Alarm! Treasury Dealer Short Positions Another Red Flag for Liquidity As Stock Market Surges On Realization The Fed May NOT Taper (And Fausti Oversold Omicron Threat)

Alarm!

(Bloomberg) — The recent drop in primary-dealer holdings of front-end Treasuries is another warning of potential market dislocation heading into the year-end liquidity vacuum.

As of Nov. 24, primary dealers — which are mostly the large banks — were on the whole betting against two- to three-year Treasuries rather than buying. They had net short positions of just over $9 million, near the most bearish levels since 2017, signaling a pullback by buyers that provide crucial liquidity for older Treasury issues.

The positioning in the front-end of the curve “suggest less demand from the dealer community to fund off-the-run long positions,” Barclays strategists Anshul Pradhan and Andres Mok say in a Dec. 3 note. Off-the-run Treasuries are notes and bonds created in past years and traded less frequently than the newest issues; they’re the biggest part of the market and make up most of the Federal Reserve’s daily asset purchases, which are being scaled back.

Short positioning increased on a relative basis as a result, “which may also have crowded demand to borrow particular issues over others,” the analysts wrote.

Those forces together could contribute to an increase in market dislocations.

Jerome Powell’s hawkish pivot shocked financial markets. A week later, stocks are higher.
The S&P 500 staged its biggest rally since March to wipe out losses from the past week. The speculative fringe that was a smoldering wreck Friday was soaring Tuesday. An index of meme stocks rallied more than 4%, while one composed of airlines added 1.6%. A gauge of newly public companies advanced more than 4%, SPACs jumped more than 2% and even cryptocurrencies rallied, with Bitcoin powering back above $51,000.

It’s a stunning about-face for risk assets that went into a tail spin after the Federal Reserve chair suggested he favored accelerating the removal of monetary support. What follows are takes from market-watchers on why the market is looking past the Fed’s potential change in policy.

Also, the realization that Fausti was chicken-little and Omicron is not the planet killer.

Or could it be that with China easing, the US will be forced NOT to taper. Or taper only ever-so-slightly.

With the Dow up another 500+ points, it looks like no one is taking Powell and the Gang seriously about tapering. Or Fausti for that matter.

NIAID Director Anthony Fausti.

Annual U.S. Home Price Growth Hits 18% in October (Highest In Non-California West And Florida, Lowest In DC, NY And Illinois)

National home prices increased 18% year over year in October 2021, according to the latest CoreLogic Home Price Index (HPI®) Report . The October 2021 HPI gain was up from the October 2020 gain of 7.4% and was the highest 12-month growth in the U.S. index since the series began in 1976. The increase in home prices was fueled by low mortgage rates, low for-sale supply and an influx in homebuying activity from investors. Projected increases in for-sale supply and moderation in demand as prices grow out of reach for some buyers could slow home price gains over the next 12 months.

The non-California west (Arizona, Idaho, Utah, Nevada) and Florida have the strongest price growth while Washington DC has the slowest growth YoY.

Other “escape to” states like Vermont, Tennessee, North and South Carolina are also showing 20%+ rates of growth while the “escape from” states of Illinois, Louisiana, New York, and North Dakota are showing low growth as in 5-10% YoY.

Waiting for you in Florida!

China’s Central Bank (PBOC) Cuts Reserve Requirements By 50 Basis Points To Stem Tide Of Economic Slowdown And Real Estate Development Problems (Big Trouble In Big China?)

Big Trouble In Big China?

China cut the amount of cash most banks must hold in reserve, acting to counter the economic slowdown in a move that puts the central bank on a different policy path than many of its peers.

The People’s Bank of China will reduce the reserve requirement ratio by 0.5 percentage point for most banks on Dec. 15, releasing 1.2 trillion yuan (US$188 billion) of liquidity, according to a statement published Monday.

The reduction was signaled by Premier Li Keqiang last week when he said that authorities would cut the RRR at an appropriate time to help smaller companies, and is the second reduction this year.

The decision comes after recent data showed the economy and industry stabilizing, although Beijing’s tightening curbs on the property market have led to a slump in construction and worsened a liquidity crisis at developer China Evergrande Group and other real estate firms.

Evergrande’s ADR is collapsing (now 5.975) along with Evergrande debt falling to 23.12 (versus 100 par).

China’s credit impulse has nosedived (see pink box) as the PBOC drops bank reserve ratios to lowest level since 2007 in an effort to float the boat. Will the PBOC drop in reserve ratios stem the tide? Or is it peasant magic?

Yes, its big trouble in big China. Let’s hope it isn’t the Three Storms (commercial real estate bubble, low Central Bank reserve ratios and … fear).

Is The US Engaged In A Monetary Cold War With Russia? (Or Will The US Become A Tightener Rather Than A Loosener?)

Is the US engaged in a monetary cold war with Russia? It looks that way if we consider the Index of Global Easing and Tightening from the Council of Foreign Relations.

Russia and Brazil are tightening along with Mexico, Colombia, Peru, Argentina and Chile. Add Pakistan, The Czech Republic and Poland to the list of tighteners.

The looseners? The US, of course, with Canada, Australia, China, India, Western Europe, Turkey and Nigeria. New Zealand is the quickest loosener.

This looks very cold war-like. But a monetary cold war.

Let’s see if The Fed becomes a tightener rather than a loosener.

Cracks Emerge in Treasury Bond Market as Fed Starts to Back Away (Stimulypto Bubble Trouble: China, Shiller CAPE, Buffett Ratio)

As The Federal Reserve tries to drain-off the extraordinary growth in its balance sheet since COVID without raising its target rate (good luck with that!), it is time to appraise where we are sitting. First, liquidity.

(Bloomberg) Buying and selling large quantities of U.S. government debt without substantially moving the market is about the hardest it’s been since the pandemic sent markets reeling in March 2020. Volatility has jumped, failed trades have increased — and Wall Street analysts warn that the Federal Reserve’s exit from bond-buying is set to make matters worse.

When markets seized up last year, liquidity in most Treasuries vanished, forcing the Fed to embark on massive asset purchases and other measures to avert a full meltdown. Now, the U.S. central bank is scaling back that buying, which has targeted the least-liquid Treasuries, and is poised to quicken the wind-down. At the same time, new government borrowing is ebbing, with the combination setting the stage for more fireworks.

OK, liquidity isn’t as bad as COVID and March 2020, but it is near the highest level since March 2020. The question is … will the numerous asset bubbles around the globe burstLet’s look at the ongoing saga of Chinese conglomerate Evergrande (mainly known as a large real estate developer). Their 8.25% bond has plunged to $23.481 on speculation of a catastrophic default on their bond payments. Then we have Invesco’s Golden Dragon China ETF (measuring a diversified market cap of US-listed companies headquartered or incorporated in China & derive a majority of their revenues from the People’s Republic of China). This ETF has crashed and burned back to pre-COVID (and Stimulytpo) levels.

Speaking of cracks, how will the Buffett Ratio US react to a reduction in The Fed’s balance sheet (orange line) and M1 and M2 Money stock? Given that the Fed Funds target rate is WAY below where it should be (according to the Taylor Rule).

As I mentioned yesterday, the Shiller CAPE ratio is at its highest level since the Dot.com debacle of 2000. How will the Shiller CAPE ratio react to The Fed’s tapering?

Even the Hinderburg Omen is flashing red … again.

Now, the Dow is up 600 points today, primarily on the news that the Omicron Variant is about as harmful as the common cold.

BUT, there is this interesting news from Steve Leisman at CNBC:

A major shift is underway at the Federal Reserve to begin to remove the central bank’s massive pandemic easing policies, and could see it hike rates sooner than is priced in by markets.

Comments by Fed officials suggest the central bank is likely to decide to double the pace of its taper to $30 billion a month at its December meeting next week. Initial discussions could also begin as soon as the December meeting about when to raise interest rates and by how much next year with Fed officials set to submit a fresh round of economic forecasts and projections for the fed funds rate.

There is no consensus yet on when to begin hikes, but it’s clear that the faster taper is designed to give the Fed flexibility to raise rates as soon as the spring. The markets do not appear to expect the first rate hike until the summer of 2022.

Uh-huh. Let’s see what happens when and if The Fed starts to taper. Is economic growth so strong that it can continue without Federal Stiumulypto? THAT is the right question.

Look at the above charts and tell me if The Fed will actually raise their target rate more than twice. Despite the Taylor Rule suggest a target rate of 15.50% to cool inflation.

NOT In Labor Force Remains Near 100 Million As REAL Hourly Earnings Drop To -1.4% YoY (Biden Celebrates Unemployment Rate Dropping To 4.2%?)

President Joe Biden took to Twitter yesterday to celebrate how well his economic policies are working, particularly the American Rescue Plan. Between Congress and The Fed pumping trillions of dollars of stimulus in the economy, how is this surprising? Or a reason for celebration?

While declining unemployment is great, there is more to the story that President Biden failed to mention. Like … the number of people NOT in the labor force remains near 100 million (99,997,000 to be exact). Thanks to Covid-related policies (like job loss due to resisting vaccinations), increasing retirement, etc.), NOT in labor force remains elevated compared to pre-Covid levels. And, of course, Biden doesn’t want to mention that inflation is growing faster than hourly wage growth resulting in REAL hourly wage growth being -1.4% YoY.

And President Biden took credit (he is a politician, after all) for a small decline in gasoline prices. Of course, after helping send gasoline prices up over 50% since he took office.

So, is Biden going to take credit for increasing gasoline prices by 50%? And declining REAL average hourly earnings? Or over 100 million people NOT in the labor force? I doubt it. But he is focusing on the POSITIVES of his American Rescue Plan.

Its a bold strategy Cotton, let;s see if it pays of for him.

REAL Average Hourly Earnings Growth Falls To -1.378% YoY In November Jobs Report (Jobs Added Missed BIG At Only 210K, New Taylor Rule Estimate Is 15.50%)

Treasury Secretary Janet Yellen said yesterday that “It’s Fed’s Job to Avoid Any Wage-Price Spiral.” Well, The Fed is helping to avoid a wage increase in real terms, since the November jobs report revealed that REAL US Average Hourly Earnings growth YoY fell to -1.378%. In other words, inflation is greater than hourly earnings.

And in other jobs related news, nonfarm payrolls rose by only 210k versus expectations of 550k jobs to be added. Even NOMINAL hourly earnings growth (4.8% YoY) was less than expected (5.0%).

Labor force participation rose a bit to 61.8%, still well below the pre-COVID levels of 63.4% in January 2020.

The U-3 unemployment fell to 7.8%. Still higher than the pre-COVID rate of 7.0% in February 2020, but getting close! As for what this means for The Fed, the new target rate implied by the Taylor Rule is 15.50%.

After this lousy jobs report, 10-year Treasury yields dropped … like Biden’s approval ratings.

The dance number where The Fed keeps their target rate at 25 basis points while the Taylor Rule implies a target rate of 15.50% is the Yellen Boogie. By Powell and the Gang.

Powell, Yellen Say They Underestimated Inflation And Supply Snarls (M1 Money Grew At 369% With Rates Near Zero Since COVID And They Didn’t See Inflation Coming???)

The Dream Team (Fed Chair Jay Powell and Treasury Secretary Janet Yellen) just can’t believe that inflation struck even after M1 Money Stock increased by 369% from March 2020 to today while interest rates remained near zero.

From The Hill: Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen on Wednesday said they underestimated how quickly the U.S. economy would rebound from the COVID-19 recession and strain supply chains.

During a Wednesday hearing before the House Financial Services Committee, the top two U.S. economic policymakers acknowledged that high inflation has risen higher and lingered much longer than they expected.

“We understood demand would be strong,” Powell said. “We didn’t understand [the] significant problems of the supply side.”

Both Yellen and Powell said substantial fiscal and monetary stimulus played a role in stoking the higher demand that fueled inflation, but they called it a challenging side-effect of an otherwise fast recovery.

Seriously? The Fed and the Federal government dumped trillions of dollars into an economic system and didn’t think there would be negative consequences??

Look at the surge in M1 Money Stock at the same time asset-backed commercial paper rates are 0.08%. That is, about 1/3rd The Fed Funds Target rate (upper bound). None of this concerned The Dream Team?

An example of what The Dream Team didn’t see happening was the explosion of home prices. Home price growth was about 4% YoY prior to COVID, and is now 19.51% YoY.

Now we have the US Treasury Actives curve inverting like the US Dollar Swaps curve after 20 years.

Here is a composite photo of Jay Powell and Janet Yellen (to save space). Here is a video of Powell/Yellen composite trying to control inflation.

US Mortgage Refinancing Applications Index PLUNGES 40.3% WoW (Purchase Apps Index Plunges 30.4%)

Its that time of year for mortgage purchases applications! Purchase applications usually decline during December and start to rise after the beginning of the year.

Mortgage purchase applications (white line) dropped -30.4% from the previous week, not usual for December. But what is surprising is the drop in REFINANCING applications: down -40.3% from the previous week.

30-year mortgage rates rose 2.16% from the previous week.

But between Omicron (or as the French say, “Oh! Macron!”) and The Federal Reserve, there is a good chance that mortgage rates will fall this week putting a quick end to refi application plunge.

Purchase applications? Nope, it is that time of the season when purchase applications drop like a rock.

Calamity Jay Powell Ditches Transitory Inflation Tag, Paves Way for Rate Hike (Compare To Volcker’s Record)

Calamity Jay Powell is no longer mentioning “transitory” when it comes to inflation, but does Powell and the FOMC have the moxie to ACTUALLY raise rates more than a smidge??

(Bloomberg) — Team Transitory is throwing in the towel.

In a clear sign that the Federal Reserve is shifting to tighter monetary policy, Jerome Powell — who’s spent months arguing that the pandemic surge in inflation was largely due to transitory forces — told Congress on Tuesday that it’s “probably a good time to retire that word.”

The Fed chair, tapped last week for another four-year term, still thinks inflation will ebb next year.

But in testimony before the Senate Banking Committee, he acknowledged that it’s proving more powerful and persistent than expected, and said the Fed will consider ending its asset purchases earlier than planned.

A number of economists are forecasting cooling inflation next year, which gives Powell an excuse to NOT raise rates, other than just a bit.

For a little history, inflation was rampant in the 1970s and early 1980s. Fed Chair Paul Volcker, all 6’7 of him, raised the Fed Funds target rate (white line) to 20% on several occasions. The result? Inflation cooled from over 14% in 1980 to 2.46% by 1983. But since 2008, Fed Chairs Bernanke, Yellen and Powell have been the ANTI-Volckers … keeping the Fed Funds Target rate near zero for the the most part and adopted their gut-wrenching quantitative easing programs that are still here today.

Of course, Powell could do what Volcker did (and the Taylor Rule suggests) and raise their target rate to 15% to cool inflation.

But does Powell and the other FOMC members have the moxie to really cool inflation? Frankly, no. Powell until yesterday played the TRANSITORY card and still believes that inflation will cool by 2022.

True, the Federal government has binged on borrowing (up 172% since January 2009). And with Biden and Congress trying to spend trillions more (much of which will be added to the public debt rolls, so increasing interest rates ala Volcker is very problematic.

And then there is always the good ‘ole excuse not to raise rates if needed. Other than admitting that The Fed is monetizing Federal government spending to which there is no end in sight.

Given Fauci’s alleged strong belief in “science” he could play Esqueleto in a remake of Nacho Libre.