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Posted in Liquidity Trader, Professional Edition

The Point of No Returns? Professional Edition

Last week the Fed bought over $10 billion of the $32 billion in Treasury purchases it is aiming for this month. FCBs were also net buyers, but were selling GSE paper. Their reductions in GSE holdings have now reached $100 billion since mid August. This is bad news, and has gone unreported in the mainstream media. What’s the issue? Why now, suddenly? This is now direct Agency paper, supposedly backed by the US Government.

There are hints that banks are under pressure, as they have reduced their buying of Treasuries. My sense is that Foreclosuregate will become the biggest financial scandal in American history, if not the biggest scandal, period, and that this will put increasing pressure on the financial system and the markets over time.

Last week should have been a very good week in the markets, with strong Fed buying, FCB support, and light Treasury supply. Yet the markets could only mark time. The pressure on banks and other investor classes is apparently building, and the central banks may be hard pressed to overcome that. The pressure on the Fed to enact a massive program of more Treasury purchases is immense. It seems almost certain that they will do something. But I am less certain that it will gain traction in moving the markets. This is increasingly becoming a quicksand pit. The Fed’s actions may not be able to pull the markets upward any more.

I have always felt strongly that it is folly to fight the Fed. My data backs that up. But the data also shows that the Fed’s pumping of cash into Primary Dealer trading accounts has been achieving diminishing returns. I am now wondering if we have reached the point of no return.

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