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Category: Fed, Central Bank and Banking Macro Liquidity

Analysis of the major forces of macro liquidity that drive markets. Click here to subscribe. 90 day risk free trial!

A Rally Can’t Live on Hope Alone

Lee Adler

If liquidity can’t explain a rally, it can’t sustain the rally. Non-subscribers, click here for access.

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Banking indicators provide us with measures of liquidity as it stood just a week and a half ago. Money market fund data is through last week. These measures are a pretty good expression of current liquidity trends. In case after case, these indicators xxxx xxxx xxxx support a long-term extension of the current rally. Non-subscribers, click here for access.

In fact, the concurrent rally in stocks and bonds is xxxxxxxx in liquidity terms. This tells us that we can play the rally on the basis of technical analysis, which has been bullish in the short run. But the liquidity picture says that the short run xxxxxxxxx xxxxxx xx xxxx xxxxxx longer. Non-subscribers, click here for access.

At this point, I xxxxx xxxxxx, and I am ready to xxxx xxxxxx at the first sign of xxxxxx intermediate term xxxxxxx. For the bond market, I’d be looking for that in December. For stocks, I will defer to my analysis in the Technical Trader, which I’ll post later in the pre market on Monday. Non-subscribers, click here for access.

 

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Fuggedaboutit! Treasury Supply Ain’t Going Away

Lee Adler

Despite what the pundits tell you, and despite the massive rally in the Treasury market over the past few days, the problem of Treasury supply isn’t going away. These rallies have come along like clockwork ever 6 months since the bear market started 40 months ago. This one gets its start from the same conditions that spawned the last 3 rallies. So is this time different? Non-subscribers, click here for access.

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No. Non-subscribers, click here for access.

Last week the Treasury reported out its quarterly refunding data, including the TBAC forecast for the next 5 months. Again, the Wall Street captured media was happy to report that the top was in in yields for the umpteenth time, and therefore the bottom was in for the bear market in bonds. The bear market that they seemingly just noticed in the past 4 weeks. When the 10 year hit 5%, the pundit parade hit the streets and the airwaves to declare that the top was in (bottom in prices). Just like all those other times Wall Street correctly called a bottom or top in any major market right on the button. Remember those times? Non-subscribers, click here for access.

So let’s look at a few facts, along with the charts of the 10 year yield to get an idea of just how far this latest rally will go, and to look at whether, indeed, the Treasury market low (or high, depending on which side of the coin you are viewing) is in for good. Non-subscribers, click here for access.

After doing that, as shown in the following pages, I came away with this: Non-subscribers, click here for access.

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Which to Believe, the BLS or Actual Tax Collections

Lee Adler

Well, it’s that time of the month again. What time is it boys and girls? It’s time to review the US Government’s end of month tax receipts for October. Those receipts tell us exactly how the US economy is doing, without the filter of Federal Agency statistical massage or Wall Street or government bureaucrats telling us what to think. Non-subscribers, click here for access.

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The monthly BLS fictional jobs report for October has already been reported, with a headline number of +150,000.  That’s the artistic impressionism of government statisticians at work. As a result, their first impressions for August and September were revised down by 110,000. So we have a net gain of 40,000 this month. Non-subscribers, click here for access.

Unlike the BLS artistic efforts, tax collections are reality. They tell us how the economy is really doing. Most importantly, they tell us whether there’s any change in the revenue trend that might affect forthcoming Treasury supply. That’s what matters, not the economy. Treasury supply is the 700 pound gorilla of the market. Non-subscribers, click here for access.

There’s been a lot of chatter in the Wall Street captured media this week about forthcoming supply because it’s quarterly refunding time. The media have finally realized that bonds are in a bear market. It only took them 39 months. We recognized it about 38 months ago. I was a month or so late there. Who knew! Once the Fed told us that it would stop buying almost all of the supply, we knew. Non-subscribers, click here for access.

Now the media has also glommed on to something that we’ve been tracking for, oh, only the last 20 years. The TBAC supply forecast. And naturally they are misinterpreting that, along with the meaning of the BLS nonfarm payrolls news. Non-subscribers, click here for access.

I will get to the Treasury supply data in a subsequent report which I hope to get out to you later today. For now, our eyes are on the October tax data, and withholding tax data through November 1, for what they tell us about the likelihood of any change in forthcoming supply. Non-subscribers, click here for access.

Of course, tangentially, the tax data will give us some insight into the direction of the US economy. I won’t say it’s irrelevant. It’s material in that a weakening economy means lower tax revenues and a stronger economy means smaller deficits and less supply. That would change the trajectory of the trend in yields, but not the direction, because unless supply is radically reduced, the market still can’t absorb it at a stable price. Non-subscribers, click here for access.

Do we need to know economic data to have a handle on Treasury supply? Not really, because we can see it from the tax trends, without trying to interpret statistically massaged, delayed economic survey reports. Non-subscribers, click here for access.

Lower revenue means bigger deficits and more supply. More supply would be catastrophic in a market under constant price pressure with existing levels of supply. If supply increases from here, the incipient rally in bond prices would be very short lived, and what comes after would be catastrophic. Non-subscribers, click here for access.

For now the rallies in both stocks and bonds are based on false perceptions. Enjoy them while they last. Non-subscribers, click here for access.

In this report we look at the charts and the data to explain what’s coming so that you’ll have a clearer understanding and a good idea of what to do about it that fits your situation.  If you are a professional, you can use this information to position your portfolio appropriately. If you are an individual investor, take this information to your money manager and tell them to subscribe to Liquidity Trader! Non-subscribers, click here for access.

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Here’s Why Macro Liquidity Still Signals Record Danger

Lee Adler

Composite Liquidity is flat and will almost certainly remain no better than flat for as long as the Fed continues to shrink its assets. There’s been just enough private credit creation, that is, money creation, to offset the Fed’s QT. So total liquidity goes nowhere. If bank deposits or foreign central bank purchases of US securities shrink, or if bank sales of Treasuries increase, the CLI will turn more negative. Non-subscribers, click here for access.

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That’s bad news for stocks and bonds, which have lately been doing poorly enough even with flat liquidity. That’s because constant massive Treasury issuance sucks more money out of the financial sphere than buyers of Treasuries have been creating by using repo to finance their purchases. Non-subscribers, click here for access.

Since the Fed started QT and liquidity turned flat, we have seen a shift in the overbought/ oversold parameters from what they had been under QE. We have an idea of where oversold is from the low one year ago. But as for overbought, we don’t have any idea. We only know that liquidity remains a constraint to upside progress, and an incentive for liquidation. So there’s reason to think that even if the CLI stays flat, the S&P will xxxxx xxxxx xxxxx xxxxx low around 3585. Non-subscribers, click here for access.

Meanwhile, an opinion I stated in June proved itself. Non-subscribers, click here for access.

6/6/23 Just imagine for a moment how bullish sentiment would become if the market tested the old high. The froth would be off the charts as virtually everyone would conclude that it was a new bull market. But without QE, it would not be. It would be a major top to end a cyclical bull market within a secular bear market. Non-subscribers, click here for access.

We’ll leave that determination to technical analysis. For our purposes here, the current liquidity tableau simply doesn’t support a long-term bull trend. But neither does it rule out an extension of the current rally. Non-subscribers, click here for access.

By July, Wall Street had turned bullish. Even the long-term technical indicators that I follow looked bullish. But these liquidity indicators were flashing red, which I noted in reports in August and September. Non-subscribers, click here for access.

The conditions that led to those red flashing lights have not been corrected. Non-subscribers, click here for access.

Such liquidity indications tend to precede long major cycle swings in prices. In that respect we are probably in the first stage of another major cycle bear market within a secular bear market similar to the late 1960s to 1982 and 2000-2009. Non-subscribers, click here for access.

Here’s the supporting evidence including charts showing exactly why we should expect this outcome. And I’ll tell how I’m looking at it tactically and strategically for your consideration. Non-subscribers, click here for access.

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Dealers Pull In Their Horns

Lee Adler

This report was originally sent yesterday under the wrong headline. 

Mid-July was a period of extreme risk in dealer positioning. The subsequent weeks until October 4 indicated a shift toward deleveraging that could become persistent, and persistently bearish, for both stocks and bonds. Any rallies would be swimming against the tide.  Eventually, they will be exhausted. Here are the pictures of the data that prove this view, and tell us what to do with it.  Non-subscribers, click here for access.

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Tepid Tax Collections Mean It’s the Supply

Lee Adler

Which stupid Wall Street is finally starting to recognize. You would think that after 3 years of a bond bear market they would have understood sooner. This reminds me of the markets of the late 1960s and 70s where I cut my teeth in this business. Every broker on the planet was shilling bond funds and the new fangled REITs as they all went to hell in a handbasket. Non-subscribers, click here for access.

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Withholding tax collections strengthened a bit in recent weeks, but not enough to narrow the deficit and meaningfully reduce the flow of Treasury supply. That supply has been gargantuan over the past month. That has caused the market to liquidate both stocks and bonds to absorb the new supply.

That should moderate somewhat in the next few months, but not enough to change the long term bearish outlook. This is an ongoing catastrophe whose effects have begun to show up across all asset classes as leveraged portfolio losses lead to liquidation pressures. Holders of leveraged bonds portfolios are forced to sell not only bonds, but stocks and whatever else they can get their hands on. It has had a deflationary pressure on asset prices.

In this report we look at the charts and the data to explain what’s coming so that you’ll understand what to do about it.

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The Rhymes of History

Lee Adler

I’m thinking in particular of the late 1960s to 1982, the era when I got my start in this business. It was a time of high inflation, tight money, rising interest rates and bond yields, and falling bond prices.

Sound familiar?

I want to replay comments from the August 16 update because they are important context.

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8/15/23 Liquidity analysis provides context, and some liquidity indicators, particularly those based on real time data, can give us timely hints of whether and when to expect a top, in conjunction with the TA. The banking data that I focus on here is released with a 9 day lag, but it can confirm what we’re seeing on the price charts. In addition, it often has enough lead time over the market trend that it can be timely in signaling and not just confirming a turn that’s about to happen. Non-subscribers, click here for access.

The Fed’s weekly H41 balance sheet data is, with the exception of occasional emergency measures, a constant until the Fed changes policy. The Fed’s balance sheet reduction program steadily reduces money in the system by a net of about $70 billion per month. That’s a discussion that we’ve had in other reports. That’s the key negative force that is a background constant which private money creation must overcome to drive stock prices in a persistent uptrend. Non-subscribers, click here for access.

Those forces were in control from May to July, but they’ve lost their grip since then. During the rally, animal spirits raged, and traders of all stripes were happy to take on more leverage to buy stocks. Lately, those animal spirits have flipped, especially over the past few days. Non-subscribers, click here for access.

How easily the market switches from greed to fear is a hallmark of the fact that with the central banks out of the money printing business, money creation is now entirely dependent on the willingness of market participants to borrow to buy. When they borrow and buy, collateral prices rise and money increases. The process is like a dog chasing its tail. When the dog gets tired, it just lays down on the floor. Non-subscribers, click here for access.

Over the past 3 weeks, traders tired of the game. Now they’re sleeping and prices are falling. They’d better watch out, or soon the margin man will come to the door to take the sleeping dogs to a kill shelter. Non-subscribers, click here for access.

We can get a picture of those forces from bank deposit data and bank repo data. Non-subscribers, click here for access.

Other key real time measures that we can watch are Money Market Fund Assets (MMF) and the Fed’s Reverse Repo (RRP) slush fund. During the rally in June and July, both shrank as investors piled into stocks. Institutional investors and hedge funds withdraw the money to buy stocks from their MMF. Banks and dealers also withdraw cash to buy stocks directly from the Fed’s RRP fund. Non-subscribers, click here for access.

Those funds have stabilized, and in the case of Fed RRPs rebounded a little, in August . It means that they’re selling, which we already know from watching the price charts, and depositing the proceeds back in their MMFs and Fed RRPs. Non-subscribers, click here for access.

This report updates the data and tells you exactly what it means along with what to look for and what to do about it. Check it out! Non-subscribers, click here for access.

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Here’s Why This Stuck Market Is Not Surprising

Lee Adler

Maybe we shouldn’t be surprised about the stuck market. No wonder it’s going nowhere. Flat is as flat does. Composite Liquidity is flat. There’s been just enough private credit creation, which is the same as money creation, to offset the Fed’s QT program. So total liquidity goes nowhere and stock prices are stuck, both over the past two months and since 2021. Non-subscribers, click here for access.

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It may feel like a big bull market since last October, but in the big picture, it’s nothing. What we are left with is a range of motion based on the usual market sentiment swings that happen regularly every 2-4 years. But those swings have limits. They are constrained by the liquidity trend.  Non-subscribers, click here for access.

The current composite liquidity picture tells us that we face a critical juncture in about two weeks. Here’s what the that picture  tells us about where stocks are headed next.  Non-subscribers, click here for access.

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Beware! Jobs Really Much Weaker Than They Say

Lee Adler

In the early August update we saw that withholding tax collections had gone flat. They have not improved since then. Collections remain weak. Non-subscribers, click here for access.

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BLS jobs reports have begun to adjust to that fact with tepid growth reported for August, but the reality is much worse. Over time the numbers will reflect that. But we don’t know when. Nor do we know how the market will react to the news when that adjustment finally comes. Non-subscribers, click here for access.

We do know however, that weak tax collections mean bigger deficits. Bigger deficits mean more supply. For the time being there are no increases scheduled in long term paper during the current quarter or Q4. The supply hits will come in the T-bills. And that often works in favor of stocks as market participants use the bills for collateral. It means more money and more leverage. Stock prices rise, but the system grows increasingly fragile as leverage increases. Non-subscribers, click here for access.

We live in “interesting” times, and the longer this goes on, the more interesting it becomes. There’s opportunity, and there’s risk. This report should help you take advantage of the former and minimize the latter. Non-subscribers, click here for access.

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Here’s Why This Is a No Clickbait Market for Primary Dealers

Lee Adler

Please feel free to carry on with your late summer vacation. So what if the kids go back to school. Why should you have to go back to work! Besides, most of our kids are grown. So sit back and enjoy these pre Labor Day dog days.  Non-subscribers, click here for access.

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Yesterday’s bond market rally appears to be but a brief respite in a relentless trend toward lower prices and higher yields. A reaction rally is nothing new, and isn’t likely to change the fact that a market steadily getting pounded with new supply when dealers are already net long, will continue to see generally lower prices until something changes. Change is xxxxxx xxxxxxxxx current picture, xxxx xxxxx xxxxxx xxxxx xxxxxx future.

That rally in the bond market notwithstanding, there’s no reason to change my long-term xxxxxxxxx view of the bond market. The pressure on bond prices ultimately will exact a price on stocks as well.

However, the key word is “ultimately.” These are not market timing measures. They merely provide context. These measures of primary dealer market risk say yes, there’s risk, but they are not at xxxxxxxxx that suggest an xxxxxxxxxxxxxx that stock prices are xxxxxxxxxxx another major xxxxxxxxxx.

This is just a lukewarm endorsement of the bullish trend in stock prices for most of this year. The pullback of the last month does not appear to be in the context of xxxxxxxxx xxxxxxxxxxx xxxxxxxxxx , either in technical terms or in terms of the liquidity context represented in this data.

All things considered, I can only endorse xxxxxxxxxxxxxxxxxx chart opportunities on xxxxxxxxxxxxxxxxxthe ledger, as opposed to xxxxxxxxxxxxxxxxxxxxxx. Non-subscribers, click here for access.

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