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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!

Bears Beware, Money Managers Are Finally Spending their RRP Slush Fund

Last month’s discussion of the US Treasury doing bond buybacks on the heels of a reeling bond market has faded into the background, thanks to a well timed bond market rally. The mere talk of buybacks reignited fixed income animal spirits, if there is such a thing. Now we can get back to the discussion of the one thing that actually matters for sustaining hope induced rallies.

Cash.

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That’s because the rallies so far have been based on hope, rather than fact. All of the talk, all of the speculation, about when the Fed will start easing is just that. Talk. But in the market, ultimately, only money talks. For market prices to rise in the face of ever increasing supply of new securities, there needs to be more money available to fuel the demand to absorb that supply. Otherwise, in the immortal words of Randolph Duke, “Prices will fall.” Non subscribers, click here to read this report.

We focus on the Fed as the all powerful Lord of money. The Fed mostly giveth, but since March, the Fed hath been takingeth awayeth. Non subscribers, click here to read this report.

But there are other sources of temporary money. Not the least of which are the financial assets, especially US Treasuries, themselves. Once created, they become collateral for credit which can fuel rallies that last much longer than most of us expect. But only for as long as prices are rising. Because once that stops, sellers start tiptoeing to the exits. Non subscribers, click here to read this report.

Eventually, prices rise to resistance levels where sellers appear, including dealers and others who want to build short positions. Without new capital, whether central bank money, or fiscal largesse, or profits, which are then added to capital, (as opposed to extinguishing debt or spent on consumption), all rallies must fall by the wayside. Non subscribers, click here to read this report.

Which is where this one should go. Because the sources of quasi permanent money like Fed QE just aren’t there right now. However, there are a couple of potential sources that are so huge, and so liquid, that we need to be cognizant of them. They are the Fed’s RRP slush fund, that so far has remained over $2 trillion. And the US Treasury’s piggy bank, that has been hovering around $600-650 billion, which is where the Treasury wants to hold it for a “rainy day.” Non subscribers, click here to read this report.

Such a rainy day might be another debt ceiling impasse, coming to a theater near you next year. Or it might be a bond market meltdown. The last chapter of that long running bear market brought out the talk of the Treasury doing a big series of buybacks of longer term paper, to keep the rise in long term bond yields at bay. Non subscribers, click here to read this report.

That talk, and the belief among some investors that bonds had gotten cheap, and that a recession was coming, triggered speculative, leveraged buying of bonds again. So the bond market was off to the races. Amazingly, stocks haven’t melted down under the strain of that bond market buying. But this rally in both stocks and bonds looks pretty much like the last one and the one before that. All of which has led to a nowhere market. Non subscribers, click here to read this report.

It reminds me of 1973. Back then, in the early years of the Great Inflation, the market kept hitting lows and rallying, hitting lows, and rallying, and rallying again. It didn’t go down much all year, but it didn’t make any progress in those rallies. Early 1974 was more of the same, until the bottom dropped out that summer. The market just treaded water for over a year before it drowned. Non subscribers, click here to read this report.

I’m not saying that this market will do the same thing. Maybe Wall Street is so smart today, and has so many tools, that it will successfully anticipate the Fed’s policy reversal. The front running might then lead to a real bull market when the Fed opens the floodgates. Non subscribers, click here to read this report.

But think about this. If the markets refuse to go down; if stocks and bonds continue to bounce around, then what incentive does the Fed have to ease policy? If the Fed was so prescient in seeing this inflation coming—not—then what makes the Street think that the Fed will be able to foresee a brewing financial calamity. Like the last time, the Fed saw nothing until it was too late. Like this inflation. The Fed saw nothing until it was too late. Non subscribers, click here to read this report.

Nope, I’m skeptical. Historically, the Fed has always been slow in recognition, driving in the rear view mirror, reactive, rather than proactive. It never seems to understand the forces it unleashes with policy responses that have grown increasingly insane with madmen like Greenspan, Bernanke, and Powell at the helm. Only Yellen shrank the balance sheet, but Powell reversed her, showering unprecedented largesse on his banker overlords and cronies. Non subscribers, click here to read this report.

Until he was blindsided by the consumer price inflation that he caused with his monetary outburst. It’s an ugly, sad saga that we have chronicled here for two decades, and that we’ve used as the basis for understanding and forecasting the markets with some degree of success. And which I hope to continue by simply observing and reporting the trends in the data. Non subscribers, click here to read this report.

In that regard, in this report, let’s take a look at whether there’s any sign that money managers are about to pull cash out of that $2 trillion RRP fund to buy bonds or stocks, or anything for that matter. And xxxx xxxxxxx xxxxxxxx xxxxxx.  xxxxxxxxxxxxxxxxxx xxxxxxxxx xxxxxxxxxx xxxxxxxx xxxxxxxxx xxxxxxxxxx xxxxxxx. That’s right, stocks and bonds. Non subscribers, click here to read this report.

That helps to explain the rallies and holding actions in the two asset classes. And it is a warning to bears that the next major downleg in this bear market, if that’s what this still is, may be many months away, similar to the 1973-74 experience. Non subscribers, click here to read this report.

It means stock traders should give a thought to buying the dips AND selling the rips. Both trading from the long side, and short selling, will require good market timing through technical analysis, as the market bounces around in shorter swings than we would like. Flat rangebound trends are likely to remain the rule, not the exception. Non subscribers, click here to read this report.

As for whether its ok to start buying and holding for the longer run, xxxxxxxx xxxx xxxxx. Non subscribers, click here to read this report.

Get the rest of this dope, amply illustrated, with beautiful color charts suitable for framing, including a clear forecast on what to expect and what to do about it, in the complete subscriber version of the report. Non subscribers, click here to read this report.

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Fed Policy Will Stay Bearish Until It’s Too Late

That’s right. Inflation is dead. But it doesn’t matter, because the Fed won’t pull the stake out of its heart until it’s too late. I’ll get to that below (in the subscriber report, non subscribers, click here to read this report) but first, let’s talk about the interest rate bogeyman. It’s a fake issue, a diversionary tactic. Subscribers, click here to download the report.

Interest rates don’t matter in terms of policy effects on the markets. They are merely a meter of monetary tightness. That tightness is Fed policy, and market interest rates, T-bills in particular, continue to post warning signs about that day in and day out. Non subscribers, click here to read this report.

The Street and its captured handmaiden media mouthpieces keep talking about the Fed raising interest rates. But the Fed has never actually raised rates. It has simply rubber stamped the increases that have already happened in the money markets to the meaningless Fed Funds target rate. And it hasn’t done a very good job of keeping up with market increases. Non subscribers, click here to read this report. 

The evidence shows, ladies and gentlemen of the jury, that the market keeps outrunning the Fed’s rubber stamp. Regardless of all the bullish speculation on when the Fed will pause, or slow down its rate increases, or whatever it is that the Street wants investors to believe, the fact is that monetary conditions are still tightening, and will continue to tighten. And that will keep a lid on the markets. Rallies will continue to make lower highs, to be followed by lower lows. Non subscribers, click here to read this report.

The best meter of those conditions are short term Treasury bill rates, and those are still rising. This simple measure of the market shows clearly that the demand for short term funding continues to be greater than the supply of ready cash. Last week, both the 13 week bill rate and the 4 week bill rate hit new highs, as the Treasury repeatedly came to market with massive new T-bill offerings. Non subscribers, click here to read this report.

But that’s only the beginning of this horror story. The rest is in the report, including the evidence that inflation is already dead, and why it doesn’t matter. Non subscribers, click here to read this report.

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Bond Market Rally is Technically Valid but Belies the Facts

Obviously, no market moves in a straight line, and this one is no exception. The technical analysis says the rally in Treasuries will have legs, albeit likely to be short. Then the underlying forces of supply and demand, with constantly more Treasury supply and limited or even diminishing demand, with a severely weakened Primary Dealer system at its core, will rear its ugly head once again.

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Despite the seeming moderation of headline inflation data, the conditions cited previously in these comments remain in effect. The speculation that the Fed might ease policy on the basis of this week’s inflation news is useless. Markets move on the fact of Fed policy change, not on the basis of Wall Street promoting such changes. Non subscribers, click here to read this report.

For perspective, here’s a look back at key points of the summaries of these Primary Dealer position updates that I’ve posted this year. We start with the most recent… and follow with a look at their current positioning, and the reasons why they present unprecedented risk for investors. Non subscribers, click here to read this report.

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Bad News for the Markets – Not Just Withholding Boomed in October

In Part 1, we saw a rebound in withholding tax collections after 3 down months. October also saw a very strong gain in individual estimated taxes, probably late filers, lamenting how much money they had made. It’s consistent with the strength in withholding. Corporate taxes were lower, but that’s meaningless since so few corporations file in October.

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Excise tax collections were up for a second straight month, an indication of strong retail consumption. That’s a fly that keeps landing in the ointment of the idea that the economy is contracting, or even slowing. All signs point to a strengthening economy, and that is very bad news against a tightening liquidity backdrop. Non-subscribers, click here for access.

This report explains and illustrates the data with a couple of mind blowing charts. It adds up to one of the worst outlooks I’ve ever seen for the bond market, and that’s saying something considering how bod the market has been for the past 27 months. The same data that I cover in these reports has been correctly bearish on the bond market for that whole period. And all of that is terrible for stocks too. Non-subscribers, click here for access.

This report shows you what this real time, real data, means for investing and trading strategy and tactics. In other words how to stay out of trouble in this treacherous bear market. Non-subscribers, click here for access.

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Surge in Withholding Tax Collections in October Indicates Faster Jobs Growth

Federal withholding tax collections rose in October, breaking a string of 3 previous consecutive monthly declines. Guessing the BLS nonfarm payrolls manipulated number is always a crapshoot, but if it resembles reality at all, it will be an upside surprise. According to Dow Jones Marketwatch, the median economic guesstimate is +205,000, a drop from September’s 263,000. But the tax collections are way up from September. In reality, more jobs were added in October than September.

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If the BLS data accurately shows that, and again, that’s a coin flip, then the markets are in for an ugly surprise, as the Fed would have no excuse to pivot, pause, stepdown, or do whatever buzzword that Wall Street wants to sell you today. Non-subscribers, click here for access.

Judging from the Pope Load Jaysus’s incantations under way at this moment, the Fedican doesn’t know what it wants to sell you. The encyclical said one thing, and Jaysus is now speaking in tongues about it. It’s all word salad, and meaningless. Because it’s the money that moves market trends, not the talk.

On the other hand, if the BLS number does not reflect this month’s reality and comes in weak, as expected, then the ensuing economic data will continue to come in stronger than expected and the market will face its Come to Jaysus moment in the days ahead.

On the bullish side, strong tax collections mean … Non-subscribers, click here for access.

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A Bear Market Isn’t the Mirror of a Bull

The stock market looks even more oversold versus macro liquidity than it was in August. So, no surprise, it, and the bond market have both been rallying for a couple of weeks.

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But is the market really oversold? I don’t think so. Bull market oversold parameters are one thing. Bear markets have different parameters. Remember that it required massive liquidity growth just to keep stocks on a bull trend. That growth became insufficient to support bull markets in both stocks and bonds since mid 2020. That’s because the US Government was sucking up almost all of the Fed’s QE. Non-subscribers, click here for access.

Now the Fed not only isn’t funding that, it’s pulling money out of the banking system that would have been available to support new Treasury supply. At the same time, it’s causing the Treasury to have to issue even more supply, so that it can redeem the Fed’s expiring holdings on which it now wants repayment. That causes forced liquidation of all asset classes, not just bonds. Non-subscribers, click here for access.

So in order for the market to be truly oversold in this new ballgame, how low must it go? We don’t know. I’ve made a shadow channel on the chart as a first guess. But it’s really a wild guess. We just don’t know how deep a selloff will result in enough of an oversold condition to generate a rally that lasts more than a month, let alone a major bottom. Non-subscribers, click here for access.

There are other ways we can look at this data that may be instructive, but for now, we’re even more in the dark than usual. Meanwhile, everyone who is guessing about a Fed pivot can go right ahead and be my guest. Because, as we all know, money moves market trends. Talk is only good for blips. Try to catch them at your own risk.  Non-subscribers, click here for access.

In this report, I update our regular look at the big picture liquidity indicators that will tell us exactly in what direction, and when, the markets will make their next big moves. Non-subscribers, click here for access.

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Bears Beware, Treasury Buybacks Will Turn the Markets, Sooner Not Later

Watch out! The US Treasury is now in the process of actively discussing buying back outstanding Treasury notes and bonds in an effort to bolster the collapsing bond market.

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As reported by Bloomberg:

The specific step taken by the Treasury was in its quarterly survey of primary dealers, released Friday in connection with the financing plan to be announced Nov. 2. The 25 dealers were asked for a detailed assessment of the merits and limitations of a buyback program for government securities. When the last financing plan was released in August, the department’s industry advisers on the Treasury Borrowing Advisory Committee recommended further analysis of the issue. https://finance.yahoo.com/news/momentum-builds-creation-treasury-bond-174307311.html

The Treasury is holding $650 billion in its cash account at the Fed. This “rainy day fund” was set aside for just such occasions. And let’s not kid ourselves. When big government agencies start talking about doing something, it’s as good as done. This is going to happen, and when it does, it will push bond prices higher. And that will also give stocks a lift. Non-subscribers, click here for access.

So the questions are when and how much. As to when, the big boys are publicly speculating that it will be early next year. But looking at the bond market crash, and knowing what we know about Primary Dealer positions, leverage, hedging, and the crashing bond market, it will certainly be xxxxxxx, perhaps xxxxx xxxxxxx xxxxx. Non-subscribers, click here for access.

Meanwhile, a couple of my hot takes on the Bloomberg piece. Non-subscribers, click here for access.

Liquidity metrics for the US government debt market are approaching crisis levels after a year of steep losses for bonds caused by rising inflation and Federal Reserve interest-rate increases, and with the central bank simultaneously cutting some of its holdings, the situation may worsen. Treasury Secretary Janet Yellen expressed concern about it last week.

Duh. Like I haven’t been reporting this for the past 2 years. And they’re just getting around to recognizing it. Geeze. They’re the rocket scientists. I just have a sixth grade education (I went to Temple) and I did not stay at a Holiday Inn Express last night. Non-subscribers, click here for access.

Taken together with Yellen’s recent comments and extreme volatility in the UK bond market in recent weeks, the query suggests “that the November refunding will likely show more progress toward opening a buyback facility,” JPMorgan Chase & Co. rates strategists said in an Oct. 14 research note. Strategists at Bank of America Corp. predicted a rollout in May 2023.

Are you kidding me? May 2023? The markets will have ceased to exist by then. I predict (in my best Amazing Kreskin voice) xxxxxxx xxx, or maybe xxxx xxxxxxxx. Non-subscribers, click here for access.

Under current circumstances, which include large federal deficits, a buyback program would have different purposes. They include adding liquidity to parts of the market most in need of it, and allowing Treasury bills to be sold in more consistent quantities, with proceeds used for buybacks of securities less in demand.

That’s just BS. The purpose is to stop and reverse the bond market crash, however temporarily. And we know that it will be temporary. The effect will end when they run out of cash. Which will be at whatever level of cash they feel they need to hold. We don’t know what that is. Non-subscribers, click here for access.

Furthermore, once they get to that point, and the market has rallied because of their buying, they’ll start borrowing again to build up their cash account back toward their magic number of $650 billion. Once they start to do that, it would reverse the bullish effects of the buybacks. So prepare for a roll coaster ride over the xx-xx months following the beginning of the program. First bond prices will soar and yields will come down. Then prices will rollover, and finally crash again with yields rising in tandem. Non-subscribers, click here for access.

On the other hand, when the Treasury is finished buying, the Fed awaits to take the handoff. It has not only the possibility to return to QE, which is unlikely as a first step, it has the $2.2 trillion RRP slush fund that it could force back into the markets. Non-subscribers, click here for access.

Who knows where the Fed will be in its QT program by the time the Treasury cash for the buyback program effectively runs out.? If the PCE and CPI numbers cool enough, they’ll probably stop QT. That looks likely to happen in the next xx months based on past lead time between changes in the size of the Fed’s balance sheet and inflation data. I’ve covered that in a previous report. Non-subscribers, click here for access.

But I want to reiterate that it is not productive to guess and try to front run these things. Despite conventional wisdom that says otherwise, markets respond to money, not talk. Trade the charts, and invest based on actual macro liquidity flows. In that respect, we are not at a xxxxxxx xxxxx yet. Non-subscribers, click here for access.

Meanwhile, the government has piles of cash that could be used to light a bullish fire under securities prices. One is the aforementioned Treasury cash account, and the other is the Fed’s money market fund of money market funds, its unlimited Overnight Reverse Repo (RRP) program. When they use those they could ignite bull runs that will look like bull markets. Non-subscribers, click here for access.

The Treasury and Fed money are demand side impacts. Then there’s always the issue of supply.  On the Treasury Supply front, keep in mind that the updated TBAC forecast for the current quarter and advance forecast for Q1 of 2023 will be released the week of November 2. They’ll give us a roadmap on what to expect for the subsequent 4½ months. Non-subscribers, click here for access.

In this report, I describe what’s likely in the months ahead, and suggest what you might do about it to defend yourself, or even take advantage. Non-subscribers, click here for access.

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We Can Now Project When Fed Will Pause, But Not Reverse

The PPI reading on Wednesday includes data which now enables us to project when the Fed will stop raising the Fake Funds rate. I call it fake because it merely mimics the market, but isn’t actually the short term money market. Nevertheless it’s what the Fed and the Street want you to pay attention to, and it’s what most sheep do pay attention to. I say Bah!

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I was able to make this projection using a highly sophisticated algorithm developed by artificial intelligence, that being my brain drawing trendlines. It’s a technique that I have developed over my nearly 60 years of studying technical analysis, including 40 years of computer generated analysis. Non-subscribers, click here for access.

Naturally this formula is far too simple, direct and obvious to be recognized by the high priests of Economism. But I have spent my life specializing in simple, direct, and obvious, which is all that I am capable of. And so, I will attempt to the best of my ability to illustrate it for you. Non-subscribers, click here for access.

Using this secret algorithm I was able to determine that the Fed should announce a pause in rate increases next xxxxxxx. The market will briefly celebrate that, but that will be a big mistake. Because the Fed has never actually raised rates and rates aren’t the problem. They are a symptom. The market has driven rates up and the Fed has rubber stamped that, while never quite getting to where the market already was. Non-subscribers, click here for access.

Now, for the illustration of how xxxxxxx was projected to be the point at which the Fed decides to pause. xxxxxx is when the trend of the Fed raising the Fake Funds rate intersects with a somewhat likely trend of the Fed’s favorite inflation measure, the Core PCE. Non-subscribers, click here for access.

CHART Non-subscribers, click here for access.

I use the just reported PPI for core final demand consumer goods (PPI-CFDCG) as a leading indicator of where the PCE is likely to be headed. The PPI-CFDCG dropped from an annual rate of +8.5% to +8% in September. This was the first decline in this series, which tends to lead CPI and the Fed’s favorite measure, core PCE, by anywhere from 3 to 12 months. Non-subscribers, click here for access.

Note that this downturn follows the beginning of the Fed’s Quantitative Tightening or QT, by 6 months. That’s also normal. Non-subscribers, click here for access.

I then drew a trendline extrapolating this downturn into the future. The validity of doing that is supported by the fact that the upswing rose on nearly a straight line basis as it followed Fed pandemic era QE with a lag of about 6 months. As goes the money supply, so goes inflation, the one thing that Milton Friedman got right. Non-subscribers, click here for access.

By the way, “inflation,” doesn’t mean only consumer prices. Inflation is classically defined as a rise in the general level of prices. General means everything. That includes asset prices. Modern priests of Economism exclude asset prices from the definition of inflation, so that they can conveniently ignore the jillion percent increase in asset inflation we’ve seen over the past 13 years. Non-subscribers, click here for access.

The only inflation they accepted as real was consumer price inflation. And that is utter nonsense. The refusal to recognize asset price inflation as an element of general inflation is at the very crux of the intractable problem we face today. Now we must pay the price for that willful ignorance. Non-subscribers, click here for access.

So now we see the impact of reducing money supply on both types of inflation. The problem the central banks have in their drive to reduce consumer price inflation is that asset prices react immediately and directly to tightening money supply. Consumer prices react with a lag. Asset prices, both stocks and bonds, have already collapsed. Consumer prices haven’t budged yet. Non-subscribers, click here for access.

And now we can see that this process will continue for months. It has the potential to cause unfathomable financial destruction. Non-subscribers, click here for access.

This is a huge problem for Wall Street. Because of the nature of the Fed’s inflation fight, the tightening of money supply versus rising money demand, is absolutely destroying asset prices in a process that will continue until the Fed stops tightening. Non-subscribers, click here for access.

Again, the Fed Funds rate is irrelevant. To halt the downtrend in asset prices, the Fed must stop reducing the money supply and must start increasing it again by an amount sufficient to absorb almost all Treasury issuance.  Non-subscribers, click here for access.

The Fed pretends that it will only stop tightening when the Funds rate that it sets every 6 weeks is supposedly neutral. The Fed’s focus is on the PCE, and the PCE follows the curve of the PPI finished core consumer goods series by a few months, at a lower level. We can therefore project the trend of PCE by mimicking our favorite PPI trend as I showed in the chart above. Non-subscribers, click here for access.

In so doing, the falling core PCE would meet the rising Fed Funds rate in xxxxxx. The Fed will yell “Pause” in a crowded theater, and everybody will rush into the market. There will be a buying panic when that happens. Non-subscribers, click here for access.

But the buying panic will quickly die and the collapse of asset prices will resume unless the Fed also reverses from QT back to QE. Because the money market would otherwise continue to tighten, and short term rates would resume rising. Non-subscribers, click here for access.

The markets get a break in xxxxxxx because the US Treasury xxxxxx xxxxx xxx xxxxxx xxx then. That enables the Treasury to pay down T-bills in xxxxxxxx xxxxxxx xxxxxxx xxx x xxxxxxxx.  This will take the pressure off the money market for a few weeks in this coming xxxxxxxx. Non-subscribers, click here for access.

But supply pressure will explode in xxxxxxx because the xxx xxxxxxxx xxxxxxx xxxxxx xxxxxx that month, while at the same time tax revenue xxxxxxxxx xxxxxxxxx xxxxxxxxx xxxxxx xxxxxxpoints of the year. The government’s cash need will soar, and so will its short term borrowing. At that point the markets are very likely to crash again. Non-subscribers, click here for access.

I say again, because the supply demand imbalance in the financial markets between now and xxxxx xxxxxxxxx xxxxxxxxx xxxxxxxx will be the worst it has been in this market. There will be immense pressure on asset prices for the next xxx months. The conditions for a crash are in place. That may force the Fed to act weeks before it gets Fed Funds to a so-called “neutral” rate, which looks like x.x%. A xx and a xx would get us there. Non-subscribers, click here for access.

Surprise, surprise, surprise! This is essentially the consensus outlook. But so what! Non-subscribers, click here for access.

The destruction of stock and bond prices will be epic by the time this rate path is complete in January.  Might that be enough for the Fed’s resolve to crack before they’ve gotten to x.x%? Of course. Or might the Fed hold out until that x.x% rate is reached? Sure. We just don’t know. Non-subscribers, click here for access.

But remember, the Fed merely follows market interest rates, such as on the 13 week T-bill. That rate is merely a meter of just how tight the money market supply-demand balance is. And it is the imbalance of supply of securities over effective demand for them that causes falling prices, and their mirror, rising short term rates and bond yields. Non-subscribers, click here for access.

The dynamic of prices trending lower WILL NOT CHANGE until the Fed reverses from QT, back to QE. And it must do so in enough size to once again absorb most Treasury issuance as it did during the 12 years of the bull markets. Non-subscribers, click here for access.

Anything less than aggressive QE will not end the bear markets in stocks and bonds. It may alter their courses. It will generate rallies on the bear market slope of hope. But it will not end the bear markets. That would take a massive policy reversal by the Fed. Non-subscribers, click here for access.

The other thing to keep in mind is that it will do us absolutely no good to anticipate this so called Fed “pivot.” Markets turn on money flows. The bear market will end when the Fed supplies enough money to end it. Any speculation on when it will end, even if the guess is correct, will hold no advantage whatsoever. What’s the point of being early? Non-subscribers, click here for access.

Buy the markets when the monetary facts change. Not before. Non-subscribers, click here for access. 

Simple, direct, obvious.

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Look Out For the Real Fallout of Declining Withholding Tax Collections – Part 2

We track Treasury supply because Fed policy comprises only one side of the supply/demand equation. Treasury supply makes up the bulk of the other side. The information we have on Treasury supply is known, either in advance or at least in real time. Tax revenue is the primary determinant of changes in supply. We merely need to monitor the tax revenue trend, and legislation that affects the Federal Budget to get an idea where supply is headed in the near term.

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We’ve now seen xxx months of falling withholding tax collections. That’s a xxxxx, but it was mitigated in September by very strong quarterly estimated individual and corporate taxes. But those are lagging because they are based on the third quarter as a whole, not just September. Non-subscribers, click here for access.

On the other hand, excise tax collections were up, an indication of strong retail consumption. So that’s a fly in the ointment in terms of the idea that the economy is contracting. But it’s too small an item to matter to total revenue.   Non-subscribers, click here for access.

September revenues got a boost from quarterly estimated taxes, as always. We expected that. As a result, the Treasury paid down a significant amount outstanding T-bills during the month. Again, no surprise. But it certainly didn’t help the markets much. Maybe the Treasury market a little toward the end of the month. But if that’s all a “good” liquidity month can do, watch out for the next two months. Non-subscribers, click here for access.

The point is that September was as good as it gets, and as good as it will be, until xxxxxxx, when the xxxxxxxxx xxxxxxxx xxxxxxxxx xxxxxxx will again create a temporary budget surplus. That will be used to pay down T-bills again. But xxxxxxx xxxx xxxxxxxx will be a drought, with heavy Treasury supply, which would be made worse by weakening tax revenues. Non-subscribers, click here for access.

The Fed will exacerbate the problem with QT. It will tell the Treasury to redeem $60 billion a month of the Fed’s Treasury holdings. That’s an extra $60 billion a month in Treasury supply that the US government will need to issue so that it can repay the Fed. Investors and dealers will be forced to absorb that, because the Fed cavalry isn’t riding to the rescue to take up the bulk of supply.  Non-subscribers, click here for access.

The xxxx xxxxx months will be the worst supply demand imbalance we have seen so far in this bear market. I would expect both stock and bond prices to xxxx xxxxxxx xxxxxxxx xxxxxxx. Any rallies should be xxxxx xxxxx, and should xxxxx be xxxxxxxx xxxxxxxxxxx. Non-subscribers, click here for access.

Furthermore, xxxxxx the xxxxxx will continue to be a really bad idea, just as it has been all year, unless you plan on, and in fact do, xxxxxx the xxxxx. Non-subscribers, click here for access.

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Look Out For the Real Fallout of Declining Withholding Tax Collections

Federal withholding tax collections declined in September for the third straight month. Predicting the BLS jobs data is always a crapshoot, but after 3 months of real weakness in withholding taxes, this should be the month when reality catches up with the BLS.

But will the BLS report a decline, when the consensus is for a gain of 275,000 jobs? Not likely.

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But more importantly, declining revenue means more harsh reality for the Treasury market in the form of more supply than the TBAC had forecast that the Treasury would issue. We can’t project that indefinitely, but at least in the near term it means additional supply on top of already heavy forecast supply. Non-subscribers, click here for access.

And that has implications for the market, which I cover for you in these reports. Non-subscribers, click here for access.

9/3/22 But the fact is that if tax revenues are weakening, Treasury supply will only increase, regardless of what Wall Street says about the economy. Treasury supply will increase just as the Fed requires the Treasury to add $60 billion a month in new debt sales to the public to pay off the Fed. Non-subscribers, click here for access.

In addition to that extra supply from QT, and a weaker economy, the Fed is causing demand to weaken. Not only is  the Fed no longer the primary buyer and financing agent in the market, but it is also choking demand by removing the cash from the banking system that would otherwise be available to fund Treasury purchases. Non-subscribers, click here for access.

The accompanying weaker economic data will be spun as bullish, while in fact it will not be. At least at first. The bottom line is that the weaker tax revenues are not bullish. It will only be bullish when the Fed finally reverses policy. All I can say is, “xxxx xxxx xxxx!” Non-subscribers, click here for access.

Here’s how to view the data, and what it means for investment strategy and tactics. Non-subscribers, click here for access.

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