Many of you remember the old Warner Bros. cartoon series, Looney Tunes – specifically the slapstick episodes involving the hilarious duo, Wile E. Coyote and the Road Runner.

Somehow, in every episode, the fast-running ground bird manages to outwit the coyote, despite repeated attempts by the coyote to catch and eat it.

No matter how ingenious and complex the contraptions the coyote devises, they always manage to backfire – often with the coyote running off the cliff, falling deep into the canyon, as seen from a bird’s-eye view.

And this is exactly what we are seeing right now with the Federal Reserve.

The market is overinflated, and the Fed has concocted an elaborate plan to engineer a soft landing.

But it won’t be a soft landing. It will be a hard landing, just like the coyote running off the cliff and falling deep into the canyon.

So today we’ll look at the interplay between the Fed and the Treasury, and how that’s influencing the markets.

The Market Has Been Tricked by Increased Leverage, But Not for Long…

Over the past month commercial bank and foreign central bank buying, and increased borrowing by shadow banks, drove bond yields toward the low side of their range for the year.

That buying and borrowing also provided liquidity to drive the stock market rally.

While predicting how long this can last is difficult, it’s certain that it will end, and end with a thud, after buyers realize, like Wile E. Coyote, that there’s no ground beneath them.

The rally is simply not sustainable, as the Fed relentlessly pulls money out of the system.

There are two forces – buyers buying and using debt to do so, versus the Fed pulling money out of the system. The Fed isn’t going to yield.This creates increasing risk of a disorderly unwinding of leveraged positions – in other words, a crash.

Let’s look at some of the details. Treasury issuance (supply) is surging, but Primary Dealer buying has not kept pace.  Foreign demand for long term Treasuries has virtually disappeared, while surging for short term bills.