The tidal wave of Treasury supply overwhelmed the stock market this week. It should never come as a surprise when this happens because the Treasury calendar isn’t exactly a secret. We are well aware that whenever the Treasury starts pounding the market with $50 billion a week or more in new paper, something must get sold to make room. Sometimes it’s other Treasuries, sometimes its corporates, and most of the time it’s stocks and commodity futures.
There’s no way around it. The Primary Dealers must raise cash to be able to absorb the new paper. The Primary Dealers are reeling and the Fed is terrified that a failed Treasury auction is coming soon to a theater near you. It is in talks to add 4 dealers to the list, which shrank to 16 dealers with the absorption of Mohel Lynch (Oy, do we got tips for you!) into Banc of America Securities.
Apparently, the geni-asses in Wishington haven’t figured this out. For every billion they raise in stimulus and bailout bills, billions of paper wealth will be wiped out, buying power will go down, assets will be written down, and the vicious cycle will feed on itself in an orgy of cannibalistic self destruction until even the skeletal remains of the system are ground into powder.
The stimulus and bailout bills are not even a zero sum game. They become part of a negative feedback loop whose velocity only increases with each dollar added to the programs. I wouldn’t want to bet on where this will all stop, but zero is as good a guess as any. Complete collapse.
We’ll get more gory details from the Fed in tonight’s H41, and I will post a complete update tomorrow. For now, we’ll take a look at how the Treasury auctions went this week, with particular attention to the size of the indirect bid, and get an idea of what to expect next week. Meanwhile, CP outstanding is available for this week and it’s bad, down across the board. Any time CP goes down, stocks go with it. Or is it the other way around? I’ve also updated the mortgage applications chart. The word that comes to mind is “catastrophic.”
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