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.

The Powellenburg Omen Is Flashing … Again (ECB Balance Sheet Is 79.62% Of European Union GDP)

Well, the US stock market is raging along with Federal Reserve monetary stimulus, Federal government fiscal stimulus and a roaring economy.

A note of caution: the Hindenburg Omen chart is flashing … again. It forecast the stock market crash of 2008, but growing monetary stimulus from The Federal Reserve (green line) has helped prevent another correction.

The Shiller CAPE ratio is signalling a correction just like the Hindenburg Omen.

But Fed Chair Powell and Treasury Secretary Yellen along with our free-spending Congress and Administration have nothing on Europe where the ECB’s balance sheet is a whopping 79.51% of European Union GDP! The Fed’s balance sheet is “only” 36.66% of US GDP.

Here is the SS Powellenburg cruising over Wall Street.