June 1, 2021 | In this issue of The Institutional Risk Analyst, we feature a comment by Lee Adler, publisher of Liquidity Trader. Lee is one of the better-informed observers of the market for US Treasury and agency securities, and among the best Fed watchers in the business. As is our custom, Lee follows what the Federal Open Market Committee actually does in the markets, not what they say in carefully manicured statements written by the Fed’s all powerful Washington staff.
May 23, 2021
Back in September I wrote about why I was giving up on the banking system indicators. Essentially it boils down to this. Every time there’s a critical problem in the banking system due to banker malfeasance, the Fed steps in to paper it over and reward the criminals.
That’s why we focus on the Fed more than anything else. Regular review of the banking indicators was useful once upon a time. The Fed has rendered them irrelevant. But I promised to keep an eye on them, and it has been 5 months since we last looked. That’s enough time that, if anything material has changed, we need to know about it. So herein is a review, our first since last December.
In this report, I highlight the charts. The charts really speak for themselves.
The bottom line is that the system remains extremely vulnerable to a decline in Treasury prices that is probably coming in the second half. Likewise, the return of optimism in commercial real estate is problematic. The banks are taking no precautions. There’s no sign of recognition of the looming losses.
It means that the entire banking system could be destabilized in the second half of this year. The Fed will have to act, massively. History shows that the Fed won’t act in time to prevent a breach of the system. History also shows that the Fed has the power to ultimately make its actions give the appearance of stabilization, leading to the return of animal spirits.