From the bowels of the NY Fed: $6.001 B Coupon Purchase 2020-09-22, NYFed treasury securities operations.
The Fed buys these from Primary Dealers. It pays for them by conjuring money that didn’t exist prior, and crediting that money to the selling dealer’s checking/trading account at the Fed.
It’s then the dealer’s money to do what dealers do. They buy other securities, mark them up, and sell them to customers, usually big institutions and hedge funds. That’s how the Fed’s printed money gets mainlined directly into the stock market and other financial markets. The Fed stuffs the dealers’ pockets full of cash day after day after day. The dealers buy more and more stuff and push prices up while distributing the inventories to their customers, using CNBC and THE Wall Street Journal as the marketing arms of their businesses.
The rest of us retail schleppers then just happily pile in, along for fun hay ride behind the big-ass bulls who never shit.
Except once in a while.
Of course the dealers use some of that Fed cash, along with more that they borrow in the repo market (think “margin” in our frame of reference), to buy more Treasuries.
When the dealers buy more Treasuries at auction the next week, the money they pay for the Treasury paper goes into the US Treasury account at the Fed. The Treasury subsequently spends that. That’s how some of the Fed’s confetti gets into the economic stream, although the US Treasury has been hoarding an enormous pile of cash that it built up between March and July.
That’s a time bomb. The effect will depend on what they decide to do with it. If they spend it into the economic stream, it will goose economic activity. If they use it to pay down debt, it could set off another ferocious burst of asset inflation like the one from April to August. So, bears, beware.
But if market participants decide to use that cash to deleverage, it will be bad news for the bulls. There have been rumblings of that in the data for several months, and yesterday I got a letter from Interactive Brokers stating that it was raising margin requirements on all accounts, ON ITS OWN! This is not a Fed or CFTC action. This is an independent brokerage tightening money of its own accord.
The implications of this are earth shaking. The incipient deleveraging trend that I’ve been reporting in my Liquidity Reports is now more than me just speculating based on the data I watch. This is the smoking gun. This is the real deal. This is a sea change in broker/dealer mentality and culture, and it’s the stuff of which bear markets are born.
The Fed’s QE Treasury purchase schedule calls for another $1.2 billion today, $1.75 billion on Thursday, and $8.8 billion Friday. Is that a lot? Not in terms of the mountain of Treasury supply coming this week.
The Fed also buys MBS from the Primary Dealers almost daily also, but these are forward contracts, and they only settle those in the third week of each month.
Mo’ Money is always on the way.
In the name of Jaysus! Praise the Load and pass the Kool Aid!
Get the big picture outlook at Liquidity Trader.
Composite liquidity continues to rise, but at a slower pace than in the second quarter as the Fed has slowed QE. That reduces the cash flowing into Primary Dealer accounts, which in turn contributes to a slowing in secondary liquidity drivers.
“Slowing” is a relative word, however. Historically, the numbers remain gargantuan.
No, something else is holding the market back. Here’s what that something is, and what we’re going to do about it.
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