Menu Close

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!

Fed Will Administer Volckera to Cure Inflation Pandemic, and We’ll All Die

Subscribers, click here to download the report.

It’s that time of the month and that time of the quarter when all should be well for the markets. Except it’s not.

“That time of the month” is the Fed’s regular once a month MBS settlement week at mid month. This month it runs January 13-20, with total settlements of $90 billion. That’s still a big number, but it isn’t doing much good. And it will shrivel over the next several months as the Fed cuts new MBS purchases and replacement purchase shrivel due to rising mortgage rates. Therefore, right now is as good as it gets for the bond market, and secondarily for stocks.

It’s also the week for quarterly estimated Federal income taxes to come in from individual filers and corporations. That shrinks the monthly deficit in January. In normal times it would result in a surplus for the month. Typically the Treasury would then pay off some maturing T-bills, and the holders of those bills would be stuck with excess cash. Some of them roll that out to longer dated paper and a few even buy stocks. So it’s typically a short term bullish seasonal influence around the third week of January.

This year, not so much. The Treasury still is trying to refill its cash account and has $160 billion to go to reach its stated goal of holding $650 billion in cash. So the “January effect,” which is really just bullish seasonality resulting from the regular January T-bill paydowns, looks like a non starter this year. The performance of the stock and bond markets so far in January are a testament to that.

If the market doesn’t perk up over the next few days, then here’s what we have to look forward to.

February will be worse. xxxx xxxx xxxx xxxx (subscriber version). February always runs the largest cash deficit of the year as tax receipts dwindle and cash outlays mushroom due to the February tax refund bulge. The Treasury often draws from its cash account to pay for that, rather than issue new debt. But this year, the Treasury is trying to raise more cash. There’s going to be a ton of new Treasury supply in February and that will pressure not only the xxxx xxxx xxxx xxxx, but should have a secondary impact on xxxx xxxx xxxx xxxx. This report describes those impacts, and their timing.

My mantra is the same. I’m xxxx xxxx xxxx xxxx (subscriber version) bonds. I’m looking for stocks to short over the next few weeks for what should be a bearish month in February. I’ll post those in Technical Trader updates as they come up.

With the Fed cutting QE to zero, or so it says, the rest of the year could be xxxx xxxx xxxx xxxx(subscriber version). The Fed is worried about inflation. Rightfully so. A little too late, but what else is new.  Might it now be willing to pull a “Volcker,” allowing rates to soar, and allowing the chips to fall where they may? If they dare try it, the market’s retribution will be xxxx xxxx xxxx xxxx.

I’ll keep you updated on the developments and outlook. Get the full story in the subscriber version.

Subscribers, click here to download the report.

Subscription Plans

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

Breakout Under Way!

Subscribers, click here to download the report.

We have some consequential new data in the past few days since I posted the QE/Treasury supply update on January 3. Treasury yields are breaking out. The RRP slush fund has reversed, and T-bill issuance is continuing at a breakneck pace. An initial jobs report shows tremendous growth, as foretold by the daily withholding tax data.

The ADP private payrolls data was released yesterday, and it accurately reflected what the withholding tax data for December already told us— that jobs growth is still going strong, or even accelerating. Whether the BLS Nonfarm Payrolls farce release on Friday shows this or not is anyone’s guess. You know the truth.

The US economy is going gangbusters, but the Fed has created and is imminently facing the greatest crisis in its history.

Here’s the latest in this ongoing financial soap opera for the ages.

Get the full story in the subscriber version.

Subscribers, click here to download the report.

Subscription Plans

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

Wheels Are Moving in Slow Motion for the Top

Subscribers, click here to download the report.

The debt limit has been raised. The Treasury has flooded the market with supply, and will continue to do so for another month or two. But there’s been no disaster in the market. The Fed’s RRP slush fund, designed to absorb the flood of supply, has even grown, thanks to year end window dressing.

Even after that window is undressed this week, there will still be around $1.6 trillion in that fund to start. That is overnight liquid money that holders will use to buy new Treasury issuance. The RRPs will gradually be drawn down. But there’s enough there to absorb the ongoing supply bulge that the government needs to issue to rebuild its cash and repay the internal accounts it raided while the debt limit was in place.

We don’t know exactly how much more the government needs to get its internal accounts back to normal, but it could achieve that purpose very quickly given the availability of the RRP fund. It holds more than enough cash to fund that issuance.

That RRP fund, with it’s baseline starting point of approximately $1.6 trillion also gives the Fed cover to wind down QE to zero in March. The Fed will cut QE, and everything will look hunky dory. Wall Street will conclude that “tapering” QE was no big deal. Market complacency will be thick. Get out your carving knives.

Once the Fed has cut QE to zero, and RRP holders decide that they will spend no more to support the market, is that when the crisis begins?  No, not immediately.

First, there will be the annual tax windfall that occurs in March and April, when corporate and individual income taxes for the preceding year come in. The Treasury always uses that cash to temporarily pay down outstanding debt. The holders of that debt get money back. They use that cash to buy longer term paper, and in some cases to buy stocks. So we get a seasonal rally every year in March and April.

But in late May, the Treasury starts net borrowing again. Then we watch. We watch to see how that RRP fund is doing. Once it turns flat, and there’s no more QE, and the seasonal tax windfall cash has been spent, that’s when the trouble starts in the market.

Sell in May and go away? This report tells you why that might be a good idea. The report shows what to expect for both stocks and bonds, along with the why’s and wherefores, likely timing, to give you a clear grasp on on a strategy and tactics that might make sense for you.  Get the full story in the subscriber version.

Subscribers, click here to download the report.

Subscription Plans

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

Get Ready for a Slow Moving, but Perfect Storm

Subscribers, click here to download the report.

The conditions we were looking for last month have happened.

11/21/21 Whether there’s a default or not, the debt ceiling will be lifted, probably sooner rather than later. When it is, a tsunami of Treasuries will flood the market, mostly in T-bills. But there could also be a huge slug of makeup supply at the long end. That would send bond prices into the dumpster, and T-bill rates and bond yields flying.

How much chaos would the Fed bear before issuing another huge emergency round of QE? That’s the question, ultimately. But in the interim, the event that everyone would see as a positive, raising the debt limit, could be the quintessential “sell the news” trigger leading to a broad based crash in all asset classes.

This is what we need to be on the lookout for as this saga progresses. Therefore, I still don’t want to xxxxx xxxxxx xxx xxxxxxx xxx xxxx (subscriber version). From the liquidity perspective, I hate the intermediate term outlook for xxxx.

But I’m still comfortable following the trend on stocks, remaining long until the market tells us otherwise, especially if that happens around the lifting of the debt limit.

So that’s where we are. Will it? This report has the answer.

The debt ceiling was lifted yesterday, December 16, and stocks have been getting pounded for the last two days. This could be the moment we’ve all been waiting for, in terms of market action in stocks. I’ll address that in more detail in the Technical Trader reports.

Right now in the third week of the month we’re in peak QE week, as the Fed settles its MBS purchases this week. It’s the most bullish QE vs. supply imbalance we’re ever going to have. This is the end my friends. I can’t believe, but we’re on the Eve of Destruction.

That’s because the Treasury will now issue a massive amount of new supply in a very short period of time. It has a goal that calls for raising $600 billion to restore its cash account to the desired level. Plus it must raise additional funds – who knows how much – to repay other internal government accounts it raided to stay below the debt ceiling.

It means that there will be a lot of supply, A LOT, over the next couple of months.

What’s worse, the Fed is cutting its QE purchases at the same time. Talk about a Perfect Storm. Fed QE has funded more than 100% of the Treasury market in recent months. The norm since the Fed began QE in 2009 has been 85-90%. When it cuts QE to zero in March, it will still have a small amount of MBS replacement purchases, but that won’t even be a rounding error in terms of the amount of debt the market will need to fund.

The canny Fed and Treasury have, however, created a $1.6 trillion slush fund to help absorb those Treasuries. It’s the Fed’s RRP program, where money market funds, banks, and dealers can deposit the cash they got back from the T-bill paydowns that they got from the US Treasury since February. This report has the charts to show exactly how that worked. The correlation is perfect.

The Treasury paid off that paper systematically so that it would stay under the debt ceiling. That money is now just sitting there in overnight, same as cash, RRPs, waiting to re-absorb all the new Treasury supply that’s on the way.

Or is it? Nobody is forcing the money managers holding those RRP funds to rebuy Treasuries. They may like holding riskless Fed RRPs even more than they like holding Treasuries. So maybe not all of that $1.6 trillion will be available to absorb new supply. That’s where the problems start. When the RRP holders decide they’ve had enough. The slush fund won’t last forever. We’re tracking it closely and should know exactly when it is signaling a big problem.

Of course the Fed could force the issue, by ending the RRP program, but there’s still the point where that fund hits zero, and simply isn’t there to absorb new supply. At that point the market would face an intractable problem. Lots of supply and no ready cash to absorb it. We know exactly what would probably happen then, because we know the positioning of the Primary Dealers at all times.

Rates and yields would xxxxxxx xxx xxxx (subscriber version). Bonds would xx xxxxxxx (subscriber version). Dealers and banks would xxxxxxx xxx xxxx. Massive Fed intervention xxxxxxx xxx xxxxx  xxxxxx.

We should soon be able to estimate the timing of that.

For now, I really don’t foresee a way out of this. Only the timing is in question. I’m staying away from the xxxxxxx xxx xxxx (subscriber version), and looking for xxxxxxx xx xxxxxxx xxx xxxxxx xxxx.

Get the rest of the story and ideas on how to handle what’s to come  spelled out and illustrated in the subscriber version.

Subscribers, click here to download the report.

Subscription Plans

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

Prepare for Market Doom, the Moment of Truth Is Here –

Subscribers, click here to download the report.

The moment of truth has arrived. The debt ceiling deal is done. After a final paroxysm of T-bill paydowns totaling $209 billion this week, all that market support from the US Treasury will go in reverse. The Treasury market will get slammed with a tidal wave of supply to start to repay all the internal accounts that the Federal Government raided to stay under the debt ceiling.

Under the circumstances, I thought this would be a good time to look at Primary Dealer positions and financing, along with the usual QE and supply data in a report to follow. In any case, there are no surprises.

This situation is unfolding on the timetable we expected. The wildcard is the Fed’s RRP slush fund, which has been hovering around $1.5 trillion. The uncertainty lies in the fact that we don’t know how long that will last. What we do know is that the drawdowns will start very soon, perhaps this week.

The Primary Dealer data might give us some idea of how long the RRP slush fund will last before the bond market really starts to crack. It’s not an open and shut case that the holders of the RRPs will use all $1.5 trillion of it. I continue to think that some will stay put, content to leave their cash in these overnight RRPs with the Fed instead of moving back into T-bills. The sooner the amount of RRPs outstanding levels off, and the higher the level remaining outstanding, the more bearish it will be for Treasuries and stocks.

But first, since we last looked at the Primary Dealer data in late October, the dealers have dumped a ton of long Treasury inventory. They’re still highly leveraged, but their net long position is the lowest it has been in 4 years. They’re getting prepared for the worst. Whether that will help them weather the storm is an open question that we will monitor closely.

At the very least, we need to be prepared for xxx xxxx xxxxx xxxx (subscriber version) in stocks, and what should turn into xxx xxxx xxxxx xxxx in Treasuries and other fixed income securities. Here’s what I would do about that.

Subscribers, click here to download the report.`

Subscription Plans

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

When the Fed Balance Sheet Will Hit the Fan

This report examines and illustrates the most important line items on the Fed’s weekly balance sheet. It tells you what to look for to recognize when the markets will crash.  Because that’s coming.

The markets are in a state of suspended animation while the Treasury is still paying down T-bills, and the Fed’s RRP institutional money market slush fund remains huge.

But the Fed seems determined to cut QE, with the byproduct showing up as slower growth in its balance sheet.

That will run head on into a surge of Treasury issuance. The debt ceiling will be lifted, and the Treasury will flood the market with T-bills.  The RRP slush fund will act as a shock absorber for awhile, but it will plateau when some holders of RRPs decide to leave their cash parked there for good.

That’s when the real trouble will start for the Treasury market, with stocks to follow.  I track the trends of those key Fed weekly balance sheet line items for you.

Click here to download the complete report.

Subscription Plans

Beware- Debt Ceiling Uncertainty Darkens the Outlook

Subscribers, click here to download the report.

We approach another debt ceiling drop dead date. The next month is thus fraught with unknowns. It makes projecting our QE and PONTs charts beyond the next two weeks all but impossible. We’ll just have to wait and see along with everybody else. Of course we view the world a little differently than everyone else.

Here’s the view through that prism.

Word is that Yellen says the new drop dead date (DDD Day) when the Treasury runs out of money will be December 18. You’ll get no argument from me on that score. The extrapolations of Treasury cash spending and revenue seem to support a mid December deadline. At that point, all new debt issuance will stop, and Treasury spending will be severely curtailed. The Federal government will be unable to pay somewhere around 40% of its bills on average.

Everybody else thinks that a debt default would be a catastrophe. I’m not so sure. No doubt it will throw the Treasury market into chaos, but there will still be vultures buying any dips, knowing that a technical default will be cured sooner or later. A stoppage of issuance will mean that new supply will be zero. How much supply will come from panicked sellers, and whether that will overwhelm demand from dealers flush with QE cash, and hedge funds that are short Treasuries, remains to be seen.

The consensus seems to be that a default will trigger a really bad something something something, in the stock market and economy. The economy? Make me laugh. Irrelevant for our purposes.

But the stock market? A complete halt in government debt issuance could be very bullish…

Get the rest of the story and ideas on how to handle what’s to come all spelled out and illustrated in the subscriber version.

Subscribers, click here to download the report.`

Subscription Plans

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

The Fed Pulls The Plug, Macro Liquidity Cruiser Starts Its Turn

Subscribers, click here to download the report.

In the financial markets, money talks. I have observed and reported for many years that talking about a change in monetary policy, announcing that change, and actually executing it, are entirely different matters. The market tends not to anticipate change, it responds to actual changes in liquidity.

While the Fed and the mouthpieces of the mob have talked about tightening policy for months, the Fed only announced that it will finally tighten policy this month. The policy has yet to begin. That changes next week.

The new policy implementation begins now. The Fed actually will reduce its QE purchases for the first time since September 2019. That’s when the Fed undertook its emergency “Not QE” policy in response to the money markets freezing up. That came about from a Fed policy of non-intervention after Powell ended Yellen’s balance sheet normalization in December 2018. From December 2018 until September 2019, the Fed stood by while an onslaught of Treasury supply crushed the money markets.

The new policy that begins now is a tightening because it will reduce QE purchases. Anything that isn’t the status quo purchase rate of a total of $200 billion or so a month including MBS replacements, is effectively a tightening. The Fed will be buying less paper each month.

And so, the actual effects of the new policy begin now. The Fed will reduce its Treasury purchases by $10 billion for the mid November- mid December period. It will cut MBS purchases by $5 billion. It will continue to roll over maturing Treasury holdings and prepaid MBS. The net effect will be a reduction of $15 billion in the first month, and then $15 billion the following month.

They said they’d be flexible. In other words, if the markets tank, they’ll be back with more QE. The idea that they’ll continue cutting purchases for the 7 months it would take to get to zero, is a pipe dream. But it’s possible that they could cut for at least xxx-xxx months (subscriber version) before running into problems big enough to stop them.

I wrote months ago that the Fed could only reduce QE if the Treasury cuts issuance. That’s on the schedule this month, particularly as the new debt ceiling again restricts issuance.

But reduced issuance isn’t no issuance. After the dust settles and the debt ceiling is finally lifted or suspended for the long haul, the US Treasury will still be issuing an average of $150 billion per month in net new debt. If the Fed cuts QE for two months to new purchases of $90 billion per month after two months, and MBS replacement purchases average another $50 billion or so, the Fed will still be taking down directly or financing indirectly 93% of new issuance. No problem there. The market could sail right along with that.

But higher bond yields mean higher mortgage rates. Higher mortgage rates mean fewer refinances and fewer MBS prepayments. We don’t know exactly how much. But it will be an exacerbating factor. At the peak of the refi boom, Fed MBS purchases totaled $120-130 billion per month. Now they’re down to $100-110 billion per month, and they will drop more as mortgage rates rise.

If the stock market remains relatively stable going into January, the Fed will continue to cut its total outright purchases of Treasuries and MBS. They’ll go to $75 billion in January, and $60 billion in February. At that point, let’s say MBS replacements drop to around $40 billion a month. Then total Fed purchases would be around $115 billion and Treasury issuance would still be $150 billion. Then we’re talking about 77% of new issuance.

The benchmark for the Fed for the past dozen years has been to directly absorb and indirectly fund a total of  xx% (subscriber version) of new issuance. The only time they went lower for any length of time was during the Yellen balance sheet bloodletting from October 2017 to December 2018. That did not go well. Once the 10 year breached 3%, the panic was on. Powell took over, panicked, reversed course, and began QE to infinity and beyond.

Now we’re going to find out again how far they can push the “tapering” fantasy. They told the market that they’re going to be “flexible.” Which means that they’ll reverse course at the first sign of trouble.

The issue is where that will be. First benchmark to watch on the 10 year is txxxx xxxx xxxx xxxx (subscriber version). If that’s cleared, and I have little doubt that it will be, the pressure will be on.

The Fed’s media mouthpieces will start floating the trial balloons around then. But remember! Guidance schmidance. Money talks, and BS, even Fed BS, walks. Once the pressure on the markets begins to manifest itself, the market won’t reverse course just because of a few words from the Fed. The market will only reverse when the money starts to flow again.

As Johnnie Cochrane famously said, “The Fed must pump, or the market will dump.”

With that in mind, we look at the macro liquidity chart (subscriber version) to this point and see that nothing has changed. Stock prices continue to track with rising liquidity. But that rise is about to slow, and month after month for the next xxx-xxx months (subscriber version) months at least, the Fed will tighten the screws. My guess is that around xxxxxxxx (subscriber version), we should start to see negative impacts in the financial markets. Treasuries will come under pressure first. Stocks will follow.

Be ready for things to change. The Fed is tightening. Rule Number One now points in the other direction for the first time since the Yellen bloodletting of 2017-18.

All spelled out and illustrated in the subscriber version.

Subscribers, click here to download the report.`

Subscription Plans

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

It Only Takes One House Fire to Start a Conflagration

Subscribers, click here to download the report.` Primary dealers have reduced their long fixed income positions but they have dramatically increased their leverage. On the one hand, they have reduced their risk exposure, and on the other hand, they have increased it.

It doesn’t make much sense on the surface. But the leverage increase appears extreme, and that’s something to note as the government moves toward its ultimate resolution of the debt ceiling. That will allow a tidal flow of Treasury issuance to batter the market. At the same time, the Fed will almost certainly begin to “taper” its bond purchases. In other words, the supply of Treasuries will increase, while the market’s largest source of demand will diminish.

These facts argue for much higher yields and lower bond prices. The short term timing is uncertain. We’ll rely on the technical analysis of the charts for that. But beyond the next couple of months, all the pressure on yields should be to the upside. Which means bond prices will head lower. That could set off a firestorm in not only Primary Dealer inventories, but bank long term bond portfolios as well.

It doesn’t bode well for a neat and clean outcome for the Fed’s tapering attempt. At some point it will be forced to reverse course. But they’ll try for a while. I think that the outcome in the markets will be chaos to the downside in prices.

This report looks at the particulars of dealer positions, financing, and hedges, as well as the profits and capital trends of the big banks in the aggregate (charts and discussion in subscriber version). These aren’t timing tools but give us some idea where the risk of a blowup lies. Then I discuss the technical charts, key benchmarks and strategy (subscriber version).

Subscribers, click here to download the report.`

Subscription Plans

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

US Treasury Says, More Beans, Mr. Taggart! – LINK CORRECTED

Apologies for the bad link in this report I posted yesterday! Now corrected!

Subcscribers click here to download the complete report.

The Fed poured $132 billion of QE into the accounts of Primary Dealers between October 14 and 21, the regular monthly MBS settlement week. As a result, we got the usual predictable result of a rally in stocks.

But there was only a weak, late holding action in Treasuries. They sold off for most of the week. That’s understandable, considering that the US Treasury sucked $218 billion out of the market that week after the debt ceiling was lifted.

It will pull another $196 billion out this week. At this rate, they’ll hit the new debt limit by xxxxx xxxxxxxxxx (subscriber version). Then the extraordinary measures game and the political/fiscal brinksmanship will begin anew.

At the same time, the Fed will begin cutting its outright QE purchases, and MBS replacement purchases will also decline because of higher rates and few mortgage refis, and thus prepayments. That would normally be very bearish, but remember! They have a slush fund! The Fed’s RRP account, which currently still holds about $1.4 trillion in cash ready to absorb the flood of new T-bills.

In the context of all this new supply pounding the financial market, the stock market rally was pretty remarkable. Stocks rose despite the fact that there was more Treasury supply than there was QE. True, there’s still plenty of cash sitting in the Fed’s RRP slush fund. As I’ve pointed out, this will cushion and help to absorb the supply hit coming from the US Treasury.

Think of the RRP slush fund as a big pot of beans simmering on the money manager cowboy camp fire. Fed QE adds more beans to the pot. The US Treasury keeps eating mass quantities of the beans. It constantly refills its plate, consumes the beans, and passes the gas into the US economy. It can continue to consume those beans until they’re gone, as in when the RRP fund is exhausted. That will happen in some months, especially as the Fed gradually stops adding beans to the pot (tapering QE).

Or maybe not that long. Maybe some of those money managers tending the pot will at some point will be like Mr. Taggert. In response to the Treasury asking for still more beans, they’ll say “I think you’ve had enough!”

That’s when both the stock and bond markets will get really interesting for bears. Of course in my view, the bond market is already plenty “interesting,” and has been for some time.

Media reports have pointed out that professional money managers are overwhelmingly bearish on bonds, as if that’s some kind of contrarian bullish omen. I hate to be a party pooper, but market consensus is often right for long periods, especially when the facts support it. In this case, the facts support the consensus. So I’m xxxxxxxx xxxxxxx xxx xxxxxxx (subscriber version). Treasuries. I wouldn’t want to hold long term debt in this environment.

Subcscribers click here to download the complete report.

For the rest of the story, including the multi colored charts and discussion that will entertain, delight, and enlighten you about what to expect, and what to do about it, subscribe!

Subscription Plans

Get the complete report, including charts, tables, analysis, and outlook. and access to all past and future reports, risk free for 90 days!

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

%d bloggers like this: