Jay Powell’s first order of business is to keep the bond market from breaking down. When the 10 year yield hit 0.975 last week before backing off, the market was at the edge of the abyss. Leveraged dealer bond portfolios were on the brink of disaster.
Signs of a weakening non-recovery rescued them. Traders sold stocks, which freed up enough cash at the margin to bring bonds back from the brink.
Because of that, the Fed is ok with the weaker economy narrative for the time being.
Jaysus saves the bond market first. Stocks are just the saints of this religion. They get their share of worship. But the bond market is the Cross, the Torah, and the Koran all rolled into one. It is the focus of the worshippers. It is the altar upon which the really big money acolytes pray.
So the Fed looks at signs of weakness with relief now, because it sends the big donors in the pews. And the small part of the collection plate that the Fed doesn’t fill, those donors keep filling. And Jaysus keeps saving. Or so it appears.
But this seeming miracle is an Act that won’t work for long. Because if too many worshippers reject the saints of stocks, Jaysus himself runs a similar risk. If the flock loses faith in Him, the Church of the Fed will collapse. The bulls will all die and burn in the fires of financial market hell.
As for the bears, it’s too late. They’re so dead, they’re beyond resurrection. Nobody is short the market.
In the end, only liquidity matters. The Fed can create liquidity, but an economic narrative that leads to selling of any asset class can destroy that liquidity just as fast, or faster, than the Fed creates it.
So for that purpose we keep an eye on a few real time economic indicators that few others are watching, to keep us abreast of how the Wall Street economic narrative is going to play.
We’ve known for a couple of months that the “recovery” was a non-recovery. The Wall Street mainstream is starting to catch up with that.
This report updates us on what’s happening now in Federal tax collections, and therefore what the narrative is likely to sound like in the weeks ahead. It prepares us to be ready to act ahead of the most likely scenarios in the financial markets.
Here’s the bottom line.
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Available at this link for legacy Treasury subscribers.
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