The TBAC cut the amount of expected Treasury supply for the balance of the fourth quarter in recognition of the improvement in revenues that has already occurred and is likely to continue for the balance of the quarter. We began to note this improvement based on our daily tracking of Federal tax receipts soon after the Fed instituted QL1.5. Trickle down works! Make the Wall Street bankers even richer and their spending will trickle down to the greeters at Walmart. Unfortunately the side effects of QE2 are likely to be fatal for the economy.
Meanwhile, now that Ben has tripled the amount of QE to over $100 billion a month from $32 billion this month under QL1.5, I would expect additional economic strengthening and even higher tax receipts. It certainly won’t be triple the recent rate of improvement because the rapid inflation of the cost side of the profit equation will exert an increasing drag on profits and retard any impetus for new hiring. But for the next month or two we should see further strength in government tax revenues, probably resulting in even greater reductions of Treasury supply than the TBAC forecast. That will exacerbate the impact of QE2 on the stock, bond, and commodity markets. If you thought this week was bullish, wait until they actually start pumping after next Wednesday, the day the Fed announces its purchase target amount for the next month.
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