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The Market Has Never Been More Reliant On The Fed, Or About That "Catch-22" Taper

Tyler Durden's picture




 

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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Mon, 07/01/2013 - 17:59 | 3711494 ekm
ekm's picture

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.

Mon, 07/01/2013 - 18:03 | 3711504 Cursive
Cursive's picture

@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...

Mon, 07/01/2013 - 18:04 | 3711507 ekm
ekm's picture

It can't last that long, there will be starvation if it lasts that long.

It's coming down anyday now, any day.

Mon, 07/01/2013 - 18:09 | 3711517 fonzannoon
fonzannoon's picture

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?

Mon, 07/01/2013 - 18:12 | 3711525 ekm
ekm's picture

If the Fed buys up everything, nobody absolutely nobody will use the USD as reserve currency by 2017

Mon, 07/01/2013 - 18:26 | 3711575 Solarman
Solarman's picture

They'll use gold.  The plan all along

Mon, 07/01/2013 - 18:41 | 3711621 spine001
spine001's picture

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.

Mon, 07/01/2013 - 18:49 | 3711669 ekm
ekm's picture

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.

Mon, 07/01/2013 - 18:53 | 3711686 fonzannoon
fonzannoon's picture

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.

Mon, 07/01/2013 - 18:56 | 3711694 ekm
ekm's picture

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.

Mon, 07/01/2013 - 19:45 | 3711872 Totentänzerlied
Totentänzerlied's picture

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.

Mon, 07/01/2013 - 20:06 | 3711946 ekm
ekm's picture

I am counting on an order from the White House, not a prediction based on calculations.

Mon, 07/01/2013 - 18:32 | 3711595 MyBrothersKeeper
MyBrothersKeeper's picture

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.

Mon, 07/01/2013 - 18:35 | 3711605 ekm
ekm's picture

USD is a reserve currency, not cuban pesos

 

By that time, most of the world would have shun the dollar

Mon, 07/01/2013 - 18:46 | 3711655 Mr. Saxby
Mr. Saxby's picture

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!

Mon, 07/01/2013 - 18:09 | 3711519 GVB
GVB's picture

Interest rates on 10y money double digits. Welcome to hell.

Mon, 07/01/2013 - 19:07 | 3711731 max2205
max2205's picture

The ONLY event that could fuck up this strategy is China dumping.  The only event.

Mon, 07/01/2013 - 19:48 | 3711881 Totentänzerlied
Totentänzerlied's picture

A version of the Gonzalo Lira scenario. Unlikely, but damn it'd be epic.

Mon, 07/01/2013 - 20:30 | 3712000 BringOnTheAsteroid
BringOnTheAsteroid's picture

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.

 

 

Mon, 07/01/2013 - 18:22 | 3711558 madbraz
madbraz's picture

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.

 

 

Mon, 07/01/2013 - 18:33 | 3711592 ekm
ekm's picture

How do you know that?

 

Where do you think $20b/day is going to?

 

Why do they need $20b/day borrowing?

Mon, 07/01/2013 - 18:35 | 3711604 fonzannoon
fonzannoon's picture

we are all pulling numbers out of our asses unless someone can prove otherwise.

Mon, 07/01/2013 - 18:36 | 3711611 ekm
ekm's picture

Not necessarily everybody.

Some people actually do know the real numbers and MADBRAZ could be one of them.

Mon, 07/01/2013 - 18:41 | 3711633 fonzannoon
fonzannoon's picture

It's a tough crowd here. If you make that claim you should back it up.

Mon, 07/01/2013 - 18:46 | 3711654 spine001
spine001's picture

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.

Mon, 07/01/2013 - 18:51 | 3711675 ekm
ekm's picture

Can you explain the details why?

I understand it STRUCTURALLY, but have no details, as most of people don't

Mon, 07/01/2013 - 18:01 | 3711501 HelluvaEngineer
HelluvaEngineer's picture

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.

Mon, 07/01/2013 - 18:49 | 3711671 starman
starman's picture

yup, thats why Obama had to kill Osama cose when a Muslim kills a Muslim ther's no killing that was done. 

Mon, 07/01/2013 - 19:01 | 3711708 JFKFC
JFKFC's picture

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.

Mon, 07/01/2013 - 18:08 | 3711515 ebworthen
ebworthen's picture

"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.

Mon, 07/01/2013 - 19:12 | 3711753 Darksky
Darksky's picture

Some might call it getting fucked rotisserie style.

Mon, 07/01/2013 - 18:46 | 3711635 CrashisOptimistic
CrashisOptimistic's picture

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.

Mon, 07/01/2013 - 19:51 | 3711899 Totentänzerlied
Totentänzerlied's picture

Right, except Inhave to insist you don't call this fiat bullshit "money". It's currency. Scrip. IOUs. Debt instruments. Paper.

Mon, 07/01/2013 - 18:42 | 3711641 TrustWho
TrustWho's picture

...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. 

Mon, 07/01/2013 - 19:42 | 3711859 Winston Smith 2009
Winston Smith 2009's picture

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

Mon, 07/01/2013 - 19:57 | 3711918 Totentänzerlied
Totentänzerlied's picture

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.

Mon, 07/01/2013 - 20:07 | 3711948 chump666
chump666's picture

The Fed couldn't taper a turd.

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