Another leg down on the horizon?

Well, the past week was characterized by relief more than anything else. Resultantly, we saw a positive week for the equity indices, oil, the metals and non-dollar currencies. In defiance of the daily flow of news, we stick to our bearish guns because of the generally negative monetary dynamics in operation. As for the perilous task of short-term timing in the speculative financial markets? We don’t know, but our hunch is that we’re on the eve of another leg down in ‘risk assets’. Moreover, the lagged daily treasury statement charts seem to be confirming this at present.

 

Daily Treasury Statement  - Operating Balance Vs S&P 500

Click to enlarge. Source: US Treasury

 

The total operating balance of the US Treasury jumped to $104 billion last Friday and subsequently declined to $90 billion. As part of the US Treasury’s attempt to unwind its portfolio of Mortgage-backed securities (bought during the 2008/2009 crisis), they received $976 million last Friday and $26 million on Tuesday. Since this unwinding operation has been in process for some time now, we thought we’d make a chart (as promised). The chart below shows the amount received into the US Treasury’s coffers from the proceeds from MBS sales and interest (in $ millions) against the S&P 500:

 

MBS Portfolio unwinding by US Treasury

Click to enlarge. Source: US Treasury

 

As can be seen on the chart above, the US Treasury tends to receive large deposits (relating to MBS sales) around the second week of every month. It’s certainly something we can watch out for.

 

As mentioned above, we stick to our medium-term negative view on the so-called ‘risk assets’. In particular, we’ve seen short term sentiment rebound from pessimistic levels. In combination with this, we take note of the negative monetary dynamics and the bearish outlook on the lagged daily treasury statement charts (which is no guarantee!). As mentioned in a previous update:

 

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… 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.

 

Daily Treasury Statement - Operating Balance Vs Dow LAGGED

Operating Balance Vs Dow Inverted & Lagged - Click to enlarge. Source: US Treasury

 

Daily Treasury Statement - Operating Balance Vs S&P 500 LAGGED

Operating Balance Vs S&P 500 Inverted & Lagged - Click to enlarge. Source: US Treasury

 

Daily Treasury Statement - Operating Balance Vs Russell 2000 LAGGED

Operating Balance Vs Russell 2000 Inverted & Lagged - Click to enlarge. Source: US Treasury

 

Daily Treasury Statement - Operating Balance Vs VIX LAGGED

Operating Balance Vs VIX lagged - Click to enlarge. Source: US Treasury

See here for our collection of rare historical economic data.

Posted Jul 23, 2011