He who hesitates is lost.
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When Kevin Warsh came aboard as Fed chair, he let it be known that reducing the Fed’s footprint in the markets was one of his goals. No more QE market interventions. No more forward guidance. He would move forward by going backward, to the good old days, when young traders stood by the news ticker on Thursday afternoon waiting for the word from Dr. Doom, Henry Kaufman, and Dr. Death, Al Wojnilower, on how they read the Fed’s tea leaves, from changes in M1.
We have a bit more information today, but no more schedules of how much money the Fed will print and when. So, we don’t know specifically what their plans are, except that they will read the economic data and react to it, rather than set policy proactively. They will keep us in the dark, just as they reach out in the darkness as the walls close in on them.
One group that won’t be in the dark, insofar as the Fed’s plans, is the Primary Dealers. To the extent that the Fed does have a clue as to its next moves, it is certain that the subject will come up in the daily pre market meetings between the Fed’s traders and the Primary Dealers. Meanwhile, the Fed and its henchmen will treat us like mushrooms, keep us in the dark and feed us BS, while making shadow policy in their daily meetings with their strawmen.
The burgeoning debt issuance will eventually call on the Fed to monetize the debt. Since Congress made that illegal, the Fed and Treasury set up the Primary Dealer system to act as the Fed’s conduit to, wink-wink, conduct open market operations in the secondary market to do “legally” what had been made illegal. The day is coming. The question is when, and how much.
Last week the Fed’s Head Trader, Roberto MoeLarryCurly Perli, gave a speech at a Treasury conference where he confirmed that the Fed had ended outright QE T-bill purchases in mid-August. These are or what the Fed calls, in gaslighting terms, Reserve Management Purchases or RMPs.
Whoa, I said! What did I miss? In truth, the Fed had made statements that it would reduce QE to zero in prior FOMC announcements. Perli just confirmed it, and I checked the chart of the SOMA, and there it was (chart below).
The Fed had cut those purchases from $40 billion earlier this year to $10 billion per month in June and July, before going to zero in August. The Fed is still doing MBS replacement purchases in amounts in the teens. These are purchases of T-bills to replace MBS prepayments of Fed holdings, which occur naturally in the course of business. At bottom, whether it’s $50 billion or $15 billion per month in T-bill QE makes little difference. It doesn’t do much in the face of monthly supply amounts in the hundreds of billions.
The Treasury market turned sour while the Fed was still doing its $40 billion of T-bill purchases plus MBS replacements. But that performance grew worse as the Fed began cutting QE. When the Fed cut to zero T-bill purchase in August, the bond market virtually fell apart, and yields soared.
Liquidity is context. Technical analysis provides action signals, given the context. Be prepared to act on whipsaws of bullish technical signals or support breaks. This is no joke.
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