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Sea Of Money

Sea of Money

Glimpse into Future

In this issue of the Market Shadows Newsletter, we index previous educational articles by Paul Price for easy access and review recent moves in the virtual portfolios. Lee Adler provides an update on current market conditions.

Read the whole newsletter: Sea of Money: Market Shadows Newsletter 5-7-13

Excerpt from Glimpse into Future

Lee Adler of the Wall Street Examiner reported on May 1 that the Federal Government is "rolling in cash" due to higher-than-predicted tax collections and possibly reduced spending due to the sequester cuts. In Wildly Bullish Liquidity Flows Should Benefit Stocks More Than Treasuries (subscription required), Lee noted,

"Overall, the TBAC sees a net paydown of $21 billion from now through the end of the second quarter. That's a far more bullish forecast than they had in February for this period when they were expecting that the Treasury would need to raise cash from net new supply of $83 billion from now until the end of the quarter. That's a positive swing of $104 billion from the last quarterly TBAC update until the one just released at the beginning of May."

Thus, the Treasury's revised projection that it will pay off $21 billion in net borrowing by the end of June resulted from higher than expected tax revenues and the much maligned sequester cuts. This is equivalent to a family being able to reduce their credit card's monthly balance by paying more to the bank in a given period than they incur in new charges.

Reduced federal borrowing will free up $21 billion investor money that would have been soaked up by new T-bond issuance. A good part of that sum will likely find its way into the stock market, providing fuel for a stock market melt-up. This excess liquidity is bullish for stocks, as Lee Adler explains in the following excerpt from The Irony Of The Fed's Manipulation - Professional Edition (subscription required):

The only change in today's FOMC statement was the addition of some words to the effect that the Fed would consider increasing quantitative easing (QE, colloquially known as 'money printing'). Apparently its strategy of jawboning and manipulating commodity prices worked too well, so now instead of threatening to end or taper QE, it now must resort to threatening to add to it to keep commodities from continuing the decline that the Fed seemed to want.

It would seem that too little inflation is a worse fate than too much.

Regardless of all the words, the policy remains the same. Print mass quantities of money and jam it into the accounts of the Primary Dealers every month. Today (May 1) there's some profit taking as traders and algos digest weak economic data, but I'm sure that once they've had a chance to consider and recalibrate the implications of the Fed continuing to increase the size of the numerator that goes into the pricing equation, they'll be back at the table shortly.

The composite liquidity indicator rose last week, mostly from the Fed's weekly Treasury purchases.

Gains in most indicators were slight. April, the period of the strongest liquidity flows of the year from the massive paydowns of Treasury debt, has now ended. Liquidity will slack off a little in May as the Treasury returns to being a net borrower, but river of cash will continue until the Fed ends QE. The Bank of Japan's (BoJ) massive new QE program will also add to US market liquidity."

The biggest surges of cash come after the Fed settles its MBS purchases around mid month. That pattern will go on until the Fed ends this round of QE. News flow will cause stock and bond prices to continue to fluctuate around the liquidity trend. Buyers will get fatigue from time to time, as they did today. No doubt there will be more efforts to manipulate commodity prices, particularly gold and silver, but now that the Fed sees that it may have been too successful in scaring speculators away from commodities, they'll probably try to say stuff that gets them buying again. Fed policy is nothing if not ironic...

Some of the money that the BoJ prints not only can but does move into US paper, whether Treasuries or stocks. It will show up in the Foreign Central Bank measure and in banking measures. There's a strong correlation between the BoJ balance sheet and US stock prices, both over the long term, and in intermediate swings."

The correlation between the direction of stock prices and the size of these central bank balance sheets is remarkable.

Fed Cash to Primary Dealers measures the flow of cash into Primary Dealer accounts from Fed securities purchases. This indicator has the heaviest weighting in the composite. The current growth under QE3/4 is the fastest in history. It will be bullish until the Fed ends QE. Stocks will stall or pull back from time to time, hemmed in by resistance and news flow, but the Fed's cash will find its way into equities sooner or later.


Read the whole newsletter: Sea of Money: Market Shadows Newsletter 5-7-13

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