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Category: 1 – Liquidity Trader- Money Trends

How Fed and Treasury policy, Primary Dealers, real time Federal tax collections, foreign central banks, US banking system, and other factors that affect market liquidity, interact to drive the financial markets. Focus on trend direction of US bonds and stocks. Resulting market strategy and tactical ideas. 4-5 in depth reports each month. Click here to subscribe. 90 day risk free trial!

Modestly Hedged Dealers, Record Short Hedge Funds Suggest Disaster Ahead

Primary Dealers remain moderately hedged in their bond portfolios. There’s no sign in their data that disaster is imminent, but they are also not prepared if the bond market continues to go south, as it has been for the past month. And as it is likely to when the debt ceiling is finally lifted, whether before or after default. At that point the market will be crushed with supply. Non-subscribers, click here for access.

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Originally, I was a lone voice in the wilderness warning of this eventuality, but big players have joined the chorus recently. The idea seems to be in the process of becoming conventional wisdom. Does that mean that the big players who matter are as well prepared as necessary to prevent the bond market crunch? Non-subscribers, click here for access.

This report gives answers and tells you what to do about it. Non-subscribers, click here for access.

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The Most Widely Forecast Economic Disaster In History

We look at the charts of the banking and Fed balance sheet data, and current tax collections, in the context of the above heading. The failure of the government to raise the debt limit will mean that the US Government will run out of cash to pay its bills within the next few weeks. The Wall Street cognoscenti, who have no sense, see that it will mean the end of the world. Non-subscribers, click here for access.

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I think that AI will end the world before a US technical debt default will. No doubt, given the rabid dogs in charge of the issue in the House of Representatives, there will be a technical default. They don’t care about the consequences, predicted or otherwise, because the vast majority of them are in safe seats backed by voters who don’t care and know even less. The only thing that matters to them is to stick it to the “woke” crowd. A debt default would certainly be one way of sticking a finger in the eyes of the woke. Non-subscribers, click here for access.

So my wild guess is that it will happen. Non-subscribers, click here for access.

But wait! There’s more. And you need to know what that is if you want to play to win. Or at least to save your skin. Non-subscribers, click here for access.

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Weak Real Time Withholding Taxes Set Up a Showdown

Withholding tax collections through May 2 have been much weaker than the year ago period, and weaker versus last month. This does not bode well for the budget deficit. It suggests that there could be be more Treasury supply than forecast by the TBAC. Non-subscribers, click here for access.

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It also suggests a very weak jobs report for April assuming that the BLS doesn’t adjust the weakness away in the various statistical tricks it applies to smooth the data. Non-subscribers, click here for access.

That’s never a safe assumption, but sooner or later reality catches up with them. Last month’s report should have been weaker than it was, based on March tax collections. The BLS reported 236,000 new jobs in March. Based on withholding for March, that number should have been zero or negative. There was no improvement in April, so this should be the month where reality catches up with them. Non-subscribers, click here for access.

If it does, the R House Majority will have absolutely no incentive to reach a deal to raise the debt limit. The worse they make the Administration look, the better it will be for them politically. Non-subscribers, click here for access.

Meanwhile, Madame Secretary has warned us that the drop dead date for the debt limit is June 1. Supposedly that’s when the Treasury will run out of money. I did a few back of the envelope calculations, and it is completely plausible that they’ll run out of cash by the end of May. Non-subscribers, click here for access.

You’ll want to see the ugly details so that you can be prepared to take the appropriate steps to protect yourself, and even profit from the situation. Non-subscribers, click here for access.

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The Big One is Coming

The tectonic plates of the financial sphere are heaving. The fault lines are growing. Fissures are widening. Cracks are spreading. The pressure is growing in the substrata, and magma is boiling to the surface here and there, and there, and there.

The big one is coming. A financial earthquake the likes of which the world hasn’t seen in 96 years. We know where the epicenter will be. It will be on Wall Street. We just don’t know when. But the time is growing shorter. Non-subscribers, click here for access.

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We can study the underlying forces, but the best meters of the building pressures are the markets themselves, both bonds and stocks. As lenders become increasingly panicked, they will call in their lines. Borrowers, highly leveraged dealers, banks, and hedge funds will be forced to liquidate. The quake will be upon us in an instant. Non-subscribers, click here for access.

We saw all this developing more than a year ago. It was simply a matter of paying attention to the Fed’s Primary Dealer data and its banking system data. There was absolutely no mystery, and no doubt that it was coming. Non-subscribers, click here for access.

I pointed out in April of last year that the Fed had decided to stop publishing the banks’ unrealized losses on for sale securities. Whenever the Fed stops publishing a line of data that it could easily continue to publish there’s only one reason. They don’t want us to see it anymore. Non-subscribers, click here for access.

But it was already out there, and we used it to extrapolate the losses to the vast bulk of their securities holdings, where no mark to market is required. We recognized then that the system was insolvent, that if the banks were forced to sell their assets, they would be equally forced to recognize losses. I warned that that could result in contagion. Non-subscribers, click here for access.

If anything, at the time, I wasn’t worried enough about just how bad this could become. I wasn’t thinking about bank runs, particularly online instaruns. Now, I am. Because there’s nothing to stop these instant bank runs. Large depositors who are not covered by deposit insurance can, and do, move all their money in an instant when they smell trouble. The contagion is starting and there’s nothing the Fed or the Treasury can do to stop a serial meltdown. Non-subscribers, click here for access.

The markets have been remarkably sanguine about all this. But that that is in the process of changing. The debt ceiling is causing distortion right now as institutions shift the funds out of the durations where the greatest risk of default is perceived, and into those seen as less risky.
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Enjoy the Market Mirage Now Because We’re Really In a Desert

We did a comprehensive review of key liquidity drivers last week. It’s an important report for an overview of the forces that are at work here.

This week, I’ll just review the charts of the current data that I think is crucial to getting a grip on what to expect. For now, we’re in the midst of a mirage because markets are holding up ok. That’s due to one thing only, Treasury Bill paydowns that have pumped $120 billion into dealer and investor accounts over the past month. It’s not quite QE, because it’s not a direct injection into dealer trading accounts, but it’s enough to make the financial markets look like an oasis in the desert. Non-subscribers, click here for access.

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It’s a mirage, and when it ends within the next xxxxx xx xxxxxx xx, the stench of death will punch us in the face. We’d better have our running shoes on. That means getting out at the first whiff that something ain’t right. Non-subscribers, click here for access.

We’re not there yet, and much depends on how the debt ceiling impasse plays out, and especially for how long it plays. Because once it is settled, that’s when reality will hit. This report explains how that will work, and when. Non-subscribers, click here for access.

Charts on US banking system data are based on data published on Friday evening for the week ended 9 days prior. In this case that’s April 12. They’re a week behind the Fed’s balance sheet data, which is posted on Thursday evening for the week just ended Wednesday. Ditto for the data on money market fund assets. Data on Treasury cash and tax receipts is virtually real time. It’s released daily, for the period ended the prior day. Fed RRPs are same day.Non-subscribers, click here for access.

Follow the charts of the real time data and stay a step ahead of everybody else.  Non-subscribers, click here for access.

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The Fed’s Circle Jerk… Is ‘Twerking?

The one thing the Fed is good at is putting out fires. They did it again this time. Stopping bank runs in their tracks, preventing what could have become an out-of-control conflagration. For now.

But it’s little more than a circle jerk. Yesterday’s firefighting will only lead to more fires down the road tomorrow. For now, it seems as though the joint action of the Fed, Treasury and FDIC has achieved the desired goal of stabilizing the banking system and the financial markets. The stock market has benefitted. And investors who had panicked into bonds are starting to see a bit of erosion of the capital they thought that they were committing to safety.

In short, here’s what happened and more importantly, what lies ahead because of it.Non-subscribers, click here for access.

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Here’s How We Know That Doom Has Already Arrived

Tax collections for March, and the month ended April 4, were so weak that they indicate that the US economy is now in recession. Non-subscribers, click here for access.

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If the BLS were tied to reality, that would mean a very bad Nonfarm Payrolls report coming up Friday. Yes, the report is scheduled for the first Friday as usual, even though the markets are closed. Non-subscribers, click here for access.

The bottom line is that the report should be a shocker, which I explain below. And that will be xxxxxxxx for bonds, and xxxxxxx for stocks. Non-subscribers, click here for access.

However, the usual seasonal tax bulge in April funds Treasury paydowns which stuff cash back into the pockets of dealers and investors. That could temporarily xxxxxx xxxxxxxx xxxxxxxx xxx effects of a weak jobs report on stocks. Non-subscribers, click here for access.

The consensus median forecast of the priesthood of Economism is for a gain of 238,000 jobs in March. If reality mattered, which it does not in the initial release, then the number would be negative. That won’t happen, but if the weakness in tax collections persists this month, then the BLS will be forced to catch up in the months ahead. Non-subscribers, click here for access.

We’ve seen that they can do that in one of two ways. They can revise previous months, or they can use their screwed up X13 Arima moving average to adjust the current month. X-13 ARIMA is like a paint brush that uses 5 years of imaginary future data to paint a picture of current reality. The BLS uses that to apply often absurd assumptions to adjust the current month to refit what happened in the past. It’s why the BLS Nonfarm Payrolls report is something more akin to impressionistic art than actual economic data. Non-subscribers, click here for access.

Eventually, they do fit the curve to what actually happened, but the process includes two monthly revisions and a once a year benchmark to real data. So it usually takes a year to adjust the current month to reality. Then there are additional annual benchmark tweaks for 4 years after that to account for the imaginary X13 ARIMA smoothing data that was initially applied. So the chart lines you see for nonfarm payrolls from traditional sources are actually fit to reality AFTER THE FACT. Non-subscribers, click here for access.

Withholding tax data has no such shortcomings. It’s real. It’s real time. And it is raw, unadjusted fact. We just smooth it so that we can make meaningful comparisons year to year and month to month. The easiest way to interpret it is to simply put it on a chart and look at it with our own two eyes. We don’t need no damn fool Wall Street egonomists to tell us what it means. We can see it for ourselves. And the chart is ugly (subscriber report). Non-subscribers, click here for access.

Again about the jobs report, I’ve observed that the new BLS reports tend to correlate more with the withholding data from two months before, not the previous month. That stands to reason because the BLS surveys employers on the 12th of the month. So the report for March is based on an employer survey as of March 12. That would mostly tend to represent February payrolls, not March. And therefore it would correlate more with February’s tax data. Non-subscribers, click here for access.

February’s withholding tax collections were way below January’s collections on a year to year change basis. And March was even worse, in fact, negative. So there should be a couple of shockingly bad jobs reports ahead. xxxxxxx for the bond market, and therefore for the idea of a potentially xxxxxxxxxxxxxxxx banking crisis. The scarier it gets, the more the market turns toward buying bonds, pushing yields down and prices up. xxxx xxxxxxxxx xxxxxx xxxxxxxxxx xxxxxxxxx xxxxxxxx problem of massive hidden losses on bank balance sheets. Non-subscribers, click here for access.

In that regard, weak jobs numbers would be just what the doctor ordered in the current environment. For bulls or bears? Find out in this report. Non-subscribers, click here for access.

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Macro Liquidity Says No Way Jerray!

Bulletin: The US Treasury just announced another T-bill paydown. That brings the one week total, April 4-11, to $55 billion. That’s more than enough in the short term to offset negative macro liquidity drivers. This is the April tax season effect on steroids already, and it isn’t even April 15 yet. Non-subscribers, click here for access.

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New game, new rules. In this report, I want to attempt to show you in more pictures and fewer words (hard for me), where things stand in terms of macroliquidity, as we embark on this new journey into the unknown. Unknown not just to us, but especially to clueless policymakers. After all, they’re the ones who created this mess in the first place. Yet, Wall Street thinks that they know how to fix it. Non-subscribers, click here for access.

Since we no longer have the benefit of them knowing, and telling us, the full scope of policy in advance, we now have to pay even closer attention to the liquidity flows. Our hope is that that is good enough. Non-subscribers, click here for access.

As we know, money talks. Central Bank BS walks. Talk is cheap. Markets can’t and don’t anticipate the future. Money moves the markets. Follow the money. Read and react. That’s the name of the new game. Non-subscribers, click here for access.

So here are my readings on what I believe are critical measures that will help to give us a bit of clarity on where we are now and where this mess might be headed. Non-subscribers, click here for access.

Where we’re headed in liquidity is still xxx xxxxxxx. The stock and bond market rallies are xxxing that. That is xxxxxxxxxxx over the long haul. Non-subscribers, click here for access.

Yes, we know there are xxxxxxx that will promote xxxxxxx at xxxxxxxxxx. That’s particularly true now with the effect of April Treasury paydowns. But once that cash has run through the system, usually around the end of May, xxxxxxxx xxxxxx. Non-subscribers, click here for access.

Will it even last that long? While the liquidity measures in the weeks ahead will help us to understand the context, we must rely on the Technical Analysis for shorter term timing. In terms of the big picture, the forces of liquidity aren’t xxxxxxxxx xxx. The hope that the Fed either will pivot, or already has, are xxxx the fumes that the markets are running on right now. Non-subscribers, click here for access.

Again, this xxxxxxx sustainable. I might be a little xxxxx under the circumstances, but with a trigger finger. I’m not xxxxx anything, and not ready to get xxxx. Non-subscribers, click here for access.

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Play By Play On the New Rules of the Game

The game has changed and there’s not even a pitch clock. But there is a bond market loss clock. Right now, it’s on a timeout. The Fed has given it a lifeline and the Treasury will stepping up with its usual seasonal help in April.   Non-subscribers, click here for access.

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Money is the Fed’s game, but not even the Fed knows what’s coming next. It used to be that it kind of knew, and so did we. Rule Number One, “Don’t fight the Fed,” was easy to follow because the Fed told us in advance exactly what it would do, week in and week out, month in and month out. For 12 years, following QE to ever higher asset prices was a no-brainer. Non-subscribers, click here for access.

No more. The Fed is flummoxed, a victim of its own blind hubris. So now it’s making up willy-nilly firefighting tactics on the fly. Under the circumstances, how do we predict what’s coming? How do we trade that which isn’t known. Do we just guess? Non-subscribers, click here for access.

Now, because it’s always about following the money. While we know less now about how that will look in the months ahead, it’s ditto for everybody else. The market will not be able to anticipate policy correctly. Non-subscribers, click here for access.

Not that it ever did. I’ve observed through the last two decades especially, that the market follows the money. It doesn’t lead it. The market responds most forcefully and persistently to actual changes in the level of liquidity, not to speculation about what the Fed will do and when will it do it. Money talks and Wall Street BS walks. Non-subscribers, click here for access.

So, in theory, if we follow the money in a timely way, we should still be able to stay on top of the game, to react correctly in time, if not in advance of what’s coming.  Non-subscribers, click here for access.

As a result, I’ve been thinking about and experimenting with better ways to get critical information out to you. I want it to be faster, shorter, and more on point. In the bad old days of QE, things were different because the Fed telegraphed what was coming for weeks and months in advance. Now, they don’t know, so neither do we. So, like the Fed, we need to be reactive, because the unknowns coming at us are greater than the knowns. Non-subscribers, click here for access.

The trick will be to react quickly and correctly when we see actual changes in liquidity flows. One of the most important ways to do that, will be, as it was before, tracking the Fed’s weekly balance sheet statement.  Non-subscribers, click here for access.

Looking at the data we have now, we know that for the next 6 weeks, the markets should xxxxx xxxxxx xxxxxxx xx xxxxx, and that’s bxxxxish. But sell in xxxxxxx xxxxx xxxx xxxxxxx. Non-subscribers, click here for access.

Here’s why, and what that means for investors. Non-subscribers, click here for access.

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Fed’s Reaction to the Big Mahoff Panic Ain’t Your Daddy’s QE

Last week I wrote that the Fed is playing a new game and nobody knew the rules. I felt like I needed a week to get a handle on what to expect.

I was doing the research and I intended to post yesterday, but Excel got cranky with the data and I spent hours hunting down a glitch. Frustrating. Thanks, Microsoft!

At least enough time has transpired that we’re starting to get an idea of the impact of the Fed’s new game.

First things first. The Fed’s new emergency lending programs are not bullish. They may stop the bleeding for a while, but they are definitely not the same thing as “old fashioned QE.”

Here’s why, and what that means for investors. Non-subscribers, click here for access.

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