Last month’s discussion of the US Treasury doing bond buybacks on the heels of a reeling bond market has faded into the background, thanks to a well timed bond market rally. The mere talk of buybacks reignited fixed income animal spirits, if there is such a thing. Now we can get back to the discussion of the one thing that actually matters for sustaining hope induced rallies.
That’s because the rallies so far have been based on hope, rather than fact. All of the talk, all of the speculation, about when the Fed will start easing is just that. Talk. But in the market, ultimately, only money talks. For market prices to rise in the face of ever increasing supply of new securities, there needs to be more money available to fuel the demand to absorb that supply. Otherwise, in the immortal words of Randolph Duke, “Prices will fall.” Non subscribers, click here to read this report.
But there are other sources of temporary money. Not the least of which are the financial assets, especially US Treasuries, themselves. Once created, they become collateral for credit which can fuel rallies that last much longer than most of us expect. But only for as long as prices are rising. Because once that stops, sellers start tiptoeing to the exits. Non subscribers, click here to read this report.
Eventually, prices rise to resistance levels where sellers appear, including dealers and others who want to build short positions. Without new capital, whether central bank money, or fiscal largesse, or profits, which are then added to capital, (as opposed to extinguishing debt or spent on consumption), all rallies must fall by the wayside. Non subscribers, click here to read this report.
Which is where this one should go. Because the sources of quasi permanent money like Fed QE just aren’t there right now. However, there are a couple of potential sources that are so huge, and so liquid, that we need to be cognizant of them. They are the Fed’s RRP slush fund, that so far has remained over $2 trillion. And the US Treasury’s piggy bank, that has been hovering around $600-650 billion, which is where the Treasury wants to hold it for a “rainy day.” Non subscribers, click here to read this report.
Such a rainy day might be another debt ceiling impasse, coming to a theater near you next year. Or it might be a bond market meltdown. The last chapter of that long running bear market brought out the talk of the Treasury doing a big series of buybacks of longer term paper, to keep the rise in long term bond yields at bay. Non subscribers, click here to read this report.
That talk, and the belief among some investors that bonds had gotten cheap, and that a recession was coming, triggered speculative, leveraged buying of bonds again. So the bond market was off to the races. Amazingly, stocks haven’t melted down under the strain of that bond market buying. But this rally in both stocks and bonds looks pretty much like the last one and the one before that. All of which has led to a nowhere market. Non subscribers, click here to read this report.
It reminds me of 1973. Back then, in the early years of the Great Inflation, the market kept hitting lows and rallying, hitting lows, and rallying, and rallying again. It didn’t go down much all year, but it didn’t make any progress in those rallies. Early 1974 was more of the same, until the bottom dropped out that summer. The market just treaded water for over a year before it drowned. Non subscribers, click here to read this report.
I’m not saying that this market will do the same thing. Maybe Wall Street is so smart today, and has so many tools, that it will successfully anticipate the Fed’s policy reversal. The front running might then lead to a real bull market when the Fed opens the floodgates. Non subscribers, click here to read this report.
But think about this. If the markets refuse to go down; if stocks and bonds continue to bounce around, then what incentive does the Fed have to ease policy? If the Fed was so prescient in seeing this inflation coming—not—then what makes the Street think that the Fed will be able to foresee a brewing financial calamity. Like the last time, the Fed saw nothing until it was too late. Like this inflation. The Fed saw nothing until it was too late. Non subscribers, click here to read this report.
Nope, I’m skeptical. Historically, the Fed has always been slow in recognition, driving in the rear view mirror, reactive, rather than proactive. It never seems to understand the forces it unleashes with policy responses that have grown increasingly insane with madmen like Greenspan, Bernanke, and Powell at the helm. Only Yellen shrank the balance sheet, but Powell reversed her, showering unprecedented largesse on his banker overlords and cronies. Non subscribers, click here to read this report.
Until he was blindsided by the consumer price inflation that he caused with his monetary outburst. It’s an ugly, sad saga that we have chronicled here for two decades, and that we’ve used as the basis for understanding and forecasting the markets with some degree of success. And which I hope to continue by simply observing and reporting the trends in the data. Non subscribers, click here to read this report.
In that regard, in this report, let’s take a look at whether there’s any sign that money managers are about to pull cash out of that $2 trillion RRP fund to buy bonds or stocks, or anything for that matter. And xxxx xxxxxxx xxxxxxxx xxxxxx. xxxxxxxxxxxxxxxxxx xxxxxxxxx xxxxxxxxxx xxxxxxxx xxxxxxxxx xxxxxxxxxx xxxxxxx. That’s right, stocks and bonds. Non subscribers, click here to read this report.
That helps to explain the rallies and holding actions in the two asset classes. And it is a warning to bears that the next major downleg in this bear market, if that’s what this still is, may be many months away, similar to the 1973-74 experience. Non subscribers, click here to read this report.
It means stock traders should give a thought to buying the dips AND selling the rips. Both trading from the long side, and short selling, will require good market timing through technical analysis, as the market bounces around in shorter swings than we would like. Flat rangebound trends are likely to remain the rule, not the exception. Non subscribers, click here to read this report.
Get the rest of this dope, amply illustrated, with beautiful color charts suitable for framing, including a clear forecast on what to expect and what to do about it, in the complete subscriber version of the report. Non subscribers, click here to read this report.
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