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Market Blows But Does It Count 8/24/20

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19 minutes ago, potatohead said:

It seems Macro investing is all the rage now. Countless Fintwitt and youtube stars parading dollar melt up, Fed balance sheet expansion  does not create inflation (only commerical bank lending), Primary dealers are only reimbursed with reserves not cash when the Fed buys US treasuries from them (therefore not inflationary) , try to call out these people and the lower the dollar goes the more they become emboldened that the dollar is a rubber band being pulled back and waiting to rip higher.

They're boobs. 

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22 minutes ago, potatohead said:

It seems Macro investing is all the rage now. Countless Fintwitt and youtube stars parading dollar melt up, Fed balance sheet expansion  does not create inflation (only commerical bank lending), Primary dealers are only reimbursed with reserves not cash when the Fed buys US treasuries from them (therefore not inflationary) , try to call out these people and the lower the dollar goes the more they become emboldened that the dollar is a rubber band being pulled back and waiting to rip higher.

There premise is that dollars are only born into existence when banks lend money to borrowers. Dollars only die when loans are paid off. Says nothing to the effect of defaults or forgiveness. Do not address that inflation is also influenced by confidence of the public's perception of purchasing power.

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But exactly what's their point? Investment wise, what's their point? 

The idea that Primary Dealers are only paid with reserves is peak idiocy. Primary dealers are paid with dollars that the Fed conjured out of thin air. The Fed deposits the money into their trading/cash accounts at the Fed. They become reserves when the dealers execute a subsequent trade or transfer the deposit to the parent bank or correspondent.  Liquidity

 

 

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5 minutes ago, DrStool said:

But exactly what's their point? Investment wise, what's their point? 

The idea that Primary Dealers are only paid with reserves is peak idiocy. Primary dealers are paid with dollars that the Fed conjured out of thin air. The Fed deposits the money into their trading/cash accounts at the Fed. They become reserves when the dealers execute a subsequent trade or transfer the deposit to the parent bank or correspondent.  Liquidity

 

 

That is what I believed as well. Many are trying to skip a step or two or convince others that the money the Fed creates out of thin air actually has nothing to do with inflation because it stays as reserves. When questioned on the dollar's weakness via "purchasing power" or money supply increases since the Fed has been created, they go silent. They continue to believe US Treasuries have long lasting value and continued deflation will keep this asset class in global demand.  At the same time, they claim because the Federal Reserve does not purchase Treasuries or mortgages directly, the Fed has had little impact on price structure, money supply, and velocity.   These people have garnered a mass of followers.

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The Fed uses the Primary Dealers as strawmen. No different from direct purchases. 

Money goes from the Fed to the dealers where it branches off. Some gets distributed to other traders, and some goes back to the Treasury, where it's spent into the economy.  

There's no CPI inflation because labor has no market power. But there's plenty of asset inflation, including housing, and commercial real estate, in particular, most of which is now worth a fraction of what it most recently sold for. The commercial RE market is frozen because no one will pay for empty office and retail buildings, or multifamily where 30% of tenants aren't paying rent. 

The real estate market is a shit show.. 

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I would love to see Lee on Realvision or any podcasts discuss with "so called experts" who simply regurgitate other's work and really have little knowledge of the Central Banks' actions and its ramifications.

 

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This chart is from the report I just posted at Liquidity Trader. It's a chart of the Primary Dealer accounts at the Fed. Notice the spikes every month when the MBS settlements are held.  This is a seperate line item from bank reserves. QE shows up in this account first. It then shows up in the reserves line item the following week when the dealers trader with counterparties or otherwise transfer the funds into commercial bank accounts, such as the account of their bank affiliate. 

pdaccountsatFed.png

The Fed’s balance sheet resumed its growth in August after a bit of a stall in July when dealers paid off Fed repos. That program has been at zero since then. Dealers don’t need to borrow from the Fed when the Fed is cashing them out every week with QE.

And there’s the rub for bears. There’s still enough QE to keep this farce going, short term factors notwithstanding.

Last week was MBS settlement week (see last week’s QE update). That pumped $100 billion into dealer accounts. Not all of that showed up on the Fed’s balance sheet total assets because other assets were paid down in the. MBS get paid off in the normal course of business during the month. Some of the Fed’s superfluous alphabet soup programs have also had reductions.

But that stuff doesn’t really matter to the stock and bond markets.

Our focus is on the Fed’s securities holdings, in what’s called the System Open Market Account (SOMA). That’s where the action shows up. It’s the money that the Fed pumps into the financial markets through its straw men, the Primary Dealers. And that is still steadily growing.

Here’s what that means for the outlook and strategy.

Subscribers, click here to download the report

Not a subscriber yet?

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