by Lee Adler, Wall Street Examiner
On February 23, the US Treasury pumped $55 billion in cash into the accounts of Primary Dealers, banks, money market funds, and other institutions that had held the T-bills that were expiring that day. These redemptions began the US Treasury’s series of massive, twice weekly paydowns of the US government’s short term debt.
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The purpose of the paydowns was twofold. First, the Treasury is required by the current budget law to whittle down its cash from a peak of $1.8 trillion last year, to $133 billion by August. Treasury Minister Janet opted to start the process by paying down existing short term debt.
That accomplished the second goal, which was to force holders of the expiring paper to buy longer term debt. Despite their protestations that all is well, economic policy makers know that the crash in Treasury note and bond prices is causing a crisis in the Primary Dealer system.
Minister Janet works very closely with Lord Jaysus of the Fed, of course. They expected that the T-bill paydowns would help to reverse the decline in the prices of Treasury notes and bonds by forcing cash into the accounts of dealers and investors. It didn’t work. At least not to the extent that they needed.
Those paydowns will ultimately total $299.911 billion as of April 1. I look at that number and I wonder if they’re sending a message, or if someone at the Treasury Department has a sense of humor. Or both.
While they were doing that, they were simultaneously issuing $437.9 billion net in new longer term debt. Normally the market would have had to absorb that without any help from the US Treasury. As bad as the collapse in the Treasury market has been, can you imagine how much worse it could have been had the Treasury not paid off those T-bills.
Those dealers and banks that got cash back, no doubt, even used a tad of that cash to buy stocks. Once dealers and investors get cash back from the Treasury, they get to decide what to do with it. They’re not chained strictly to buying T-bills. Their choices run from leaving it in the bank, to lending it to the Fed in the form of Reverse Repos (RRP), to buying longer duration paper, to buying stocks, or whatever else they can imagine. Like paying down their own debts. Imagine that!
They clearly did all of the above, as we can see from our banking data and from the performance of the stock market. That $299.911 billion got around.
I had included a projection of these funds in my look-ahead in the QE and PONT Spread charts in the mid month update. I had guessed that the Treasury would continue doing these payments at the rate they started with. But it did not. It has been tapering them. The first week they did $96 billion. The second and third weeks, they cut to $55 billion. Then they went to $44 billion, $31 billion, and in the week ahead, $18 billion.
Despite reducing those withdrawals from its cash account, Treasury cash is falling rapidly. That’s because they’re now spending heavily on stimulus. Many of the $1,400 stimulus checks have gone out. I have read that payments so far have totaled $350 billion, to 127 million people. Exact figures on how much is left are unavailable, but it should be a couple hundred billion more, spread over a few months.
This is just one element of the stimulus. Spending has begun on other programs. There are unemployment benefits, and a myriad of other benefits and programs for which money is destined.
Going, Going, Gone!
Let’s just say that the money is going fast. Between the T-bill paydowns, and the stimulus spending, it looks like this.
With this data, along with the T-bill paydowns, the stimulus spending, and projected tax revenue, we have a darn good idea of when the US Government will run out of money. We know when it will start slamming the market with even more supply. Huge supply. Record supply. The biggest baddest, most persistent tsunami of supply in history.
It will wipe out everything in its path. There will be no escape. The Fed will have no choice but to take massive action, in an attempt to reverse and repair the destruction.
We know what the Fed will do.
But we can only guess when it will do it, and how the market will react this time. The thing is, the damage will likely already have been done. And it will be historic. We need to be prepared. The last thing we want to be is the deer frozen in the headlights.
Ironically, I think that’s where the Fed is right now. Frozen in fear. Afraid to make a move. Afraid to say anything that would spook the market, or tip off just how dire the situation is. So they replay their time worn act of, “Nothing to see here, all is well.” To them, that’s better than telling the truth, and triggering panic before it will otherwise occur on its own.
It reminds me of our old saying, “Panic now. Avoid the rush.”
The situation is dire. But we don’t need to panic. I present the charts and analysis – the information you need to make informed decisions to take prudent action to protect your capital.
How much time do we have? We have some, but not all that much. Get ready to leave the party.
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