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Category: 1 – Liquidity Trader- Money Trends

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Liquidity Matters, The Fed’s BS Doesn’t

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I didn’t watch Powell’s press conference yesterday. Instead, I followed my twitter feed, where I got the reports, reactions, and impressions of dozens of reporters, analysts, and other observers of various stripes. My reaction to it was predictable. The same old disgust.

These multiple perceptions of Powell’s performance, reinforced my opinion that Powell, and most Fed governors and presidents, are cynical, pathological liars. They will stop at nothing to defend the rigging of the markets to benefit only their cronies and themselves. Meanwhile, those least able or least willing to participate in their game, suffer the consequences.

End of rant.

For our purposes, I remind myself and you, to watch what they do, not what they say. There’s scant evidence that the market anticipates, aka “discounts” the future. There’s lots of evidence that market prices correlate with money flows. In fact, there’s so much evidence accumulated through the years that we would have to be delusional not to recognize cause and effect.

These Composite Liquidity Index reports illustrate that. They don’t tell us anything that we don’t already know, but they serve as a good reminder, as reinforcement. We need to stay focused on what matters! Not the sideshows like the one the Fed put on yesterday, which the Wall Street captured media willing played into.

So what if the Fed says it’s going to reduce its QE purchases? So what if it says that it’s likely to start doing it in November? And so what if they cut by $20 billion per month and stop after 6 months as Powell suggested they might?

Well, ok. One thought is that might coincide with the draining of the RRP slush fund that I’ve pointed out to you in these reports for the past several months. I estimated that the fund would top out at $1.3 trillion, coincident with the lifting of the debt ceiling, probably in early October. Well, here we are at $1.283 trillion in the RRP fund yesterday (9/22).

And all of the headlines are about the looming Federal budget and debt ceiling deadlines.
Something’s happening here. It will get done. Temporary default or not.

Take with a grain of salt all of the predictions of catastrophe if the government defaults. There will be short term dislocations, no doubt, but the politicians will, in God’s good time, pass a budget, and lift the debt ceiling, and the Old World, with all its financial power and might, will step forth to the rescue of the New (with apologies to Churchill).

Lifting the debt ceiling will start the clock on exhausting the RRP slush fund. The catastrophe will come when that fund approaches zero again.

So here we are. The Fed will cut QE. The RRP slush fund will need to be used to absorb the Treasury issuance. If the fund lasts 6 months, which I doubt, then the Fed can follow its $20 billion per month QE cut trial balloon.

But at the end of that time the bond market will collapse, because there won’t be enough money in the financial system to absorb the paper at an equilibrium price. Prices will fall, and will do so continuously, with a concomitant increase in yield.

Or it could come sooner than 6 months. It depends on how fast the Treasury will move to replenish its cash account and repay the other internal funds it raided. If they go low and slow, then they can stretch this charade to the maximum. If they move quickly, then the sheet will hit the fan much sooner. The Fed will not be able to continue cutting purchases for 6 months. It will stop and reverse much sooner.

Not being an insider, I don’t know what the plan is. So again, all we can do, and in fact all we need to do, is watch the data. It will tell us exactly what’s going on at just the right time that we need to know it. This report, and those to come, will show you, with charts and clear explanations (subscribers only), exactly what’s going on and when we’ll need to react .

All will unfold before us in good time. We did not need Jerome Jerry Jaysus Powell, or Janet Yellin’ Yellin to tell us that. We can see the trends for ourselves in the monetary indicators. It’s all there for us to view with our own eyes (subscribers only).

We can predict what they’ll say, and more importantly what they’ll do. But prediction isn’t all that helpful, because, again, the market does not discount. It responds to changes in liquidity, directly and immediately.

On occasion, rarely, it will react to an external shock, like a pandemic. But those events are always temporary. In the end, the market always returns to following the path of liquidity. You’ll see that again, and in the future, in these reports (subscribers only) so that you can act to preserve and grow your capital under the most adverse circumstances.

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

Get Ready for the Coming Bond Market Bloodbath

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Janet Yellen has now confirmed that the Treasury will run out of money in October, as we already knew from our tracking of the data.  Congress will be forced to raise the debt ceiling. Treasury supply will mushroom at the same time as the Fed begins to cut its market support operations. The RRP slush fund will affect the timing of the coming disaster. But we know its coming and we have a good idea of when.

Meanwhile the BLS has fomented a completely false picture of inflation. I explain that in this report. It’s blatant.

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

Useless Banking Indicators Except for One Giant Red Flag

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I started to wonder how the banking indicators were looking lately. I’ve looked at the charts this morning. In updating this for you, I’ve again attempted to minimize the verbiage here. The charts are bad enough.

When it comes to banking indicators it’s best not to suffer paralysis by analysis. We’re seeing the same crazy insane, stuff, month after month year after year. As long as the Fed backstops this, who knows how long it can go on. Most of this data only reconfirms how historically extreme these conditions are. It tells us nothing about the timing of the next “adjustment.”

Besides, the markets will crack first and take the banking system down when they do, not the other way around.

So consider this report an interesting diversion. I post it because I did the work, so I may as well publish it (Sarcasm).

But I did come across one chart that appears to have timing implications.

Bank deposits.

The correlation with stock prices is stunning. But it gets even more interesting when expressed as a ratio of the S&P to deposits. That’s telling us that right now is a good time to at least get ready to dump stocks, if not do it now. This chart and the rest, all in the subscriber version of the report.

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

Take the Threat of this Triple Whammy Seriously Now

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The stock and bond markets face a triple whammy at the end of this month. In this report I’ll show you what those three things are, why and how they will impact the market and what you should do about it (subscriber version only). These three things coming together as soon as xxxxxx (subscriber version only) will pose a grave threat to the Treasury market, to short term interest rates, and ultimately to the stock market.

QE Still = 100% of Treasury Issuance, But Coming Change = Crash

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The Treasury is rapidly exhausting its cash as it continues to pay down T-bills. At this rate, it will run out of cash xxx xxxx xxxx xxxx (in subscriber report). Congress will then be forced to raise the debt ceiling.

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The Treasury will need to issue immense amounts of new debt to repay the internal accounts it raided, and to rebuild its cash account to the TBAC recommended level of $400 billion.

For the past month, and until the debt ceiling is lifted, Fed QE has been covering and will cover 100% of new Treasury issuance. That’s a short term bullish factor for bonds and stocks as it keeps pumping cash into the dealer and other institutional accounts that had been the holders of the T-bills being redeemed.

In fact, it’s surprising that the stock rally has been so muted, and that the bond rally has stopped in its tracks over the past 6 weeks. That’s because corporations have been rushing to issue new equity and new debt to take advantage of the high prices they can get. This is free money to them.

Once the Treasury begins to issue new debt, it will be on top of this gigantic wave of corporate supply. It won’t be pretty.

It also won’t be immediate. I estimate that by the time the debt ceiling is lifted and the Treasury supply tsunami starts, the Fed’s RRP slush fund will reach xxxx (subscribers only). That’s how much new Treasury debt can be issued before the crisis becomes apparent.

We have some time. And we have the meters of the Fed’s RRP slush fund account, and the schedule of new Treasury issuance, as well as the QE schedule. If the Fed chooses to reduce that schedule, that’s their problem, and the market’s.

But it won’t be ours. Because we’ll be actively watching, with situational awareness. We’ll be prepared to take advantage with enough advance notice to act accordingly. Here’s our current situational awareness update.

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

Despite the Rally Primary Dealers Are Still At Risk

This is a repost of the previous post, with corrected headline and link. I apologize for the redundancy. 

Primary dealers have offset their losses of last August through February in the recent rally, and they have reduced their net long exposure somewhat since their highest levels of a year ago.

But that doesn’t mean that they’re not still at significant risk if the bond market begins to selloff. They are still positioned for stable or higher prices, and stable or lower yields. If yields rise and Treasury prices fall, as I have concluded they will, then it won’t be long before the dealers are in trouble again. And if they’re in trouble, all asset markets will be in trouble.

This report looks at the particulars of their positions, along with a quick update on the 10 year Treasury yield. That includes a few keys that should signal when the next decline in bond prices is starting.

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

So You Think the Fed Can Taper?

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Treasuries have sold off on the strong, surprise jobs report last week.

At the same time, there’s been an equally important, but less well known surprise. The Treasury has maintained an increased pace of T-bill paydowns in the first third of August, despite the re-imposed debt ceiling.

That’s a short term bullish factor for bonds as it keeps pumping cash into the dealer and other institutional accounts that had been the holders of the T-bills being redeemed.

But it also means that the Treasury will spend its cash faster than I had initially imagined. That means that the bullish influence will end sooner than in my last guess.

I use the word “guess” deliberately. It’s difficult to estimate of what brilliant, but crazy, policymakers will make up when the heat is on.

The good news is that we now have evidence of a pattern. That pattern shows a fast spenddown. At this rate of spending, the Treasury will run out of cash in xxx xxxx (in subscriber report). As I recall from the past 7 debt ceiling debacles, there’s also a legal mandate that the government must make a large military pension fund contribution at the end of the fiscal year which will affect the drop dead date.

Maybe they can delay that for xxxx xxx xxxx (subscriber report) depending on the strength of mid September quarterly income tax collections. But at some point in xxxxxxx, the pressure to raise the debt ceiling will force a deal.

The jobs data was a surprise. As usual, the BLS first release is BS. The July nonfarm payrolls report grossly overstates the increase in jobs. The tax data is actual and, as I pointed out in the monthly Federal revenues report posted last week, withholding tax collections show that the payroll gains were certainly less robust than the BLS said they were.

As you may recall, back in the spring, there were a couple of months were the nonfarm payrolls gains were severely underreported relative to what the withholding tax collections were showing. I wrote then that the BLS data would catch up to the reality within a few months. I believe that the July report was the “catchup” month.

In our report on July federal withholding collections, we saw a dip in the second half of the month that suggested that the economy had fallen off a cliff. But withholding has now recovered to the trend in force since mid May (CHART in subscriber report). It is now at an inflection point where it should signal whether the economy has gotten back on track, or is in the process of rolling over. This should happen over the remainder of this month. I’ll post an updated chart when it happens.

The Wall Street talking head community, with a few Fedheads chiming in, is now in a growing chorus that the Fed will start tapering soon. Our analysis has been that the Fed can only taper if the Federal deficit is shrinking, thereby reducing Treasury supply. If the Fed were to taper in the face of constant or rising supply, the market would need to adjust in order to absorb the additional supply. Bond prices would fall and yields would rise.

This is where the revenue trend is important. If it weakens, the deficit will grow and supply will increase. This is even before considering the $1 trillion infrastructure spending package. If revenue growth stays strong, the Fed could conceivably do a small cut in QE (aka taper) without crushing the bond market. That could turn into the muddle through scenario.

The Treasury market rally of recent months has meant that Primary Dealers have built a profit cushion that would provide some protection in the event of bond market price weakness. In addition, initially, the supply increase that results from the lifting of the debt ceiling will be funded by the trillion + dollars that has been deposited in the Fed’s RRP program. That is still growing as the Treasury continues to pay down T-bills.

Those two factors will delay a bond market crisis for xxx xxxx (subscriber report).

It depends on when the debt ceiling is lifted, how much tax revenue the US economy is generating, and how much the Fed cuts its purchases of Treasuries and MBS as it begins the “taper.”

A muddle through scenario is always possible, but a crisis is also possible, if not more likely. The timing is in question, but it should come xxx xxxx xxxx xxxx (in subscriber report). The timing will become clearer as the trends of the data begin to show themselves once the debt ceiling is lifted. That includes the supply schedule, the trend of Federal revenue, and the Fed’s schedule of reduced purchases.

In the meantime, the status quo rules. As long as the Treasury is using its cash to pay down t-bills, the uptrend in stocks should continue. The selloff in Treasuries over the past week should reverse as those paydowns continue.

See the full report for the charts, more details on the supporting data and how we arrive at these conclusions, along with the timing, and an idea of the appropriate strategy under these conditions.

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US Economy Just Went Over a Cliff

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Wall Street wiseguys and the mouthpieces of the Mob @CNBC and @WSJ don’t know it yet, but the US economy went over a cliff in the last two weeks. They don’t know because they’re not tracking the real time Federal tax collection data like we are. And that data shows us that’s what happened.

Here’s the data, what it means for the market and for us, and some suggestions on how we might view it and use it to possibly profit in the short run, and protect ourselves in the longer term. There are an unusual number of variables, unknowns, and yet to be knowns in this outlook, but we have a general idea of a couple of likely scenarios on how the next few months might unfold. If you want to avoid the catastrophe that lies ahead, it behooves you to be familiar with those scenarios, and to track the variables as they become known.

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Here’s How Fed and Treasury Colluded to Delay Armageddon Due Date

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The Fed has bought mass quantities of Treasuries and MBS over the past dozen years, in what are called Permanent Open Market Operations or POMO. This is just a fancy name for trading with Primary Dealers. We call the Fed’s massive asset purchases Quantitative Easing, or QE. The Fed buys that paper strictly from Primary Dealers with rare exceptions. The dealers then use the cash to buy more paper, whether more Treasuries, MBS, stocks, or other financial instruments.

QE has become the primary source of demand for absorbing the supply of financial assets. The primary source of supply is the US Treasury which has lately been issuing an average of $200 billion per month, or more, of Treasury debt. The market must absorb that. In the absence of QE, prices would be under constant downward pressure. Since stocks and bonds are to some extent interchangeable financial assets, both asset classes would be affected.

The Fed has made sure to print enough money, that is to pump enough cash into the accounts of Primary Dealers, to ensure that prices maintain a steady upward course. The Fed has made sure to engineer QE to all but guarantee bull markets in stocks and bonds.

At some point that could change, and we watch the data carefully in order to estimate when that’s likely to happen.

The QE vs. Supply Equation

QE has thus become the primary fuel that powers demand for financial assets.

The flow of QE cash to the Primary Dealers is almost steady, with a non-material reduction in MBS purchase settlements scheduled for mid month.  Meanwhile, Treasury supply, to this point has been steadily enormous, fluctuating within a semi predictable range month to month. Not much has changed since the Fed’s pandemic emergency phase of QE began in March of 2020.

Until now. The big change is that the Federal debt ceiling is now back in force, which means that Treasury issuance will first slow, and possibly stop, until Congress raises the debt limit. This will reduce new Treasury issuance. Supply will be constricted. The reduction in supply could give the bond market rally a second wind, or it could accrue to stocks, or both.

So it will be bullish for awhile. Then it will stop. Then we’ll have a Wile E. Coyote moment. And then it will end. Badly. Here’s the how, why, and the timing.

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Fed Finally Starts the Standing Rippo Farcility

They’ve been threatening to do it for two years, and finally pulled the trigger. The Fed’s captured media barely gave it lip service, with a brief mention here and there. A sharp eyed Liquidity Trader subscriber, Chet, called my attention to this well hidden tidbit yesterday.

Here’s the relevant part of yesterday’s announcement by the NY Fed.

Under the SRF, the FOMC directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to conduct overnight repo operations with a minimum bid rate of 0.25 percent and with an aggregate operation limit of $500 billion, effective July 29, 2021. As with the Desk’s existing repo operations, the SRF will be cleared and settled on the tri-party repo platform. Treasury, agency debt, and agency mortgage-backed securities will continue to be accepted. All other terms will be the same as the existing overnight repo operations.

Primary dealers will continue to be counterparties for repo operations under the SRF. The SRF counterparties will be expanded to include additional depository institutions.

Chet wrote:

Why do they need this? Are the money markets who normally participate in the private repo market perceiving counter party risk? Even if the collateral they get overnight or term is pristine?
I am watching all the CNBC talking heads right now, they don’t have a clue. They should be reading your newsletter on Macro Liquidity. 

Without Chet, I may have missed that Fed release. It was not part of the FOMC statement, but was noted in a separate release at the same time as the usual Fed statement. It was designed to either be ignored, or at least under emphasized.

In that, they succeeded. Did anyone ask about it at the press conference? Yes, Mike Derby of the Journal asked a one line throwaway about it, and Powell gave a throwaway answer:

Derby: So I wanted to ask you about the standing repo facility and get your sense of what you think it will do for market trading conditions.

Powell: So, on the standing repo facility, what is it going to do? So it really is a backstop. So it’s set at 25 basis points so out of the money, and it’s there to help address pressures in money market — money markets that could impede the effective implementation of monetary policy. So, really, it’s to support the function of — functioning of monetary policy and its effectiveness. That’s the purpose of it. And it’s set up with that purpose in mind.

What a useless crock of shit that answer was.

I had not given much thought to the SRF recently, because I have always felt it was a non-issue. The Fed has always made unlimited amounts of repo funding available on an ad hoc basis when crisis demanded, so why would this matter?

Chet’s question made me revisit my thinking and I sent him this response.

I’ve long said that the idea for a Standing Repo Facility is smoke and mirrors. What’s the difference between it and offering them on an ad hoc basis when required, as they’ve always done? But I think I see their rationale for it. And it’s not what they say it is, of course.

Right now, there’s too much cash in the system from the Treasury paydowns, so it’s currently a moot point. But when that cash is gone in a few months, if the Fed opts not to take up the additional Treasury supply by increasing QE to absorb it, then the dealers will need to resort to repo to finance it.

[Additional note: Otherwise bond prices would fall and yields would rise.]

I guess the difference is that if they call it a “standing” facility, that means permanent. And that’s almost as good as outright QE to the dealers [because they would never have to pay it back], except that the cost would be variable, and would rise, if the market tightens.

Another thought is that by having this, it gives the Fed the backstop it needs to pretend to taper QE [emphasis added] No question that something will be required to absorb the Treasury issuance. If it’s not outright QE, then it will be the SRF.

At this point the SRF is a non-issue. If they ever start to use it, we’ll have to see if the dealers redeploy enough of it to keep the markets levitated. As I said in the Lindsay Williams podcast interview (Bond Yields Down, Inflation Up, Here’s Why), there are simply too many variables that will come into play beyond the next 3-4 months to make an accurate forecast [beyond that length of time] now.

Thanks for alerting me to this! I wasn’t paying attention at all today. I was out exploring Warsaw!

To sum up, there’s currently no need for this facility. But when the Treasury runs out of cash (timing analyzed here) Congress will raise or suspend the debt ceiling, and the Treasury will start issuing more debt. If the Fed wants to keep bond yields down, it will need to buy more of that new debt, or fund it in some other way. There’s no way it could taper its purchases if it wants to hold yields stable. If it doesn’t buy more paper, then they hope that the SRF will do the trick.

If it doesn’t they would either have to let Treasury prices fall, and yields rise, up to a point. That point is the level that triggers a crash. You can forget about the Fed ever tapering purchases other than a token show trial for a month or two. To seriously reduce their purchases would be an act of financial mass murder.

They will either need to increase their purchases (more QE whoopee) or do repo, lots and lots of repo. The $500 billion they have initially set will be gone in a few months. Then they’ll go to a trillion, then who knows.

It’s all so sordid. But I’m not here to moralize about why this is so gat-danged wrong. We’re only interested in the practical effects of Fed policy on the prices of stocks and bonds. I analyze that and give you the look ahead for the time frame that’s reasonably foreseeable in the Liquidity Trader Money Trends reports. If you are a new subscriber, you can try them risk free for 90 days.

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