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The Rhymes of History

I’m thinking in particular of the late 1960s to 1982, the era when I got my start in this business. It was a time of high inflation, tight money, rising interest rates and bond yields, and falling bond prices.

Sound familiar?

I want to replay comments from the August 16 update because they are important context.

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8/15/23 Liquidity analysis provides context, and some liquidity indicators, particularly those based on real time data, can give us timely hints of whether and when to expect a top, in conjunction with the TA. The banking data that I focus on here is released with a 9 day lag, but it can confirm what we’re seeing on the price charts. In addition, it often has enough lead time over the market trend that it can be timely in signaling and not just confirming a turn that’s about to happen. Non-subscribers, click here for access.

The Fed’s weekly H41 balance sheet data is, with the exception of occasional emergency measures, a constant until the Fed changes policy. The Fed’s balance sheet reduction program steadily reduces money in the system by a net of about $70 billion per month. That’s a discussion that we’ve had in other reports. That’s the key negative force that is a background constant which private money creation must overcome to drive stock prices in a persistent uptrend. Non-subscribers, click here for access.

Those forces were in control from May to July, but they’ve lost their grip since then. During the rally, animal spirits raged, and traders of all stripes were happy to take on more leverage to buy stocks. Lately, those animal spirits have flipped, especially over the past few days. Non-subscribers, click here for access.

How easily the market switches from greed to fear is a hallmark of the fact that with the central banks out of the money printing business, money creation is now entirely dependent on the willingness of market participants to borrow to buy. When they borrow and buy, collateral prices rise and money increases. The process is like a dog chasing its tail. When the dog gets tired, it just lays down on the floor. Non-subscribers, click here for access.

Over the past 3 weeks, traders tired of the game. Now they’re sleeping and prices are falling. They’d better watch out, or soon the margin man will come to the door to take the sleeping dogs to a kill shelter. Non-subscribers, click here for access.

We can get a picture of those forces from bank deposit data and bank repo data. Non-subscribers, click here for access.

Other key real time measures that we can watch are Money Market Fund Assets (MMF) and the Fed’s Reverse Repo (RRP) slush fund. During the rally in June and July, both shrank as investors piled into stocks. Institutional investors and hedge funds withdraw the money to buy stocks from their MMF. Banks and dealers also withdraw cash to buy stocks directly from the Fed’s RRP fund. Non-subscribers, click here for access.

Those funds have stabilized, and in the case of Fed RRPs rebounded a little, in August . It means that they’re selling, which we already know from watching the price charts, and depositing the proceeds back in their MMFs and Fed RRPs. Non-subscribers, click here for access.

This report updates the data and tells you exactly what it means along with what to look for and what to do about it. Check it out! Non-subscribers, click here for access.

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Posted in 1 - Liquidity Trader- Money Trends, Fed, Central Bank and Banking Macro Liquidity
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