Menu Close

The Last Ponzi Game

This is an extended excerpt from the Wall Street Examiner Professional Edition Treasury Report, a companion report to the Fed Report to be posted later this weekend. Subscriber link to the complete report is at the end of the excerpt.

A heavy Treasury auction schedule with a big settlement on Thursday was enough to contribute to keeping stock prices (SPX) in check this week, but not to knock down Treasuries. Demand for US Government paper is so great it simply engulfs even heavier than expected levels of new supply. The massive capital flight out of Europe is now confined to the only game in town, the US Treasury market, the last great Ponzi game still operating.

This won’t end well, but it won’t end until it ends, and the technical signals suggest that it won’t happen in the short run. Yields appear to be still headed lower, and that’s bad news for stocks given the recent correlation between lower yields and lower stock prices. As I’ve illustrated in the accompanying Fed Reports, there isn’t enough liquidity to power both markets toward higher prices simultaneously. It’s either one or the other. Eventually I expect a shortage of liquidity to negatively impact both markets, but we’re not there yet.

Withholding tax collections remain weak and the government continues to need to raise substantially  more cash than the TBAC had estimated it would need. That means that the economy is significantly weaker than government forecasters had foreseen just 6 weeks ago when these estimates were issued. The clues were available in the data at that time and I correctly guessed that the auctions would begin to balloon in size. Normally this would be problematic for the markets, but not in the current environment.

At the same time, foreign central bank purchases of Treasures have fallen off a cliff. Again, that would normally be extremely problematic. But it just doesn’t matter because panicked institutions fleeing Europe are like the Coneheads consuming mass quantities of all available US Treasury paper. In fact, the demand is overwhelming the massive supply. Tidal waves of panic capital flight have been flooding into the Treasury market in never before seen amounts, both in terms of the indirect bid and the bid by Primary Dealers, of whom 1/3 are European banks.

The panic buying has been concentrated in the 4 week bill, but there was also a jump in the bid for longer term paper, particularly the 10 year note (TNX) this week. The 4 week bills are where the real panic is. This is short term cash looking for a safe place to park. At the same time the increase in nervous buying is pushing out on the curve enough to continue to push yields down for a while longer. It’s also pushing the dollar higher. The dollar (DXY) faces a critical test at 82.

Get the full sized chart with analysis in the Professional Edition Click here to download complete report in pdf format (Professional Edition Subscribers) including 19 pages of charts and clear, cutting edge analysis that you can use to gain an edge in the market. Try the Professional Edition risk free for thirty days. If, within that time, you don’t find the information useful, I will give you a full refund. It’s that simple. 30 day risk free trial for new subscribers. Click here for more information.

3 month subscription to the Wall Street Examiner Professional Edition, Money-Liquidity-Real Estate package, renewing automatically unless canceled. Price: $89.00

By clicking this button, I agree to the Wall Street Examiner’s Terms of Use.

Stay up to date with the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, along with regular updates of the US housing market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Try it risk free for 30 days. Don’t miss another day. Get the research and analysis you need to understand these critical forces. Be prepared. Stay ahead of the herd. Click this link and begin your risk free trial NOW!

Enter your email address in the form to receive email notification when Professional Edition reports are posted.

Join the conversation and have a little fun at If you are a new visitor to the Stool, please register and join in! To post your observations and charts, and snide, but good-natured, comments, click here to register. Be sure to respond to the confirmation email which is sent instantly. If not in your inbox, check your spam filter.

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Follow by Email

Discover more from The Wall Street Examiner

Subscribe now to keep reading and get access to the full archive.

Continue reading