Another 3 Weeks of Relative Market Buoyancy Before Another Leg Down?
An update of the daily treasury statement charts for 1/7/11. The lagged charts suggest that the current ‘relief rally’ could last a few more weeks before reversing for another leg down.
The total operating balance of the US Treasury remained roughly flat over the past week (falling by around $8 billion). The US Treasury is currently in the process of unwinding its portfolio of Mortgage-backed securities (which it bought during the 2007-2009 crisis). As part of this unwinding process, it received $1.2 billion from the proceeds of MBS sales on Monday (27/6/11).
As mentioned in last week’s update, the long-term interpretation of the chart above remains bearish:
The long-term interpretation of this chart remains bearish. The private-sector reached a maximum capacity for leverage in 2007/2008, and has been in the process of de-leveraging ever since. Since debt can be seen as a ‘short on money’, we might say that the economy is experiencing a long-term ‘short squeeze in dollars’. Although it may be in poor taste to do so, the government can temporarily alleviate the stresses involved with this short-squeeze by levering up, itself. Just as with every other ‘short squeeze’, the woes of the short-sellers (who must buy back to close) are alleviated by a massive & unanticipated seller entering the market. In the case of this ‘short squeeze in dollars’, that big seller was and is the US Treasury, and — as can be seen from the chart above — it has stopped selling dollars for a while. So, one can only expect financial stress to reassert itself as a result (which — indeed — it has!).
Over the past few months, we’ve noticed a peculiar correlation between the lagged operating balance of the US Treasury and US equities (inverted). Since the correlation operates on a lagged basis, it can be ‘predictive’. Usually, we would have an intellectual distaste for correlations of this type, however, since it is way out of the mainstream, we don’t mind looking at it. For this week, we adjusted the lagged timeframe by a few days. The lagged charts suggest that the current ‘relief rally’ could last a few more weeks. The broad thesis is that net government spending is bullish for asset prices (on a lagged basis) and net accumulations of cash are bearish for asset prices (on a lagged basis). For a more detailed interpretation of these charts see here.
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