More

Wealth Destruction Ahead

Part One
Macro Watch
Fourth Quarter 2022
http://www.richardduncaneconomics.com
More Wealth Destruction Ahead
• The Fed is tightening Monetary Policy much faster and more
aggressively now than during the previous tightening cycle that ran
from January 2014 to August 2019.
• While asset prices have fallen this year, they haven’t fallen as much as
would have been expected given the Fed’s aggressive stance and
considering that asset prices are still stretched relative to past norms.
• This suggests that much more wealth destruction is likely to occur
before the current tightening cycle ends.
In This Video
• To show that the Fed is acting much more forcefully to tighten
Monetary Policy this time, this video will compare:
1. The speed at which the Fed Tapered Quantitative Easing in both
cycles;
2. How rapidly and how far the Fed hiked the Federal Funds Rate in
the previous cycle relative to this one, and
3. How rapidly and the extent to which the Fed destroyed dollars
through Quantitative Tightening in both cycles.
1. Tapering QE: Last Time vs. This Time
Taper: Last Time
• In the previous cycle, the Fed began tapering QE3 in January 2014.
• Over 11 months, the Fed reduced the amount of money it was
creating by $10 billion a month following every FOMC meeting, from
$85 billion a month in December 2013 to $0 in November 2014.
THE TAPER SCHEDULE: 2014
Round One
US$ billions
QE per month
Pre-Taper 85
January 75 The Fed tapered QE by
February 65 $10 billion per month
March 65 following every FOMC
April 55 meeting in 2014.
May 45
June 45
July 35
August 25
September 25
October 15
November 0
December 0
Taper: This Time
• This time, the Fed tapered much faster.
• Tapering began in November 2021 at $15 billion a month.
• That increased to $30 billion a month in January…
• … bringing QE to an end in March.
• So, this time, the Fed tapered QE over 5 months, from $120 billion a
month in October 2021 to $0 in March 2022.
Taper Schedule: 2021 and 2022
Round Two
US$ Billions per month

Pre-taper 120
November 2021 105 $15 billion
December 2021 90 $15 billion
January 2022 60 $30 billion
February 2022 30 $30 billion
March 2022 0 $30 billion
2. Rate Hikes: Last Time vs. This Time
Rate Hikes: Last Time
• In the previous tightening cycle, the first Rate Hike didn’t occur until
December 2015, 14 months after QE ended.
• The second Rate Hike didn’t happen until one year after that, in
December 2016.
• Altogether, there were nine Rate Hikes of 25-basis points each, taking
the Federal Funds Rate up by 225-basis points to a peak range
between 2.25% to 2.5%.
• The last Rate Hike in that cycle was in December 2018.
• So, the Fed hiked rates (slowly) for three years from December 2015
to December 2018.
 Source: St Louis Fed
peaked at 2.4% in December 2018.

2019-01-01
The Effective Federal Funds Rate

2.40

2018-01-01
2017-01-01
2016-01-01
2015-01-01
Nine Rate Hikes.
Effective Federal Funds Rate

2014-01-01
2013-01-01
%, 2000 to July 2019

2012-01-01
2011-01-01
2010-01-01
2009-01-01
2008-01-01
2007-01-01
2006-01-01
2005-01-01
2004-01-01
2003-01-01
2002-01-01
2001-01-01
2000-01-01
7.00

6.00

5.00

4.00

3.00

2.00

1.00

0.00
Rate Hikes: This Time
• In the current cycle, Rate Hikes began much sooner, the same month that
QE ended in March 2022 (vs. 14 month after QE ended in the previous
cycle).
• A 25-basis point hike in March was followed by a 50-basis point hike in
June, and four more Rate Hikes of 75-basis points at each FOMC since then.
• Thus far, the Fed has increased the Effective Federal Funds Rate by 375-
basis points to 3.83%.
• That’s 143-basis points above the peak in the previous cycle, i.e., 2.4%.
• And the Fed’s not finished. It’s expected to continue hiking rates until, at
least, the second quarter of next year.
 3.83

Source: St Louis Fed

2022-09-01
2022-01-01
2021-05-01
2020-09-01
2020-01-01
2.4

2019-05-01
higher than at the peak
The Federal Funds Rate

2018-09-01
is now 143 basis points

2018-01-01
of the previous cycle
(2.4% in early 2019).

2017-05-01
2016-09-01
Effective Federal Funds Rate

2016-01-01
2015-05-01
%, 2000 to November 2022

2014-09-01
2014-01-01
2013-05-01
2012-09-01
2012-01-01
2011-05-01
2010-09-01
2010-01-01
2009-05-01
2008-09-01
2008-01-01
2007-05-01
2006-09-01
2006-01-01
2005-05-01
2004-09-01
2004-01-01
2003-05-01
2002-09-01
2002-01-01
2001-05-01
2000-09-01
2000-01-01
7.00

6.00

5.00

4.00

3.00

2.00

1.00

0.00
3. QT: Last Time vs. This Time
QT: Last Time
• In the previous cycle, Quantitative Tightening didn’t begin until
October 2017, nearly two years after the first Rate Hike (in December
2015).
• QT was introduced gradually.
The Fed's Schedule For Quantitative Tightening: Round One
QT Last Time
Reduction in Reduction in
Month Treasuries Mortgage backed Total Reduction
Oct-17 6 4 10
The Fed began QT at a
Nov-17 6 4 10
Dec-17 6 4 10 pace of $10 billion per
Jan-18 12 8 20 month in Q3 2017.
Feb-18 12 8 20 It increased that pace by
Mar-18 12 8 20 $10 billion per month
Apr-18 18 12 30 each quarter, until QT
May-18 18 12 30
reached $50 billion per
Jun-18 18 12 30
Jul-18 24 16 40 month in Q3 2018.
Aug-18 24 16 40
Sep-18 24 16 40 QT remained at $50 billion
Oct-18 30 20 50 per month until it was
Nov-18 30 20 50 reduced to $35 billion per
Dec-18 30 20 50
month in May 2019.
Jan-19 30 20 50
Feb-19 30 20 50
Mar-19 30 20 50 The Fed stopped destroying
Apr-19 30 20 50 dollars through QT in
May-19 15 20 35 August 2019.
Jun-19 15 20 35
Jul-19 15 20 35
Aug-19 0 0 0
Total 435 320 755
 The Fed's Total Assets
2002 to October 9, 2019 US$ Millions
5,000,000

4,500,000 During the first three rounds of

4,000,000
Quantitative Easing
between late 2008 and 2014, It then destroyed
3,500,000 the Fed created approx. $3.6 trillion. about $700 billion
3,000,000 through QT
between Oct. 2017
2,500,000
and August 2019,
2,000,000 when QT ended.
1,500,000
That reduced the
Fed’s Total Assets
1,000,000
by about 16% from
500,000 the peak.
0
2002-12-18

2003-12-17

2004-12-15

2005-12-14

2006-12-13

2007-12-12

2008-12-10

2009-12-09

2010-12-08

2011-12-07

2012-12-05

2013-12-04

2014-12-03

2015-12-02

2016-11-30

2017-11-29

2018-11-28
Source: The Federal Reserve
QT: This Time
• This time, the Fed is carrying out QT much more aggressively.
• QT began in June this year, only three months after the first Rate Hike
(vs. two years after the first Rate Hike last time).
• It started off at $47.5 billion a month vs. $10 billion a month in the
previous cycle.
• After three months, it jumped to $95 billion a month (compared with
only $20 billion a month three months after QT began last time and
compared with a peak of $50 billion per month last time).
The Fed's Schedule For Quantitative Tightening
Round Two: 2022
US$ Billions per month QT This Time
Reduction in Reduction in
Month Treasuries Mortgage backed Total Reduction
Jun-22 30 17.5 47.5 Quantitative Tightening:
Jul-22
Aug-22
30
30
17.5
17.5
47.5
47.5
$47.5 billion per month during
Sep-22 60 35 95 June, July and August 2022.
Oct-22 60 35 95
Nov-22 60 35 95 $95 billion per month after
Dec-22 60 35 95
Jan-23 60 35 95 that.
Feb-23 60 35 95
Mar-23 60 35 95
Apr-23 60 35 95 No end date has been
May-23 60 35 95
Jun-23 60 35 95 specified.
Jul-23 60 35 95
Aug-23 60 35 95
Sep-23
Oct-23
60
60
35
35
95
95
If QT continues at $95 billion
Nov-23 60 35 95 per month until the end of
Dec-23 60 35 95
Jan-24 60 35 95 2024, $2.8 trillion will be
Feb-24 60 35 95
Mar-24 60 35 95 destroyed, reducing the
Apr-24
May-24
60
60
35
35
95
95
Fed’s Total Assets
Jun-24 60 35 95 by more than 30% from
Jul-24 60 35 95
Aug-24 60 35 95 the peak.
Sep-24 60 35 95
Oct-24 60 35 95
Nov-24 60 35 95
Dec-24 60 35 95

Total 1,770 1,033 2,803

 The Fed's Total Assets
US$ Millions, 2002 to November 23, 2022
10,000,000

9,000,000
The Fed created $5.2 trillion between
8,000,000
the time QE4 started in September 2019
7,000,000 and when QE ended in March 2022.
6,000,000
Since QT resumed in June, the Fed
5,000,000
has destroyed $340 billion.
4,000,000

3,000,000

2,000,000

1,000,000

0
2002-12-18

2003-12-18

2004-12-18

2005-12-18

2006-12-18

2007-12-18

2008-12-18

2009-12-18

2010-12-18

2011-12-18

2012-12-18

2013-12-18

2014-12-18

2015-12-18

2016-12-18

2017-12-18

2018-12-18

2019-12-18

2020-12-18

2021-12-18
Source: Federal Reserve
To Recap
• The Fed has tightened much faster this time than in the previous cycle.
• Tapering was done in five months instead of 11.
• The Fed has hiked the Federal Funds Rate by 375-basis points to 3.83%
in just 11 months and plans to keep hiking; whereas last time, it hiked
by only 225-basis points over 36 months to a peak rate of just 2.4%.
• QT is also happening much faster this time. QT started in June. Since
then, it’s destroyed $340 billion over just five months. By February
next year, it will have destroyed more than $700 billion, similar to the
amount the Fed destroyed in total last time over 22 months.
Market Reaction: Last Time vs. This Time
Market Reaction Last time, stocks rose all through
the tightening cycle up until a few
S&P 500 Index
Last Time January 2012 to February 19, 2020
months after QT began. They then became
volatile, with a number of selloffs that
3,500 eventually forced the Fed to stop tightening.

Repo Crisis:
QT Began
3,000 1st Rate Cut &
10/17
QE 4 Begins
Tapering Sept. 2019
2,500 QE 3 began
1/14 May 2019
Selloff
2,000 Oct. to Dec.
2018 Selloff

QE 3 Ended First Second The last rate hike

1,500
10/14 Rate Rate was in Dec. 2018.
Hike Hike QT ended July 2019.
12/15 12/16
1,000
2012-01-17

2013-01-17

2014-01-17

2015-01-17

2016-01-17

2017-01-17

2018-01-17

2019-01-17

2020-01-17
Source: Data from the St Louis Fed
Market Reaction S&P 500
This Time January 2021 to mid-November 2022 QT begins
at $47.5 bn
5,000 S&P peaks
Taper begins Jan. 2022 QE ends per month
4,800 Nov. 2021 March in June QT increased
4,600 to $95 bn
per month
4,400 in September
4,200

4,000
Rate Hikes:
3,800 March: 25 bp
3,600
May: 50 bp
June: 75 bp
3,400 July: 75 bp
3,200 Sept: 75 bp
Nov. 75 bp
3,000
2021-01-04

2021-02-04

2021-03-04

2021-04-04

2021-05-04

2021-06-04

2021-07-04

2021-08-04

2021-09-04

2021-10-04

2021-11-04

2021-12-04

2022-01-04

2022-02-04

2022-03-04

2022-04-04

2022-05-04

2022-06-04

2022-07-04

2022-08-04

2022-09-04

2022-10-04

2022-11-04
Source: Data from St Louis Fed
 S&P 500 Index
January 2012 to November 30, 2022
5,000 4,797
The S&P peaked in January 2022 and then With the index
4,500 lost 25% by October. After a recent now down
rebound, it’s now down only 15% from only 15%
4,000
the January peak. from the
3,500 peak, further
The 25% drop was not much larger downside
3,000 than the 20% selloff in the fourth
appears likely.
quarter of 2018.
2,500
Covid Crash
2,000 March 2022

1,500

1,000
2012-01-17

2013-01-17

2014-01-17

2015-01-17

2016-01-17

2017-01-17

2018-01-17

2019-01-17

2020-01-17

2021-01-17

2022-01-17
Source: Data from St Louis Fed
In The Next Video
• So, what we’ve seen above is that the Fed has tightened Monetary
Policy much more aggressively in the current tightening cycle than
during the previous one.
• But, despite this, the S&P 500 index is currently down only 15% from
its January peak.
• The next video will discuss why Monetary Policy is likely to tighten
significantly more during the first half of next year, and perhaps
beyond the first half.
• It will also show why investors should expect substantially more
wealth to be destroyed before this tightening cycles ends.