Gordon T Long

Gordon T Long

Global Macro Research | Macro-Technical Analysis 

TIPPING POINTS

FLOWS & LIQUIDITY

 
IS THE FED SLOWING TO CHANGE DIRECTION?
 
We are very clear in this month’s LONGWave video that the only number that counts is the rate of change of the Global Liquidity Proxy. We told you to watch it closely!
 
Well. something is now happening at the Federal Reserve that is both strange, possibly indicative of what may be happening at other central banks. It directly impacts the rate of change of the Global Liquidity Proxy. 
 
While the Fed was talking about all the asset purchase programs it would establish via its ten new SPV Facilities, it actually curtailed the overall level of its purchases. In the week ended June 10, the Fed’s total assets of $7.1 trillion increased by less than $4 billion.Then in the week ended June 17 its total assets actually fell by $74 billion. 
 
It is signaling that the Fed front-loaded its QE in March and April and is now systematically backing off!  Is there a shift occurring in how the Fed is now approaching the crisis?
 
The Fed would appear to be shifting its lending and asset purchases away from propping up financial markets toward propping up consumption by states and businesses and ultimately spending by workers/consumers via its municipal lending facility, its PPP loan facility, and its main-street lending facility. These funds are finally flowing into consumption and not asset prices. Good for the economy but bad for inflated asset markets.
 
The US Federal Reserve that created $2.8 trillion and the threw it violently at the market which triggered everyone to jump onboard the market lift-off rocket,  has now just as abruptly stopped propping up asset prices with its liquidity pumping!!.
 
  The Fed said in its semi-annual report to Congress that:
 The economic damage from the recession may be “persistent”, as a collapse in consumer demand could bankrupt many businesses. There’s uncertainty about future demand and productivity as firms shift production processes, which could lead to lower wages (and lower consumption)
 
SITUATIONAL ANALYSIS
 
WATCH WHAT THE FED DOES, NOT WHAT IT ‘SELLS’ PUBLICLY!
  • PLUNGE IN REPO BALANCES: Repo balances dropped by $74 billion. The Fed is still offering theoretically huge amounts of repos every day, but it has tweaked the offering terms, so that there is now almost no appetite for them, and what’s left on the balance sheet are older term repos that unwind and are gone. On today’s balance sheet, the repo balances dropped by $88 billion from the prior week to $79 billion, the lowest since September 18.
  • PLUNGE IN LIQUIDITY SWAPS: Central bank liquidity-swap balances dropped by $92 billion.The Fed’s “dollar liquidity swap lines” with other central banks had been roughly flat for seven weeks, after the $400 billion surge in early April. But this week some swaps matured and were unwound, and the balance dropped by $92 billion to $352 billion. Of that drop, $75 billion came from the swap line with the ECB, $9 billion from the Bank of Japan, and $7 billion from the Bank of England (country data via the New York Fed)
  • JUNK BOND & ETF BUYING STALLS:  Fed doesn’t wanna buy junk bonds and ETFs anymore. This is where much of the media hype has focused on, following the endless announcements by the Fed. The Fed says that these bailout schemes are authorized under Section 13 paragraph 3 of the Federal Reserve Act, as amended by the Dodd-Frank Act. And Powell calls these creatures “thirteen-three facilities.”
  • TREASURY BALANCES RISE BY ONLY $26B: The Fed added $26 billion of Treasury securities during the week, bringing the total to $4.17 trillion. Over the past four weeks, the balance increased in a range between $9 billion in $26 billion, about the same range before the outbreak of bailout mania.
  • MBS BALANCES RISE BY$83B: The Fed has cut its purchases of government-backed mortgage-backed securities (“Agency MBS”) after the initial burst. But its MBS trades take one to three months to settle, and the Fed books them after they settle, which creates an erratic pattern. So what we’re seeing today are settled trades from some time ago. The balance of MBS rose by $83 billion to $1.92 trillion. This includes Agency Commercial Mortgage Backed Securities that the Fed started buying as part of its bailout program. But the balance of these CMBS has remained flat over the past three weeks at $9.1 billion.
  • FUNDING TO STATES, MUNICIPALITIES & BUSINESSES: The Fed has started lending to entities, including states and banks, under programs that channel funds into spending by states, municipalities, and businesses, rather than into the financial markets. These types of programs are propping up consumption – not asset prices. That’s a new thing.
WHAT’S GOING ON AT THE FED?
 
The $74 billion in total assets that the Fed shed during the week brought the Fed’s total assets down to a still breath-taking $7.095 trillion. You can see from the curve that this isn’t an accident, but part of a plan to front-load QE and then back off – rather than let it drag on for years:

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