August is Here & Treasury Refunding Time

Federal Reserve MTM losses near $1T

August is here and the FOMC hike is behind us, markets have shrugged that off and the gravy train of no fear relentless buying in equities seems to know no bounds. This is not something you fight, this is not something you short. This rather is the time to realize that the markets do not care about rates, they do not care about sky rocketing debt and the certainly do not care that each and every day volatility gets taken to the woodshed. Its the new normal, which isn’t really new, rather this has been the QE4EVR mantra that has been in place since 2009.

Starting with TARP and the FRB balance sheet 10x run from $$900B to $$9T and that is a lot of debt to lever up. Who cares the US Debt chart looks like this:

So next time someone tells you the US Debt levels matter, well just say matters to whom?

So to fund this pig, it was obvious that the US Treasury Refunding announcement today showed that the treasury expects an extra $267Bn as this Bloomberg headline states very boldly a nice fat $ 1 Trillion for the quarter:

Now we know the Federal Reserve will be willing and able to support this supply and we suspect QT will be ended far sooner than many think. In fact the US equity markets are relying on it to usher in the next big wave push higher. We suspect a general correlation of about 0.6 in regards to the growth of the FRB assets to the increase in US debt from this point forward. Meaning if the US Debt rises by $1 Trillion we suspect the Federal Reserve assets will increase commensurately by $600B.

So by the time the US debt is $35T we should suspect the FRB Assets to be around $9.7T, by which time if the US hasn’t experienced a real recession would have the SP500 > 5000 and the Nasdaq well north of 17k!

Speaking of the Federal Reserve, we love their latest quarterly mark to market unrealized (loss) yea yea we know it doesn’t matter, a whopping $911 Billion:

Seems like their DV01 has settled in around $1.2 Billion but it will be interesting to see how big this gets, higher for longer means a $1 Trillion MTM loss for the FRB!

It also means the US Treasury will be paying $1 Trillion in interest costs alone, with the Defense allocation plus interest eating up nearly 50% of all US tax revenue…nice.