Lee AdlerThe forecast has changed. It’s less bearish, but it’s still bearish. Here’s why.
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Macro liqudity been bullish since early July. That was no secret. We were fully informed and prepared. And it’s no secret that this balance is about to flip to bearish. Really bearish. Can our beloved Fed get ahead of that curve?
The US Treasury issued its quarterly refunding report this week. So we now know what to expect from the US Treasury. We already knew what the Fed’s plans were. It made its policy pronouncement last week. More of the same. Snooze.
But that expectation is only good for the balance of this quarter, that is, through September. The government’s forecast for debt issuance beyond that, for the last calendar quarter, and maybe even for the next 7 weeks, should be taken with 5 pounds of salt.
The Treasury Borrowing Advisory Committee (TBAC) does ok for the current quarter when it issues its estimate halfway through the quarter. It helps to know what has already happened for the first half of the quarter. But their look-ahead forecasts to the following quarters are usually revised significantly, and sometimes completely reversed.
So we’ll focus on what we can reasonably expect from now through September. Even though we don’t know how much the government will spend on economic relief.
Here’s the key takeaway.
Open the report to find out what it is, why it is, and what to expect.
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Macro liquidity is growing at a historically rapid pace, but much slower than in the second quarter. And there are signs of trouble brewing. Here’s what they are and what to do about them.
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Fed QE and Treasury supply remain roughly in balance. The Fed is still funding most, if not all new issuance, either by direct purchase of Treasuries, or indirect funding via purchases of MBS. Meanwhile delayed tax collections are creating a July cash windfall for the Treasury. It’s all bullish for the next two weeks.
But then it gets different. Here’s why, and what to do about it.
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Several banking indicators have exhibited a mild trend of deleveraging that has now persisted over two months. What we don’t know yet is whether it is just a correction of overborrowing during the initial phase of the pandemic and the Fed’s response.
Or is it the beginning of a persistent trend of deleveraging? That’s important because if it is the latter, it would have the power to change the direction of stocks
That could be a good thing over the long term. But it could also lead to another accident in the shorter term, over the next few months.
Unfortunately, so many aspects of this are uncharted waters for us. We can’t look at history and say, oh, this is just like that, or even something like that. We must take our best shot based on the logic of the current circumstances. Another problem is that, while economists assume that humans are rational actors, we know that that’s not often the case. We have to figure out how humans are most likely to behave, rational, irrational, or otherwise.
Ultimately that boils down to divining the trends in the data as it exists. Let’s just look closely at what we know and ask a few questions. Is the current trend persisting? Are there conditions on the horizon that might lead to change? Is change already underway? What are the signs? How will the Fed respond? And more importantly, how long will it take the Fed to respond.
Fortunately, the last two questions don’t need an answer. Because the Fed doesn’t know what it will do until it does it, neither does the market. And it’s likely to take the market longer to figure it out than it takes us, if we’re paying attention. Which we are.
Here’s what we know and what to do about it.
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Wall Street media shills have noted that the Fed’s balance sheet has shrunken a bit in recent weeks. Let’s get this out of the way first.
It’s meaningless and temporary. Here’s why, and here’s what really matters.
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The Meyer Lansky like Fed has cut back QE, but Treasury supply has also receded. So the Fed is still funding most new issuance, either by direct purchase of Treasuries, or indirect funding via purchases of MBS. That has allowed the dealers enough flexibility to keep the players at the gaming tables. Are they being set up for the kill?
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As the Fed has cut back on QE, Primary Dealers have also cut back their inventories of Treasuries and the leverage that they use to finance them. That’s not bullish. Here are the details and a few charts along with a suggested strategy to play the dealers’ game, not the one they want you to play as they set up new traders for the kill.
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The imbalance between Fed QE and Treasury supply is ugly as as it gets for the next week, but then it gets less ugly. Here’s what you need to know and how you need to see it to trade successfully.
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We know that total liquidity is still growing. The Fed is still printing and pumping money into the system at an historic rate. That rate is well above the norms of the original QE back in 2009-10, but well below the peak panic levels of March and April. The Fed has been dialing it back from the extreme pumping it reached at the market bottom in March.
Ay, but theres’s a rub, and it’s not barbecue. It’s an irritant. And the markets won’t like it.
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