After years of following and reporting certain banking indicators for hints about how liquidity is impacting the system, and vice versa, that’s the question I’m now asking myself.
Well, there is an answer. And you need to know it! For your financial health, and for your sanity.
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There will be a severe shortage of QE next week to match up with the end of month Treasury issuance. Bears have a shot there, but here’s why things tilt back toward the bulls after that.
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The Fed’s balance sheet resumed its growth in August after a bit of a stall in July when dealers paid off Fed repos. That program has been at zero since then. Dealers don’t need to borrow from the Fed when the Fed is cashing them out every week with QE.
And there’s the rub for bears. There’s still enough QE to keep this farce going, short term factors notwithstanding.
Last week was MBS settlement week (see last week’s QE update). That pumped $100 billion into dealer accounts. Not all of that showed up on the Fed’s balance sheet total assets because other assets were paid down in the. MBS get paid off in the normal course of business during the month. Some of the Fed’s superfluous alphabet soup programs have also had reductions.
But that stuff doesn’t really matter to the stock and bond markets.
Our focus is on the Fed’s securities holdings, in what’s called the System Open Market Account (SOMA). That’s where the action shows up. It’s the money that the Fed pumps into the financial markets through its straw men, the Primary Dealers. And that is still steadily growing.
Here’s what that means for the outlook and strategy.
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The forecast has changed. It’s less bearish, but it’s still bearish. Here’s why.
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By now, you’ve heard all about the $2.8 trillion budget deficit so far this year.
Old news. With more pandemic spending on hold, the monthly deficits will shrink. Good news, bad news. Here’s why.
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No news isn’t no news. The Primary Dealers are in the same posture they’ve been in. They’re still bullish on bonds and that’s an extremely dangerous situation.
It’s like that warehouse packed with explosives in Beirut. One small fire could ignite a conflagration of biblical proportions.
The dealers continue to maintain historically large fixed income positions. Those positions hit record high prices. They’ve accumulated a good bit of inventory near the highs. They remain highly leveraged. Worse, they’ve reduced their futures hedges significantly. They are positioned for even more or a bullish environment in bonds.
This report gives you the keys to look for.
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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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A recovery in withholding tax collections that began in mid June, ended in the last week of July. The one time annual tax windfall is now fini, and more spending is coming. Here’s what it means for the stock and bond markets.
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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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Lee Adler