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How the Fed and Treasury Rig The Debt Ceiling Roulette Game Matters

I could just repost the same thing every time I update this report. The Fed continues to rig the stock market, and that rigging continues to work. I know of no reason to expect this to change. Someday, it will, but not today. Make no mistake though, changes are coming, and you need to be ready for them. This report tells you what to look for.

Stock prices remain right in the middle of the channel surrounding the liquidity line on the Composite Liquidity Chart. What I wrote about this indicator in June, remains true today. The market isn’t overbought. Nor is it oversold. It’s just tracking the growth of systemic liquidity. Not too hot, not too cold, but just right. Goldilocks.

Earlier, in March, I wrote:

This indicator is so good that it looks rigged. If you’ve been with me for a long time, you’ve watched this with amazement, as I have, for years. When all these liquidity measures are combined into one, they form a track that stock prices mimic, and vice versa.

They are both cause and effect. It’s like quantum mechanics. They’re intertwined, separate, but one. Increasing liquidity causes stock prices to inflate. Inflation in stock prices causes liquidity to increase. The Fed just keeps pumping the fuel to make sure that the engine keeps running. And when it threatens to stop, the Fed just pumps more. It has had the ability to reflate the system when it has deflated.

Meanwhile, the US Treasury is acting as the paramedic rescue squad for now. It has been pumping massive amounts of cash into the money markets every week since February 23. It has been doing it with T-bill paydowns, which I’ve written about both in these reports, and in occasional news updates in the Wall Street Examiner.

Jaysus and Janet both are praying that those dealers and investors use that cash to buy enough longer term paper to push bond prices up, and yields back down. Keep in mind that yields are just the sideshow. The problem is that bond prices have fallen so much that dealers are facing enormous losses in their bond inventories. It renders them unable to maintain orderly markets in all their businesses.

Now $700 billion in T-bill paydowns later, on top of regular ongoing Fed QE, the Fed and Treasury have succeeded in driving a massive rally in Treasuries. That has given the Primary Dealers juicy profits over the past few months.

This has taken the pressure off the Dealers, who matter to the Fed, and transferred it to any hedge funds who were short Treasuries. If they lose money, the Fed doesn’t care so much, as long as the biggest ones aren’t at risk of going bust.

But the dealers must be saved at any cost, and for now, they have been. Once again, the Fed has managed to steer the market away from sure catastrophe. But this time, it took a partnership with the US Treasury, in the form of those massive T-bill paydowns pumping cash into the market. However, that’s a one shot deal. Once that cash is gone, it’s gone. And with the Federal debt ceiling back in place as of August 1, that cash will be gone, and soon.

There are a couple of likely scenarios ahead as the market faces the reimposition of the debt limit. Here are the most likely scenarios, along with how the Fed and Treasury are likely to manage the liquidity pool. Finally, as we track the flows in the weeks ahead, we’ll know what to do to manage our portfolios to take advantage, or to protect ourselves from the market crash that would be baked in if the Congress and the Primary Dealers behave in a certain way.

Or whether a muddle through scenario might play out.

I spell all of that out for you in this report.

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Posted in 1 - Liquidity Trader- Money Trends, Fed, Central Bank and Banking Macro Liquidity
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