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Category: Fed, Central Bank and Banking Macro Liquidity

Analysis of the major forces of macro liquidity that drive markets.  

The Fed’s Slush Fund is Working

Lee Adler

The Fed’s Reverse Repo (RRP) operations act primarily as a money market fund for money market funds (MMFs.) The MMFs were forced out of their T-bills in 2021-22 because the US Treasury was paying them down. The Treasury redeemed the T-bills and the MMFs got cash back. Not what they wanted. They need to earn interest on those funds.  Non-subscribers, click here for access.

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The MMFs were therefore in trouble. The Fed came to the rescue by opening its RRP operations to the MMFs. Previously, only Primary Dealers could participate. In effect, the Fed began subsidizing MMFs. As the Fed raised the rate it paid on RRPs, that increased the subsidy to MMFs, and their holders, mostly big investors. Non-subscribers, click here for access.

In this program, the MMF’s could place their excess cash with the Fed overnight and get a nice big fat, risk free, interest payment in return. The Fed imagines that money into existence. Non-subscribers, click here for access.

But the interest payments cut into the Fed’s surplus (aka profit). If the Fed loses money, that reduces the amount of surplus and ultimately, the taxpayer ends up paying for that. Nice. Taxpayers fund welfare payments to MMFs which are typically held by the wealthiest of the wealthy anyway. Therefore the Fed’s interest payments on RRPs are welfare for the rich. Non-subscribers, click here for access.

But I digress.

Once the RRPs were opened up to MMFs, RRPs outstanding ballooned. They got up to $2.6 trillion when the Fed rescued those couple of failed banks in March. Non-subscribers, click here for access.

Meanwhile, I have constantly warned that when the debt ceiling was lifted and the US Treasury started issuing T-bills again, MMFs would pull cash from RRPs to buy T-bills. It’s now happening. RRP balances have fallen by $275 billion since May 24, as the Treasury has been issuing wads of T-bills, including a net of $175 billion this week. Non-subscribers, click here for access.

The RRPs aren’t funding all of that, but they’re absorbing most of it. With T-bills being perfect collateral, they can be, and are, used for repurchase agreements from banks (RPs) whereby the bank will provide credit up to nearly the amount of the T-bill. RPs are like margin loans in that respect, except that the haircut is almost nothing. So the reintroduction of T-bills into the market provides collateral for more credit. More credit means more money to buy hot paper. Non-subscribers, click here for access.

And they’re buying it. Non-subscribers, click here for access.

Some of you have pointed out correctly that MMFs, particularly government MMFs, can only buy T-bills with their cash. But MMFs are only intermediaries. Who holds MMFs? That’s right, major investment institutions, hedge funds, and you and me, aka Ma and Pa investor.
We investors, both big and small, participate in the Fed’s RRP program through these intermediaries. And when we as a group start feeling bullish on balance, for no reason in particular, then we pull money out of MMFs and buy stocks, bonds, real estate etc. etc. etc. Non-subscribers, click here for access.

That’s what is happening now. The rationale for it DOES NOT MATTER. The fact that interest rates are higher now than last October when stocks bottomed, DOES NOT MATTER. The fact that the Fed is still steadily tightening monetary policy via QT DOES NOT MATTER. Non-subscribers, click here for access.

Yet.

QT will matter.

I’ll tell you when, and why, and what it will mean for your dining, listening, and investing pleasure. Non-subscribers, click here for access.

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Investors Breathe Sigh of Relief But D-Day Is Now

Lee Adler

The debt ceiling issue has been settled. Investors breathed a sigh relief and bought stocks. But they did it on margin, because the cash liquidity for it sure isn’t there. So we can probably count the longevity of this rally with the fingers of our hands, and it won’t be in months. And probably not weeks either. Non-subscribers, click here for access.

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Of course, liquidity isn’t a timing device. It merely establishes context. And the context ain’t bullish. Animal spirits and increased leverage have a shelf life, and this one is about to run out. The timing is likely to depend on the onslaught of new Treasury supply that’s about to hit, now that the debt ceiling has gone away for a couple of years. Non-subscribers, click here for access.

In the short run, anything can happen, especially when hedge funds have a record short position in Treasuries, which we have discussed elsewhere. But the liquidity context argues for the rally in stocks to end soon. Timing that is a matter for technical analysis. Non-subscribers, click here for access.

This report tells what to expect, why, and how. You need to know that so that you are prepared to react properly when the time is right. Non-subscribers, click here for access.

My swing trade screens for stock picks have led me to select only buys lately, until this week when I began to tentatively nibble on the short side. The liquidity picture now suggests that we start to look more closely for opportunities to go short, and to put in trailing stops on our long side trades. Non-subscribers, click here for access.

As for the bond market, once the potential for a short squeeze is out of the way, it will be time to get out yet again. Non-subscribers, click here for access.

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Incomprehensible, That’s What You Are

Lee Adler

But First, A Number

Before I get into the withholding tax data for May, the Treasury just posted the following on the heels of the signing of the debt ceiling deal. My reaction? HOLEE COWWWWW!!! Non-subscribers, click here for access.

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Date Security Type Total Offering Total Publicly
Held Maturing		 Net New Cash or
(Pay Down)
06/08/2023 Bills $123,000 $101,998 $21,002
06/06/2023 Bills $164,000 $135,979 $28,021
06/05/2023 Bills $65,000 $25,000 $40,000
06/02/2023 Bills $25,000 $0 $25,000

That’s $95 billion in new supply in 6 days. And that’s only the beginning, whoa whoa whoa whoa whoa whoa oh oh oh oh oh oh oh uh oh. Non-subscribers, click here for access.

You would think that that would leave a mark in T-bill trading, but so far at least, nothing has moved. It might be because the market was already at 5.42, which is 37 bp above the Fed’s RRP rate. Once again, the market leads, the Fed lags. The T-bills should start sucking money out of the Fed’s RRP slush fund. Non-subscribers, click here for access.

It’s all dead money anyway until investors decide that they want to use it for something else. If it stays in the RRPs, yes it’s available to spend on stocks and bonds, but there’s a reason that $2.2 trillion or thereabouts has just sat there for the past year. And if it gets pulled out to go back into the Treasury’s cash account for rebuilding to the desired $600 billion, that cash won’t be spent in the markets, or the economy either. Non-subscribers, click here for access.

That money is dead to me. It won’t be used to support stock and bond prices. As Treasury issuance explodes and the Fed continues to insanely pull $95 billion per month out of the banking system, something will break. That’s a given. Non-subscribers, click here for access.

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Modestly Hedged Dealers, Record Short Hedge Funds Suggest Disaster Ahead

Lee Adler

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

Lee Adler

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

Lee Adler

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.

Non-subscribers, click here for access.

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The Big One is Coming

Lee Adler

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

Lee Adler

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?

Lee Adler

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

Lee Adler

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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