Courtesy of Lee Adler of the Wall Street Examiner
QE2 has ended, removing the market’s most important direct prop as well as the fuel that propelled the markets’ other drivers. There could be a snowball effect as it becomes necessary to liquidate all kinds of assets in order to absorb massive waves of Treasury supply. That assumes there’s no default precipitated by the debt ceiling problem. I’m not going to speculate on any “what if” scenarios, if they don’t reach an agreement to raise the debt ceiling. I don’t have a crystal ball to foretell what might happen.
Meanwhile the Treasury market has gotten a break, thanks to the run away from European bank paper and sovereign debt. That capital flight is boosting the Treasury market at a time when all the usual underpinnings for that market are extremely weak, including FCB buying, and especially bank buying, which is in the midst of a record collapse. Without the support of the Fed, the FCBs, and the banking system, the Treasury market should be in a state of collapse. Instead, impending collapse in Europe has come to the rescue, with funds seeking safety running into US government paper. Financial commercial paper outstanding is collapsing as the run builds. I have bad news for those people. They can run, but they can’t hide. Market adjustments alone will cause losses in longer term US government paper.
In my last update of this report I wrote:
However, if you are expecting a crash the day or the week after QE2 ends, I wouldn’t bet on it. The Treasury is giving the markets a week off after QE ends, with no new supply in the first week of July. The TBAC even says there will be a paydown that week… The day of reckoning may be July 7, when the Treasury announces the big July 15 note and bond refunding. That’s forecast at $63 billion in net new money. I think it could be significantly more. If it doesn’t shock the market, it should at least pressure it. Those auctions and the July 15th settlement will be where the rubber meets the road in terms of a world without QE. Around then is when we should get the first sign of how things will play out. I expect it to not be pretty.
I don’t need to point out that so far, July 7 did set the peak for the stock market.
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