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Fed Cuts Back QE – Will Stocks Survive?

The Fed is throttling back on its market supporting QE operations. The results of that may be starting to show up in stock prices.

The Fed announced Friday that it will buy $15 billion a day in Treasuries, from Primary Dealers. That’s down from $30 billion a day last week, and $75 billion per day the previous week.

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The Fed deposited $15.5 billion into the accounts of the Primary Dealers today in payment for its purchases of Treasuries. It uses the dealers as middlemen, while giving them a guaranteed skim.

The only difference between using the dealers to act as strawmen, and the Fed buying the paper directly from the Treasury, is that the dealers get that skim. It’s an outrageous scam that benefits only the dealers and costs everybody else, including other buyers of the paper and taxpayers.

The Fed also bought $10 billion in MBS today. These were forward purchase contracts that do not settle until May 13-20, which means that the cash won’t hit dealer accounts until then.

$116 billion in MBS past purchases settled Wednesday, April 15. No doubt that that cash was largely what powered Friday’s rally. And no doubt the Fed is now severely disappointed, maybe even panic stricken, as the gains have almost completely evaporated. When you spend $146 billion, including Treasury settlements, and get nothing, that has to be at least mildly annoying. 

The rest of us should find it terrifying.

An additional $17.5 billion in MBS settlements took place today, and $47.7 billion will settle Tuesday.

Think about it. The Fed put $32 billion into dealer accounts today, and the S&P fell 53 points. Jesus. 

That’s all the MBS settlements until May 13. The market will now have to get by on $15 billion a day in Fed cash deposits to Primary Dealers, in payment for its Treasury purchases. 

Meanwhile, the Treasury has scheduled sales of $224 billion in new paper into the market.  Think that might be a problem? The Treasury market apparently didn’t think so. It rallied and the yield on the 10 year fell 3 bp.

Where did the cash for that rally come from? Stocks. The SPX dropped 53. The Dow lost nearly 600.

I post the chart below updated in real time twice a week for Liquidity Trader subscribers. This one is from Friday. Stocks began to rally in mid March when Pandemic Pandemonium Panic QE first began to exceed Pandemic Pandemonium Panic US Treasury Rescue Package debt offerings. In other words, the Fed began injecting more money into the markets than was needed to absorb all of the new Treasury supply.

Fed QE

Soon those offerings could begin to exceed QE again. Then what? Stay tuned to Liquidity Trader for in depth real time tracking and forecasts of when there will be enough QE and when there won’t. Get access to current, past, and future reports with a90 day risk free trial. Updated twice a week or more.

 

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish LiquidityTrader.com, and was lead analyst for Sure Money Investor, of blessed memory. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both sales, analytical, and trading capacities. Prior to starting the Wall Street Examiner I was a commercial real estate appraiser in Florida for 15 years. I was considered an expert in the analysis of failed properties that ended up in the hands of bank REO divisions, the FDIC, and the RTC. Remember those guys? I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. I'm not some Ivory Tower academic, Wall Street guy. My perspective comes from having my boots on the ground and in the trenches, as a real estate broker, mortgage broker, trader, account rep, and analyst. I've watched most of the games these Wall Street wiseguys play from right up close. I know the drill from my 55 years of paying attention. And I'm happy to share that experience with you, right here. 

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