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Posted in 1 - Liquidity Trader, Liquidity Trader - US Treasury Market Trend Supply and Demand

Dealer Dementia, Payback Delayed but Not Denied

I’ve marveled at the ability of the players to keep stock prices rising despite the reduction of Fed QE, and the continued pounding of Treasury supply on the market. Even more amazing is the fact that the rally in stocks has NOT come at the expense of the Treasury market. The Treasury market has managed not to blow up.

“How are they doing it?” I have wondered. And WTF does it mean for the future?

I have some answers, but not all. Obviously, as much as I’d like to get there for your benefit, I have never come remotely close to finding all the answers. Fortunately, I just need enough of the right ones to get the direction of the market right. Right now is a particularly difficult time for that. The Fed is barely absorbing 20% of new Treasury issuance and bond prices stay high and stock prices keep going higher?

My thinking has been that, no, you’re not wrong, Lee, the market is overstretched and vulnerable.

How can this be happening? Simple. The dealers and other big market participants are again piling on more leverage. They’re making the same mistake they always make right before everything blows up. The shock is how quickly they forget the lessons of recent history. Short term memory loss I guess. It’s dementia. That’s it. The dealers have dementia.

So here we are. Yet again, those who do not remember the past are condemned to repeat it. Here’s why, and what to do about it.

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