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Lee Adler’s

Lee Adler’s

Their Expense is Your Income

Lee Adler

Ten days ago, I was stunned when the stock market did exactly the opposite of what I had forecast for July and August. Based on monstrous Treasury supply pressure that we knew was coming, I had expected a gathering crunch, not just for Treasuries, but also for contagion into other assets.

Not only did that not happen, stocks broke out, and even gold and precious metals started to recover. The Macroliquidity™ model, which I have tweaked and adjusted through the 26 years I have been publishing these reports, failed to foreshadow the stock market breakout. It correctly identified that the bond market would increasingly tighten. That part has played out, although so far somewhat more mildly than I thought. But the stock market breakout to new highs was a shock to the model.

I agonized over it. What did I miss! And then I had a flash of recognition.

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The Buy Signals Weren’t Fake

Lee Adler

Cycle and momentum indicators are in bullish configurations. The problem is that in bear markets such patterns typically fail. That requires patience and proof before action. Price patterns need to resolve upwards from bases, which in this case would be a daily close above xxxx. Conversely, a breakdown would target support around xxxx. Weeks of sideways churning are more likely to be a consolidation leading to a xxxxxxxxx.  

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Beware of Fake Buy Signals in Gold and Miners

Lee Adler

Cycle and momentum indicators are in bullish configurations. The problem is that in bear markets such patterns typically fail. That requires patience and proof before action. Price patterns need to resolve upwards from bases, which in this case would be a daily close above xxxx. Conversely, a breakdown would target support around xxxx. Weeks of sideways churning are more likely to be a consolidation leading to a xxxxxxxxx.  

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Primary Dealers Show Signs of Dreaded Deleveraging

Lee Adler

Primary Dealer fixed income holdings have fallen since March, and most of the decline appears to be mark-to-market losses. The Treasury keeps adding supply, of which the Fed absorbs only a fraction, leaving dealers to take their share, required by their special status, as bond prices erode and the 10 year yield pushes toward 5%. The result is a deleveraging cycle in dealer balance sheets that raises the risk of forced, disorderly liquidation across markets.

This report shows where the cracks are in the Primary Dealer holdings, financing, and hedging statistics through mid-July. It also includes a look at hedge fund positions in the bond market, which are another canary in the coal mine of deteriorating liquidity conditions across asset classes.

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MacroliquidityTM – Two Charts that Should Shake Your Confidence

Lee Adler

This report features two charts that tell a coherent and sobering story. Repo financing that has quietly fueled this rally is plateauing in exactly the pattern that has preceded every major correction of the last few years. At the same time, junk bond spreads are sitting within a hair of their tightest levels in three years, which is precisely the condition that leads to an eventual unwind that is violent instead of orderly.

I have warned for months that the wave of Treasury supply set to hit in July would open a window of extraordinary risk. Below, these two charts, which you won’t see anywhere else, show why the calm on the surface is the least reassuring thing about this market.

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Liquidity Blowoff – The Final Stage

Lee Adler

The Treasury market is facing a dangerous convergence of forces as a massive wave of new supply hits a financial system fueled by a final, parabolic surge in money growth. Other asset classes, particularly stocks, depend on a stable Treasury market foundation. While stock markets have remained buoyant, the underlying mechanics that have driven years of asset price inflation are reaching a stage of extreme, perhaps terminal, excess.

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