currently under water on a marked to market basis but even a modest increase in interest rates, which the Fed is ironically trying to encourage over the next year or so, would reduce and perhaps wipe out the Fed’s capital base. The leverage ratio would then be “infinite”. Your banker or mine would not be happy.

Not to worry: as long as the Fed can continue to print money, and the Assets are not valued at “the market”, insolvency, illiquidity or bankruptcy is not a risk. On the other hand, how worldwide capital markets would view this situation, and their willingness to finance the US deficits in the absence of the US Federal Reserve leading the way, is an open question.

Roger Lipton




The new fiscal year for the US government started October 1st. In the two months ending 11/30, the current deficit has been $337B, up 10.4% from a year earlier, headed comfortably over $1T for the current year, up from $984B.  As always, the increase in debt is higher, up $360B, the difference being the “off-budget” spending, mostly to finance the deficit in the social security entitlement account. Most years, this off budget spending totals a couple of hundred billions, still a serious amount of money.

It’s no coincidence that the Fed Balance Sheet has increased, from 9/25 until 11/27 by $194B so the Fed has financed about 57% of the two month operating deficit. It’s clear therefore that the Fed has no choice but to continue expansion of its balance sheet. Now at $4.095T, it is clear that a new high above $4.5T is in the cards by the end of the current fiscal year ending 9/30/20.  Of course, the old high was put in place to stimulate growth in the wake of the 2008-2009 financial crisis. The new high will take place in the middle of “the greatest economy the country has ever experienced.”

THE QUESTION: What’s the matter with this picture?

THE ANSWER: In the 2008-2009 crisis the Fed balance sheet went up by $3.5T. Might the Fed need to take its balance sheet to at least $7-8T to forestall the next downturn. With any addiction it always takes a bigger hit to maintain the high. Economic policy would be simple if recessions (and worse) could be easily avoided by the printing of new money. Do you not suppose that a price must be paid at some point ? It’s trite but true: if something can’t go on forever, it won’t.


Today’s Wall Street Journal describes how the US is in a relatively strong bargaining position relative to trade negotiations. We respectfully disagree. (1) Both economies are increasingly burdened  by debt and supported by government spending.  China, though growth is apparently slowing to a mid single digit pace, with financial strains to be sure, still owns the fastest growing major economy in the world. The US, with its own set of economic distortions, is growing at a tepid 2% rate. (2) China, though diversifying away from dollar denominated securities, still owns over $1T of our debt, and could create havoc by forcing worldwide interest rates higher with their sales. While the markdown on their remaining position might create some discomfort at home, this remains a possibility (3) China can offset new tariffs by weakening the Yuan, requiring retaliation by the US and other trading partners (4) China is dedicated over the long term to joining, or replacing, the US Dollar with the Yuan as a reserve currency. Most students of the situation believe that China is very substantially understating gold reserves. We believe that many other Chinese agencies besides the People’s Bank of China have been buying physical gold, and far more than the PBOC has reported. Add the fact that adversarial Russia continues to purchase physical gold. Nothing would please China, or Russia, more than to replace the US Dollar with a new reserve currency that is backed by gold, and we believe that is where the worldwide monetary system is headed. It so happens that China and Russia are in the best position to do so. The key question remains: when ???

Roger Lipton



Gold bullion and the gold miners had a “consolidation” in September, though still up for the quarter and the year. Gold bullion was down 3.4% in September. The average of the two major ETFs, GDX and GDXJ, was down 11.1%.  It should be remembered that gold bullion is still up 14.5% for the year and the gold miners are up over 20%. This is  reasonably impressive performance of this presumably counter cyclical asset class,  considering that the US Dollar is at a high, as is the general equity market.

Virtually all of the decline in September was in the last week, which has been typical every year since 2013, prior to Golden Week in China (where a great deal of gold is bought, both by the government and the public). Golden Week is a 7-8 day semi-annual holiday. We’ve shown charts below of the gold price in the week before and after the start of this holiday, and you can see the decline and recovery which has been typical. For what it’s worth, gold is up 0.5% this morning at 11:00am as this is written, and the gold minering stocks are up over 2%. All the economic trends that we have long discussed are still in place, and accelerating.

There are a number of major current developments, all supportive of gold demand.

  • QE4, a new round of money creation is already taking shape. The Fed has been forced to insert $50-75B of funds daily in the form of “Repos” into the short term fixed income markets. While these funds roll over from day to day, supposedly don’t accumulate, this sort of intervention is a sign of unusual strain within capital markets. Supposedly short term intervention aside, the Fed Balance Sheet has started expanding once again. After bottoming at $3.76 trillion on 8/28, the latest total is $3.858 trillion, up $88 billion in the last two weeks. The Fed has publicized their “data dependence”, but balance sheet expansion so soon has not been implied.
  • The Japanese monetary authorities are newly committed to a new round of monetary stimulus, a continuation of the strategy that hasn’t worked for over twenty years. You don’t get out of a hole by continuing to dig.
  • WeWork’s rapid transition from (private) market darling to a bankruptcy risk is a powerful form of therapy for worldwide money managers. This kind of disillusionment can quickly undermine capital markets, both debt and equity, and is an example of how crises develop “very slowly, then very quickly”.

Roger Lipton



It should be no surprise that “officials”, in this case Fed Chairman, Jerome Powell, massage the facts to provide whatever agenda they are trying to promote.

Jerome Powell, in yesterday’s news conference, was asked about how far the final stage of balance sheet shrinkage would go, before being “normalized” in late 2019. Recall that the $900 billion of assets owned by the Fed back in 2008, bought with newly printed currency, expanded to a maximum of $4.5 trillion during and after the 2008-2009  financial crisis to keep the banking system from imploding and to support the economic recovery. Most economists like to think that the possible unintended consequences of this unprecedented monetary experiment are worth the ongoing risks because the financial system was saved by the intervention. Over the last decade, fed officials have come to the conclusion that the balance sheet should be shrunk, but the normalized level would be about $2.5 trillion based on an economy that has grown over the last ten years. Of course, the economy has grown nothing like the 177% increase that the balance sheet would have grown, but that’s been the working objective until just recently.

It’s important to put the Fed’s current forecast in context. Starting in late 2017, the Fed has shrunk the balance sheet steadily by selling some securities and letting others maturing in a “run off”. It was hoped that this reduction of monetary accommodation would not hurt the economy. However, with the reduction of Fed participation as a buyer of fixed income securities, and a planned series of fed fund rate increases, market interest rates immediately started to rise in late 2017, and that has contributed to economic growth slowing from the 3% rate of 2018, now expected to be in the low 2% area in 2019. Predictably, by the fourth quarter of 2018, as the stock market was collapsing, the Fed “caved”, and said they would back off from the balance sheet reduction, as well as reducing the number of interest rate increases planned in 2019.

It is now assumed that the rate increases are over for the moment, and the Fed is watching carefully, “data dependent”, yadayada. As far as the Fed balance sheet goes, it stands, as of the last report on 3/13/19, at $3.97 trillion, down 12% from the high of $4.5. Our estimate, provided just last week, was that the balance sheet reduction would go to about $3.7T, down about 18% from the high. As we said, a quintuple in the balance sheet, from $900B to $4.5T, is necessary in hard times to avoid a financial calamity, but the “good times” only allow for an 18% reduction, not exactly a balanced situation, as John Maynard Keynes economic principles would have required.

You have to read between the lines if you are interested in the facts from which to make an informed judgement as to what the future holds. Jerome Powell, Fed Chairman, is extremely articulate, perhaps the best that we can remember in this respect. However, he has his “agenda”, and we can’t resist the temptation to clarify just a couple of of his press conference comments of yesterday. Naturally, he claims that the economy is doing just fine, everything is under control, the Fed is watching carefully and has lots of flexibility to respond to any foreseeable situation. We can’t help pointing out the similarities to the Fed’s outlook in ’07.

In yesterday afternoon’s press conference:

Chairman, Jerome Powell, was asked whether the Fed balance sheet reduction was a form of “tightening”, which could be hard for the already slowing economy to absorb. He claimed that reduction of the balance sheet is not tightening, as it is not a part of “monetary policy”, just a separate planned reduction back to an appropriate level as part of a natural process. He can call expansion of the balance sheet from $900B to $4.5T whatever he wants, but it wasn’t done for no reason. $3.6T of fresh currency was created, out of thin air, inserted into the financial markets, helped keep interest rates low and finance our operating deficit, and the higher stock and bond prices created the wealth effect that Ben Bernanke predicted. If expansion was a big help, contraction can’t be of no consequence. 

Secondly, he was asked how much further the balance sheet reduction would be taken by the termination as of 9/30/19. After a bit of “dancing”, he said “you are no doubt looking for a number, so that would be ‘a bit’ over $3.5T”. He no doubt wanted to provide the impression that the balance sheet reduction is continuing, automatic as presented originally, wouldn’t be a problem for the economy, and the $3.5T is an acceptable objective. Here’s our interpretation:  If we assume “a bit” over $3.5T would be $3.55T, that would require a reduction over the next 6.5 months  of $421B from the $3.971T at 3/13/19, or an average of $64.7B per month. That pace of reduction would be higher than any level during the peak pace of reduction. Q3 of ’18 averaged $37B per month. Q4’18 averaged $39B per month. So far in ’19 the average has been 35B/month.  If we assume $30-$35B/month over 6.5 months, that would be 195-228B, which would leave the balance sheet at $3.74-3.77T (still $70B or so above our target), and we don’t consider $250B “a bit”, though a quarter of a trillion dollars is admittedly not worth what it used to be.

It remains to be seen how the worldwide economy responds to the end of the largest  monetary experiment in the history of the planet. 

Roger Lipton





It now seems clear that Q1’18 will not demonstrate a pickup in the economy. After 2.9% real GDP growth in Q4’17, lagging the much heralded 3% plus in Q2 and Q3’17 (Q3 aided by reconstruction activities after the storms), it now seems clear that Q1’18 will be closer to 2% than 3%. Recall that Q4 consumer spending, which included the best Christmas season in at least five years, included record high consumer credit card debt (with an increasing incidence of default) and a reduction of the consumer savings rate down to about 3% of household income, not the healthiest combination for longer term spending expectations. Sure enough, the first quarter of ’18 seems to be characterized by slightly higher consumer savings, as the public is still burdened with high health care, rent, and education costs. We saw a chart recently that indicates that about 33% of 25-29 year olds are living with parents or grandparents, up from about 26% in 2010. No doubt many of these Millennials are coping with the burden of student loans. Surveys indicate that many consumers are going to apply savings from the new tax bill against debts, rather than increase spending. Economic spokespersons (i.e.Kudlow, Mnuchin, etc.etc.) continue to predict that the tax bill will stimulate faster GDP growth and much higher tax revenues, in time reducing the federal debt burden. Time will tell, obviously, but the jury is still out, and the signs are not convincing so far.


The US Federal Reserve continues to “normalize” the bloated balance sheet, but is running behind schedule. Recall that the plan called for $10B/month reduction in Q4, $20B/month in Q1, $30B/month in Q2, $40B in Q3, $50B in Q4’18, and that’s as far as described. The plan fell behind schedule by $23B in Q4, fell another $4-10B behind plan in Q1 (depending on whether you use 3/28 or 4/4), so was $27-33B behind schedule as of 3/31, a significant percentage against the $90B that was scheduled. In the first week of Q2, ending 4/11, the Fed’s balance sheet was essentially unchanged. The rubber meets the road now with a reduction of  $30B monthly. Since the Fed’s activities affect short term interest rates rather than longer term, it could be instructive to look at what the bellwether ten year treasury note has done over the last six months. During Q4, as the Fed got $23B behind their $30B objective, the ten year traded between at 2.35% to 2.45%. The Fed stepped up their selling in Q1, meeting their quarterly objective (though not catching  up) and the ten year moved dramatically, from just above 2.40% to as high as 2.95% and closed Q1 at about 2.75%. So far in Q2, the ten year has traded back up to 2.85% as this is written.  The more volatile two year treasury, which bottomed around 1.3% in midSeptember, has moved in a straight line to 1.9% at 12/31, 2.27% at 3/31, and 2.38% today. These are very dramatic moves, and the pace of “normalization” continues to quicken. Time will tell what affect $30B/month of Fed “runoff” has on interest rates, but the possibility exists that rates could spike higher, especially if the Fed tries to catch up with the shortfall to date of about $30B. If interest rates spike upward in Q2, as they did in Q1, it could  be unsettling to capital markets that are already showing volatility that we have not seen in years


Gold has been “consolidating”, around $1350/oz., up 3-4% for the year, fairly firm day to day, seemingly threatening to break out on the upside. No doubt the increasing visibility of federal debt accelerating to over $1 trillion annually as far as the eye can see, is contributing to the interest, as well as the possibility of increased inflation. Since Central Banks, worldwide, are trying to stimulate inflation, it stands to reason that they would be continuing to purchase gold bullion, which they are. Market technicians, chartists, point to $1,375 and $1,400 per ounce as “breakout” levels on the upside. After a 4-5 year consolidation, some observers think gold bullion could make a move to new all time highs, above $2,000/oz. From our standpoint, the gold miners seem to be the most advantageous way to participate, since the gold mining stocks are even more depressed in price than the metal itself. The last time gold bullion was around $1,350/oz., in mid 2016, the gold mining stocks were about 35% higher. If the price of gold breaks out on the upside, the gold mining stocks should do even better.

Roger Lipton


SEMI-MONTHLY FISCAL/MONETARY UPDATE – EVERYTHING’S UNDER CONTROL…SURE! – Believe that and I’ve got a bridge to sell you 🙂

Some economists, stock market strategists, and investment advisors have referred to the current economic situation is “goldilocks”, GDP growing modestly (sub 2%) but about to firm up, inflation under control (also sub 2%), the Fed continuing to “normalize” rates with the latest 25 basis point increase and another scheduled for December. Everything is even promising enough that the Fed is talking about beginning to pare down their $4 trillion balance sheet at the end of this year. (I can’t resist interjecting here that balance sheet reduction remains to be seen and the end of ’17 is a long way off.)

However…..while the financial world is relatively quiet, for the moment, the underlying problems have not gone away. The following chart provides us a simple picture of what Central Banks have “wrought” over the last 8-9 years.

While the US Fed has taken a break from money printing, their slack has been taken up by the ECB, BOJ, BofE, and SNB. Lots of economists have reflected that the appropriate money printing in ’08 saved the world from a financial collapse, and we can’t disprove that, but you can see that  $7-8 trillion has been printed subsequent to early ’09, and the curve now is steep as ever. Wouldn’t it be nice if all we had to do to create prosperity was rely on the Central Banks to provide the cash. We could all stop working, collect, and spend the cash. Unfortunately, goods and services have to be produced at competitive prices if an economy is to flourish. You would think that Central Bankers would understand this, but surgeons “cut” and Central Bankers “print”.  You would think that $11 trillion of new money since 2006 would have stimulated the US (and worldwide) economy rather substantially. That’s an incomprehensible amount of money. (Lebron James makes $40,000,000 per year. It would take him TWO HUNDRED SEVENTY FIVE THOUSAND YEARS to earn $11 trillion.) That’s true, but bringing the discussion back to earth, the result in this case is that US GDP growth has averaged 1.3% from 2007 until 2016, still sub 2% since ’10. It happens that the US economy grew at 1.3% during the US depression of 1930-1939, so I propose that what we have experienced, and are about to experience,  is not “goldilocks”. The Central Banks around the world have been essentially “pushing on a string”.

The same problems exist today that were in place ten years ago, but the numbers are a lot larger. We continue to believe that there is no graceful way to “normalize” the situation. We don’t blame Janet Yellen. She didn’t create this mess. It was the politicians, of both parties, over the last thirty to forty years. We believe that there will be no more than one more rate hike this year (right now an apparent 38% probability for December) but interest rates will still be very low historically, and “real” interest rates will still be negligible, if not negative. As far as reducing the Fed balance sheet, Janet Yellen discussed a modest pace of reduction. If this reduction starts at all, it will be a form of “tightening” that, along with the modest rate increases,  our still fragile economy will not easily withstand. We believe that the current series of interest rate increases, as well as the initiation of the Fed balance sheet reduction, will just be precursors to the next round of stimulus.

We believe that the price of gold, marking time lately, will resume its long term rise, as the next round of stimulus comes into view. This is, after all, what Central Bankers do.




The capital markets were once again relatively quiet, as was the price of gold bullion (down 0.1%) for the month). The gold mining stocks were mixed on the month, with the larger miners (represented by GDX, up 1.8% and the smaller miners, represented by GDXJ down 2.5%. It appears that the re-balancing of GDXJ, which we described last month, and has affected the pricing of some of the small to medium sized miners has largely run its course, so the miners should begin to act a bit more rationally.  Our gold related holdings have not changed, but we have found some restaurant/retail companies that we believe offer opportunity to “augment” our returns.

The most significant fiscal/monetary developments over the last month are as follows:

The federal budget debate continues, and is heating up in terms of resistance to the suggested spending cuts. Also, the debt ceiling has to be raised quickly because tax receipts are coming in more slowly than anticipated, and the government is already running on “temporary” spending measures.

While there is evidence of improvement in the economy, in particular the employment numbers (all of which are estimates, normally revised several times) there continues to be many signals that the recovery is anemic. Even the Fed said “the growth is modest………Consumer spending softened, with many districts reporting little or no change in non-auto retail sales”.

Related to the Fed’s observations, the most recent consumer surveys show a clearly weakening trend, which we postulate reflects frustration over POTUS’ difficulty in delivering on campaign promises.

Clearly, the unproductive “noise”, largely provided by our inexperienced and “unorthodox” Commander in Chief is undermining  policy initiatives. Policy paralysis, in large measure,  becomes the result, with executive orders implementing a more limited agenda. Unfortunately, time wasted is exacerbating, not helping, the fiscal/monetary distortions that are negatively affecting the worldwide economy.

Consumer debt is at new highs. The housing “bubble” of 2007 has been replaced by new highs in sub-prime auto debt, student loans, and “shadow bank” (internet) lending. We don’t believe interest rates will rise by much. Higher rates would choke off the already tepid consumer spending and wreck government budget balancing attempts.

We continue to feel that the 1.5-2.0% GDP growth (the weakest “recovery” after recession in at least 50 years) that has been a feature of our economy for almost ten years now is more likely to slow than accelerate. The sluggish growth has been in spite of close to zero percent interest rates and trillions of newly created dollars. It stands to reason that even modestly higher interest rates and an attempt to reduce the size of the Fed’s balance sheet will be a deterrent, not a stimulant, to faster growth. Further, we believe that the modest “tightening” direction will prove to be just a setup to the next phase of stimulation, as the economy stalls and politicians scream “do something”. At some point as that process plays out, we expect gold related investments to be the “cream rising to the top” of asset allocation.