Nomi Prins: Repo Injections Are QE by Another Name
Albert Lu: I’m joined today by Nomi Prins, the author of Collusion and former managing director of Goldman Sachs. Nomi thanks for joining me again. How are you?
Nomi Prins: I’m doing great. Thank you so much for having me on.
AL: It’s great to have you on again and, you know, I really enjoyed your recent article “The Soaring Twenties” to start the new year. I think it was a great way to kick off this new year—Ten Economic and Market Trends to Consider for 2020. So, let’s start with just an overview. What do you think the overall backdrop for 2020 is going to be? We had a tremendous 2019. Is it going to be more of that?
NP: I actually think of myself, generally, as a fairly skeptical person, but I also like to look at the data. And what we saw towards the end of last year and, actually, throughout most of last year, was the Fed retreating from its hawkish stance in 2018 and moving very quickly to a more accommodative stance, with three rate cuts. But it wasn’t just the Fed doing rate cuts. The Fed also opened up its balance sheet a little bit more through a little bit more money. Actually, when I say a little bit more, half-a-trillion dollars’ worth more money into the markets through repo operations—meaning short-term loans to the banking community and to the communities they service.
From a corporate standpoint, all of that helps, not just [to] lift the markets, because the extra money was coming in—which we’ve seen in some of the years in the past decade as well—but also because of the confidence that the markets then could have that the Fed would be there. That, if the Fed needed to, it would find ways. They might not be rate cuts; they might not be conventional QE; but they’d be this sort of back and backhanded QE through the repo markets. And not just the Fed, but central banks around the world—and not just the main central banks, but a lot of the emerging market central banks and the sort of medium to smaller form of economies throughout the world—switch to their own accommodative states for their own reasons. And that’s something relatively new.
So, we have almost a three-to-one number of central banks and emerging markets find some form of either rate reduction or other accommodative way to alter their money cost in their own countries throughout the world. All of that culminates into a generally bullish backdrop, I think, going forward into this year.
AL: You know, I couldn’t agree with you more. That reversal was key last year and that, you know, strong double-digit return. Powell talked a tough game but when it came down to it he really gave in.
What do you think, if anything, could make him retreat, yet again, and reverse direction in 2020?
NP: In terms of becoming hawkish again, I think it would take an amount of inflation in real prices that I don’t think we’re going to see. And even if we see it, I think it’s going to be difficult for him to act on it, because there’s a lot of chatter within the Fed, and there has been, actually, [in the] last few years, about whether their inflation targets even make sense and whether or not the 2 percent level is the right level to even start to worry about. So before we would even get to a 2 percent level, which we don’t have, in terms of real price appreciation, but even if we do get there, I think would be more talks within the Fed as to whether that was meaningful.
And so I think that’s going to keep the Fed pretty much in limbo. And also again, we have US elections coming up towards the end of the year. There’s going to be a lot of focus on that, and plus other emerging markets and other types of economies have their central banks also on a neutral-to-accommodative stance. So I think they would have to overcome a lot of data to get back to a particularly hawkish stance, or even to raise rates this year.
AL: I find myself in this strange position not of just agreeing with you—we agree quite often—but also coming around and, sort of, seeing it the way that the consensus is looking at it—that is, all the things are lined up for another good year. I say that reluctantly, because of the underlying problems we have in the economy. But I really think you’re right and they’ve already sort of left the door open, or cracked the door open, to sort of reconsidering that 2 percent threshold by saying they want a symmetric 2 percent, which means they can overshoot. So, you know, I totally agree with you in that. Now, another point you made was about emerging markets, and this also came up in your article. Emerging markets and gold will beat the dollar.
So, you seem to think that our easing is going to beat their easing. Is that a correct way of looking at it?
NP: There’s a couple of different things going on. I think our easing will actually beat their easing, in terms of the fact that we’re not, actually, going to be doing anything. But, we are adding money into the markets. They will potentially be reducing their rates more, but I think [that] net-net that additive inflow into the markets of money from the Fed will be like an ease, right? So, not to get complicated on that, emerging markets have less tools because they have less balance sheet capabilities to take on the sort of debt, or other things, in their own country. So it’ll be two different kinds of easing. So yes, we will be, because we’re opening the Fed’s balance sheet and it’s growing easing by more than emerging markets will. But emerging markets will be easing and that’s going to stimulate their markets and potentially their economies.
Although, I generally don’t believe there’s a real relationship between economic growth and market growth, but it will provide a perception throughout the world of market growth, which will bring in capital in emerging market countries. So it’s sort of like there’s two different reasons but, together, it means the dollar should weaken relative to emerging market currencies. Emerging markets, in general, on a stock basis, should outperform the US, and gold should outperform, potentially, both.
AL: That’s interesting. So, I was going to ask you about that. Gold, I mean. The dollar has been strong for quite some time now. It’s reasonable to expect that that would turn around.
But you think gold relative to other currencies would be a good bet this year?
NP: Yes, because of that implicit, and explicit, easing that will be happening with respect to all these other currencies. The Fed opened the door for these other emerging markets to ease their monetary policies. And as such, relative to those currencies, gold will also be able to outperform as they outpe
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