Category: Fed, Central Bank and Banking Macro Liquidity

I’ve been doom scrolling my newsfeeds for the past few days, not getting much work done. What a catastrophe. War in Europe, just 120 miles from where I was living a few short weeks ago.

I just communicated with a Ukrainian friend who lives in Kyiv and owns a number of apartments there. She left the city with her family on Thursday, for what she felt was greater safety in the west of the country. She said that the Russians are shelling and firing missiles at civilian targets indiscriminately, and that many ordinary people have died. She called Putin crazy. Then she noted how proud she was of her countrymen for their firm resistance.

I made several friends in Eastern Europe during my 26 months living there. I got to know their attitudes toward Putin and the Russians. My friends are all older people. They lived for decades under Russian domination. They love freedom and they hate the Russians viscerally. They will never surrender, even if Russia finally dominates in this conflict and subjugates them.

The question for us here is how this will impact monetary policy. We already know that the Russian central bank will be blocked from moving money, and that some Russian banks will be blocked from accessing the international payments system. No doubt this chaos will trigger a roundabout detour in the Fed’s tightening policy.

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But will they actually reverse and return to QE? We’ll have to see what’s next. I would suspect that most of the easing would be directed at their cohort, the ECB, and other central banks. My guess is that they won’t immediately return to outright QE, pumping money into Primary Dealer accounts again, at least not right away.

The Fed is boxed in. It faces the prospect of an international financial crisis. It faces the reality of 40 year record inflation that has the prospect of worsening. We’ll watch what the Fed says because it will lead us to what they’ll probably do. Although in emergencies, the doing comes first. And markets respond to the doing, not the talking, despite what the Fed and the high priests of Wall Street want you to think.

So unless they pump money directly back into the markets via buying securities from Primary Dealers, it won’t reverse the course of the financial markets. Bond prices will still xxxx xxxxx (subscriber version). and yields xxxx xxxxx. Stock prices will have their usual April seasonal bump from tax revenues being used to pay down Treasury debt for a few weeks. Then they’ll xxxx xxxx.

I believe that unless the Fed returns to buying paper from the dealers, that course is set. If they do return to QE, I’ll wait and see what the market response is. Normally I’d say it would be a go, bullish. But the dealers still have the option of simply paying down debt with the proceeds of selling their Treasuries and MBS to the Fed. If they were to do that, game over.

Meanwhile, I say what I’ve been saying for the past 18 months. I would continue to xxxx xxxxx (subscriber version) bond market. If I had any long term bonds in my portfolio, which I don’t, I’d xxxx xxxxx.

There are, of course, ways to xxxx xxxxx the bond market. I’d rather xxxx xxxxx stocks. Just my preference.

Stocks will have rallies. I’ll use the TA to xxxx stocks for swing trades when they look good for that. I’ll continue to report weekly on that, and the overall technical market outlook in the Technical Trader reports.

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The Federal budget deficit is shrinking as the economy experiences an inflationary boom. This is just what the Fed was hoping for, but inflation has obviously gotten away from them. It will only get worse as the lagging rent component of CPI will push the total index higher, even if and when the other components begin to moderate.

The rent of shelter and owner’s equivalent rent that’s based on it make up about 40% of Core CPI. Those two components are not based on real time market rents. They’re based on a survey of renters, asking them what they’re paying. The OER is derived from that as a base, and then adjusted from time to time by asking homeowners how much they thought their houses would rent for… As if they knew.

This isn’t merely a dumbass way to measure rent inflation, it’s fraud. Contract rents are usually adjusted upward at a rate far below the increase in market rent. That’s because landlords like to keep good tenants in place rather than incur the friction costs of raising the rent too much and having them leave. It costs money to find a new tenant, and spruce up the unit.

So when the BLS asks tenants what they’re paying, it does not get the full effect of the currently soaring rents. Apartment List does a national rent report showing rents up 17.8% year over year. BLS has imputed the rent component of CPI at 4.1%. At 40% of core, this difference means that the BLS is understating total Core CPI by roughly 5.5 percentage points. That’s obscene. It’s an affront to human intelligence.

But CPI was never intended to measure inflation. That’s why they took home prices out of the index in 1982. CPI was always intended as a tool for indexing government wages and benefits, and industrial labor contracts. In the 1970s indexing got too expensive as home prices surged. So they worked out a way to remove house prices and falsify the housing component of CPI beginning in ‘82.

Now, the Fed is devaluing the mountain of debt out there. Bond holders will get a small fraction of their purchasing power back if they hold to maturity. And if they don’t, and sell along the way they’ll get killed on the capital loss as a result of collapsing bond prices.

We saw this coming since about a month after the bond market turned in August 2020. I don’t think it will get better any time soon, although certainly there will be bond rallies from time to time. Still consistent with my message of the past 18 months, they’ll be xxxx xxxxx (subscriber version).

Meanwhile, the budget deficit will narrow as long as the economy booms. That will reduce Treasury supply. But it won’t reduce it to $20 billion a month. Maybe it will fall to an average of $60 billion per month as some forecasts suggest. Maybe it won’t. I don’t know. The economy is booming at the moment, and there’s no reason yet to expect a slowdown.

But it doesn’t matter. Because the market has shown that it can only absorb $20 billion per month while the Fed kept bond prices stable and suppressed by buying or funding $180-$200 billion per month in net new supply.

Now, if the Fed isn’t buying, and the market can only absorb $20 billion per month, with supply even as low as $60 billion, that’s $40 billion in excess supply that the market can’t take at a stable bond price.

Therefore, bond prices will xxxx xxxxx (subscriber version) and so will stocks, as they get xxxx xxxxx . They’ll be xxxx xxx xxxxxxxx xxxxxxxxx on leveraged funds who hold both stocks and fixed income. And they’ll get xxxx xxxxx because eventually rising yields will force some money managers to xxxx xxx xxxx xxxxx.

There will be no xxxx xxx xxxxx, except to xxxx xxxxx (subscriber version). I’ll continue to look for xxx xxxx trading opportunities in the Technical Trader reports. I’ll leave xxx xxxx the bond market to whale hedge fund professionals.

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There’s more evidence in the weekly data on the biggest US banks .of the sea change in psychology and financial conditions that is triggering this bear market environment

The Fed is mandated to control inflation. That means that it has no choice but to follow the conventional economic prescription for doing so. Tight money.

Tight money means death, destruction, and chaos, given how much debt and leverage now overburden the banking system in general, and the Primary Dealers in particular. As they become increasingly stressed, the effect will show up in the markets as lower prices. That will increase the stress, and so on.

The Fed will have its hands tied as long as the CPI and PCE measures remain elevated. Therefore, a resumption and continuation of the crash that has already begun in both stocks and bonds is baked in. It won’t be a straight line. There will be rallies, and they will represent profit opportunities for those willing to short them when they run out of steam.

The big surprise in this data is the evidence that both Primary Dealers and money managers are already hoarding cash. This is a reversal of their past behavior of immediately redeploying cash when speculation and bullishness ruled.

If this is the new mindset, we’re about to reap the whirlwind. Here’s what to do, along with the supporting charts, data, and analysis to help you understand what’s really going on behind and beyond Powell’s tortured dissembling.

Find out what to expect now and what to do about it in this report.

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

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

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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.

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

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

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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.

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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