Disaster Averted (For Now): How the Surprise Debt Deal Will Impact Markets

LAMPP Update: Keep Raising Cash as We Head Towards Red


The intermediate term LAMMP is now perilously close to turning red, and any Treasury issuance over and above the amount estimated by the TBAC could trigger the signal.

The Fed will hold its usual mid-month MBS settlements this week. That will be a mitigating factor. We’ll know the exact amount on Thursday when the Fed posts the details on its forward purchases over the past month. It should be around $25-28 billion.

That would be enough to keep the intermediate LAMPP from turning red if there’s no material increase in Treasury offerings. As of 10 a.m. Monday, the Treasury had not announced any increase above the normal level of offerings.

The four-week bill is normally announced at 11 a.m. The TBAC had forecast that that offering would total $30 billion. Let’s keep an eye out for any unusual increase in that. Even if there is no unusual increase, the fact that the LAMPP is so close to a red signal is reason enough for extra caution. We don’t want to even think of going long here.

The long term LAMPP is starting to edge lower. It’s at least a few weeks from a red signal, but it’s headed in that direction. This is good reason to continue our program of regular selling to raise cash.

By now you have heard about the debt ceiling deal that President Trump made with congressional democrats(hard to believe),which has now been approved by Congress as a whole.

Rupert Murdoch-owned Fox News is calling it a disaster, while Rupert Murdoch-owned Marketwatch is opining that it’s a good thing. Never let it be said that old Rupert doesn’t know how to play both sides of an issue. Fair and balanced.

Let’s also note that this deal is only for three months. We’re going to need to revisit this again in December, though it seems likely that, by then, they’ll have made a deal for the long term that would obviate the need for another debt ceiling impasse.

But we’ll need to monitor closely for any potential changes to market liquidity as the next drop-dead date approaches.

Meanwhile, if you’re confused by all this, join the crowd. I’ll try to sort through the confusion to tell you what it means for you and your money. We’ll look at it through the prism of my LAMPP indicator of market liquidity.

As traders and investors, that’s the only thing that really matters to us: the impact this deal will have on our portfolios.

Here’s what you need to know…

What the Surprise Deal Means for the Markets

First, I must say that I’m surprised.

I had guessed that a deal wouldn’t be done until the 11th hour, just like the last couple of times we faced a debt ceiling crisis. That would have been the end of September, when the government was projected to run out of money. Both in 2015 and 2013, a deal wasn’t done until the clock struck 12, and all the congressional carriage drivers had turned into pumpkins.

This time, they did the deed three weeks early. While I didn’t expect the unexpected it, I had allowed for the possibility and had written that an earlier deal would mitigate the impact to some degree.

So what does it mean?

First and most obviously, the Treasury has $50 billion more cash on hand than it would have had at the end of September, when it would have run out of money completely. We don’t know how much money it has raided from the government’s internal debt. But I suspect that most of those machinations are already complete.

That means that the amount of money that the government will need to suck out of the financial system over the next couple of months might “only” be $250 billion or a little more, instead of $300 billion. Much of that will need to be raised immediately in September.

This would still have a material negative impact. The biggest difference may be that the Treasury won’t need to slam the market all at once with a massive slug of new supply. It would have had to do that if the deal was delayed until the last minute. Now the additional borrowing that it will need to do can be phased in over a couple of months.

So instead of an instant market cliff in October, the pressure will come more evenly over the course of the remainder of September and the next two months.

This would be the new framework of what I expect to unfold. But as always, we’ll follow the money. The Treasury had not announced any new borrowing yet on Friday. Monday will be its first opportunity to do so. I’ll be watching the Treasury announcements for any increase in borrowing and will report that to you in the days and weeks ahead.

Any additional borrowing will have a direct impact on the LAMPP. The US Treasury’s borrowing schedule is one of the two components of the LAMPP. The Fed’s pumping or draining of cash to and from Primary Dealer accounts is the other.

The LAMPP is on the razor’s edge of turning from yellow (caution) to red (sell). If the Treasury starts pulling more cash from the market now, the LAMPP could turn red within the next couple of weeks, rather than in October.

So what does all this mean for us as traders?

Right now, the best thing to do is to stay the course.

Continue to sell stocks and raise cash. My personal benchmark was to get to 60-70% cash by October (of course, the level of cash that’s appropriate for you will depend on your personal circumstances).

If you haven’t started selling yet, there’s no better time than now. Any rallies over the next few months, whether or not they reach new highs, will be good selling opportunities.

And stay tuned right here for what’s likely to be the most important signal change in the LAMPP since 2009.

Sincerely,

Lee

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