The "Puts" Are Not Struck Here. Look Out For Lower Risk Asset Prices

With the US government’s structural fiscal train running full steam ahead with no hope of tax hikes or spending cuts to slow it down, the strike price of the Fed’s “put” to add liquidity back into the market is much lower than here because it is increasingly difficulty to provide accommodation when inflation is running above target and re-accelerating. The market really can’t expect the Fed to step in any time soon, until we start to see a sizable deterioration in the labor force, which doesn’t appear likely at this moment. The Fed “put” is lower. 

That leaves only the Treasury “put” to assist markets as risk assets correct. We just learned yesterday that weaker tax receipts than expected are putting some handcuffs on the execution of this Treasury “put.” Because of the heavy bills issuance needs on expanding deficits, Yellen was forced to raise the TGA for end of 3q by $100bn giving her less ability to pump liquidity in as we approach the election. And with higher deficits and overall borrowing needs, she is going to have to keep duration issuance amounts higher for longer as well. Her ability to execute the “put” with term premiums still so low by historical standards should be lower as well as she strives to keep overall borrowing costs as low as possible for American taxpayers. So, the strike price on the treasury “put” is lower too. 

So the path from here for markets is to search for the lower strike prices on both the Treasury and Fed “puts.” I think that path will be nasty for risk assets and that’s coming to a theater near you over next 2-3 months.