Yesterday, a couple of you highlighted the fact that there are so many different opinions about what the Fed is doing and trying to achieve, it’s hard to know what to pay attention to.
I want to bring some of those posts over here today. I need to head out for some personal business that may take most of the day. So let’s have at it, and I hope that you will continue the discussion, along with your market observations.
Before we start, here’s the hourly chart of the ES fucutures as of 4:30 AM in New York, 10:30 here in central Europe. What a mess. The quintessential meat grinder for swing traders. Looks like it’s edging lower here. However, the 5 day cycle projection is only 3934 at the moment. Ho hum.
Oh, and there’s Dino again. I don’t even need to outline him. We know how that usually ends up. Dinosaurs eat bears for lunch.
Click to engorge
Meanwhile, the discussion in the Wall Street mafia media has focused on the issues of Treasury yields and inflation. It completely misses the point, which is in fact what they want. Wall Street’s game is to always get you to focus on the sideshow so that you don’t look to see what they are stealing, or how criminally malfeasant they are.
The problem isn’t yields. That’s a second order consequence of the crooks’ outrageous behavior over the years. And whether there’s inflation or not is completely tangential. It’s a sideshow. The problem is the falling price of bonds and the massive, highly leveraged inventories of fixed income investments that it is crushing. The crooked Wall Street crime syndicates and the Fed crooked cop on the beat built this house of cards, and now it’s collapsing. We’re in the early stages.
Using the 10 year yield as a proxy for price, because yield is what we all relate to, I had been warning for months that once the 10 year yield crossed above, first 0.8%, and then 1.0%, there would be waves of forced selling by Primary Dealers, whose gigantic bond inventories would be increasingly under water. Then I always added “AND OTHER LEVERAGED SPECULATORS.” The dealers weren’t the only ones leverage long up the wazoo. They’re just the most important ones, because the ARE the system.
Can you say Archegos? Tip of the iceberg. The dealers themselves are in the same beached boat. The Fed keeps pumping enough to give them the appearance of being afloat, but the situation is dire. Switching metaphors, we illustrate the problem like so.
Hindenburg Warning Update
by Lee Adler • • 0 Comments
This is for the Treasury market. Proxy TLT.
Click to inflame
Nobody thinks that an accident is guaranteed to happen until after the conflagration is raging. Then those who were behind the scheme say, “No one could have foreseen this.”
Such bullshit. Over and over and over.
So this is bad now, but you ain’t seen nothing yet. Looking ahead, oh, the humanity.
With that thought, let’s continue yesterday’s discussion. Thanks to potatohead and he who is No Einstein for stimulating me to think and expound on this.
13 hours ago, potatohead said:I get the sense, he is very knowledgeable about the system. However, he has been pro banks and the Federal Reserve. He has done a good job of understanding their game and how they operate. However, your analysis seems more time tested and consistent than many others I have read. Maybe not him, but oo many of these twitter stars have been broken clocks.
My sense is that the Federal Reserve or the big banks are trying to reign in speculation. They may know the game is long in the tooth. They are using tools that give the appearance that the game is being fed liquidity but as you have uncovered, the banks are walking out the back door quietly until last week. Example, the T bill pay downs. That crushed very short term rates while allowing some to simply deleverage rather than throwing back in the market. He is saying the Fed could use RRP to bring short term rates back up and show they are still in complete control . However, this drains liquidity. The existing leverage and margin debt still remains. That’s where your analysis really shines. At the end of the day they are still in the same shell game.
13 hours ago, DrStool said:Well, RRPs don’t drain liquidity, and can’t move rates. They’re just overnight deposits with a different name.
There’s no voluntary deleverage in my opinion. Big banks never voluntarily reign in speculation. And the Fed is telling everybody that there’s nothing to see here, move along.
This is a forced march because of massive losses on leveraged positions. Nobody is doing this voluntarily. My surmises is that most of the dealers, virtually all owned by very big multinational banks, are walking dead men.
The Treasury market is in deep shit. And that’s why the Treasury got a head start on shrinking its cash pile by doing paydowns rather than wait and just spend it for stimmy.
13 hours ago, potatohead said:This is why I enjoy your work. I read others but something does not add up at the end of the day. When I play out their entire thesis, we are still over leveraged and the debt needs to be serviced or extinguished. Yet the Fed’s balance sheet keeps expanding. Logically, that leads me back to your work.
The size of the Fed’s balance sheet needs to be viewed in relation to supply of and demand for financial assets. That’s the issue for us — the price of financial assets.
The US Treasury creates so much supply of securities, that the market could NEVER absorb it on its own. The Fed must provide the demand.
This started with the first TARP which, ironically, the market was able to absorb on its own because there was so much panic that the world massively panicked INTO Treasuries. The problem at that time was, Primary Dealers were net short Treasuries. They got killed because they got that so wrong. And in getting killed themselves they crashed the system. There was nobody left standing to make and maintain orderly markets. That forced the Fed to step in.
Fast forward a dozen years and everybody is filled to the gills with long Treasuries. They don’t have a choice. The US Government is burying the market with wave upon massive wave of never ending supply.
Primary Dealers have been accumulating and holding record long positions, and leveraged those positions to the nth degree to carry them. Therefore the Fed must print enough money to buy enough or fund enough of the Treasury supply to keep prices high and yields low. Ever since QE1, the magic number has been 85-90%. Month in and month out, the Fed has maintained that purchase ratio. When the tried to deviate, the market went against them so badly, the Fed relented. It puked from the pressure.
The relentless drop in bond prices tells us that by buying or funding 85-90% of net Treasury issuance today, the Fed isn’t creating sufficient demand to absorb enough supply to keep prices stable. Dealers and institutions are so stuffed with inventory and overleveraged that they can’t take another dime of new supply.
Look at the timing of when bond prices started falling. The market has been choking on this shit since last August. During the early months of the pandemic panic, the Fed did enough QE to fund 120% of new Treasury supply. Extra slosh to stop the panic and reinvigorate animal spirits.
It worked.
The Fed then reduced emergency QE back to their normal 85-90% in July. Bond prices topped out and immediately started their relentless decline. Direct cause and effect.
The total amount of monthly issuance is now so huge, that the Fed financing 85% of it is no longer enough to preserve the appearance of a stable, working market.
In other words, the Fed is too tight at the given level of supply. And supply will soon double. We’re about to see the MMT crowd face their come to Jaysus moment.
Then what will the Fed do, and when will it do it? Those are the two great questions. I address these issues in every Liquidity Trader report. We answer them based on the Fed’s historical behavior. I have been interested in the Fed for 44 of the 53 years that I’ve been observing the markets. The Fed is people. People behave in similar ways in similar situations. We learn from the lessons of history.
So, many tanks and dungs a lot for that!
And away we go!
Animal Spirits are Waning and Money is Disappearing
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