Another Week or Two of Resilient ‘Risk Assets’ followed by another Downturn?
An update of the daily treasury statement indicators for 9/7/11. If one were to take the lagged charts at face value, one would conclude that there could be another week or two of buoyancy in ‘risk assets’ followed by another downturn.
The total operating balance of the US Treasury moved slightly lower over the past week (from around $78 billion to around $64 billion). During a generally positive week, nothing was deposited from the proceeds of the sales of Mortgage-backed Securities.
As mentioned in a recent 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 months and years we’ve noticed a peculiar lagged correlation between the total operating balance and US equities (inverted). The lagged characteristic means that it can be regarded as (somewhat) predictive and forward-looking. Although we’re generally (very!) skeptical about such things, we don’t mind publishing it because it’s not a widely look-at market indicator. The interpretation remains positive for the next two weeks; after this we could see a reversal in the so-called ‘risk assets’. 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.
Recommended: Charting the Federal Reserve's Assets - 1915 to 2012