Bored with the constant daily speculation about who may be the Fed’s next head (short answer: whoever Goldman says), and more interested with the actual liquidity dynamics that the next Chairman (or Bernanke, as his departure is far from certain) will have to deal with? Here is the latest.
As per last night’s H.8 update, commercial bank deposits rose by $94 billion in the week ended July 17: the fourth largest weekly increase in history, where the top two occurred in the days after the Lehman bankruptcy. Looks like the latest iteration of the great rotation is right into checking and savings accounts. This took total commercial bank deposits to an all-time high of $9.54 trillion. However, this is not due to money creation through private sector lending, as total commercial bank loans and leases continue to languish at Lehman levels of just over $7.3 trillion: the entire difference can be attributed to the $2+ trillion in excess reserves created by the Fed since the start of the GFC.
Speaking of Fed reserves with banks, the most recent number was $2.1 trillion, and its allocation breakdown by Domestic (small and large) and Foreign banks operating in the US is as follows:
Foreign banks continue to be the biggest beneficiary of the Fed’s monthly $85 billion liquidity largesse, just as they were the biggest winners during QE2.
In fact, the total reserve cash distribution continues to favor foreign banks, which now have a record $1.13 trillion in cash, or $9 billion more than all Domestically-chartered banks, at $1.122 trillion. The notable shift of cash reallocation from domestic to foreign banks since QE2 can be seen on the chart below.
To nobody’s surprise, global liquidity (as created by the Fed) continues to be infinitely fungible, and increasingly benefits offshore-based (mainly European) banks.
That takes care of the liquidity allotment to the private sector. What is its corresponding offset at the public, read Federal Reserve, side?
As everyone knows, the Fed’s balance sheet continues to rise to new record weekly highs, with the Fed monetizing $36.7 billion in securities in the past week (and injecting a like amount of Flow into the S&P500), and at a record $3.575 trillion in assets, the Fed’s balance sheet is now $728 billion higher than a year ago. Even assuming a $20 billion/month Taper enacted some time in late October, we still anticipate the Fed’s asset to rise to just shy of $4 trillion by the end of the year. And once the market tumbles as the reality of the Taper is digested, we won’t be surprised if the untaper forces the Fed to not only returns to the old $85 billion/month regime, but pushes it above $100 billion every 4 weeks.
The Fed is increasingly operating on borrowed time. As we explained two months ago when we showed that the Fed may well own all the outstanding duration in the Treasury market by 2018, Bernanke’s ability to monetize debt will be curtailed not only by the IOER NIM carry trade turning negative one day in the future, but also by the amount of Treasury 10 Year equivalents outstanding in general. As of the most recent week, as SMRA reports, “after the Treasury issuance, maturing securities, rising interest rates, and Fed operations during the week, the Fed owned about 31.00% of the total outstanding ten year equivalents. This is above the 30.81% from the prior week, and the percentage of ten-year equivalents available to the private sector decreased to 69.00% from 69.19% in the prior week.”
At the current pace of absorption of private sector 10 Year equivalents (roughly 0.2% of total per week), the Fed has 2-3 more years at best before the private sector has to pick up the torch of “quality collateral” creation (i.e. securitization must be revived and the universe of acceptable collateral acceptance expanded without the credit bubble collapsing first) or else. This is precisely the tightrope that the Fed is walking on right now: levitate asset prices, but not so fast to lead to a risk of a credit bubble pop as almost happened in May and June. In other words: expanding public and private total and shadow collateral at a Goldilocks pace – anything faster or slower and Bernanke’s entire legacy gets thrown out of the window.