Author: Lee Adler

I’ve been doom scrolling my newsfeeds for the past few days, not getting much work done. What a catastrophe. War in Europe, just 120 miles from where I was living a few short weeks ago.

I just communicated with a Ukrainian friend who lives in Kyiv and owns a number of apartments there. She left the city with her family on Thursday, for what she felt was greater safety in the west of the country. She said that the Russians are shelling and firing missiles at civilian targets indiscriminately, and that many ordinary people have died. She called Putin crazy. Then she noted how proud she was of her countrymen for their firm resistance.

I made several friends in Eastern Europe during my 26 months living there. I got to know their attitudes toward Putin and the Russians. My friends are all older people. They lived for decades under Russian domination. They love freedom and they hate the Russians viscerally. They will never surrender, even if Russia finally dominates in this conflict and subjugates them.

The question for us here is how this will impact monetary policy. We already know that the Russian central bank will be blocked from moving money, and that some Russian banks will be blocked from accessing the international payments system. No doubt this chaos will trigger a roundabout detour in the Fed’s tightening policy.

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But will they actually reverse and return to QE? We’ll have to see what’s next. I would suspect that most of the easing would be directed at their cohort, the ECB, and other central banks. My guess is that they won’t immediately return to outright QE, pumping money into Primary Dealer accounts again, at least not right away.

The Fed is boxed in. It faces the prospect of an international financial crisis. It faces the reality of 40 year record inflation that has the prospect of worsening. We’ll watch what the Fed says because it will lead us to what they’ll probably do. Although in emergencies, the doing comes first. And markets respond to the doing, not the talking, despite what the Fed and the high priests of Wall Street want you to think.

So unless they pump money directly back into the markets via buying securities from Primary Dealers, it won’t reverse the course of the financial markets. Bond prices will still xxxx xxxxx (subscriber version). and yields xxxx xxxxx. Stock prices will have their usual April seasonal bump from tax revenues being used to pay down Treasury debt for a few weeks. Then they’ll xxxx xxxx.

I believe that unless the Fed returns to buying paper from the dealers, that course is set. If they do return to QE, I’ll wait and see what the market response is. Normally I’d say it would be a go, bullish. But the dealers still have the option of simply paying down debt with the proceeds of selling their Treasuries and MBS to the Fed. If they were to do that, game over.

Meanwhile, I say what I’ve been saying for the past 18 months. I would continue to xxxx xxxxx (subscriber version) bond market. If I had any long term bonds in my portfolio, which I don’t, I’d xxxx xxxxx.

There are, of course, ways to xxxx xxxxx the bond market. I’d rather xxxx xxxxx stocks. Just my preference.

Stocks will have rallies. I’ll use the TA to xxxx stocks for swing trades when they look good for that. I’ll continue to report weekly on that, and the overall technical market outlook in the Technical Trader reports.

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Not much has changed since our last look at Primary Dealer data 4 weeks ago. The script is playing out. It’s Greek tragedy, because we know what’s coming. I’ll recount what we’ve already said, and add plot embellishments from current data that the Fed posted Thursday, that’s up to date through 10 days ago.

The bottom line is that the financial market is moving towards a crisis. Fast. It will continue to do so as the Fed cuts QE first to zero, then goes in reverse. It will do so even more as the Fed shrinks its balance sheet by allowing maturing paper to be paid off rather than rolled over. If they do that, the pressure on on Primary Dealers will only get worse. They have not established the net short positions needed to manage it.

On average, their positioning is not good for a decline in bond prices (rise in yields.) Some Primary Dealers are probably well positioned. That means that some, if not most, are not. Those who are not well positioned are almost certainly already in trouble.

This won’t end well.

This report has the charts and analysis to prove it.

I’ve opined to stay away from the bond market for the past 18 months. Has that now changed? And what about stocks?

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The Federal budget deficit is shrinking as the economy experiences an inflationary boom. This is just what the Fed was hoping for, but inflation has obviously gotten away from them. It will only get worse as the lagging rent component of CPI will push the total index higher, even if and when the other components begin to moderate.

The rent of shelter and owner’s equivalent rent that’s based on it make up about 40% of Core CPI. Those two components are not based on real time market rents. They’re based on a survey of renters, asking them what they’re paying. The OER is derived from that as a base, and then adjusted from time to time by asking homeowners how much they thought their houses would rent for… As if they knew.

This isn’t merely a dumbass way to measure rent inflation, it’s fraud. Contract rents are usually adjusted upward at a rate far below the increase in market rent. That’s because landlords like to keep good tenants in place rather than incur the friction costs of raising the rent too much and having them leave. It costs money to find a new tenant, and spruce up the unit.

So when the BLS asks tenants what they’re paying, it does not get the full effect of the currently soaring rents. Apartment List does a national rent report showing rents up 17.8% year over year. BLS has imputed the rent component of CPI at 4.1%. At 40% of core, this difference means that the BLS is understating total Core CPI by roughly 5.5 percentage points. That’s obscene. It’s an affront to human intelligence.

But CPI was never intended to measure inflation. That’s why they took home prices out of the index in 1982. CPI was always intended as a tool for indexing government wages and benefits, and industrial labor contracts. In the 1970s indexing got too expensive as home prices surged. So they worked out a way to remove house prices and falsify the housing component of CPI beginning in ‘82.

Now, the Fed is devaluing the mountain of debt out there. Bond holders will get a small fraction of their purchasing power back if they hold to maturity. And if they don’t, and sell along the way they’ll get killed on the capital loss as a result of collapsing bond prices.

We saw this coming since about a month after the bond market turned in August 2020. I don’t think it will get better any time soon, although certainly there will be bond rallies from time to time. Still consistent with my message of the past 18 months, they’ll be xxxx xxxxx (subscriber version).

Meanwhile, the budget deficit will narrow as long as the economy booms. That will reduce Treasury supply. But it won’t reduce it to $20 billion a month. Maybe it will fall to an average of $60 billion per month as some forecasts suggest. Maybe it won’t. I don’t know. The economy is booming at the moment, and there’s no reason yet to expect a slowdown.

But it doesn’t matter. Because the market has shown that it can only absorb $20 billion per month while the Fed kept bond prices stable and suppressed by buying or funding $180-$200 billion per month in net new supply.

Now, if the Fed isn’t buying, and the market can only absorb $20 billion per month, with supply even as low as $60 billion, that’s $40 billion in excess supply that the market can’t take at a stable bond price.

Therefore, bond prices will xxxx xxxxx (subscriber version) and so will stocks, as they get xxxx xxxxx . They’ll be xxxx xxx xxxxxxxx xxxxxxxxx on leveraged funds who hold both stocks and fixed income. And they’ll get xxxx xxxxx because eventually rising yields will force some money managers to xxxx xxx xxxx xxxxx.

There will be no xxxx xxx xxxxx, except to xxxx xxxxx (subscriber version). I’ll continue to look for xxx xxxx trading opportunities in the Technical Trader reports. I’ll leave xxx xxxx the bond market to whale hedge fund professionals.

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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!

FREE REPORT – Proof of How QE Works – Fed to Primary Dealers, to Markets, To Money