Remember that in addition to its primary function, which is to push stocks higher i.e., the "wealth effect", the Fed's Quantitative Easing has another just as important role: to monetize the US deficit. Which is why the news that was released moments ago [4]from the Treasury, namely that the US deficit for Fiscal 2014 has just fallen to a meager $483 billion, or 2.8% of GDP (mostly thanks to the GSE inbound receipts which in turn were courtesy of the latest dead cat bounce in housing), and down from $680 billion a year ago, is hardly what the BTFDers were hoping for.
Fiscal 2014:
[5]
Fiscal 2013:
[6]
But this is great news for the US right?
Sure, it is also horrible news for all those liquidity addicts who hope that the Fed can engage in another $1 trillion or so QE program, because at this rate the US will only issue a net ~$250 billion in debt in 2015 (before the demographic crunch takes the deficit to the moon again after 2016).
It thus means that if the Fed takes away a net $800 billion from the market in 2015 if it does in fact launch another massive, $1 trillion QE, then the Fed's ownership of the entire marketable US bond market, when expressed in 10 Year equivalent terms, would rise from the current 35% to somewhere just about 50%, in the process destroying any remaining liquidity that US bonds may have, precisely what the TBAC was complaining about last summer.
So anyone hoping that today's tumble is merely a precursor to more QE, think again. Then again, there is a simple loophole: just tell Obama and Congress to spend, spend, spend, as fast as possible. Traditionally, they have had zero problems with following this directive.
