Transitory

 

 

by Larry Levin

During Chairman Bernanke's recent speech the word "transitory" was used often.  Mr. Bernanke was trying to bamboozle us into believing that rising commodity inflation was "transitory"...and not his fault, of course.  
 
Sadly, Mr. Bernanke did not give us a potential time frame of this so-called temporary inflation and that was probably by design.  Since we know without question that this "transitory" inflation is DIRECTLY CORRELATED to his QE programs (read: free money for the TBTF banks) he may be signaling to us that inflation will slow quickly when QE2 ends, but so will the economy.  Will it end on time and be no QE3 in the future?  Doubtful.
 
What is clearly "transitory" and can be measured in just days, if not hours, are the Primary Dealer's interests in holding US Treasuries.  With each passing so-called successful auction, the Primary Dealers (PD) sell back the IOUs to the Fed in a multi-billion dollar game of hot potato.  The length of time the PD community wants to play the monetization game is getting shorter and shorter.  Monetization of debt is getting quicker.
 
ZeroHedge gives more detail here:

http://www.zerohedge.com/article/dealers-scramble-offload-treasury-exposure-ahead-qe2-end-flip-record-75-just-issued-7-year-a

For those who care what is happening behind the scenes even as everyone continues to predict there will be no snags associated with the transition from a QE2 to a non-QE2 world should look at this brief analysis. On May 26 the Treasury issued $29 billion in 7 Year bonds (Cusip QQ6)- the auction was considered a smashing success by all with the Bid To Cover coming at a record high 3.24 Bid To Cover, and pricing 2 bps inside of the When Issued: an indication of massive demand. Dealers were allocated $11.4 billion and as Stone McCarthy reported: "The $62.3 billion Dealer bid was up from $54.7 billion last month and it was the largest Dealer bid since February 2010."
 
So far so good right? Here is what happened next. On June 1, barely a day after the bonds had settled, Dealers shipped $5.393 billion right back to the Fed (making who knows how much in "fees" in the process) in that day's POMO. And today, just a week after the last 7 year targeting POMO, Dealers sold another $3.168 billion to Brian Sack (of the FRBNY).
 
Total tally: $8.561 billion monetized by the New York Fed in less than two weeks following the auction. Simply stated: the Dealers' unprecedented interest in the auction... was transitory. Just two weeks later, the Dealers have flipped back 75% of their entire position in the latest 7 Year On The Run bond. And this is the kind of sleight of hand that allows the Treasury to represent success after success in bond auctions, only to allow the Fed to do the backdoor switcheroo literally hours later, and compensate the conning Dealers for fooling the marks: in this case US taxpayers, naive believers that there is actual interest in US Paper, and of course China and other foreign investors who bought $13.8 billion of the same auction.
 
What happens when Dealers are unable to flip up to 75% of any given bond back to the Fed in under two weeks: stay tuned and find out in precisely 3 weeks.
 
Yes indeed, it should be interesting.

 

 

Trade Date: 6/9/11

E-Mini S&P Trades*

(before fees and commissions):

1. Pivot Point sell @ 9:38am at 1383.00 = -0.25 (1 lot)
2.  Algorithm positions (0)
3.  “Reading the Tape” positions (2) …combined Secret’s, Algo, & “Reading the Tape” total… +0.25

Sign up as an AvidTrader Member to receive "The Technician" Value Area's each day. The market then has an 80% chance of filling the Value Area. Many traders familiar with the Value Area and the techniques that go along with it use it to help them decide what trades to do each day. Join and see how this technique can help you trade more successfully!