Yogi Berra famously said, “You can observe a lot by watching.” I’ve been watching markets since the late 1960s. As a young trader in the early ’70s, I learned to focus on monetary indicators—because that’s where the real backstory always is.
For the past 24 years, I’ve published those observations for Liquidity Trader clients—focused on liquidity conditions, central bank policy, repo markets, bank deposit trends, and Treasury market stress and response.
Between December and February, in my usual Liquidity Trader Macro Liquidity Reports, I posted multiple warnings that the market was becoming increasingly fragile. These weren’t abstract forecasts. They were direct observations—sent to clients in real time—as macro liquidity conditions reached extremes and the foundations of the rally began to rot out from underneath.
This isn’t rocket science. It’s just knowing what to watch, and having the discipline to call it as it is. 55 years of observing financial markets gives a person who is paying attention, some idea of what to watch. And because I don’t have retail clients that I need to hand hold, I don’t need to pull punches or coddle anyone. I call it as I see it.
In that vein, here’s a list of observations I wrote about while the market was still rallying—and the warnings I published for clients at the time:
Market sentiment and systemic risk – December 13, 2024:
“Indeed, when sentiment turns, this is unlikely to result in merely a garden variety correction. The greater likelihood is a great bear market, with a crash or two along the way.”
Stock market price level relative to bank deposits – December 13, 2024:
“When it finally corrects, my guess is that it will be far more than just a correction.”
Treasury market leverage and hedging – December 13, 2024:
“This increases the potential for an accident. Hedging with futures has so far mitigated against an extreme market event. I can’t conclude that that effect will be permanent.”
Fed Reverse Repo Facility reaching effective zero – July 17, 2024:
“Furthermore, it has been my opinion that when this fund levels out, whether at zero or above, that will be when the real trouble starts for the markets.”
RRP facility liquidity drying up – September 18, 2024:
“At some point in the fourth quarter, we will begin to see the impact of no more water in the well.”
Liquidity extremes and market vulnerability – December 24, 2024:
“The stock market is extended, and liquidity measures are at extremes. While markets are extended, no clear sell signals have emerged yet. However, the potential for a bear market to begin is high, if sentiment shifts.”
Declining Fed RRP balances and growing fragility – December 24, 2024:
“That means increasing leverage with increasing fragility and vulnerability to rapid, uncontrolled unwinding.”
Rising bond yields impacting equity markets – December 24, 2024:
“Rising bond yields and continued debt issuance should continue to apply pressure to fixed-income markets, with eventual contagion into stocks and other assets.”[In this case, the egg got in front of the chicken.]
Sentiment shifts triggering sudden bear markets – December 24, 2024:
“When sentiment shifts, and [T-bill paydowns] starts being used to pay off debt, is when the bear will suddenly appear, as if out of nowhere.”
Foreign central bank flows warning signs – December 18, 2024:
“In view of the huge negative divergence from stock prices dating back to mid 2023, this is a bearish warning.”
Bond market selling becoming self-perpetuating – December 24, 2024:
“Falling bond prices are on the verge of becoming self-perpetuating, and then causing contagion into stocks. The highly leveraged bond positions could lead to margin calls.”[I was bullish on Treasuries for the January-May period due to T-bill paydowns, but warned of a liquidity cliff to follow. The tariff announcement lit the match ahead of schedule.]
Deleveraging feedback loops forcing central banks to intervene – December 18, 2024:
“When prices do start down, the margin calls will quickly follow. That then becomes a feedback loop that is all but impossible to break. That will force central bank intervention on a massive scale yet again. But in the meantime, the damage will be done.”
Primary Dealer leverage instability – January 15, 2025:
“Wild swings in net repo financing show growing instability in dealer leverage. The leverage levels highlight the vulnerability to future disruptions.”
Technical signs of topping – January 15, 2025:
” As systemic leverage grows and technical signals diverge, we need to be awake to the looming risks and opportunities of the next bear market perhaps later this year. Top formation is probably already under way.”
Treasury cash and debt ceiling dynamics – January 20, 2025:
“Cash will come into the US Treasury from the January 15, March 15, and April 15 estimated tax collection windfalls. The drop-dead date for raising the debt limit or defaulting could be pushed out to …”
Market psychology under the debt ceiling – January 20, 2025:
“A holding action is likely for as long as the debt ceiling is in force. The markets have a greater potential for a break once the debt limit is lifted.”[If this is already happening now, what then?]
Fed RRP depletion risk – January 25, 2025:
“At $100 billion, there’s little cash left in the pot to support further advances in stock prices. If the Treasury elects not to pay down debt, then the RRP fund should finally approach zero and the well will be dry.”
Early signs of sentiment shift – January 25, 2025:
“The ratio of stock value to total money supply has begun to fall short. That suggests the beginning of a sentiment shift that should, at the very least, end the persistence of the rally.”
T-bill paydowns and misallocated liquidity – February 16, 2025:
“If recipients of the paydowns choose to pay down debt to deleverage, the impact could be bearish for risk assets.”
Looming exhaustion of Treasury cash – February 16, 2025:
“In the absence of a timely resolution to the debt ceiling impasse, the U.S. government faces a multifaceted crisis… the Treasury’s cash reserves could be depleted by ….”
Foreign capital flight and liquidity risk – February 16, 2025:
“Foreign central banks are redeeming their Treasury holdings. This represents a steady drain of foreign cash from the U.S. system.”
These are just the observations I shared between December (or before) and February. You’ve seen how those played out.
But that was then. What should you be watching now?
Join me and find out!
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