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The market waltzed through a week of heavy Treasury auction supply, but it did not have to pay the piper until Friday and Monday, May 2, when all the new paper was due to settle. Thursday's settlement actually saw bills paid down by $11 billion. That and $16 billion in POMO gave the markets plenty of juice for Ben's coming out party. The US Government, just like Colonel Kadaffy, sent out wads of cash to its minions to insure that cheering, fist pumping crowds would show up for Ben's appearance before the scripted, adoring mob of ink stained wretches. It was sickening. And I'm not even talking about the so called reporters in the room with him. I'm talking about the security market apparatus. Anyone who dared protest that the market show had gone too far was beaten to a pulp. Even venerable bear David Rosenberg of Gluskin Sheff was cowed into submission.
Friday and Monday the market has a big pile of new paper to settle. We have to wonder whether having spent every last penny they had in propping things up earlier in the week, the dealers have anything left come Monday. The markets "should" sell off, if not today, then Monday.
The indirect bid at the auctions continues to weaken, suggesting that foreign central bank (FCB) players continue to withdraw from the game, but the Fed's custodial data on FCB holdings went the other way, showing an explosion of FCB buying the prior week.
It can't be Japan and probably isn't China, which has its own problems, so by process of elimination, the only ones with that kind of cash are the oil producing nations. That game can only go on as long as the Fed keeps pumping up the price of gas. It's a market double whammy. What happens after June? Poof! It's gone. But until then, the potential for this light show to go ballistic should not be discounted.
As I reported last week, corporate tax collections were negative versus last year but not as bad as the earlier indications suggested they would be. The big squeeze I expected from materials cost increases hasn't shown up, probably because materials aren't that big an input for most businesses. So corporations are doing great; it's just people who aren't doing so hot, and that, dear friends, is completely irrelevant when it comes to the market. Withholding taxes are now barely higher year over year, with a stall particularly evident over the past 2 weeks suggesting that the economic "recovery" has probably stalled. As tax refund stimulus rapidly subsides and emergency stimulus spending recedes, the economy could weaken rapidly, causing revenues to fall. Even though government spending should be reduced, the deficit, and hence Treasury supply, would start growing again right around the time the Fed stops propping up the market with its money pumping.
When the Fed withdraws the pump feed at the end of June, as the Bernanke has essentially confirmed it would, there's every reason to believe that the markets will face a liquidity crisis. (4/22/11) I don't think that any of that $1.5 trillion in bank reserves on deposit at the Fed will be pried loose to backstop the markets. I remain stumped as to how the Fed might fund that, even if the banks wanted to do it. The only alternative I can imagine at this point is a rapid, perhaps cataclysmic rise in interest rates and yields. I look at these conditions, and all I can see is a black hole.
Lord Bernanke's press conference broke no new ground. Dr. Quiver Lip You Can Tell He's Lying Because His Lips Are Moving told all the standard lies and revealed all the same delusions that I have catalogued here month after month since his tenure began 5 years ago. The part that I found most laughable was his use of the FOMC members' and district bank presidents' economic forecasts as some kind of Holy Grail. After all, I showed last year just how hopelessly incompetent these boobs are at even understanding the present, let alone predicting the future. Ben Bernanke emphasized that the Fed bases its policy decisions on these forecasts. How insane is that? Wouldn't it make more sense to base it on something more esoteric like, say... reality?
The most frightening aspect of this is how few people seem to "get it." None of the reporters seriously questioned Bernanke about the Fed's track record of badly misunderstanding the economy. None confronted him about the Fed's money pumping causing the runaway gas price inflation which Bernanke blames on worldwide demand. Well, there was a lot of demand for housing in the US in 2005 too. There's real demand and there's speculative bubble driven demand. The Fed refuses to admit the difference and the mainstream financial media blindly supports that delusion. Virtually everyone is happy to ride down Bernanke's Highway to Hell without so much as a vaguely serious question about the Fed's competence, even after it has proven itself to be totally, and probably willfully, ignorant of the facts on the ground time and time again.
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