The futures have broken out this morning despite the Fed’s cuts in QE over the past 2 weeks. “Why, it’s a bull market,” Jesse Livermore once quoted a well-known, old trader of the 1920s. Whatever this is, bull market or not, the Fed has clearly turned the tables with $1.5 trillion or so in QE over 6 weeks. Here’s a brief intro.
I cover the nitty gritty- charts, analysis, explanation, forecast and strategy recommendation at Liquidity Trader. If you are of the mind that the Fed should not be the market, it’s horrifying. But we can’t close our eyes. We need to look at it and understand what we are seeing. Because the market is a Fed manufactured illusion. Here’s the latest. Check it out risk free for 90 days.
Meanwhile, on Monday, the Fed bought $6.8 billion in Treasury paper and $7.3 billion in MBS from the Primary Dealers. That’s a LOT LESS than they were doing a couple of weeks ago.
Still, stocks march higher and Treasuries have held near their highs in prices, lows in yields. It’s a perfect world.
The Treasury settlements are next day. The MBS won’t settle until mid May. They’re not an issue right now. They will be when all the prior forwards settle May 13-20. For now, the dealers only see about $7-10 billion per day in cash from the Fed via the Fed’s Treasury purchases from them.
Notice that I said “only.” That’s because the dealers and their institutional customers need to absorb $241 billion in Treasury issuance this week. How the hell are they paying for that? This isn’t just this week. It’s every week.
The Fed pays for its Treasury purchases by depositing newly imagined money into the dealers’ bank/trading accounts at the Fed. So the Fed is injecting $40-50 billion into the market this week. Where’s the other $190-200 billion to pay for the new Treasuries coming from? If stocks or bonds don’t sell off, it’s coming from the existing, and shrinking, pool of cash that the Fed filled up a couple of weeks ago.
The dealers can do whatever they want with that cash. They use some to buy their next allotment of Treasuries. The rest they use to accumulate other inventory, mark it up, and distribute it to their institutional sheep customers. But if the Fed isn’t replenishing the pool, it’s being drained. It’s going into the US Treasury, and the Treasury is spending it to keep the US economy barely functioning.
The Fed has no policy now. It’s just guessing. Ad hoc, week by week, seat of the pants fakery. But the money that didn’t exist yesterday is real enough once it gets into dealer trading accounts.
And it’s real in the banking system when the US Treasury spends it. A mere trillion keeps the masses placated while the other trillion or so surreptitiously pads the pockets of the Regime’s plutocrat cronies and sponsors. They all get to have a good laugh with Trump at his next big soiree at Mar-a-Lago. When it reopens.
The Fed has scheduled purchases of $11 billion in Treasuries, and $8 billion in MBS for today. The Treasuries settle immediately. That cash gets deposited directly to Primary Dealer bank/trading accounts at the Fed.
Sounds great, huh? But what’s that gurgling sound? Oh, it’s the Primary Dealers choking on new Treasury supply inundating them, while they’re busy buying and marking up ES futures and stocks.
Here’s the problem. The dealers and other players need Fed cash to absorb new issuance of US Treasury bills notes and bonds. Otherwise they’re depleting their cash.
The US Treasury issues the debt that raises the money that the US government needs to pay for the Pandemic Pandemonium Panic Relief and Crony Pocket Padding programs. $90 billion of that issuance settles today. $55 billion settles on Wednesday. Somebody has to pay for that. But the dealers are using up their cash boosting the ES futures overnight and in the pre market, and then goosing stocks during the day.
Buyers of Treasury paper (TP) must either borrow the money via repo, or sell shit to pay for it. Obviously for the moment, they’re not selling and raising cash. That has a limit. This stock market rally looks really good right now, but the hangover is coming, and I don’t think we’ll have to wait long.
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