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Did you notice in yesterday’s press conference how Jerome Powell kept clearing his throat. He was apparently choking on the vomit of his own double talk. The lies, self contradiction, and obfuscation were breathtaking. This man has no conscience. But then, he’s a central banker. What should we expect.
It’s a good thing that Powell doesn’t own a big bond portfolio.
Well, actually, he does. A lot of munies. A lot of real estate funds, and lots and lots of stock funds. But he makes policy to benefit American workers, who can’t afford to buy houses from the real estate ETFs that Powell owns. Supposedly.
That will be the extent of expressing my disgust with yesterday’s spectacle. The purpose of this report is to review the state of real time tax collections as they accurately show what the US economy is actually doing, and to relate that to the unusually important twin pieces of news that came out yesterday. One was the TBAC schedule for the first quarter of 2022, and the other was the Fed’s taper announcement.
The Fed plans to cut $15 billion a month from their purchases until they get to zero net purchases next June. It’s no surprise that at the same time, less Treasury issuance is forecast. The TBAC says that issuance will be cut in half in Q1.
We knew that the strong tax collections would cause issuance to begin to shrink. We knew that the Fed would only taper QE when Treasury issuance began to decline. There’s no surprise in any of this.
One Bloomberg story highlighted the fact that the Fed’s taper was simultaneous with the Treasury “tapering” issuance. There’s just one problem. While issuance will be cut in half from Q4 to Q1, assuming that the next lifting of the debt ceiling doesn’t screw that up, the Fed’s purchases would go to zero under their plan. At the same time, half of the current level of Treasury issuance still amounts to $150 billion per month on average.
Let me say this about that.
The market cannot absorb $150 billion a month in new issuance at current price levels. Bond prices will crater before the Fed ever gets remotely close to zero QE. In fact, just 2-3 months of reduced QE might be all the market can bear.
We know that for the past dozen years with QE, the Fed has funded 85-90% of Treasury issuance month in and month out. They’ve done it with a combination of outright purchase, and indirect funding through cashing out dealers via MBS purchases.
Yellen tapered for a year. Treasury yields soared. Powell came on the scene, choked, stopped tapering, and soon started printing again like there was no tomorrow.
They’ve suppressed bond yields as a result. They have screwed yields to the floor, screwing risk averse savers in the process.
The mirror of that is that they nailed prices to the ceiling. Most of the world’s wealth is tied up in bonds and real estate. Powell and his cronies benefitted immensely from the Fed’s direct suppression of yields and inflation of bond prices.
When Treasury issuance increased, the Fed increased QE to insure that bond holders suffered no losses, and that the residential and commercial real estate bubbles continued to inflate.
But even with that increased support, the yield on the 10 year has risen from 0.50 to 1.50-1.70. We’re about to see what happens when the Fed cuts its absorption to less than 85%. The Fed says it will be flexible. The taper isn’t on autopilot.
I’ll say. Watch what happens when the 10 year yield explodes past 2%. Let’s see how long they stick with this “taper” while Powell and friends’ personal holdings of bonds and real estate funds crater.
We have a couple of wild cards in the mix. These include the xxxx xxxx xxxx (subscriber version only), which is already again beginning to stifle issuance. The Treasury returned to T-bill paydowns last week after issuing $254 billion in net new bills since October 15. They’re already running into the new higher debt ceiling, so they have to start paying down T-bills again while they continue to issue coupon (longer term) debt.
So the games will begin again. With that $254 billion that the Treasury raised in T-bill sales, they managed to rebuild the Treasury cash account from around $50 billion to $311 billion as of November 2.
That’s probably enough to hold off the dogs until xxxxxxx (subscriber version only). At that point, we’re going to have to have another debt ceiling increase. Hopefully this one will be more or less permanent, simply because it’s easier to forecast when we know what the limit will be or not be, for the foreseeable future. Otherwise we’ll have to keep floating like a butterfly as we go.
For now there are things in place that will buy a lot of market shenanigans for a few months. They include the $311 billion in the Treasury account, the presence of the xxxxxxxxxxxxxx (subscriber version only),, and the $1.35 trillion still sitting in the Fed’s RRP slush fund.
The day of reckoning is not today. It probably won’t be xxxx (subscriber version only), because they get a xxxx xxxxxx xxxxxxxxx xxxxxxxx (subscriber version only), that xxxxxxxx xxxx. It might be xxxxxxxx, or xxxxxxx, or xxxxxxxx. I’d guess closer to the later part of that period, but it all depends on whatever develops day to day. That’s why we track this data. We’ll see the changes coming in time to act.
The smart money has already been tiptoeing out the side door. We see that in the 10 year yield bumping up toward the highs again. That’s what I’d key on. I’ve said for months that I don’t want to be holding Treasuries or longer term fixed income investments. That doesn’t change.
Assuming that the 10 year yield does break out above xxxx (subscriber version only), that’s where I think we’ll really start to see the wheels come off. First in the bond market. But down the road in stocks too. It may not be an immediate worry, but at some point in xxxx xxxxxxx xxxxxxxx xxxxxxxx (subscriber version only), it will be.
The technical analysis of the stock market itself should tell us when the turn is under way. I wouldn’t short the market stock market heavily until the TA tells me that it’s safe to do that. It hasn’t told me that yet. Although I have a couple of toes in the water in the swing trade chart picks list in the Technical Trader reports.
Subscribers, click here to download the report.
Subscribers, click here to download the report. Available at this link for legacy Treasury subscribers.
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