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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!

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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One Banking Indicator Is Flashing Bright Red for Stocks

Lee Adler

The signal is coming from the ratio of xxxx xxxx to total bank deposits, as reported weekly in the Fed’s composite banking system data. That ratio is at an all-time record, tying the peak reached when the stock market topped out in December 2021. Non-subscribers, click here for access.

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It’s only flashing red, not solid red. It means that we must stop, look, and listen for the next few weeks to see if this signal goes full red stop, or back to flashing yellow. Non-subscribers, click here for access.

Other indicators similarly suggest caution. They’re not outright bearish for the big picture, but they’re in position to develop that way in the weeks ahead. By the same toke, they are also in position to break out and go higher. Non-subscribers, click here for access.

Taken together, it means that the market is at a significant inflection point. The information coming from the banking data in the weeks ahead should give us a significant signal on the market’s intermediate term direction. Non-subscribers, click here for access.

This report shows current charts so that you can see for yourself. I’ll track this data for you in the weeks ahead as we stay on the lookout for something big. Non-subscribers, click here for access.

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More Supply is Just a Lie But Withholding Weakens

Lee Adler

Market pundits worried this week about the coming massive increase in Treasury note and bond supply. There’s just one problem. It’s not true. The issuance schedule is exactly the same as first forecast in May. And T-bill supply is coming down. Non-subscribers, click here for access.

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But there’s a big problem despite that. Withholding tax collections have gone flat. This is real time, actual collections data, not some retrospective, manipulated government economic statistic. So we know that the jobs data is BS. Non-subscribers, click here for access.

A deeper dive tells us that there’s no immediate reason to expect material change in stock price trends. But at the same time, conditions for change will ripen over the next couple of months. We need to be ready. This report tells you what to look for. Non-subscribers, click here for access.

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Let the Scary Pictures On Primary Dealer Financing Do the Talking

Lee Adler

Dealer fixed income positions have shrunken recently. Is that because they are selling and deleveraging or is it because they must mark to market while their inventories lose value.  Non-subscribers, click here for access.

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It looks like the latter. Because they have been adding T-bills and taking on a massive amount of new leverage via the private repo route. It’s clear that that leverage is being put to use, and the evidence shows that it’s not going into the bond market. It’s going to stocks.  Non-subscribers, click here for access.

But what does it tell us about what the markets will do now? Here’s your answer.  Non-subscribers, click here for access.

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Correlations Don’t Matter Until They Do, Like Now

Lee Adler

I have been meaning for weeks to hunt for correlations in the data between bank loans to shadow banks and stock prices, and between bank repo loans to the direction of stock prices. The road to hell is paved with good intentions, right? I spent a couple of hours looking at the data every which way, and I found some occasional correlation, but other times there was none. Sometimes hunches don’t pay. It was a lot of time spent for nothing. But some time spent for something. Non-subscribers, click here for access.

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Where I continue to find a strong correlation is between the direction of the Fed’s RRP slush fund (down) and stock prices (up). That has been persistent over the past year. The evidence supports the idea I first put out here a couple of years ago. That is that when the RRPs would start coming down, it would be a bullish signal for stock prices. Here’s the proof, with the amount of RRPs outstanding plotted on a negative (or inverse) scale. See chart in report.  Non-subscribers, click here for access.

The implication here is that as long as the total RRPs are decreasing (rising on this chart), then stock prices are likely to continue rising.  Non-subscribers, click here for access.

So, we will continue to keep an eye on that. This week, there was an uptick in the RRPs, and stock prices started to waffle. A precursor to something? Maybe…  Non-subscribers, click here for access.

There are other signs that something big is about to happen.  Non-subscribers, click here for access.

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We’re Not There Yet

Lee Adler

The private money and credit creation process and the resulting bull market in stocks is at loggerheads with the Fed’s policy of shrinking the balance sheet. Traders and investors are now in clear violation of The First Commandment, Rule Number One, “Don’t fight the Fed.”  The question now becomes who blinks first. The lawbreakers, or the law? Non-subscribers, click here for access.

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A couple of high frequency, real-time measures show us important sources of the money funding this stock market rally. These measures should give us hints of when this process is coming to an end, which will correlate with, if not cause, a stock market top. Non-subscribers, click here for access.

So, if you fight the law, will you win? Here’s the answer. Non-subscribers, click here for access.

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