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Category: 1 – Liquidity Trader- Money Trends

Reports on the Fed and Treasury, Primary Dealers, real time Federal tax collections, foreign central banks, US banking system, European banking system, and other factors that affect market liquidity. Resulting market strategy recommendations. 6-7 reports each month. Click here to subscribe. 90 day risk free trial!

Bond Market Has Mitigated Some of the Risk, But Don’t Go To Sleep

In Part 1 of this report, I covered dealer positions, financing, and hedging.  Dealers have mitigated a significant amount of risk by selling paper to the Fed, reducing their inventories, and increasing their hedges. They’ve also benefitted from the rally in prices over the past few weeks. That rally has largely been driven by the Treasury paying down T-bills.

This report looks at several large bank measures, including net unrealized profits or losses of large banks on trading positions, and week to week changes in total bank capital. Those changes indicate the profits of the entire banking system, or in this case, the 25 largest US banks.

The data suggests that the big banks who are largely the parent firms of the primary dealers, haven’t been as profitable as their earnings report suggest, or that at least they have not increased their capital at all.

They aren’t required to mark their investment portfolios of long term bonds to market. If they need to liquidate any of that, then those losses will be recognized. There’s some chance that they will need to liquidate later in the year, as Treasury supply increases, putting downward pressure on bond prices.

Meanwhile, Treasury paydowns will continue to support a bid for both bonds and stocks, for as long as they continue. Rip roaring tax collections have slowed the drawdown in the Treasury balance, so the paydowns will probably continue at their current pace, if not more, until xxxx (see subscriber report)

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Despite the weakness in stocks and bonds in the wake of today’s FOMC announcement, these conditions argue for the churning slight uptrends in stock and bond prices to continue until xxxx. Conditons will then turn more bearish. I tell you when that will be, and what my strategy is.

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

Have Primary Dealers Built a Muddle Through Scenario?

For several months, I’ve been positing the idea that when the Treasury gets its cash level down to the legally required limit, the stock and bond markets would be in big trouble. The risk of a crash would be as great as it ever is. I posted an expected time window (in subscriber version)  where it would be a good time to get out of both the stock and bond markets.

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That conclusion came from the idea that:

• Primary Dealers were overleveraged in their fixed income portfolios.

• That the market has been artificially buoyed by the Treasury paying down T-bills. It has now injected $620 billion into the accounts of dealers and investors since February 23.

• That when the Treasury reaches the required cash level of XXX billion (reported in subscriber report), the paydowns will stop.

• That record levels of deficit spending would then no longer be partly funded out of the Treasury’s cash on hand. That would require a dramatic increase in debt issuance.

At first I estimated that that would happen in xxxx (see subscriber version), but lately I’ve pushed that estimate back to xxxx (subscriber version). At that point, the increase in Treasury debt supply would supposedly begin to push bond prices down both in Treasuries, MBS, and corporates.

Highly leveraged dealers would then face forced selling as they were required to meet collateral calls on the inventories they had financed with repurchase agreements (repos). Repos are just a fancy kind of short term borrowing to finance securities purchases, similar to when we use margin debt to buy stocks.

All of that still looks likely to happen. But instead of a crash, I can now see the possible outline of more of a “muddle-through” scenario. I still expect trouble to arrive around xxxxx (in subscriber version), with maybe a few weeks of Wile E. Coyote market action.

But maybe that trouble won’t be quite as bad as I first thought.

There are two reasons for that. Discussion in subscriber version.

The end of Treasury paydowns will, no doubt, cause yields to rise over a short period of time. And that could have been catastrophic.

But lo and behold, we see Primary Dealer data that suggests it won’t be as bad as I had feared. I show that data in a couple of tables and charts in this report.

We won’t know for sure until we get there. I’m still looking at xxxx (in subscriber report) as a likely top in the markets. We’ll just have to see how conditions evolve over the next (time period in report), and take action accordingly. For now, while the Treasury continues to pay down outstanding T-bills, we can follow this strategy (discussed in report).

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

Real Time Tax Data Shows Nirvana for Stocks and Bonds, But It’s Temporary

Withholding tax revenues rose sharply again in May (chart in subscriber version). Non withheld taxes also rose sharply. The economy is growing faster than the Fed would have you believe, and that the Wall Street mob seems to believe.

Revenue momentum is hot, hot, hot. But spending is hotter (table in subscriber version). The impact of economic stimulus will lead to economic overheating and embedded inflation.

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Meanwhile, the Treasury’s bloated cash account is coming down slowly. To get to the level legally mandated by the budget law by the deadline (reported in subscriber version), the Treasury will need to continue T-bill paydowns. This will continue to provide a bid for both stock and bond prices.

But that will all reverse, and we know when. The Treasury’s excess cash will be gone. Enormous monthly deficits will then need to be fully funded by borrowing. Hundreds of billions in new Treasury debt will start hitting the market for months to come. The pressure on the markets will multiply instantly.

Both bond and stock prices would begin to decline rapidly. The Fed would be forced to act.

The media is reporting the Fed is thinking about getting ready to talk about tapering bond purchases. Forget about it. It’s ridiculous. When the Treasury gets down to its required cash level, not only will the taper talk masturbation end, but Fed yield control, with unlimited QE, would be in play.

A slow Fed response would come too late to prevent real, and possibly lasting, damage to market prices of stocks and bonds (Treasury yield and price charts in subscriber version).

Meanwhile the US Treasury has pumped $600 billion into the accounts of holders of expiring T-bills since late February. Those holders are mostly money market funds, but include dealers and other big institutions. Dealers and big investors deploy that cash to buy longer term Treasuries and, in some cases, stocks. More paydowns are coming. That’s short term bullish for both bonds and stocks.

But beware! The end is nigh! And we know when. This report shows you how we reach this conclusion, and when you need to take action to either take advantage or get out of the way. With 9 beautiful charts and tables to show you exactly how and why we reach this conclusion!

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Have a question about Liquidity Trader? Click the chat link at the bottom right of the page, and I’ll be happy to answer your questions. I am often available to chat with you directly between the hours of 5 AM ET and 4 PM ET weekdays. At other times I’ll respond by email.

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Goldilocks Correlation is Still Bullish, Still Bullish After All These Years

Stock prices are currently right in the middle of the channel surrounding the liquidity line in the Compositite Liquidity Chart (viewable in subscriber version). By this measure the market isn’t overbought, as so many bearish pundits are bellowing. Nor is it oversold. It’s just tracking the growth of systemic liquidity. Not too hot, not too cold, but just right. Goldilocks.

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Here’s Why the Treasury Paydowns Aren’t As Bullish As Expected

The balance between QE and Treasury supply will remain bullish through through xxxx (subscribers only). This should provide a boost for stocks. It should keep the Treasury selloff at bay for another month or two.

However, this is not as bullish as I first thought. It appears that around 75% of the T-bill paydowns are going to money market funds and other institutions who must hold short term instruments instead of lengthening maturities or buying stocks. So most of the cash from the paydowns is ending up in Fed RRPs.

Only about ¼ of the money has been used to buy stocks and bonds. So the effect has been muted. There’s no massive blowoff. Instead conditions lend themselves to a churning topping action lasting through xxxx (subscribers).

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Banking System Fragile As Fuse For Implosion Nears Ignition

Every time there’s a critical problem in the banking system due to banker malfeasance, the Fed steps in to paper it over and reward the criminals.

That’s why we focus on the Fed more than anything else. Regular review of the banking indicators was useful once upon a time. The Fed has rendered them irrelevant. But I promised to keep an eye on them, and it has been 5 months since we last looked. That’s enough time that, if anything material has changed, we need to know about it. So herein is a review, our first since last December.

In this report, I highlight the charts. Because there are so many, I’ve attempted to minimize the verbiage. I talk too much. The charts really speak for themselves.

The bottom line is that the system remains extremely vulnerable to a decline in Treasury prices that is  coming in xxx (subscribers only). Likewise, the return of optimism in commercial real estate is problematic. The banks are taking no precautions. There’s no sign of recognition of the looming losses.

It means that the entire banking system could be destabilized in xxxxx (subscribers only). The Fed will have to act, massively. History shows that the Fed won’t act in time to prevent a breach of the system. History also shows that the Fed has the power to ultimately make its actions give the appearance of stabilization, leading to the return of animal spirits.

But I don’t know if it will work yet again, and we can at least expect a significant break first. So here’s what I would do (subscribers only).

Now here’s a review of the banking indicator charts.

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

Treasury Adds to Fed QE to Create Bullish Cash Tsunami

The balance between QE and Treasury supply has gotten even more bullish and will remain so until xxxx (subscribers only). This should provide a boost for stocks. It should keep the Treasury selloff at bay until xxxx (subscribers only).

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I have previously made the case for the Treasury to run out of money in xxxx (subscribers). If that estimate is correct, the outlook will turn negative in xxxx (subscribers). But for now, bullish liquidity forces remain in place, outside of the usual month end supply pressure.

As delayed tax receipts come in, in May, the Treasury will have even more cash for paydowns. The rest of May into mid June could be very bullish as a result. A selling opportunity for both stocks and bonds will arise as the Treasury approaches the point where its cash hoard is used up.

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

TBAC Supply Forecast Tells Us When the Markets Should Top Out

The Treasury Borrowing Advisory Committee (TBAC) is a gang of Primary Dealers and other big investment firms that tells the US Treasury once each quarter how much paper it will need to issue, and when. It provides an estimate of issuance by date and type for the current quarter and the next one. It does so every February, May, August, and November, near the beginning of the month.

The TBAC just issued its reports for the current quarter last week. The report confirms what we expect, a massive supply increase coming. We know exactly when it’s coming, and have a pretty good idea of when it should start to cause problems for the stock and bond markets. With that knowledge, we can now prepare for action to take advantage.

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Here’s Why We Should Sell In June, Before the Swoon

Withholding tax revenues exploded higher in April. Everybody knows the jobs number will be huge. The withholding data says not huge enough. But I’m not here to game that because the BLS makes up the number in the first release then revises it 7 times over 5 years to fit the tax data and unemployment claims data. The BLS survey first release is essentially statistical horseshit.

The April tax windfall is bigger than it looks because the base period was during the US economy’s shutdown last year. However, the total appears to compare favorably with April 2019, until we consider wage inflation. Then the rebound is just back to the April 2019 level.

But momentum is hot, hot, hot. The economic news will be hot, hot, hot. Bond traders will have an excuse to sell. Stock traders will have an excuse to buy. But excuses don’t matter. Money talks. And we follow the money. We know where it is, and where it’s headed. Click here for a 90 day risk free trial to Liquidity Trader Money Trends reports. 

Despite the hot momentum of tax collections, spending is hotter, and the deficit is massive. Back of the envelope calculations continue to suggest that the US Treasury will run out of cash in XXXXX (subscribers only). It will then need to radically increase supply. The xxxxx (subscribers only) quarter will then be crunch time for the markets. Click here for a 90 day risk free trial to Liquidity Trader Money Trends reports. 

Meanwhile the US Treasury has pumped nearly a half trillion dollars into the accounts of holders of expiring T-bills. Those holders include dealers and big institutions. They deploy that cash to buy longer term Treasuries and, in some cases, stocks. That’s short term bullish for both bonds and stocks. More paydowns are scheduled for the next couple of weeks. Bullish for both asset classes.

The new TBAC supply estimate suggests that the paydowns will end this month. The Treasury will be set to increase issuance in the xxxxx quarter (subscribers only if we extrapolate current flows. Does this mean it will be time to sell in June and prepare for the swoon? Or do we have more time for holdin’ and hopin’? This report has the answers.

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Available at this link for legacy Treasury subscribers.

KNOW WHAT’S HAPPENING NOW, before the Street does, read Lee Adler’s Liquidity Trader risk free for 90 days!

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Markets Awash in Cash – Where, How, and How Long, Revealed

The markets are awash in cash. It shows up on the Fed’s balance sheet. It shows up in the Treasury account, and in Primary Dealer Accounts. It shows up in Reverse Repos.

That cash is coming from the US Treasury’s campaign of paying down T-bills. Those paydowns have totaled $430 billion since February 23. It’s an abomination of market manipulation. But it has worked to stabilize the bond market, levitate stock prices some more, and some more, and some more, and to stave off yet another Primary Dealer collapse.

We can follow these flows via the Fed’s weekly balance sheet statements, and the charts and indicators we derive from it.

The Treasury still has $1 trillion in its account that it must spend down. Annual taxes are still coming in, replenishing that account. The Treasury will almost certainly continue to pay down T-bills until there’s no cash left. I will do a revised estimate of when that will be from the April end of month Daily Treasury Statement. Prior to that, I give my best current swag in this report.

Until then, the cash will continue to flow. This report shows you exactly how this impacts stocks and bonds, so that you know how to play it, and when to GTFO.

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