The futures continue the pullback that began a day after Jaysus Powell promised that the Fed would do whatever it takes to keep the US economy afloat, including slaughtering grandparents.
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Thursday, the Fed bought $14 billion in Treasury paper and $6 billion in MBS from the Primary Dealers. This week the Fed has bought a LOT LESS than it had been buying a couple of weeks ago. It has been announcing its purchase schedule for each following week on Friday afternoons. It will be interesting to see if it continues to cut.
The stock market will have big problems if the Fed continues its reduced level of QE.
I have been warning that these cuts mean that the Fed is no longer buying anywhere near enough to absorb all new Treasury issuance. It had been doing that, and in the early weeks of the panic Jaysus Powell saved the Primary Dealers by actually buying a lot more than was needed. That resulted in cash piling up in dealer accounts. That cash is in the process of being depleted.
The market action of the past two days suggests that it’s gone! Will Jaysus save the banks again? Stay tuned.
Of the $20 billion the Fed bought yesterday, only 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. That will be a nice boost for the markets that week. But a lot can happen before that.
This week the dealers only saw an average of $10 billion per day in cash from the Fed via the Fed’s Treasury purchases from them. The Fed has scheduled just $10.5 billion in Treasury purchases and $8 billion in MBS for Friday. That’s way short of what’s needed. The dealers and their institutional customers had to absorb $241 billion in Treasury issuance this week.
This isn’t just this week. It’s every week. Look for more of the same next week, and until all of the pandemic relief and rescue programs have been funded.
How the hell are they paying for that?
The Fed pays for its Treasury purchases by depositing newly imagined money into the dealers’ bank/trading accounts at the Fed. It injected around $50 billion into the market this week via these purchases. Where’s the other $200 billion to pay for the new Treasuries coming from?
Earlier in the week I warned that if stocks or bonds don’t sell off, it would be coming from the existing, and shrinking, pool of cash that the Fed pumped into in Primary Dealer trading accounts a couple of weeks ago.
And it’s gone!
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The rest of this is repeated from Thursday’s post for the benefit of new readers.
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, Then the pool is being drained. It’s going into the US Treasury, and the Treasury then spends it to keep the US economy barely functioning.
The Fed has a new policy now. It’s “whatever.” Right now, it is standing pat on doing “whatever.” It’s just guessing. Reactive, ad hoc, week by week, seat of the pants, whatever it fucking takes, including screwing grandparents out of their life savings, fakery.
While it’s policy fakery on the grandest scale in history, 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 $14 billion in Treasuries, and $8 billion in MBS for Thursday.
Sounds great, huh? But what’s that gurgling sound? Oh, it’s the Primary Dealers choking on new Treasury supply inundating them, while they’ve been busy buying and marking up ES futures and stocks.
How much excess cash do they have left? That’s the question. Because when it runs out, if the Fed sticks with these reduced purchases, this rally could get unwound really fast. But the reactive Fed won’t sit on its hands. If the market starts crashing again, the Fed will pump again. We could see some spine tingling market swings in the days ahead.
One of those days could be today. As you know by now, 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. $105 billion of that settles today. Somebody has to pay for that. The Fed is only buying $14 billion.
If stocks don’t sell off today, then Jaysus Powell will walk on water next.
