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The Market Has Never Been More Reliant On The Fed, Or About That "Catch-22" Taper
As has been made clear previously, the primary reason the Fed is concerned with reducing the amount of monthly liquidity Flow (i.e., the Taper) has nothing to do with the economy, or concerns related to the prevention of asset bubbles, and everything to do with the fear that as it extracts ever more collateral out of the market, and transfers increasingly more Treasurys out of private hands and into its infinite "pseudo-public" balance sheet, the liquidity of the Treasury market will get increasingly more distorted and fragile. After all, recall that the Fed is currently monetizing 10% of all outstanding marketable debt stock in 10 year equivalent terms each year which also happens to be the hard ceiling on duration monetization. But as market events in the past two weeks reminded us, there is a flip side to that: now that the Fed is into its 5 year of explicit market support and rate stabilization, the market simply has no clue how to operate should the Fed no longer be the core source of duration end-demand in a world in which deficit spending is now in its terminal exponential phase.
If there is one chart that shows just how addicted the market has become to the Fed's soothing monthly bond bid come hell or high water, it is the following. It shows that on a rolling 6 month average, the Fed is now responsible for monetizing a record 70% of all net supply measured in 10 year equivalents. This represents a reliance on the Fed that is greater than ever before in history!
It is somehow in this environment - when the Fed is monetizing more duration than ever on a relative basis - that the Fed believes it can wean the market off its support: a market that has never been more reliant on the Fed than it is now.
And, hence, the Fed's Catch-22: damned if you taper, damned if you don't.
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The Fed has been testing tapering since at least April-May
We'll be having an inevitable Triple Lehman very soon. INEVITABLE.
http://www.reuters.com/article/2013/06/27/fitch-mortgage-reits-reliance-on-repo-fu-idUSFit66128920130627
Read.
@ekm
I agree it's inevitable. I decline to put a date on it though, as I thought it was long ago. I'll go so far as to say probably before Obama leaves office...
It can't last that long, there will be starvation if it lasts that long.
It's coming down anyday now, any day.
ekm from the chart the other day on ZH, it seems around 2017 the fed will have bought up every single treasury bond. So Obviously the music is going to have to stop....but why try to timestamp it to days? It could be a year and a half from now...or more....
I don't disagree with your conclusion, but if you are tying it to crude prices....they have been around $90 plus for years now. Why does it have to end tomorrow?
If the Fed buys up everything, nobody absolutely nobody will use the USD as reserve currency by 2017
They'll use gold. The plan all along
Ekm, the math side of this, assuming it is a chaotic system, is clear, there is no way to predict the timing of the crash, since it is infinitely dependent on the initial conditions. What that means is that an infinitesimal change in the initial conditions can make the system diverge an infinite amount. Therefore you can not predict even with all the computer power in the world and even if you had access to all the variables, like terms in loans, which you don't more than a few miliseconds forward. It is the nature of the system. Don't ever think you can fit the complexities and dynamics of the system in your head. Kahneman wrote about this in his theory of perspectives book, we are just hard wired to simplify the complexities of the world around us and our brains make us believe that we understand them, when in truth we are just deluding ourselves. By the way this may be the trap that the FOMC is in, rather that all of them being crooks, although both are hard to prove the outcome is the same.
Totally and fully agree.
My prediction comes from macro events
1) Oil has been for too long above $90 and the economy is shriking due to lack of energy
2) The world is shunning the dollar and going for currency swaps, barter.
3) A crash must occur now so the Fed starts printing again by 2015 so Hillary can win. US Presidential elections are a factor
4) ZIRP has lived too long. Zero interest rates aod neg ones, makes business not produce. Only high acceptable interest rates make people over produce, and this is by the very definition of 'money', which can be only credit/debt.
I don't see anyone can dispute any part of your conclusions except the aspect of trying to pin it to the day/days/weeks/months.
You forget the entertainment part, however this has gone too too too toooooooooo long.
Dollar as reserve currency is in danger. Too many currency swaps.
You make the mistake of using reasonable assumptions when assessing an unreasonable world.
Absolutely no one will be able to predict exactly why the world eventually dumps treasuries, and dollars, or when it will happen.
If the investing world had its priorities in order, the Fed would be the only buyer of public debt since the Lehman collapse.
I am counting on an order from the White House, not a prediction based on calculations.
They will buy everything up and then wait for Japan and Europe to crash. US will then sell treasuries to them as they will be looking for safe haven. This will drive yields to zero and allow the govt to save itself from the debt accumulated. Then US becomes Japan. Just thinking out loud.
USD is a reserve currency, not cuban pesos
By that time, most of the world would have shun the dollar
I've been thinking the same thing, as I've watched treasury prices plummet. They're setting up a short squeeze for Asia and Europe collapses. BTFD!
Interest rates on 10y money double digits. Welcome to hell.
The ONLY event that could fuck up this strategy is China dumping. The only event.
A version of the Gonzalo Lira scenario. Unlikely, but damn it'd be epic.
I doubt China will dump treasuries because this would be considered an act of war by the US and the result would be unimaginable. I once scoffed at the possibility of a third world war and scoffed more at the possibility of it being nuclear. No longer though do I doubt this outcome. A third world war now seems almost inevitable. We could spend hours trolling through possible macro events that would trigger such an event but I think it would be easier to go straight to the source, sociopaths and pyscopaths run the world. I doubt there would be even any disagreement about this, regardless of political affiliation, regardless of country and regardless of religion. Sociopaths and psycopaths are driven by power, by control. They would rather destroy the playing field and all the players than lose the game. Defeat to these people is worse than death, defeat strips them of their identity.
With a third world war, by definition, comes a proxy nuclear war as the most strategic target in any country will be their nuclear reactors. Not a single warhead needs ever be launched as many countries contain nuclear weapons connected to the very foundations of their land. No army general will overlook a country's nuclear reactor(s) as the first and most strategic and valuable target. It is inevitable. It is the wont of the human race. Nothing can stop it. We've got half the population too apathetic to do anything and the other half that would welcome it a la the new testament and revelations. This is the ultimate expression of the sick nature of the human being, sociopaths running the place whose propensity is towards destruction and the worlds holy books telling the dumb masses that this is the fate of the human race. How can the human race ever expect to prosper under such circumstances. It's almost as if the sociopathic and psycopathic leadership of the world and religion form a fatal symbiotic relationship. As if almost the psycopaths and sociopaths have actually crafted the holy books /s (sarc off).
Bring on the asteroid and put us out of our misery . . . . . . . damn I can't win, the religious freaks would even welcome this as it would validate revelations. Fuck humans are fucked.
What goes unnoticed is the fact that since February the NY Fed has been lending Treasuries to primary dealers to the tune of $20 billion/day - amounts associated with prior crisis events. No need to post collateral (and buy treasuries on the market) when you can borrow from your friendly neighbor the NY Fed.
Remove this cushion and it's over for risk assets.
How do you know that?
Where do you think $20b/day is going to?
Why do they need $20b/day borrowing?
we are all pulling numbers out of our asses unless someone can prove otherwise.
Not necessarily everybody.
Some people actually do know the real numbers and MADBRAZ could be one of them.
It's a tough crowd here. If you make that claim you should back it up.
If madbraz is correct and 20 billion a month are being loaned out to maintain the system alive, then the situation would be a lot worse than even the worst among us are guessing. It'd be game over already. It'll fit with the nervousness of Bernanke and him being fired.
Can you explain the details why?
I understand it STRUCTURALLY, but have no details, as most of people don't
Anybody else have the opinion that Obama is being set up as the fall guy by the people who actually control the world? I think he's being discarded and used as the justification for civil war, which is what they really want.
yup, thats why Obama had to kill Osama cose when a Muslim kills a Muslim ther's no killing that was done.
No doubt. The debt ceiling needs be resolved by September. What else is in September? Ah, the hypothetical taper. GOP will negotiate a taper into the debt ceiling deal, tank the market, blame it on ObamaCare, pick up some seats in 2014 & start a war.
The last thing Barry needs right now is a shitty market. Watch.
"Fifty Trades of Gray"
LOL, yeah, about right, S&M for taxpayers - unwillingly blindfolded and taking it in both ends.
C'mon Bernanke; I dare you to announce that in October you will set the FED rate at 5% - nice healthy yield.
Some might call it getting fucked rotisserie style.
You guys are making the same mistake as the past 5 years.
You're analyzing things as if money is immutable. It's not. It's an imaginary substance that can be changed by decree -- and if some numbers on a screen threaten blood, the numbers will be changed by decree.
Only oil stops this, guys. Only oil. It's the only thing they can't change.
There was a comment in a different thread this morning -- the IMF has informed Egypt there will be no loan upcoming unless they end subsidies on domestic oil products. They MUST have less consumption from Egypt, so that other countries can have that oil. They say "you can have lower govt spending if you don't subsidize that oil." But it's their own oil. And they can get the numbers the IMF wants by increasing Suez Canal traverse fees. The IMF isn't interested in that solution.
Egypt is down to about 750K bpd pumped. Used to export. No longer.
And the IMF sallies forth with this while proclaiming abundance.
Right, except Inhave to insist you don't call this fiat bullshit "money". It's currency. Scrip. IOUs. Debt instruments. Paper.
...And these PhDs have no backbone for tough love. They are a bunch of Moma boys who want to be loved. In a society that only knows "give me, give me", Daddy Bernanke has only one answer. Current Fed members must hate Paul Volcker.
Here's another bit of great news for the student loan debt bubble and default rate:
Student loan rates just doubled -- what now?
http://www.nbcnews.com/business/student-loan-rates-just-doubled-what-now-6C10506410
The unknown persons who own the private portion (at least until they flip them to the fedgov) of these fraudulent loans are gonna celebrate with hookers, blow, and champagne, that's what.
The Fed couldn't taper a turd.