Tim, as I hope you know, I love your work. I was a customer of ProphetCharts many moons ago. And of course, I’ve been syndicating your posts on WSE for a while.
I was somewhat bemused about your Via Mundi post.
I’ve spent the last 19 1/2 years online explaining just how the money gets into the system and how that impacts the markets.
There’s normally only one conduit for monetary policy transmission, except when the Fed goes crazy with alphabet soup programs. But even those are but the pimple on the elephant’s ass compared with its main transmission mechanism.
There’s absolutely no mystery. The Fed normally transmits monetary policy–the new money it blows into existence–just one way. Through Open Market Operations. The Fed does trades with Primary Dealers. QE is really nothing more than a series of big trades with Primary Dealers every day. The Fed buys Treasuries or MBS from Primary Dealers, and only Primary Dealers. Absent the alphabet soup pimple, there’s no other way for the money to get into the system.
It goes through the dealer accounts and the market first, and most of it stays there, while some goes into the economic stream through the dealers next purchases of Treasuries. But mostly, the financial markets just keep inflating from all the cash the Fed pumps directly into them via the dealer conduit.
Do stock buybacks boost the market? Sure. Are they a scam? Absolutely. But the big scam is the Fed’s daily cash infusions to Primary Dealers. From which, by the way, they take a nice cut. It’s the essence of the Wall Street skim game.
The Fed buys inventory from the dealers and pays for it with a cash deposit into the dealers’ accounts at the Fed. This week the Fed will buy about $42.5 billion in Treasuries and MBS from the dealers. The Treasuries settle next day. The MBS are forwards that are always scheduled for settlement in a bunch around the third week of the month. This month the settlements start tomorrow and run through June 22. I’ll be posting a detailed update on that tomorrow 9 [done].
Normally the MBS settlements give the markets a boost because the Fed cashes out the dealers all at once. The May settlement was $265 billion. That was enough to give the stock market one hell of a goosing. June will be less than half that. I still have to crunch the numbers for the exact figure, which I’ll post tomorrow. Should be around $100 billion or so [ended up $130 billion].
Treasury supply is an offset. Some of this money must go toward absorbing that. The willingness of foreign central banks, and investors generally, to keep buying is another offset. If they don’t buy as much, then either the dealers must buy more, or bond prices fall and they can’t buy stocks because they have to support Treasury prices first.
So we’ll see. Watch the 10 year. Above 0.80 persistently I think that the dealers, and hence the entire system, will be in deep shit. The Fed would have to up its game again. How many times that will work is the next question.
Once the Fed buys the paper from the dealers, it has no control over what they do with it. It’s the dealers’ money. So they do what dealers do. They buy more inventory, mark it up, and move it out. Could be more Treasuries and/or MBS, or it could be any kind of financial asset.
The easiest markup game for them is stocks. So of course there’s a direct correlation between QE and stock prices. Yes, Virginia, Jaysus Powell is Santa Claus with a money printing press, and he deposits the gift of gelt to the dealers’ accounts every week.
And they use some of it to buy and flip stocks, touting it all the while on CNBC and in Rupert Murdoch’s ubiquitous News America Marketing/Dow Jones news wires and publications.
This is such an easy game for the dealers. The Fed deposits cash into their accounts in payment for Treasuries, and the dealers use it to accumulate more inventory, including stocks. They then tout their equities inventories via their marketing arms. Their customer herds, essentially institutions and hedge funds, are the biggest sheep trend followers of all. They have lots of money, and the dealers give them easy, nearly free credit to boot. And they’re incredibly stupid, vain, and venal. Easily manipulated.
The retail investor is an afterthought. But if they pile in, well, the more the merrier, says Santa Jaysus Federalus.
This is not a mysterious process. The Fed itself describes it in great detail buried on the NY Fed website.
It’s a process that Wall Street wants you to ignore. The last thing they want anyone to do is to know what Primary Dealers do. So that’s the biggest thing that interests me. Anything that the Street would prefer that people not understand and not pay attention to.
You could say I’ve done a bit of homework on the subject.
I’ve been following these shenanigans for 50 years since I started trading as a teenager in the sixties. I’ve been writing about it online for the past 20 years. Back in the day the Fed was all about secrecy and we only had the weekly money supply on the Thursday afternoon ticker. Now we have so much data my head spins trying to figure out what matters, and to track it, analyze it, and explain what it means to people.
It’s a hopeless task. But it’s what I do.
