One more positive week where the May high is tested?
Ok, so we’ve rebounded sharply off the pessimistic lows of mid-June, yet the secular and medium-term pictures remain bearish. What does this mean for the ever-allusive task of short-term timing? Well, taking the daily treasury statement charts at face value, one might conclude that we might see one more retest of the May high before seeing another bout of market stress.
The total operating balance of the US Treasury declined over the past week from around $59 billion to $42 billion. After a fairly long time (it would seem), we can report that the US Treasury received around $9.5 billion into its coffers from the proceeds of the sales of Mortgage-backed securities on Thursday. Perhaps they did so because the equity futures were pointed up on the morning of Thursday… unsurprisingly, ‘risk’ generally closed down for the day:
Anyhow, the long-term interpretation of the daily treasury statement chart above remains bearish. As we said in a previous update:
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!).
On the shorter-term timeframe, we notice a peculiar lagged correlation between the US equity indices and the total operating balance of the US Treasury. The lagged property means that this indicator has the capacity to be predictive. We generally don’t pay much attention to such kinds of analysis, but we indulge in this particular one because it is way out of the mainstream. These indicators suggest that we could see one more relatively positive week in the ‘risk assets’ before seeing another bout of market stress. 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