Does the draining of liquidity affect equity prices? Karl Denninger says yes, that it amounts to an unpleasant "forced choice." Read both Karl’s article from today and his article from Tues, THURSDAY: Watch Bernanke, (below).
Thursday Comes: FedWatch
Courtesy of Karl Denninger at The Market Ticker
I told ‘ya to watch Bernanke on Thursday. Here are the final results; as expected, he did roll some (but nowhere near all) of the expiring TAF.
That’s a net $53 billion drain in system liquidity, on top of the $~70ish billion drained by TARP repayments.
Given the extraordinary "program" support of The Fed, this isn’t as dramatic as what happened last September, but look folks, the record is what it is.
This is twice that I have caught meaningful "corners" in the equity market, all by watching intentional liquidity moves by central banks.
(As a refresh, here’s my Thursday call from last week)
So far the maximum move down has been 5% since the Thursday call. That’s fairly significant, and given the further drain for today, I doubt its over.
The previous "catch" was on the cusp of a 30% decline.
Those of you who think that there’s something "tinfoil" about these sorts of manipulations need to consider that this is all done right in the open, if you know where to look.
There is no attempt to hide anything and no conspiracy – simply a conflict of interests (The Fed wants a 4% mortgage rate but can’t have it while throwing liquidity into the system, as both fear of hyperinflation and "risk appetite" drive bond yields the wrong way) and as such there is a forced choice – it is not possible to support both markets at once.
You can either play "loose money/green shoots" and accept that mortgage rates will go into the 7s (at least) or you can play "tightwad" and drive down mortgage rates through a fear trade into Treasuries, but in the process stock prices will get hammered.
Clearly in September the "game" got away from Ben; this time they have (so far) managed to keep things (somewhat) under control. There is of course no assurance that it will remain under control, and in fact there is every reason to believe it won’t, given that this exercise with liquidity is somewhat like herding cats – if you’re trying to shoot at a specific result you’re unlikely to succeed, especially if the intended attempt is to "nuance" outcomes (e.g. "let’s drive down bonds and its ok if stocks decline a little bit.")
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THURSDAY: Watch Bernanke
In light of what I said before about drains of liquidity….
(click for larger image)
The salmon-colored day is the one to pay attention to.
It is always dangerous to assume that an expiring block of paper will not be rolled. It usually is. But – if it is not, in this case, roughly $100 billion in cash will come out of the "sloshing cash" in the banking system.
Of late it has been unusual for there to be visible OMO. Note that the table’s first three columns are zeros – this is the result of The Fed’s "unusual" policies, and is why my usual FedWatch has produced no information via this route for months, unlike the September 24th Ticker.
(TIOs can usually be ignored as they rarely have any impact on the overall condition of system liquidity.)
But the TAF maturation, if it does not roll, is a big deal.
What’s T+3? Monday/Tuesday after options expiration, a nasty time for a liquidity drain to show up. If that drain does happen on Thursday you can expect to see it in the market some time within the next week, probably Monday or Tuesday, and it won’t be pretty.
File this one in the "teach a man to fish" department; you can find this data, any time you’d like it, at http://www.gmtfo.com/reporeader/OMOps.aspx
Now you know how to read one of the tools that I use to watch Ben and his Merry Men – the tool that, in fact, caught him in September of 2008.
UPDATE 9:04 AM: The Fed has just announced an intent to award $48B in TAF paper, implying that about half of the $100 billion will roll and the rest drain. Again you cannot be sure until the day passes, and sometimes until the next day, but this is what it looks like.
