WSJ: The Other Doomsday Scenario

WSJ headline: The Other Doomsday Scenario Looming Over Markets

Sub-headline: A U.K. fund manager says the big worry isn’t inflation, it’s the Fed reversing quantitative easing

Think inflation is the biggest threat to your investments? Perhaps not: One fund manager that successfully navigated the past two major stock crashes is bracing for an awful end to the year because it fears the Federal Reserve’s quiet exit from bonds.

London-based Ruffer LLP is concerned that the accelerating runoff of the Fed’s Treasury holdings will suck liquidity out of the markets—just as rising rates and falling stock and bond prices increase the need for cash to smooth the drop.

“It puts a pincer on equities and bonds at the same time,” said Alex Lennard, investment director at Ruffer. It could be “the sort of event you tell the grandchildren about.”



The Fed doubles the pace of its bond runoff this month, aiming to reduce its Treasury holdings by $60 billion and its mortgage-backed securities by $35 billion monthly. Those concerned about the impact include hedge fund giant Bridgewater, which thinks markets will fall into a “liquidity hole” as a result.

Bank of America equity strategist Savita Subramanian says QT alone could lead to a 7% stock price drop as the boost from QE is reversed. Steven Major, global head of fixed-income research at HSBC, thinks the interaction of QT and the plumbing of the financial system is too complex for anyone to predict properly. “The truth of it is that no one really knows,” he says, including the Fed.

The last time QT was tried, under Fed Chairwoman Janet Yellen, now Treasury secretary, it went perfectly—until it suddenly didn’t. Ms. Yellen said the predictable pace of balance-sheet reduction starting in 2017 should be “like watching paint dry,” and for two years it was. Then in 2019 the overnight lending market—crucial to the financial system and reliant on plentiful reserves—seized up, forcing an emergency rescue to prevent a full-on credit crunch.