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Shorter Surges, Shorter Pullbacks - 8/16/22


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I think it is safe to say that if the Fed still wants higher interest rates, the RRP program may have in theory been their way to remove buying power of traded securities so those securities would trade at lower prices higher yields and new funds could go into an alternative savings account where a new form of QE has been created. Thus liquidity is being created on one hand by creating /paying interest while Fed is trying to reduce the balance sheet and say we are hawkish. No wonder the market is talking Pivot everyday.

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2 minutes ago, potatohead said:

I think it is safe to say that if the Fed still wants higher interest rates, the RRP program may have in theory been their way to remove buying power of traded securities so those securities would trade at lower prices higher yields and new funds could go into an alternative savings account where a new form of QE has been created. Thus liquidity is being created on one hand by creating /paying interest while Fed is trying to reduce the balance sheet and say we are hawkish. No wonder the market is talking Pivot everyday.

The RRP account is an overnight money account. In no way does it remove or limit buying power. It's no different than you putting your excess cash into a money market fund. Even if 500 billion of the 2.2 trillion in the RRPs is money available to be invested in securities other than T-bills, that money is in no way restricted from buying stocks. Settlement is 3 days. The money in RRPs is always available tomorrow. 

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75% of the interest paid on RRPs goes to MMFs. And the interest isn't high enough to materially loosen credit conditions. 

No, this rally is creating its own liquidity as rallies do. Rising prices increases collateral value to enable more borrowing to buy. 

This cannot be indefinitely sustained when the Fed is constantly removing cash from the system, and when the Treasury is pulling cash out of the markets and transferring it to the economic stream relentlessly.  Only that portion of government spending that pays interest on the debt goes back into the financial sphere. The rest of it goes into the economic sphere where it drives inflation relentlessly higher. Even if the inflation rate settles at 8%, that's horrendous. 

This margin driven echo bubble will end, and the markets will go down relentlessly when it does. The only question is the timing. For that, we rely on the TA. Which has been dead accurate. 

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In the end, with this rally, bulls are digging their own graveyard. To fight inflation the FED has to tighten financial conditions. What we see the last few weeks is the exact opposite. So the FED will and must react, but not in Volcker style, just to make that clear. The society would break up this time, maybe even civil war. There was even an assasination attempt on Volcker in 1981. Poopwell knows that too…

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