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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!

How to Play When Fed Changes the Game, Not Just the Rules

The Fed is playing a new game. The problem is that nobody knows what the rules are, not even the Fed. In fact, nobody even knows what the game is. Especially not the Fed. Non-subscribers, click here for access.

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So now we’re faced with contradictory policy aims. They can stabilize the banking system in the short run, or they can continue to fight inflation. But, sorry, they can’t do both. Non-subscribers, click here for access.

The policy tools for each are not only different, they are mutually exclusive. Continuing to fight inflation will cause the final collapse of the financial system. Reflating the financial system now will bring simmering inflation to a full boil. Non-subscribers, click here for access.

They’ve opted for that. Then what comes after? And what can we investors do about it to protect ourselves. Non-subscribers, click here for access.

The answer for now is, … Non-subscribers, click here for access.

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Systemic Meltdown Under Way As Dead Bodies Finally Start Surfacing

This was supposed to be the regular Composite Liquidity Update, but we have a slightly more pressing problem at hand for the opening of banks and markets on Monday. So I will ditch the CLI for a few days and take a quick look at where we stand in terms of the potential for a systemic meltdown that endangers all of us. Non-subscribers, click here for access.

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I’ve been following the financial commentariat on Twitter and elsewhere over the weekend, and the excuse making for the failure of SVB is epic. There are also a few good takes about how the bank’s Held to Maturity, and Available for Sale fixed income portfolios were under water. Non-subscribers, click here for access.

The Dead Bodies Are Finally Rising to the Surface for All to See

OK, surprise, surprise. Non-subscribers, click here for access.

Of course not. There’s no need to get into the particulars of the SVB situation, because it’s merely the tip of the iceberg that we’ve had on our radar for months. I’ve been warning about the dead bodies which would soon be floating to the surface. Well, here we are. Credit Suisse is so far surviving. The Silvergate scam did not, and now SVB (Silicon Valley Bank) has been revealed. Silly con, alright. Non-subscribers, click here for access.

The bank runs have begun. The Fed has an emergency meeting scheduled for Monday morning. Is this the end of QT? It has to be. If not, this will get a lot worse. But if it is, the rally that started in the bond market on Friday could get a lot bigger and that could self mitigate the crisis. Non-subscribers, click here for access.

A lot can, and will happen on Monday alone. Here’s what’s critical for you to know, including what to do to protect yourself if you haven’t already. Non-subscribers, click here for access.

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As events race ahead of this report, you can follow an intelligent discussion of those events at the Capitalstool message board starting here as of Sunday evening. 

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February Withholding Taxes Say – Fade the Jobs Report!

It’s that time of the month again. The tax collections are complete for February so we know how the jobs market really did for the month. Meanwhile, the BLS will announce its fictitious jobs number for the month a week from tomorrow, which is a week later than usual.

The BLS bases its estimate on a haphazard and poorly conceived survey of employers, which the BLS then manipulates to the point of uselessness. Furthermore, apparently fewer employers are taking part in the survey, rendering this monthly exercise even less accurate than in years past. When it wasn’t very accurate to begin with. Subscribers, click here to download the report.

BOTTOM LINE: Revenues were weak. The jobs number should be weak. But fade any rally on that, both stocks and bonds, because xxxx xxxxxxx xxxxxxxx xxxxx xxxxxxxxxx xxx xxxxx. 

Here’s what’s critical for you to know. Non-subscribers, click here for access.

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Here’s Why There Will Never Be Bull Markets Until This One Thing Happens

I received some great questions from Ken up in Canada. I want to use them as a jumping off point for trying a different, hopefully simpler format today on a subject we all know and love.

The Fed Balance Sheet.

OK, I kid, I kid. We may know it, or not, but we sure don’t love it. And this format probably isn’t any simpler. But I’ll try.

So let’s start with the essence of simplicity. In this report, I will attempt to explain why:

There will never be a long running bull market in stocks or bonds until xxxx xxxx xxxx xxxx. And I don’t just mean xxxxx xxxxx . xxxxxxxxxxxxxx xxxxx xxxxxxxx xxxxxxx xxx x xxxx.

Here’s why, including a Q&A with Chat GPT, the Sergeant Schultz of Fin Tech.

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You Can Now Follow the Diabolical Usual Suspects

Yesterday, February 15, 2023, a day that will live in… nobody’s memory, the S&P 500 closed at 4147.60. It first notched that price on the way down on April 29 of last year. Since then the market has traded through this level on no fewer than 19 days.

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In other words, the market has been range bound for nearly 10 months. And so it would seem that everyone can claim victory, bulls, bears, and the flat market crowd, whose number are legion. Not. But because no one is wrong, all of the children of Wall Street are above average, while the stock market is… average. Non subscribers, click here to read this report.

The liquidity picture has told us that the market should be lower, mainly because the Fed is draining $95 billion per month from the banking system and the markets. At the same time, the US Treasury has continued to pound the market with supply (mostly) even with the debt ceiling holding back an increase in the total debt in recent weeks. Non subscribers, click here to read this report.

I say “mostly” because there have been periods of a month or more where the US Treasury, in its infinite wisdom, has decided to pay down hundreds of billions in outstanding US Treasury bills. We’ve recounted those moments here as they happened. Non subscribers, click here to read this report.

When the Treasury does that, it is, in essence and actuality, pumping that money back into the markets. Holders of the T-bills get cash back, and some of those holders use some of that cash—economists say “at the margin”—to buy stocks or bonds. So, typically, during periods of paydowns the asset markets move higher because those erstwhile holders of the T-bills being redeemed, buy stocks or bonds with the cash they get back. Non subscribers, click here to read this report.

Partly as a direct result of that, we saw the lowest low in stock prices last October. But the paydowns had a secondary effect. I recounted in these pages recently that the paydowns enabled the Primary Dealers to do some balance sheet repair, despite the Fed pulling cash out of the banking system via QT. Non subscribers, click here to read this report.

The Primary Dealers are still required to pick up their fair share of Treasury issuance. The burden the has been particularly difficult without the Fed taking that inventory accumulation off their hands as it did under QE. However, the US Treasury’s big campaigns of T-bill paydowns also sent cash back to the Primary Dealers who held some of those bills. They used the cash not to buy more T-bills, but to pay down the repo debt behind the original purchases. They were able to reduce leverage, and position themselves to take on more inventory. Which they have done. Non subscribers, click here to read this report.

Regardless of that, we had seen from the banks’ weekly data on their fixed income holdings that some of them were sitting on hidden losses in their not-marked-to-market long term portfolios. I forecast that we would soon start to see some of them in trouble as they were forced into liquidation mode. So far, only CreditSweets (CS) has floated to the surface, but there are surely other bloated bodies about to be revealed, as the current round of falling bond prices persists. Non subscribers, click here to read this report.

Since October, stocks have made a higher low, followed by a higher high. Transpiring over 4 months, it looks like the start of a bull market. But in my recollections, it would be the weirdest start to a bull market that I’ve seen in 56 years of closely following markets. They typically don’t start until the Fed starts reversing tight policy. Non subscribers, click here to read this report.

Wall Street likes to think that markets anticipate; that they discount the future. They don’t, and they don’t. So I don’t agree that this market is correctly anticipating anything. It has merely been bouncing around on temporary shifts in government liquidity manipulation. Non subscribers, click here to read this report.

I won’t try to directly correlate these actions by the US Treasury with market movements. Others have purported to show that a direct day to day or week to week cause and effect relationship exists. While it is indeed cause and effect, it’s not predictive on a daily basis. It works on trends. Non subscribers, click here to read this report.

First of all, the timing of the deployment of the cash varies among recipients. And second, they choose to deploy it in different asset classes—i.e. stocks, bonds or “other.” If Goldman is going one way on a particular day and JPM is going another it’s not going to show up on the charts as a coherent message. When the Fed is creating a surfeit of cash, it doesn’t matter. But when cash is relatively scarce, it makes a difference. Non subscribers, click here to read this report.

Technical analysis remains the best method for estimating timing of market effects, and in rangebound, illiquid markets, even that is fraught with peril. Non subscribers, click here to read this report.

Last week, we talked about the bizarre decision by the US Treasury to issue even MORE short term debt, while under the constraints of the debt ceiling. Non subscribers, click here to read this report.

This week (February 13-17), the Treasury has shown that it intends to continue pounding the market. Here’s the issuance table since January 31. Another $34 billion today, and $23 billion next Tuesday. That’s on top of the $153 billion in bills since January 31. How in the world are the markets absorbing that without being torn apart? Non subscribers, click here to read this report.

I have the answer, and now you do too. It’s information that will help you understand this game, and win at it. Non subscribers, click here to read this report.

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US Treasury Throws A Shocker to Reverse the Stock Market Outlook

The stock market rally has stuttered and stumbled over the past 9 days. We now know why and, knowing that, we can forecast what comes next.

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The US Treasury announced this week that it would issue another $67 billion in net new T-bills next week. That’s on top of $9 billion coming today. At the same time, they have not revised downward TBAC forecast net coupon issuance. Non subscribers, click here to read this report.

WTF! Don’t they know there’s a debt ceiling in place, and that they hit it on January 19? Usually under these debt ceiling impasses, the Treasury stops issuing debt on balance for the duration that they’re at the ceiling! They literally CANNOT legally issue more. Non subscribers, click here to read this report.

But WAIT! There’s more! Non subscribers, click here to read this report.

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Withholding Taxes Fell Sharply in January

I started this update before the jobs report, was interrupted, and came back to this Yooge upside surprise. I apologize for this reading being disjointed. However, it’s clear that this BLS report is makeup for severely understating the December jobs gain, which was apparent from the huge surge in December withholding. January’s withholding has largely reversed that. Here’s what this means for your trading.

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Composite Liquidity Should Be Bearish, Here’s Why It’s Not Right Now

Composite liquidity is flat and will remain so until the Fed restarts QE. That should be bearish, but it’s not right now. There are a couple of reasons for that. And they are reasons to hold off from looking to get short right now. But are they reason enough to go long? Here’s the answer.

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A Funny Thing Happened on the Way to the Debt Ceiling

When we last looked at Primary Dealer positions and financing in November, it looked like the dealers were in dire straits. Massively leveraged in the bond inventories, with falling prices, and inadequately hedged. It looked like the beginning of the end.

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But it wasn’t. As she had in the past, in a different role, Janet Yellen rode to the rescue of the dealers, the bond market, and indirectly the stock market and stock investors. In December, as we noted at the time, the US Treasury began paying down T-bills, first in small amounts, and then in mass quantities. Non subscribers, click here to read this report.

That made all the difference that was needed to prevent disaster, and to turn the outlook at least mildly bullish in the short run. The US Treasury was acting in loco parentis, or in this case, contra loco Fed. The Treasury pumped money into the market. The mechanism is different than when the Fed does it, but the effect is similar. Money goes into the markets. Securities prices rise. Non subscribers, click here to read this report.

While I noted and reported this to you back in December it wasn’t clear to me why the Treasury was doing that. Call it a lack of situational awareness. Mea culpa. But now we know. And we also know what to expect. We’ve been here before. Non subscribers, click here to read this report.

Here’s what happened, and what we can look forward to in the next several months. Non subscribers, click here to read this report.

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Withholding Taxes Are Soaring

Federal withholding tax collections soared last month and continued to do so in the first few days of January. I wondered if this was an anomaly, but correlated data supports it. Regardless of what the BLS reports this morning, which is always a crapshoot, there is no doubt that there was a jobs boom in December. Sooner or later that will show up in the jobs data. The Fed won’t like it, and neither will the market. But whether it will be this morning, or in next month’s data that this surprise shows up, I don’t know.

What I do know, and what you should know is the following. These are real, hard facts that you can act on.

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