The alchemistic correlation continues to break down as the US Treasury replenishes its coffers…

Since our last update on 11/9/11, US Treasury cash has increased from just under $17 billion to a healthy $61.59 billion. In that update, we noted that the peculiar lagged correlation between the US Treasury’s total operating balance and US equities had begun to break down meaningfully for the first time since the establishment of greshams-law.com. Indeed, this trend has continued over the past two weeks. Here I present a quick review of recent operations by the US Treasury and an update of the usual daily treasury statement charts.

 

DTS - Operating Balance Vs S&P 500

US Treasury Cash (with subcomponents) against the S&P 500 - Click to enlarge. Source: US Treasury

 

The total operating balance of the US Treasury rose from $16.709 billion on 8/9/11 to $58.831 billion on 15/9/11 and then to $61.586 billion on 22/9/11 (latest). As can be seen from the chart above, this is a healthly replenishment when compared to the prior several weeks. Can you hear the sigh of relief at the Treasury?

 

Our regular readers will be aware that the US Treasury is currently in the process of unwinding its portfolio of Mortgage-backed securities. They typically make a large sale towards the end of the second week of each month. September was no exception; the US Treasury received $8.67 billion on 13/9/11, followed by $0.873 billion on 15/9/11 and $0.051 billion on 19/9/11. As mentioned in the previous update, the US Treasury makes its sell decisions ‘subject to market conditions’. This is a big indicator for the degree to which the US Treasury is fearful of the consequences of swapping ‘risk assets’ for dollars. As can be seen on the chart below, this month’s major MBS selling spree was less than the former three months. This could be an indication of renewed profligacy in the public sector!

 

US Treasury MBS Unwinding deposits from proceeds of sales

Deposits into the US Treasury's coffers from the Proceeds of MBS sales. - Click to enlarge. Source: US Treasury

 

On the lagged charts we find that the pseudo-correlation between the US Treasury cash line and ‘risk assets’ has broken down meaningfully. As mentioned in previous updates:

 

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.

 

DTS - Operating Balance Vs Dow Lagged & Inverted

US Treasury Cash Vs Dow Jones Industrial Average Lagged & Inverted - Click to enlarge. Source: US Treasury

 

DTS - Operating Balance Vs S&P 500 Lagged & Inverted

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

 

DTS - Operating Balance Vs Russell 2000 Lagged & Inverted

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

 

DTS - Operating Balance Vs VIX Lagged

US Treasury Cash Vs VIX Lagged - Click to enlarge. Source: US Treasury

See here for our collection of rare historical economic data.

Posted Sep 25, 2011