Category: Fed, Central Bank and Banking Macro Liquidity

There were no significant changes in the data this week. In looking at the big picture, I saw nothing that would materially change my analysis and outlook posted in the previous update posted August 19. However, I want to comment on an observation I made last week. Non-subscribers, click here for access. 

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8/19/24 That means that the more T-bills the Treasury issues, the more bullish it is, because of market participant willingness to use those bills to convert to cash, which then enters the banking system via the magic of government deficit spending. So not only does that T-bill issuance fund market speculation, it also stimulates the economy via deficit spending. Non-subscribers, click here for access. 

It’s magic. And it will work until the system becomes so overleveraged that it breaks. We saw the first shot across the bow in recent weeks. Non-subscribers, click here for access. 

I would only amend this to say that the more T-bills the Treasury issues, the more bullish it is, potentially, because dealers, banks, hedge funds and money market funds must make a proactive decision to employ that tactic. If they turn cautious, which I seem to recall happening a couple of times in ancient history, then the T-bill issuance can become a safe haven holding rather than collateral for increased speculation. Non-subscribers, click here for access. 

That’s the transition for which we must always be alert. There’s nothing concrete pointing that way yet. However, in July we noted that we reached an extreme of hysteria on some measures that could be the precursor to an attitude adjustment. Here’s where that stands, and what to do about it, as of right now. Non-subscribers, click here for access. 

Along with the usual charts and explanations to paint the picture. Non-subscribers, click here for access. 

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Whereas, in the course of human events… Non-subscribers, click here for access. 

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Wait! Who starts a report with “Whereas!” I do! Whereas I’ve been summer vacation mode, traveling, I’m a bit behind on updated the Treasury supply and banking data. So I’ll reduce this to bite sized pieces for more current consumption over the next two days. First let’s start with Treasury supply. The Treasury and TBAC just released their latest 6-month supply estimates on July 31. Non-subscribers, click here for access. 

In following reports, I’ll get to the Fed balance sheet data, which is released on Thursday evening, and then the banking data, released Friday evening. Non-subscribers, click here for access. 

Repo use surged last week in a massive breakout. Clearly, the players have decided that they are ready and willing to use repo to acquire and finance Treasury inventory. Coupon issuance for the August 15 mid-month refunding is light, but the Treasury has issued a tsunami of T-bills in July and August. Heavy coupon supply is due at month end. Then T-bill paydowns are coming in September as usual, thanks to the mid month estimated tax payment windfall. Non-subscribers, click here for access. 

Meanwhile, T-bill issuance has been massive in July and August. Back in the old days, I thought that T-bill issuance was bearish because buyers needed to liquidate existing assets to purchase them. That used to work, but now it is wrong, as we recognized when T-bill issuance surged in June. Here’s why, what it means for the market, and how to play it as a result. Non-subscribers, click here for access. 

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Primary Dealers remain net short the bond market, considering both their securities portfolios and futures hedges. That’s a problem, considering not only what’s going on right now, but what has been going on for the past 3 months. Non-subscribers, click here for access.

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Here’s what this means for stocks and bonds, and what you should do about it.  Non-subscribers, click here for access.

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The only thing keeping the market afloat is the willingness of big market participants to take on leverage to continue buying stocks and bonds. Increasingly prodigious amounts of T-bill supply are not pressuring prices as I had forecast back in ancient times, maybe 3 months ago, that they would and should have. Instead, they have become the basis for taking on more debt via repo and margin, and using it to buy other assets such as Treasuries and stocks. Non-subscribers, click here for access. 

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As a result, I have been suggesting to hold on to longs for the time being, and hold off on shorting. However, the market’s pricing is now so extended versus base liquidity, aka money, that we have to wonder where the limit is? Is it here, or is it the sky? Non-subscribers, click here for access. 

The trend is still in place and there’s no indication yet that it is beginning to turn. On the other hand, there are indications that price to liquidity ratios are at or near extreme trend limits. They’ve been at other apparent limits before and gone through them, as the movement increasingly moves toward the vertical. They’re so vertical now that it looks “end-stagey” to me, but that’s just a gut reaction born of 56 years of observing markets, not an empirical judgment. We need more. Non-subscribers, click here for access. 

It will come down when the weight of higher prices becomes too much to absorb. All we can do is closely watch the price measures via technical analysis, and apply basic TA to price/liquidity sentiment measures, looking for the first signs of a change of direction. Given the fragility of the current structure, I suspect that the turn could be faster than usual. I would want to react quickly at the first sign of a turn. In other words, sell first and ask questions later. Non-subscribers, click here for access. 

This report shows and explains the critical indicators that you need to follow to stay on top of the market as it tops out. Non-subscribers, click here for access. 

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Withholding tax collections were strong in June. The US economy shows no sign of slowing. More importantly, strong revenue growth has restrained the growth of Treasury supply. Consequently, the US Treasury was able to continue T-bill paydowns through June, reducing the negative impact of heavy coupon issuance. Non-subscribers, click here for the rest of the story.

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We were able to use the data to foresee that, and the fact that the impact would be bullish. We also knew that the paydowns would end in July and that the resumption of T-bill issuance that would result in renewed withdrawals from the Fed’s RRP facility. That’s because money managers would switch from holding Fed RRPs back to holding T-bills as they were issued. The decline in the RRP fund would resume. Non-subscribers, click here for the rest of the story.

Given where I expected the RRPs outstanding to be at the end of June, last month I guessed that the facility would run dry in November or December. But the RRPs never got as high as I expected as money managers took some of the cash from the T-bill redemptions and used it to buy stocks and bonds instead of depositing it in the RRP facility. Non-subscribers, click here for the rest of the story.

Now bill supply is starting off July at a gargantuan level. Putting 2 and 2 together suggests that the RRP slush fund will run dry in October, even at the current revenue growth rate. Non-subscribers, click here for the rest of the story.

Here’s the illustrated story of how we got here, and what it means for your trading and investment strategy. Non-subscribers, click here for the rest of the story.

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