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Category: Fed, Central Bank and Banking Macro Liquidity

Analysis of the major forces of macro liquidity that drive markets. Click here to subscribe. 90 day risk free trial!

Ponzi Much? Understanding Treasury Debt and Market Fragility

Lee Adler

The US government will sell T-bills this week in exactly the amount that it withdrew to pay interest on the Federal debt on November 15. Coincidence? I think not. But while it makes a point, the real issue is in the ability of an extended financial system to withstand the drumbeat of Treasury supply. Non-subscribers, click here for access.

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That system is at an all-time record in size and in relation to stock prices, moving relentlessly in the same upward direction as the Treasury issues more and more debt. The fragility seems to be able to grow endlessly. The game can go on until it can’t. Our job here is to be on the lookout for any signs that it is reaching that point. It’s getting closer but we haven’t yet reached that inflection point. This report shows you what to look for in the charts of the crucial banking and liquidity indicators.  Non-subscribers, click here for access.

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Here’s Why Lower Treasury Supply Ahead is Bullish or Super Bullish

Lee Adler

Treasury supply is scheduled to moderate over the next 3 months but there will still be moments of pressure on the markets. How the new government treats the debt ceiling reimposition on January 2 is a wild card. If it treats the debt ceiling as inviolable, then it will pay down T-bills for a few months until it runs out of cash. Those paydowns would be bullish. Non-subscribers, click here for access.

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Don’t Be Misled By October Tax Collections Collapse

Lee Adler

Federal withholding tax collections stalled in October. The jobs report mirrored the tax collections for a change. Non-subscribers, click here for the rest of the story.

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According to economists, external factors were to blame for the slowdown. For once, I won’t quibble. These included the 2 hurricanes that pounded Florida and the Southeast, and the Boeing strike. That strike will continue to impact year to year comps for as long as it lasts. Hopefully, there will be no more hurricanes. Non-subscribers, click here for the rest of the story.

10/4/24 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 change come early November if the Treasury shocks the market with a supply reduction. Non-subscribers, click here for the rest of the story.

That outlook came to pass, with a small reduction in expected supply for the next 3 months. I will consider that in greater depth along with a detailed supply schedule estimate in a report to follow in a few days. The biggest wildcard, however, is the re-imposition of the debt ceiling on January 2. If past debt ceiling episodes are any guide, the Treasury xxxxxxxx xxxxxxxxxxx xxxxxxxxxxxx. Those paydowns are normally a xxxxxxxxxxx influence. That would start in January. More on that in the next report. Non-subscribers, click here for the rest of the story.

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Primary Dealer Crisis Now, Crisis Later

Lee Adler

Primary Dealers were wrong about the Treasury market in September, and it has cost them. They reached a small net long position in their hedged bond accounts just as the bond market was topping out in price terms. Since then, bonds have gotten crushed and yields have soared. The dealers aren’t net short enough to profit.  Non-subscribers, click here for access.

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We had recognized the potential for a turn in the last report on dealer positions. 9/11/24- Technically Treasuries are near an important inflection point on the charts. Repo shows extended leverage among dealers. They are slightly short overall, which isn’t bullish for the big picture. They are leveraged to the hilt and they’re taking hits.

There’s no information to suggest that the young downtrend in bond prices and uptrend in yields will reverse anytime soon. A bullish turn may need to await the reimposition of the debt ceiling in early January of next year. That’s because if the Treasury follows past practice, when the debt ceiling is imposed, the Treasury will pay down T-bills. That puts cash back into dealer and investor accounts, enabling them to absorb Treasury coupon supply, and to buy stocks at the margin.

But until then, there doesn’t appear to be a catalyst in this data to cause a reversal in the bearish environment for bonds. I had worried about that being a catalyst for contagion into stocks, and we may have gotten our first dose of that today (October 31) with the S&P 500 dropping 108 points.

It looks as though the period from now until the beginning of 2025 will be a time of xxxxxx xxxxxx. We had a xxx xxxxx xxxxxx today. This suggests that it’s time to xxxxxx xxxxxxx xxxxxxxx xxxxxxxxx. I will look for those setups and report on them as they arise in the swing trade stock screens.

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Liquidity Measures Show Markets Stretched to the Limit

Lee Adler

This week I looked at the issue of bank capital and its relation to bond prices. This is another fly in the ointment that is poised to blow up, especially after Monday’s rout in the bond market. Between this fragility, the extreme extension of stock prices versus bank deposits and money supply, and the possibility of disintermediation pulling deposits out of banks, there’s xxxxxxxxxxxxxxxxx xxxxxxxxx  xxxxxxxxxx xxxxxxxxx. Non-subscribers, click here for access. 

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One other issue is the potential for a sharp reduction in T-bill issuance in November and December. That would xxxxxx xxxxxxxx xxxxxxxxx xxxxxxxxx. Bond buyers, including dealers, would need to either repo their Treasury coupon purchases, liquidate other assets, or take on when-issued short positions against future issuance. Any of those actions could further destabilize the bond market, which xxxxxx xxxxxxxx xxxxxxxx. Non-subscribers, click here for access. 

On the surface, it appears that there’s still adequate liquidity to support the rally, but this thesis is now stretched to the limit. I’m still reluctant to xxxx xxxxxxxx xxxxxx xxxxxxxxx. I would want to xxxxxxxxx xxxxxxxx xxxxxxxxx long positions, and definitely not xxxxxxxxxx xxxxxxxxx xxxxxxxxxx As for bonds, I’m back to xxxxxx xxxxxx. Non-subscribers, click here for access. 

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Liquidity Says, The End Is Nigh, Almost

Lee Adler

Market rallies continue to be supported by adequate liquidity, but there are chinks in the armor. Nothing outright says “Sell now,” but there are warning signs that say, xxxx xxxx now. It’s probably too late. Non-subscribers, click here for access. 

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One item to watch closely is repo usage. Repo growth is absolutely necessary in this market to fund an uptrend in stock prices. And Repo has been dropping like a rock since peaking at the end of September. So far, there’s just a break of the short-term trend, which isn’t significant in the big picture, but it could be if it continues, or backs and fills for a while and then breaks down. Non-subscribers, click here for access. 

We also need to watch the Fed’s RRP slush fund as it approaches zero. That will become one less bullish prop for the markets. It has been a form of deferred QE, or strategic QE reserve, stored up from the old days when the Fed pumped so much money into the system, $2.5 trillion of it wasn’t able to be deployed. Now that RRP money is almost all gone, absorbed by a couple years of Treasury issuance. Non-subscribers, click here for access. 

Meanwhile, total money is still surging, so there’s still plenty of cash around. That’s a reflection of the market generating profits, and money growth, on its own. But it’s not a matter of sufficiency. It’s a matter of willingness to deploy, and that’s at an all time high. The question is how much farther can that willingness be stretched as prices rise higher and higher. Non-subscribers, click here for access. 

The markets are creating money with no help from the Fed. That’s strictly a matter of sentiment, or call it animal spirits. And that can change. That change is what we are looking for in this liquidity data. Right now the markets are especially vulnerable to sentiment changing. Stock prices are more extended versus money supply than at any point in history. Which means that the risk of a sentiment change is higher than at any point in history. Non-subscribers, click here for access. 

For now, the stock market remains a xxxxxxxx xxxxxxx. The bond market has probably already made xxxxxxx xxxxxx xxxxxxxx, but it will be a jagged path that will depend in part on the supply schedule. Yields began to soar as bond prices plunged in recent weeks. But thanks in part to light Treasury coupon issuance this week, ……… Non-subscribers, click here for access. 

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We’re Now Week to Week for this Bull

Lee Adler

Market rallies continue to be well supported by adequate liquidity, but the end is drawing closer. Non-subscribers, click here for access. 

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There are forces that could begin to hamper the price uptrend around the end of October. The first one is a large Treasury coupon issuance that will suck up liquidity at the end of the month. It will be interesting to see to what extent buyers use repo to fund the absorption of that paper. If they opt not to on balance, prices will fall and yields will rise. That could lead to problems for other asset prices. Non-subscribers, click here for access. 

Meanwhile, the issuance of T-bills will moderate because the Treasury has excess cash on hand. T-bills serve as perfect collateral for repo borrowing that supports both economic activity and asset price speculation. They are instantly convertible into money. As long as animal spirits are raging, speculators and others will borrow against those bills and the money will get spent on goods, services, and asset speculation. Non-subscribers, click here for access. 

We have seen that the more T-bill issuance the merrier. We might guess then, that any reduction in bill issuance might hamper that speculative impulse. Non-subscribers, click here for access. 

A big source of money supporting the stock market rally has been the Fed’s RRP slush fund facility. It has been steadily spent down for the past 18 months. It rebuilt by a couple hundred billion at the end of the third quarter (window dressing), and hasn’t dropped back as sharply as I guessed last week it would. There’s still around $325 billion in that facility. Non-subscribers, click here for access. 

That’s money that can be used to fund asset purchases, including Treasuries and stocks. If that facility xxxxxx xxxxxxxx, it means that money is being used to xxxxxxx xxxxxxx, other xxxxxx xxxxxxxx, xxx stocks. We have long seen a correlation between declining RRPs outstanding and rising stock prices as holders of the RRPs use the money to buy stocks at the margin. Non-subscribers, click here for access. 

At some point that facility will run dry, either in absolute terms, or when the last holders decide that they’re not going anywhere. That will happen in xxxx months. When it does, it should be bearish. For asset prices to continue rising, investors, dealers, and traders will need to fund purchases out of other cash and borrowing. With the constant barrage of Treasury supply it will be a tall order to maintain rising prices. Non-subscribers, click here for access. 

Finally, there’s the issue of whether stocks are overbought relative to total money. In terms of bank deposits only, the answer is xxxxxx. But in terms of total available money, it’s xxxxxxxxx. It was in June, but that has xxxxxxx. So we’re waiting for a more definitive sign that animal spirits are xxxxxxxxx. Non-subscribers, click here for access. 

Given the degrees of extension that we’ve seen in the past 6 months, any rollover in these measures now is likely to signal a major market peak. We’re not there yet, but it is week to week. I’ll keep you updated when the first signs appear.  Non-subscribers, click here for access. 

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Get Your Red Hots Here

Lee Adler

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

Lee Adler

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

Lee Adler

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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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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