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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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To: Taikun who wrote (26389)	2/14/2005 10:07:52 AM
From: russwinter	Read Replies (2) of 110194

Wow, terrific interview and web site, alot of my stuff in there, goes to thread header: wallstreetexaminer.com Liquidity Unwinding This Week by Steve Northwood, Sunday February 13 2005 Liquidity watchers saw an awesome display of a pump induced rally last week. The dump may be just as impressive this week. There was an unusual confluence of events late last week. The Fed and the Treasury danced an interesting dance that resulted in a liquidity whiplash. The Fed poured liquidity into the system Thursday to monetize large weekly Treasury auction settlements. In fact they pumped enough to monetize the entire new issuance. They seem to have ignored what Treasury borrowed the money for, namely to pour out $20 billion in tax refunds. We know there was excess liquidity by seeing the weekend Fed Funds rate plunge. That $20 billion jam isn’t there to stay. Monday will see another $5 billion returned to the system because of an expiring Cash Management Bill, so Monday could take another little jump. Tuesday and Wednesday will be another story. Treasury note settlement will suck $40 billion in new cash from the system. If the Fed doesn’t act aggressively, the market will face significant broad-based selling. Wednesday the Fed will have $8.25 billion in short term repurchases expiring. Again, unless they replace it, there will be a cash shortage on the street and the market will be under extreme pressure. Since the general direction of Fed policy is tightening, we know they will drain this week. The only question is how much and when. The only large add to the system this week will be $17 billion in tax refunds on Friday. The Friday refund effect will wind down quickly over the next few weeks and dry up until mid April when the flow sharply reverses. The days just before and after the 15th will see a $90 billion drain from the system. The actions of the Fed and Treasury have been the single best predictor of market direction for several weeks now. Since the Treasury activity is pretty well known, we will be watching the Fed’s actions closely.

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