The Meyer Lansky like Fed has cut back QE, but Treasury supply has also receded. So the Fed is still funding most new issuance, either by direct purchase of Treasuries, or indirect funding via purchases of MBS. That has allowed the dealers enough flexibility to keep the players at the gaming tables. Are they being…
As the Fed has cut back on QE, Primary Dealers have also cut back their inventories of Treasuries and the leverage that they use to finance them. That’s not bullish. Here are the details and a few charts along with a suggested strategy to play the dealers’ game, not the one they want you to play as they set up new traders for the kill.
The Treasury’s numbers are in for June and they’re not good. First things first. The BLS jobs data is just BS.
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Common sense says that as case numbers increase, tax collections would fall and vice versa, REGARDLESS of whether governments imposed lockdowns. So my expectation was that as governors across the country lifted restrictions, case numbers would rise, and tax collections would fall.
Well here we are.
The imbalance between Fed QE and Treasury supply is ugly as as it gets for the next week, but then it gets less ugly. Here’s what you need to know and how you need to see it to trade successfully.
We know that total liquidity is still growing. The Fed is still printing and pumping money into the system at an historic rate. That rate is well above the norms of the original QE back in 2009-10, but well below the peak panic levels of March and April. The Fed has been dialing it back from the extreme pumping it reached at the market bottom in March.
Ay, but theres’s a rub, and it’s not barbecue. It’s an irritant. And the markets won’t like it.
This data tells us exactly what the big picture is right now, while Wall Street economists are still scratching their asses and trying to figure out what the government statistician manipulated data will be and will mean. And the first report from that government data is still 13 days away.
Primary dealers have been gradually paying down their outstanding repo loans from the Fed, just as we have long expected. This has momentous implications for the stock and bond markets. You need to see these charts!
The Monthly Treasury Statement for May confirms that the economy rebounded during the month, but more recent data through last week suggests that the rebound has already expired. Signs of renewed weakness come when the numbers are still far from a full recovery. The economy is beginning to weaken again, starting from weakness.
That’s relevant because it means that the Federal government will need to continue to issue massive amounts of debt. It may not be quite as much as in March and April, but it will still be at least double past peak levels.
We also know that the Fed has sharply cut the amount of that debt that it is directly absorbing or financing.
Here’s what this means for your investing strategy.
The Fed has now promised QE infinity. But will it be enough, in the face of Federal deficit financing to infinity and beyond? Because for every dollar the Fed has promised to print and pump through Primary Dealer accounts into the financial markets, the US government has promised to issue about $3 in new debt.…