Category: Fed, Central Bank and Banking Macro Liquidity

Despite the fact that the Fed is no longer the only driver of the markets in one direction, it still plays a role indirectly. So we still monitor the Fed’s weekly balance sheet. It is still the timeliest source of data on several critical market drivers. It’s published weekly, virtually in real time, with data through the current Wednesday, published on Thursday after the financial markets close.  Non-subscribers, click here for access.

Subscribers, click here to download the report.

The numbers and the discussion are dry, and can be dense, so I’ve been thinking about ways that I could relate those numbers to the reality of stocks and bond prices on the ground, without putting you to sleep.  Non-subscribers, click here for access.

Then it dawned on me!  Non-subscribers, click here for access.

So, in this report I present a few charts of the Liabilities side of the Fed’s balance sheet. They show us that maybe we shouldn’t be so sanguine about the continuation of this bull market. In fact, it looks like something bad is coming, and soon.  Non-subscribers, click here for access.

Subscription Plans

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! 

Attention New Subscribers! Please check your spam folder for your subscription welcome messages and post notifications and whitelist Liquiditytrader.com. Some email providers like Hotmail and others which use the Proofpoint gatekeeper are blocking Liquidity Trader emails completely. I have been unable to get them to stop. Please notify them to “Let my emails go!”

If you continue to have issues receiving Liquidity Trader emails, just check here daily at 9 AM ET for the latest posts.

THANK YOU FOR YOUR SUPPORT!

Attention New Subscribers! Please check your spam folder for your subscription welcome messages and post notifications and whitelist Liquiditytrader.com. Some email providers like Hotmail and others which use the Proofpoint gatekeeper are blocking Liquidity Trader emails completely. I have been unable to get them to stop. Please notify them to “Let my emails go!”

If you continue to have issues receiving Liquidity Trader emails, just check here daily at 9 AM ET for the latest posts.

THANK YOU FOR YOUR SUPPORT!

Bank deposits, repo borrowing, and the Fed’s RRP facility have been the fuels for the rally. There are strong correlations between them and stock prices. In the past two weeks they’ve reached an inflection point. Depending on how they break, we should get a signal on the most likely intermediate term direction of stock prices. Non-subscribers, click here for access.

However, liquidity only establishes market context. Technical analysis of price trends shows action and timing. Context helps us to better understand the timing indicators when they are ambiguous. I cover that in the Technical Trader reports. Non-subscribers, click here for access.

Subscribers, click here to download the report.

Subscription Plans

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! 

NOTE! This report has been updated here with important previously overlooked information. 

Withholding taxes plunged in December. They are by far the largest component of Federal tax revenue. This was not an anomaly. It was a continuation of a downtrend that began in November. This trend is a sign of economic weakness, recession, and most importantly, the fact of less revenue than expected. The US Government schedules Treasury issuance on the basis of revenue forecasts. When revenue falls short of the assumption underlying the supply forecast, it means that Treasury supply will increase. Now this will come from an already heavy forecast level in the first quarter. Non-subscribers, click here for access.

Subscribers, click here to download the report.

Despite market expectations of lower interest rates ahead, the Fed is not yet refilling the punchbowl. The existing punchbowl, the Fed’s RRP facility, continues to be drained. It will run out of funds xxxxxxxxz xxxxxx xxxxxxxx xxxxx xxxxxx. Only the timing is at issue. The fall in tax revenues suggests that the day of reckoning will come sooner rather than later. I’m back to projecting xxxxxxxxx xxxxxxxxxx xxxxxxx, but we’ll adjust that expectation as we determine day by day xxxxxxxxx xxxxxxx xxxxxxxx xxxxxxxx, and whether RRP slush fund withdrawals are xxxxxx xxxxxxxx xxxxxx xxxxxxxxx.  Non-subscribers, click here for access.

Subscription Plans

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! 

Tracking total Primary Dealer financing, as reported weekly by the New York Fed, shows us the approximate level of risk inherent in dealer positions. This analysis includes not only their outright positions, repo financing, but also net Treasuries borrowed, which is a proxy for short positions that hedge outright positions held. We then include dealer fixed income futures hedges. This combined view tells us whether they are long or short on balance. It also gives us a view of how leveraged they are. Non-subscribers, click here for access.

Subscribers, click here to download the report.

The dealers have gone whole hog in terms of repo borrowing and maximum leverage since September. They first got there in mid-July. That was reversed by a period of deleveraging that lasted into September, accompanied by weaker markets. But then they came roaring back, pedal to the metal, with maximum leverage. Non-subscribers, click here for access.

At the same time, money has poured out of the Fed’s RRP slush fund at a breakneck pace as investor psychology turned more and more bullish. The Fed even followed the crowd this week, suddenly pivoting its guidance toward rate cuts next year, surprising the markets. Non-subscribers, click here for access.

$900 billion in cash has come out of the Fed’s RRP facility since September. Market participants have used that cash to buy not only T-bills, but also stocks and bonds. Combine that with the increased use of leverage by the dealers over that same period, and a temporary reduction in Treasury supply in December, and the stock and bond markets have been on fire. Non-subscribers, click here for access.

This too shall pass, but the question is when. The Primary Dealer positioning data alone doesn’t tell us that, but it does give us an idea of the elevated level of risk. It suggests that when Treasury supply returns to normal, and the RRP slush fund runs dry, the markets could be in for a sudden and violent turn. Non-subscribers, click here for access.

I initially estimated in prior reports that the RRP facility was heading toward zero in xxxxx, but as the pace of withdrawals has accelerated in the past few weeks, we adjusted that to xxxxx. The current data through Friday suggests that that’s still the target. But before that, Treasury supply will mushroom again xxxx xxxx , and will be heavy in xxxxxx. The ruts in the road should start to show up then. Non-subscribers, click here for access.

With the Fed’s pivot in rhetoric this week, the euphoria has been thick. Light T-bill supply until xxxxxxx xxxxxxx xxxxxx should keep that going. Meanwhile investors and dealers have continued pulling money out of the Fed’s RRP facility at a breakneck pace over the past couple of weeks with no T-bill supply driving that. That means that instead of simply buying T-bills as they usually do with that cash, with the T-bills then being used as collateral for more repo borrowing, dealers and investors have gone to directly buying stocks and bonds. Non-subscribers, click here for access.

I see no reason for that to change over the next xx xxxxx. But a big Treasury coupon settlement in xxxx xxxxxx xxxxxxx should present a roadblock, with more supply in xxxxxx xxxxxxx xxxxxx xxxxxxx giving an overleveraged dealer market a reality check. Non-subscribers, click here for access.
.
When the 10-year yield hit 5%, we recognized that it was time for a bond rally. It has come with a vengeance. Now it is time to start looking for signs of a bearish turn there as we head into xxxxxxxx xxxxxxx xxxxxxx. Stocks should follow suit as investors wake up to the fact that the cash that fueled the buying frenzy will soon run out. Non-subscribers, click here for access.

Bottom line, I would not be xxxxxxx xxxxx xxxxxx xxxxxx but xxxxx xxxxxxx xxxxxx xxxxx. Non-subscribers, click here for access.

Subscription Plans

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! 

Back in the good old days of QE, liquidity analysis was straightforward. The Fed pumped money into the markets via the conduit of Primary Dealer trading accounts and stocks and bond prices went up. When the Fed paused a couple of times, prices also paused, even came down a little. Then the Fed would start pumping again and up prices would go.

Easy-peasy. Non-subscribers, click here for access.

Subscribers, click here to download the report.

We caught on to that game soon after the Fed started buying Treasuries direct from the Primary Dealers in March 2009. In fact, from the time I first started closely tracking the Fed’s daily open market operations against stock prices in 2002, we knew that there was a correlation. Non-subscribers, click here for access.

As a result, when they started QE, I was concerned that it would have a massive influence on the markets, creating a gross distortion with largely unknowable negative consequences. We then got to live the nightmare of central bank market manipulation for a dozen years. But at least it was easy to see and forecast cause and effect. Non-subscribers, click here for access.

From mid 2014 until late 2017 the Fed held steady. Then Janet Yellen began shrinking the balance sheet in late 2017, in what they called “normalization” and I called “bloodletting.” It didn’t work. The Treasury kept pedal to the metal in debt issuance and the market couldn’t handle it. This was despite the BoJ and ECB taking the handoff from the Fed. They printed like mad from 2015 through 2017 while the Fed was in pause mode. Non-subscribers, click here for access.

The ECB and BoJ got on board with “normalization in 2017-19. Stocks started to rebound after a hard selloff in 2018. Non-subscribers, click here for access.

Janet started the bloodletting in 2017, for which she gets no credit, and US stocks and bonds had a series of mild cases of diarrhea. That led to the September 2019 repo market “plumbing problem.” Yeah, it was a plumbing problem alright. The toilet got stopped up with TP—Treasury paper. Jay the plumber kneeled down and gave the market “Not QE.” It got quite a response. Non-subscribers, click here for access.

But the $400 billion of “Not QE” was a mere drop in the bucket compared to what was to come. The Pandemic Panic. The Treasury issued, and the Fed bought, a couple of trillion in new debt in the space of a couple of months. You see that on the left side of the chart. Then the Fed continued this new round of QE for another 18 months at a slower pace, despite the fact that it wasn’t needed. The US economy had already begun to recover and had gotten up a head of steam. Even the working poor got helicopter money. Of course, hedge fund operators continued to get paid, while Ma and Pa Saver continued to get zilch, i.e. ZIRP on their hard earned savings. Non-subscribers, click here for access.

All of that money printing made it easy to make money in the market. The Fed bought or financed almost all of the Treasury issuance. Fed credit begat animal spirits, private credit creation, and increasing leverage. Bulls were all geniuses, and bears were all idiots. Non-subscribers, click here for access.

It was easy because it was predictable. The Fed and Treasury always told us exactly what to expect in advance. More debt. More money. Non-subscribers, click here for access.

Now it’s not so easy. We’re still getting the more debt part of it, only the Fed ain’t payin for it any more. Nor are the ECB or the BoJ. Curmudgeons all. Non-subscribers, click here for access.

The Fed stopped QE and started draining money from the banking system with what we call Quantitative Tightening, or QT, in April 2022. Starting with the months where the Fed was ending QE, we had a bear market for 21 months. We see that in the center of the chart. Non-subscribers, click here for access.

Then, recovery began in October 2022 despite the fact that the Fed was still curmudgeonly. We see that on the right third of the chart. Non-subscribers, click here for access.

Just how did they accomplish that levitation act? The Fed had a trick up its sleeve. This report tells and shows exactly how it works, and how we know exactly when it will stop working. Non-subscribers, click here for access.

Subscribers, click here to download the report.

Subscription Plans

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!