On Tuesday, market analyst and founder/CEO of investment strategy firm The Macro Compass predicted that the fastest decline in USD and EUR bank reserves in ten years would occur in 2023. The Macro Compass CEO believes that the follow-up to 2022’s bear market will be the extremely poor performance of risk assets and tightening USD and Euro bank reserves in 2023, citing a graph sourced from analysis on his website.
In 2023, USD and EUR financial interbank money (bank reserves) are set to decline at the fastest pace in 10 years.
Risk assets have never performed well when the financial printing press stopped working.
From BRRR to RRRB. pic.twitter.com/vPiQ5Smiso
— Alf (@MacroAlf) January 3, 2023
The past year has seen worrying record-high inflation rates across the US and Europe. In the US, inflation follows policies and actions taken to ease the effects of the financial crisis of 2008 and, more recently, COVID-19. In Europe, the fallout from Brexit as well as COVID-19 and the European Central Bank’s overexpanded balance sheet have been major stimulatory factors for the high inflation. Recent efforts have seen the US Federal Reserve and the European Central Bank (ECB) take balance sheet reduction actions to combat this inflation.
Market analyst, Alfonso Peccatiello, known colloquially as Alf, founder and CEO of investment strategy firm, The Macro Compass, has blamed these inflation combative actions for his predicted decline of interbank money reserves. He blames, in particular, the Quantitative Tightening (QT) policies in the US and Europe, as well as the European Central Bank’s massive Targeted Longer-Term Refinancing Operations (TLTRO) repayments, for the decline.
The US Federal Reserve’s quantitative tightening comes as a recent reversal to quantitative easing, which helped lessen the effects of the 2008 financial crisis but inadvertently swelled the Federal Reserve System balance sheet. In Europe, the quantitative tightening is in response to the historically large 8.5 trillion euros on the European Central Bank’s balance sheet. The ECB’s TLTRO, which loaned banks in Europe 2.1 trillion euros between 2014 and 2017, was the European Central Bank’s initiative to encourage economic activity and lending in the face of euro deflation. Recently, the massive early repayment initiative saw the Central Bank collect $796 billion by December 2022.
Alfonso Peccatiello’s tweet argues that these reversals and repayments are leading to a frightening rate of depletion of bank reserves in 2023, and only a strong decrease in Reverse Repurchase (RRP or Reverse Repo), which central banks use to remove from the money supply, may partially offset the trend.
Not all responses agreed with Peccatiello, however, with some other market watchers claiming that declining bank reserves may not be as harmful as Peccatiello makes out, due to the lack of a real effect of bank reserves on liquidity.
