Courtesy of Russ Winter of Winter Watch at Wall Street Examiner
Lee Adler uses a Fed cash indicator which he defines in the Q&A below. To me in eyeballing it, markets show a positive effect from this priming when stock values and assets were very cheap such as 2009 and near fair value in 2010. I don’t see this Fed cash as having much effect when asset values are inflated as they are now, although it might be a factor in maintaining inflated asset prices for an undetermined period of time. The Fed has increased this total Fed cash to primary dealers by 50% since January 2011, and the market has climbed about 10%, and punctuated by several steep corrections. But it seems that just to maintain these levels requires a parabolic angle of ascent. I say the heroin from this Fed cash effect is greatly diminished or even finished.
Question : Explain who the primary dealers are and their role in facilitating “fed cash”. What is Fed cash exactly?
A: http://www.ny.frb.org/markets/pridealers_policies.html. Basically, they make the market in Treasuries and are the Fed’s counterparties and dealers in the market, just like your broker is for you.
The Fed buys MBS from them and credits their account. That’s their cash. What they do with it is up to them. Same when Fed buys Treasuries from them. When Fed sells Treasuries to Fed, it debits their account.
Question : I guess you might say that Fed fuel to primary dealers has to be nearly a parabolic trajectory or peddle to the metal at this stage to keep this market afloat. Eyeballing the chart it seems the addiction is so acute that even a bending down of the trajectory could set off a plunge.
Agree.
Question: To what degree do you see primary dealers as the marginal buyer of Treasuries. What does it mean when they go this long? Did they miscalculate, or is supply so heavy that this expected of them now.
It’s required. Years ago they were net short all the time in order to absorb supply. Now they hedge I guess. Who knows? I just look at the position and see a huge potential problem for them. The COT’s say they’re not fully hedged in the futures either. They are still a little bit long.
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