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Category: 1 – Liquidity Trader- Money Trends

How Fed and Treasury policy, Primary Dealers, real time Federal tax collections, foreign central banks, US banking system, and other factors that affect market liquidity, interact to drive the financial markets. Focus on trend direction of US bonds and stocks. Resulting market strategy and tactical ideas. 4-5 in depth reports each month. Click here to subscribe. 90 day risk free trial!

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Withholding tax collections grew strongly in September. They weren’t alone. Other taxes also showed very strong growth. There’s no evidence of economic slowing. Every real time tax measure points to a rapidly growing economy right through October 1. The Fed is easing monetary conditions into a red hot environment. A rapidly growing economy coupled with Fed easing is a recipe for xxxxxxxxxx xxxxxxxxx xxxxxxxxx . Non-subscribers, click here for the rest of the story.

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If revenue continues this red-hot growth, it’s even possible that the November TBAC forecast will show at least a small reduction in expected Treasury supply. That’s something to keep in mind with the 10-year Treasury Yield breaking its 6-month downtrend today. This is a shift toward greater bearishness that I think is reasonable, but that could xxxxxxxxxxxx…

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The Longer This Goes On, The More Fragile It Becomes

Market rallies have been well supported by adequate, self generated liquidity. But that’s about to change in October, particularly late October. Non-subscribers, click here for access. 

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There are a couple of things to watch. One is that …

That prop now goes away until xxxxxxxxxxx. Investors will need to use debt to absorb the immense wave of Treasury supply that’s on the way.

The other factor is that ……. That will give us a better idea of when …………………………. will stop acting as a prop for asset prices.

I continue to estimate that it will ……………………. in late ………. or xxxxxxxxxx.  The longer this goes on, the more fragile the system becomes.

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Market Can’t Live By Repo Alone

Not much has changed in liquidity measures since last week’s breakout to new highs. Most indicators have paused. But the market rallies remain well supported by adequate liquidity. Non-subscribers, click here for access. 

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There are a couple of things to watch. One is that the September T-bill paydowns have ended. These are regular quarterly occurrences that happen when quarterly estimated income tax collections come in. The US Treasury briefly has an excess of cash, and pays down outstanding T-bills. Those are direct cash infusions into dealer and big investor accounts, and they’re virtually always bullish. That prop now goes away until December. Non-subscribers, click here for access. 

The other factor is that the Fed’s RRP slush fund has rebounded as a result of those paydowns, and the stupidity of quarter end window dressing. Much of that spike will disappear on October 1. Then we’ll see how much investable cash remains in the RRP facility, so that we can get a better idea of when that fund will run out of cash, and stop acting as a prop for asset prices. Non-subscribers, click here for access. 

I continue to estimate that it will effectively run out of money in xxxxxxxxxxx, or xxxxxxxxx at the latest. That’s when we’ll find out whether animal spirits are sustainable on the basis of repo borrowing alone, along with the attendant increase in leverage. Non-subscribers, click here for access.

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Macro Money Blows the Roof Off

Measures of banking system and non bank liquidity have broken out to new highs. The market rallies remain well supported by adequate liquidity. There are a few measures flashing yellow but most are ramping. Non-subscribers, click here for access. 

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At the same time, critical ratios reached all time levels of extension over the summer. It means that the current rally is likely to be the final rally of the bull markets in stocks and bonds. Enjoy it while it lasts, because it’s not long for this world. Non-subscribers, click here for access. 

Along with the usual charts and explanations to paint the picture. Non-subscribers, click here for access. 

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Primary Dealer Clown Show Danger Pales in Comparison to Hedgie Daredevils

Primary Dealers remain modestly net xxxx the bond market, including both their securities portfolios and futures hedges. That’s a problem, considering not only what’s going on right now, but what has been going on for the past 3 months. Non-subscribers, click here for access.

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Technically Treasuries are near an important inflection point on the charts. Repo shows extended leverage among dealers. They are slightly xxxxx overall, which isn’t bullish for the big picture. They are leveraged to the hilt and they’re taking hits. Non-subscribers, click here for access.

Hedge fund positions in Treasuries have blown the basement out of their record short position. The mind boggling short position is based on a hedged carry trade that just keeps getting bigger and bigger. This is partly a function of ever increasing supply. Non-subscribers, click here for access.

That has the potential to trigger an unstable unwinding. So far it hasn’t. The rally goes on and their short position keeps getting bigger. It’s not clear how long it will be until this breaks. We must remain vigilant for a sign, whether it be in the liquidity data or the technical side. Non-subscribers, click here for access.

Between both the dealers and the hedge funds we see these enormous positions, extreme leverage, and one-way hedged bets. Whatever way this breaks, the move should be big and fast in both bonds and stocks. However, we don’t yet have a tell on which market takes the hit, and which takes off. Or maybe with the extreme leverage, they both implode. Something big is coming, but when and how are still unclear. We need to be vigilant for something big. Here’s what to do in the meantime while we lie in wait, ever watchful. Non-subscribers, click here for access.

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Here’s Hard Evidence that the Slowing Economy Narrative is False

Recently, the narrative used to explain or excuse the recent performance of US stocks and bonds is that the US economy is slowing. The crystal ball gazers are seeing something that just isn’t there in the real time data. If anything, the economy has started running hot again. Whether it undergoes a normal short-term economic pause here, or breaks out into runaway growth, remains to be seen. But there’s no sign of any material slowing in real time tax collections data. Non-subscribers, click here for the rest of the story.

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Withholding Tax Collections Support Sufficient Liquidity Growth

Withholding tax collections grew enough in August to support existing market trends. Non-subscribers, click here for the rest of the story.

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Meanwhile, after my repeated warnings that the tax collection data did not support the BLS monthly nonfarm payrolls fiction, the other shoe dropped. The BLS announced a downward benchmark revision of 800,000 jobs for the year. This was due to an average monthly overstatement of “only” 67,000 jobs per month. Non-subscribers, click here for the rest of the story.

And let’s not forget the monthly revisions, which are often material. What a joke. I’ll stick with analyzing the tax data, which tells us all we need to know about the all-important Federal revenues in real time. That, secondarily, tells us something about the US economy, and how much excess liquidity it might be generating from business profits and employment income. Excess income becomes excess liquidity in bank accounts and money market funds, available to buy stocks and bonds.

Regardless of how misleading the jobs reports may be, nominal revenue growth, from both jobs and inflation, has been strong enough to restrain the growth of Treasury supply and enable the US Treasury to build an enormous hoard of cash while cutting bond and note issuance.

That doesn’t change the fact that there’s still a tsunami of supply coming. But if the mix emphasizes T-bills, the market can readily fund that through using the T-bills as collateral for repo at 97% of face value.

Of course, whether it will do that or not depends on psychology, which we consider with the analysis of ratios of stock prices to liquidity in other reports.

There’s not enough evidence yet in the tax data to suggest that that strong revenue growth holding back the growth of Treasury issuance has changed. Withholding tax revenue rebounded in August enough to xxxxxxxxxxxxxxxx xxxxxxxxxxx xxxxxxxxxx July. There’s enough revenue to xxxxxxxxx xxxxx expected T-bill xxxxxxxxxx xxxxxx xxxxxxx result of September estimated tax collections. The Treasury has already posted a modest T-bill paydown for this week. We’ve estimated that xxxxxxx xxxxxx xxxxxxxx, once the quarterly tax windfall is collected on September 16.

To see the data for August visualized and learn what to expect …

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Liquidity Still Supports the Rally, But with Warnings

There were no significant changes in the data this week. In looking at the big picture, I saw nothing that would materially change my analysis and outlook posted in the previous update posted August 19. However, I want to comment on an observation I made last week. Non-subscribers, click here for access. 

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8/19/24 That means that the more T-bills the Treasury issues, the more bullish it is, because of market participant willingness to use those bills to convert to cash, which then enters the banking system via the magic of government deficit spending. So not only does that T-bill issuance fund market speculation, it also stimulates the economy via deficit spending. Non-subscribers, click here for access. 

It’s magic. And it will work until the system becomes so overleveraged that it breaks. We saw the first shot across the bow in recent weeks. Non-subscribers, click here for access. 

I would only amend this to say that the more T-bills the Treasury issues, the more bullish it is, potentially, because dealers, banks, hedge funds and money market funds must make a proactive decision to employ that tactic. If they turn cautious, which I seem to recall happening a couple of times in ancient history, then the T-bill issuance can become a safe haven holding rather than collateral for increased speculation. Non-subscribers, click here for access. 

That’s the transition for which we must always be alert. There’s nothing concrete pointing that way yet. However, in July we noted that we reached an extreme of hysteria on some measures that could be the precursor to an attitude adjustment. Here’s where that stands, and what to do about it, as of right now. Non-subscribers, click here for access. 

Along with the usual charts and explanations to paint the picture. Non-subscribers, click here for access. 

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Attention New Subscribers! Please check your spam folder for your subscription welcome messages and post notifications and whitelist Liquiditytrader.com. Some email providers like Hotmail and others which use the Proofpoint gatekeeper are blocking Liquidity Trader emails completely. I have been unable to get them to stop. Please notify them to “Let my emails go!”

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Liquidity Now Hinges on Mood

DVP (Delivery versus payment) Repo, which is the bulk of the repo market, made a new high last week, supporting a bullish trend in stocks. The players continue to be ready and willing to use repo to acquire and finance holding Treasury inventory. Non-subscribers, click here for access. 

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Coupon issuance at mid-month was light which eased the burden on the markets. At the same time, the Treasury has issued a tsunami of T-bills in July and August. That turns into repo. That is insta-money. T-bill issuance is effectively money printing as long as the players are willing to repo the T-bills. If they were not, they would need to liquidate assets to buy the new T-bills. They’d rather hold their stocks and bonds, and use repo to buy the bills. It’s cheap financing for their holdings of long-term financial assets. Non-subscribers, click here for access.

In view of this process, here’s an illustrated look ahead at what to expect to signal a final top in stock prices. See for yourself, understand, and decide based on these specific triggers. Non-subscribers, click here for access.

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Attention New Subscribers! Please check your spam folder for your subscription welcome messages and post notifications and whitelist Liquiditytrader.com. Some email providers like Hotmail and others which use the Proofpoint gatekeeper are blocking Liquidity Trader emails completely. I have been unable to get them to stop. Please notify them to “Let my emails go!”

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Bits and Pieces- Why What Was Bearish is Now Bullish

Whereas, in the course of human events… Non-subscribers, click here for access. 

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Wait! Who starts a report with “Whereas!” I do! Whereas I’ve been summer vacation mode, traveling, I’m a bit behind on updated the Treasury supply and banking data. So I’ll reduce this to bite sized pieces for more current consumption over the next two days. First let’s start with Treasury supply. The Treasury and TBAC just released their latest 6-month supply estimates on July 31. Non-subscribers, click here for access. 

In following reports, I’ll get to the Fed balance sheet data, which is released on Thursday evening, and then the banking data, released Friday evening. Non-subscribers, click here for access. 

Repo use surged last week in a massive breakout. Clearly, the players have decided that they are ready and willing to use repo to acquire and finance Treasury inventory. Coupon issuance for the August 15 mid-month refunding is light, but the Treasury has issued a tsunami of T-bills in July and August. Heavy coupon supply is due at month end. Then T-bill paydowns are coming in September as usual, thanks to the mid month estimated tax payment windfall. Non-subscribers, click here for access. 

Meanwhile, T-bill issuance has been massive in July and August. Back in the old days, I thought that T-bill issuance was bearish because buyers needed to liquidate existing assets to purchase them. That used to work, but now it is wrong, as we recognized when T-bill issuance surged in June. Here’s why, what it means for the market, and how to play it as a result. Non-subscribers, click here for access. 

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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! 

Attention New Subscribers! Please check your spam folder for your subscription welcome messages and post notifications and whitelist Liquiditytrader.com. Some email providers like Hotmail and others which use the Proofpoint gatekeeper are blocking Liquidity Trader emails completely. I have been unable to get them to stop. Please notify them to “Let my emails go!”

If you continue to have issues receiving Liquidity Trader emails, just check here daily at 9 AM ET for the latest posts.

THANK YOU FOR YOUR SUPPORT!

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