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The Real Reason The Fed Must Taper? It Has No Choice – Professional Edition

The composite liquidity indicator leveled last week. The Fed’s usual mid month round of MBS purchase settlements June 13-20 have ended and the July surge does not begin until July 15. Fed MBS purchase settlements have added cash to dealer accounts and boosted the composite liquidity indicator sharply following stalls over the previous few weeks. This stop start pattern is likely to continue in the months ahead as liquidity growth is no longer a one way street. Other forces of liquidation and deleveraging are creating crosscurrents in liquidity flows that are likely to continue indefinitely.

The Fed however, faces a dilemma. It will need to cut back on QE as Treasury supply shrinks. Surging tax collections and huge dividend payments from the GSEs are dramatically cutting the government’s deficit and therefore reducing Treasury supply (see Treasury update). With less Treasury supply to absorb the Fed’s newly printed money each month, bubbles (asset inflation) in stock prices and especially housing are likely to be exacerbated, and consumer price inflation might even return with a vengeance.

This report illustrates the key indicators that have correctly pointed the way thus far throughout the bull market, and should continue to do so.

Table of Contents

Macroliquidity Component Indicators
Fed Cash to Primary Dealers
Foreign central bank purchases
US commercial bank deposit flows
Bank Treasury purchases
Bank Trading Accounts
Bank reserve deposits
Treasury Auctions, Federal Revenues and Supply Impact, and Treasury Yields
Open Market Operations (OMO) and Monetary Policy Actions
Primary Dealers
Other Policy Tools and Total Fed Credit
Other Fed Balance Sheet Items – Liabilities
Bank Loans Outstanding
Foreign Central Banks
The Dollar
Commercial Paper
Fannie and Freddie
Money Supply and Fund Flows
Bank Holdings of Treasuries
Bank Capital Trend

Click here to download complete report in pdf format (Professional Edition Subscribers) including 36 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.

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