Ten days ago I posted:
The current move projection on the 10 year Treasury yield is 1.70. Longer projections point higher. I update that regularly in LT.
They’ve now surpassed that initial target. All this is happening despite the Treasury pouring a quarter trillion in cash into the market over the past 3 weeks in an attempt to stop the hemorrhaging from Primary Dealer bond inventories. The dealers are on the ropes, as they hold massive positions accumulated at much higher prices. They bought these positions with equally massive leverage. I use the TLT, the 20 year Treasury bond ETF to illustrate the problem.
Just an aside for new readers, I have been warning in Liquidity Trader Money Trends reports since last fall that the Treasury market was the system’s Achilles heel and that once the 10 year yield crossed 0.8 first, and then 1.0, the problems for the Primary Dealers would be acute, leading to forced liquidation, and then contagion and collateral damage in all asset classes, including the one that interests us the most, stocks.
This morning, the 10 year is trading at a yield of 1.72. If you’ve been following the script here, you know that the proximate problem is price, not yield, but yield is a good mirror. And in the short run, the target has risen to 2.03.
Everybody is watching yield, and associating it with inflation fears and the nonsense that it means the market expects economic recovery. All well and good, but irrelevant and immaterial, ladies and gentlemen of the jury.
What’s happening here is forced selling. Wall Street always wants to impute meaning to market moves. What it really means is what it actually is. Forced selling. A crunch. A crash. Collapse. Collateral calls to dealers, and margin calls to other leveraged longs.
The problem is the dealers. They’ve been weakened to the point of becoming little more than straw parties acting as conduits for the Fed feeding $200 billion a month into the markets. Yeah, $200 billion. The media isn’t counting everything the Fed pumps into the dealers every month when it tells you that it’s doing $80 billion or $120 billion. I keep you up to date with the real numbers, how much cash the Fed actually pumps into the dealers and thereby into the markets.
$180-$200 billion a month. Still it’s not enough. Bonds are crashing. Whether in a couple months, weeks, or days, stocks will follow. Dealers will need to start liquidating anything that isn’t nailed down. We use technical analysis to discern when stocks will get hit. The day is drawing closer.
The question is how much contagion and collateral damage in other asset classes will be necessary before the Fed is moved to emergency measures. Measures which only start out as “emergency,” but in reality become permanent.
Stay tuned for Yield Control and Infinite QE, coming soon to a trading screen near you. Be prepared with forward looking updates at Liquidity Trader.
It’s always good to know what’s coming.
