Courtesy of Karl Denninger at The Market Ticker
Liquidity Disappearing
Bill auctions: 13 week bid-to-cover 2.79, 26 week 2.72.
Both the lowest btc in over three months.
Gee, on a day when the market is down 24 handles on the SPX there’s no huge demand for Treasuries?
Hmmmm…. gee, let’s see, we seem to be a bit short of money here.
Short on the Treasuries, short on equities, short on COMMODITIES.
Remember what I was talking about with liquidity drains a week and change ago? Two events detected a few days apart, with today being "T + 3" on the second one (yes I know that other markets don’t settle like stocks, but there is USUALLY a 2-3 trading day delay between when these things are initiated and when they show up in the markets.)
The Fed is quickly proving that it is nothing more than this:
I bet that if the movie were shot today that guy would be standing there in a pair of boxers.
I hope you folks who got all giddy about the SPX in the 900s and the DOW up around 8,800 took the opportunity to either sell or hedge.
While there is no guarantee that this pattern will continue the fact remains that liquidity matters and there is little point in trying to argue that the primary fuel for the rally off the March lows has been unprecedented system liquidity provided by Sir Feds-a-lot.
The problem is that Treasury has been and continues to suck all the oxygen out of the room with their unprecedented issuance of debt to fund Obama’s silliness in the form of his budget "priorities" and the raw handouts to banking interests, much of which is apparently going to show up in Goldman Sachs bonuses.
Again, to put this in perspective this 7-day window has $165 billion in issuance. The entire S&P 500 – all 500 stocks – has been trading in the $2-2.5 billion a day range for the last month or so. That’s the capital flow that is represented by all trades in all 500 stocks.
There are of course lots of other stocks, but in aggregate the S&P 500 posts the largest dollar volume on a typical day by a significant margin.
You simply cannot issue $165 billion in Treasury Debt and expect it not to have a major impact on system liquidity. It is not possible. That which is spent on one thing (in this case Treasury bonds) cannot be spent on another (in this case stocks.)
The Fed cannot "monetize" this debt without creating an instant dislocation in the Treasury market – their games thus far have produced a SMALL rumbling of trouble there, but nothing like an outright monetization campaign would produce.
Bernanke and Obama are backed into a corner, exactly as I predicted would happen. In order to continue to issue like this in the Treasury market while not driving Treasury rates to the moon money will have to be "scared" into bonds – which means blowing up the stock market.
Sorry folks, but those "green shoots" are in fact marijuana plants and our President along with his economic advisers have been smoking ’em.