Thanks to Professor Anthony Sanders for the kind mention in his post about the US Treasury Kabuki Theater. This is part of a bigger issue that is crucial to our understanding of markets. I have been covering it in depth every week for the past 13 years. I jotted down a few thoughts in response to Professor Sanders’s post and a few others I have seen…
Wall Street Examiner Exclusives
The Fed’s balance sheet went through the normal mid month fluctuations last week as MBS are paid down early in the month and then are replenished at mid month. There has been essentially no change in the total size of the balance sheet since QE officially ended a year ago. And there will be no material change going forward until the Fed either decides to start shedding assets (not gonna do it) or until it restarts QE (somewhat more probable than shrinking the balance sheet).
The Composite Liquidity Indicator has been inching sideways after hitting a new high during the August 26 week. More importantly, the slope of the line has been nearly flat since January. In this game, if liquidity isn’t growing, that’s tight. Governments are always borrowing more, so if the system isn’t providing new cash to absorb that debt, the cash to pay for the new debt needs to come from somewhere else. That spells liquidation.
Where else can we review the weekly balance sheet changes of a major corporation, bank, or other financial institution weekly? The Fed provides the means for us to look at its balance sheet every week and actually follow the flows of funds as they move from the Fed to the Federal Government to the banks and vice versa.