Macro liquidity is growing at a historically rapid pace, but much slower than in the second quarter. And there are signs of trouble brewing. Here’s what they are and what to do about them.
Subscribers, click here to download the report
Not a subscriber yet?
Get this report and access to all past and future reports risk free for 90 days!
Fed QE and Treasury supply remain roughly in balance. The Fed is still funding most, if not all new issuance, either by direct purchase of Treasuries, or indirect funding via purchases of MBS. Meanwhile delayed tax collections are creating a July cash windfall for the Treasury. It’s all bullish for the next two weeks.
But then it gets different. Here’s why, and what to do about it.
Subscribers, click here to download the report
Not a subscriber yet?
Get this report and access to all past and future reports risk free for 90 days!
Several banking indicators have exhibited a mild trend of deleveraging that has now persisted over two months. What we don’t know yet is whether it is just a correction of overborrowing during the initial phase of the pandemic and the Fed’s response.
Or is it the beginning of a persistent trend of deleveraging? That’s important because if it is the latter, it would have the power to change the direction of stocks
That could be a good thing over the long term. But it could also lead to another accident in the shorter term, over the next few months.
Unfortunately, so many aspects of this are uncharted waters for us. We can’t look at history and say, oh, this is just like that, or even something like that. We must take our best shot based on the logic of the current circumstances. Another problem is that, while economists assume that humans are rational actors, we know that that’s not often the case. We have to figure out how humans are most likely to behave, rational, irrational, or otherwise.
Ultimately that boils down to divining the trends in the data as it exists. Let’s just look closely at what we know and ask a few questions. Is the current trend persisting? Are there conditions on the horizon that might lead to change? Is change already underway? What are the signs? How will the Fed respond? And more importantly, how long will it take the Fed to respond.
Fortunately, the last two questions don’t need an answer. Because the Fed doesn’t know what it will do until it does it, neither does the market. And it’s likely to take the market longer to figure it out than it takes us, if we’re paying attention. Which we are.
Here’s what we know and what to do about it.
Subscribers, click here to download the report
Not a subscriber yet?
Get this report and access to all past and future reports risk free for 90 days!
Wall Street media shills have noted that the Fed’s balance sheet has shrunken a bit in recent weeks. Let’s get this out of the way first.
It’s meaningless and temporary. Here’s why, and here’s what really matters.
Subscribers, click here to download the report
Not a subscriber yet?
Get this report and access to all past and future reports risk free for 90 days!
The Meyer Lansky like Fed has cut back QE, but Treasury supply has also receded. So the Fed is still funding most new issuance, either by direct purchase of Treasuries, or indirect funding via purchases of MBS. That has allowed the dealers enough flexibility to keep the players at the gaming tables. Are they being set up for the kill?
Subscribers, click here to download the report
Not a subscriber yet?
Get this report and access to all past and future reports risk free for 90 days!
As the Fed has cut back on QE, Primary Dealers have also cut back their inventories of Treasuries and the leverage that they use to finance them. That’s not bullish. Here are the details and a few charts along with a suggested strategy to play the dealers’ game, not the one they want you to play as they set up new traders for the kill.
Subscribers, click here to download the report
Not a subscriber yet?
Get this report and access to all past and future reports risk free for 90 days!
The imbalance between Fed QE and Treasury supply is ugly as as it gets for the next week, but then it gets less ugly. Here’s what you need to know and how you need to see it to trade successfully.
Subscribers, click here to download the report
Not a subscriber yet?
Get this report and access to all past and future reports risk free for 90 days!
We know that total liquidity is still growing. The Fed is still printing and pumping money into the system at an historic rate. That rate is well above the norms of the original QE back in 2009-10, but well below the peak panic levels of March and April. The Fed has been dialing it back from the extreme pumping it reached at the market bottom in March.
Ay, but theres’s a rub, and it’s not barbecue. It’s an irritant. And the markets won’t like it.
Subscribers, click here to download the report
Not a subscriber yet?
Get this report and access to all past and future reports risk free for 90 days!
Primary dealers have been gradually paying down their outstanding repo loans from the Fed, just as we have long expected. This has momentous implications for the stock and bond markets.
Subscribers, click here to download the report
Not a subscriber yet?
Get this report and access to all past and future reports risk free for 90 days!
A sharp eyed subscriber caught an error on the top of page 4 of this report. I typed “billion,” instead of “trillion,” twice, in reference to T-bill issuance for the quarter. The paragraph should read as follows:
How much more? The TBAC said that $84 billion in Treasury coupon paper (notes and bonds) will settle at the end of the month. It didn’t give details on short term paper issuance, but it projected $2.68 trillion in bill issuance for the whole second quarter. $2.25 trillion has already been issued or scheduled through June 16. That means another $440 billion or so to come in the last 2 weeks of June. In other words, total net new issuance for June 17-30 is projected to be $524 billion.
Sorry for the confusion!
Subscribers, click here to download the report
Not a subscriber yet?
Get this report and access to all past and future reports risk free for 90 days!
Lee Adler