Lee AdlerStock prices are currently right in the middle of the channel surrounding the liquidity line in the Compositite Liquidity Chart (viewable in subscriber version). By this measure the market isn’t overbought, as so many bearish pundits are bellowing. Nor is it oversold. It’s just tracking the growth of systemic liquidity. Not too hot, not too cold, but just right. Goldilocks.
The balance between QE and Treasury supply will remain bullish through through xxxx (subscribers only). This should provide a boost for stocks. It should keep the Treasury selloff at bay for another month or two.
However, this is not as bullish as I first thought. It appears that around 75% of the T-bill paydowns are going to money market funds and other institutions who must hold short term instruments instead of lengthening maturities or buying stocks. So most of the cash from the paydowns is ending up in Fed RRPs.
Only about ¼ of the money has been used to buy stocks and bonds. So the effect has been muted. There’s no massive blowoff. Instead conditions lend themselves to a churning topping action lasting through xxxx (subscribers).
Every time there’s a critical problem in the banking system due to banker malfeasance, the Fed steps in to paper it over and reward the criminals.
That’s why we focus on the Fed more than anything else. Regular review of the banking indicators was useful once upon a time. The Fed has rendered them irrelevant. But I promised to keep an eye on them, and it has been 5 months since we last looked. That’s enough time that, if anything material has changed, we need to know about it. So herein is a review, our first since last December.
In this report, I highlight the charts. Because there are so many, I’ve attempted to minimize the verbiage. I talk too much. The charts really speak for themselves.
The bottom line is that the system remains extremely vulnerable to a decline in Treasury prices that is coming in xxx (subscribers only). Likewise, the return of optimism in commercial real estate is problematic. The banks are taking no precautions. There’s no sign of recognition of the looming losses.
It means that the entire banking system could be destabilized in xxxxx (subscribers only). The Fed will have to act, massively. History shows that the Fed won’t act in time to prevent a breach of the system. History also shows that the Fed has the power to ultimately make its actions give the appearance of stabilization, leading to the return of animal spirits.
But I don’t know if it will work yet again, and we can at least expect a significant break first. So here’s what I would do (subscribers only).
Now here’s a review of the banking indicator charts.
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FREE REPORT – Proof of How QE Works – Fed to Primary Dealers, to Markets, To Money
The balance between QE and Treasury supply has gotten even more bullish and will remain so until xxxx (subscribers only). This should provide a boost for stocks. It should keep the Treasury selloff at bay until xxxx (subscribers only).
I have previously made the case for the Treasury to run out of money in xxxx (subscribers). If that estimate is correct, the outlook will turn negative in xxxx (subscribers). But for now, bullish liquidity forces remain in place, outside of the usual month end supply pressure.
As delayed tax receipts come in, in May, the Treasury will have even more cash for paydowns. The rest of May into mid June could be very bullish as a result. A selling opportunity for both stocks and bonds will arise as the Treasury approaches the point where its cash hoard is used up.
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FREE REPORT – Proof of How QE Works – Fed to Primary Dealers, to Markets, To Money
The Treasury Borrowing Advisory Committee (TBAC) is a gang of Primary Dealers and other big investment firms that tells the US Treasury once each quarter how much paper it will need to issue, and when. It provides an estimate of issuance by date and type for the current quarter and the next one. It does so every February, May, August, and November, near the beginning of the month.
The TBAC just issued its reports for the current quarter last week. The report confirms what we expect, a massive supply increase coming. We know exactly when it’s coming, and have a pretty good idea of when it should start to cause problems for the stock and bond markets. With that knowledge, we can now prepare for action to take advantage.
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The markets are awash in cash. It shows up on the Fed’s balance sheet. It shows up in the Treasury account, and in Primary Dealer Accounts. It shows up in Reverse Repos.
That cash is coming from the US Treasury’s campaign of paying down T-bills. Those paydowns have totaled $430 billion since February 23. It’s an abomination of market manipulation. But it has worked to stabilize the bond market, levitate stock prices some more, and some more, and some more, and to stave off yet another Primary Dealer collapse.
We can follow these flows via the Fed’s weekly balance sheet statements, and the charts and indicators we derive from it.
The Treasury still has $1 trillion in its account that it must spend down. Annual taxes are still coming in, replenishing that account. The Treasury will almost certainly continue to pay down T-bills until there’s no cash left. I will do a revised estimate of when that will be from the April end of month Daily Treasury Statement. Prior to that, I give my best current swag in this report.
Until then, the cash will continue to flow. This report shows you exactly how this impacts stocks and bonds, so that you know how to play it, and when to GTFO.
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The balance between QE and Treasury supply remains bullish. This should provide an underpinning preventing the stock market selloff from going too far. At the same time, Treasuries have apparently put in an intermediate term low.
May will be even more bullish, but there are trends in place that will end the party, and we have a pretty good idea of when.
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FREE REPORT – Proof of How QE Works – Fed to Primary Dealers, to Markets, To Money
Primary Dealer data is always among the most important types of data for us. I look at it in as many ways as possible with the data that’s available.
On rare occasions the data tells us that change is under way. Most of the time, it simply confirms what we already had concluded.
Today, the macro data on the Primary Dealers and the big banks does not support the strong bank earnings that the big boys reported this week. The data suggests that a supply tsunami will hit the market soon (at the time projected in one of our recent reports). The Primary Dealers’ difficulties will become paramount, and the Q1 bank profits will have proven illusory.
The markets will have foreshadowed the reporting of that before the news is out, as always. Technical Analysis should sound the clarions as the turn gets under way. In the meantime, this analysis tells us that the conditions for a turn are building toward a crescendo.
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FREE REPORT – Proof of How QE Works – Fed to Primary Dealers, to Markets, To Money
We have finally seen the effects of the bond market crisis in dealer inventories, and it isn’t pretty.
Dealer inventories have plunged by $166.6 billion since February 24. This is not simply repricing of the inventory. This is active, aggressive liquidation. We have reason to believe that it is forced liquidation. We know that because we know the degree to which this inventory was bought and carried with insane levels of leverage.
One chart in the report shows the scale of the drop, and relates it to the direction of Treasury securities prices.
Another shows total dealer Treasury collateral repo versus the yield on the 10 year note on an inverted scale. That shows the direction of Treasury prices relative to their total repo borrowings against their Treasury holdings.
Another chart shows all Primary Dealer net borrowings, which is the net of their repo and other financing from their reverse repo and margin lending operations. That’s plotted versus their total Treasury holdings. This chart is interesting because it shows the total amount of leverage employed against the only the safest collateral held.
Then there’s the mother of all charts. The chart shows a four year history of the direction of Treasury prices, overlaid with total dealer fixed income positions, and net dealer borrowings used to finance those positions. At the bottom is the ratio of the net debt financing to the total fixed income portfolio value.
The correlation between all 4 series is clear. The past is prologue. The implications are horrifying.
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FREE REPORT – Proof of How QE Works – Fed to Primary Dealers, to Markets, To Money
In past reports I’ve covered the fact that the proximate cause of the US Treasury’s massive intervention in the Treasury market is the crash in Treasury bond prices and not yields. Dealers are underwater. They’re drowning. And surprise, surprise, they have engaged in more stupid behavior of the kind that causes systemic crashes.
Why are we surprised? These same Wall Street Mafiosi are behind every financial crash, and they are never held responsible. Quite the contrary, the Fed bails them out and rewards them for their disgusting, criminal malfeasance and wild gambling with other people’s money.
The financial system with the Fed as corrupt cop on the beat, stinks to high hell, but it is what it is. We just have to understand their corrupt rules and play by them in order to preserve and grow our capital. Understanding that game meant that we’ve had to be bullish most of the time for the past dozen years.
Sad.
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