The Treasury’s numbers for June were as bad as expected. Early July numbers look good, but it’s a trick. Here’s how we know, and what that means for the markets.
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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 Treasury’s numbers are in for June and they’re not good. First things first. The BLS jobs data is just BS.
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Common sense says that as case numbers increase, tax collections would fall and vice versa, REGARDLESS of whether governments imposed lockdowns. So my expectation was that as governors across the country lifted restrictions, case numbers would rise, and tax collections would fall.
Well here we are.
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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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The data is noisy, and week to week the changes may not mean much. But in some weeks, it’s obvious that it’s part of a bigger trend, whether confirming or indicating change. Even if there are just hints, this information can be incredibly useful. It is useful because it tells us exactly what the big picture is, while Wall Street economists are still scratching their asses and trying to figure out what the government statistician manipulated data means. And the first report from that data is still 13 days away.
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Primary dealers have been gradually paying down their outstanding repo loans from the Fed, just as we have long expected. This has momentous implications for the stock and bond markets.
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Lee Adler
