Author: Lee Adler

Well, it’s that time of the month again. What time is it boys and girls? It’s time to review the US Government’s end of month tax receipts for October. Those receipts tell us exactly how the US economy is doing, without the filter of Federal Agency statistical massage or Wall Street or government bureaucrats telling us what to think. Non-subscribers, click here for access.

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The monthly BLS fictional jobs report for October has already been reported, with a headline number of +150,000.  That’s the artistic impressionism of government statisticians at work. As a result, their first impressions for August and September were revised down by 110,000. So we have a net gain of 40,000 this month. Non-subscribers, click here for access.

Unlike the BLS artistic efforts, tax collections are reality. They tell us how the economy is really doing. Most importantly, they tell us whether there’s any change in the revenue trend that might affect forthcoming Treasury supply. That’s what matters, not the economy. Treasury supply is the 700 pound gorilla of the market. Non-subscribers, click here for access.

There’s been a lot of chatter in the Wall Street captured media this week about forthcoming supply because it’s quarterly refunding time. The media have finally realized that bonds are in a bear market. It only took them 39 months. We recognized it about 38 months ago. I was a month or so late there. Who knew! Once the Fed told us that it would stop buying almost all of the supply, we knew. Non-subscribers, click here for access.

Now the media has also glommed on to something that we’ve been tracking for, oh, only the last 20 years. The TBAC supply forecast. And naturally they are misinterpreting that, along with the meaning of the BLS nonfarm payrolls news. Non-subscribers, click here for access.

I will get to the Treasury supply data in a subsequent report which I hope to get out to you later today. For now, our eyes are on the October tax data, and withholding tax data through November 1, for what they tell us about the likelihood of any change in forthcoming supply. Non-subscribers, click here for access.

Of course, tangentially, the tax data will give us some insight into the direction of the US economy. I won’t say it’s irrelevant. It’s material in that a weakening economy means lower tax revenues and a stronger economy means smaller deficits and less supply. That would change the trajectory of the trend in yields, but not the direction, because unless supply is radically reduced, the market still can’t absorb it at a stable price. Non-subscribers, click here for access.

Do we need to know economic data to have a handle on Treasury supply? Not really, because we can see it from the tax trends, without trying to interpret statistically massaged, delayed economic survey reports. Non-subscribers, click here for access.

Lower revenue means bigger deficits and more supply. More supply would be catastrophic in a market under constant price pressure with existing levels of supply. If supply increases from here, the incipient rally in bond prices would be very short lived, and what comes after would be catastrophic. Non-subscribers, click here for access.

For now the rallies in both stocks and bonds are based on false perceptions. Enjoy them while they last. Non-subscribers, click here for access.

In this report we look at the charts and the data to explain what’s coming so that you’ll have a clearer understanding and a good idea of what to do about it that fits your situation.  If you are a professional, you can use this information to position your portfolio appropriately. If you are an individual investor, take this information to your money manager and tell them to subscribe to Liquidity Trader! Non-subscribers, click here for access.

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Composite Liquidity is flat and will almost certainly remain no better than flat for as long as the Fed continues to shrink its assets. There’s been just enough private credit creation, that is, money creation, to offset the Fed’s QT. So total liquidity goes nowhere. If bank deposits or foreign central bank purchases of US securities shrink, or if bank sales of Treasuries increase, the CLI will turn more negative. Non-subscribers, click here for access.

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That’s bad news for stocks and bonds, which have lately been doing poorly enough even with flat liquidity. That’s because constant massive Treasury issuance sucks more money out of the financial sphere than buyers of Treasuries have been creating by using repo to finance their purchases. Non-subscribers, click here for access.

Since the Fed started QT and liquidity turned flat, we have seen a shift in the overbought/ oversold parameters from what they had been under QE. We have an idea of where oversold is from the low one year ago. But as for overbought, we don’t have any idea. We only know that liquidity remains a constraint to upside progress, and an incentive for liquidation. So there’s reason to think that even if the CLI stays flat, the S&P will xxxxx xxxxx xxxxx xxxxx low around 3585. Non-subscribers, click here for access.

Meanwhile, an opinion I stated in June proved itself. Non-subscribers, click here for access.

6/6/23 Just imagine for a moment how bullish sentiment would become if the market tested the old high. The froth would be off the charts as virtually everyone would conclude that it was a new bull market. But without QE, it would not be. It would be a major top to end a cyclical bull market within a secular bear market. Non-subscribers, click here for access.

We’ll leave that determination to technical analysis. For our purposes here, the current liquidity tableau simply doesn’t support a long-term bull trend. But neither does it rule out an extension of the current rally. Non-subscribers, click here for access.

By July, Wall Street had turned bullish. Even the long-term technical indicators that I follow looked bullish. But these liquidity indicators were flashing red, which I noted in reports in August and September. Non-subscribers, click here for access.

The conditions that led to those red flashing lights have not been corrected. Non-subscribers, click here for access.

Such liquidity indications tend to precede long major cycle swings in prices. In that respect we are probably in the first stage of another major cycle bear market within a secular bear market similar to the late 1960s to 1982 and 2000-2009. Non-subscribers, click here for access.

Here’s the supporting evidence including charts showing exactly why we should expect this outcome. And I’ll tell how I’m looking at it tactically and strategically for your consideration. Non-subscribers, click here for access.

Subscribers, click here to download the report.

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KNOW WHAT’S HAPPENING NOW, before the Street does, read Lee Adler’s Liquidity Trader risk free for 90 days! Act on real-time reality!