Category: 1 – Liquidity Trader- Money Trends

The game has changed and there’s not even a pitch clock. But there is a bond market loss clock. Right now, it’s on a timeout. The Fed has given it a lifeline and the Treasury will stepping up with its usual seasonal help in April.   Non-subscribers, click here for access.

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Money is the Fed’s game, but not even the Fed knows what’s coming next. It used to be that it kind of knew, and so did we. Rule Number One, “Don’t fight the Fed,” was easy to follow because the Fed told us in advance exactly what it would do, week in and week out, month in and month out. For 12 years, following QE to ever higher asset prices was a no-brainer. Non-subscribers, click here for access.

No more. The Fed is flummoxed, a victim of its own blind hubris. So now it’s making up willy-nilly firefighting tactics on the fly. Under the circumstances, how do we predict what’s coming? How do we trade that which isn’t known. Do we just guess? Non-subscribers, click here for access.

Now, because it’s always about following the money. While we know less now about how that will look in the months ahead, it’s ditto for everybody else. The market will not be able to anticipate policy correctly. Non-subscribers, click here for access.

Not that it ever did. I’ve observed through the last two decades especially, that the market follows the money. It doesn’t lead it. The market responds most forcefully and persistently to actual changes in the level of liquidity, not to speculation about what the Fed will do and when will it do it. Money talks and Wall Street BS walks. Non-subscribers, click here for access.

So, in theory, if we follow the money in a timely way, we should still be able to stay on top of the game, to react correctly in time, if not in advance of what’s coming.  Non-subscribers, click here for access.

As a result, I’ve been thinking about and experimenting with better ways to get critical information out to you. I want it to be faster, shorter, and more on point. In the bad old days of QE, things were different because the Fed telegraphed what was coming for weeks and months in advance. Now, they don’t know, so neither do we. So, like the Fed, we need to be reactive, because the unknowns coming at us are greater than the knowns. Non-subscribers, click here for access.

The trick will be to react quickly and correctly when we see actual changes in liquidity flows. One of the most important ways to do that, will be, as it was before, tracking the Fed’s weekly balance sheet statement.  Non-subscribers, click here for access.

Looking at the data we have now, we know that for the next 6 weeks, the markets should xxxxx xxxxxx xxxxxxx xx xxxxx, and that’s bxxxxish. But sell in xxxxxxx xxxxx xxxx xxxxxxx. Non-subscribers, click here for access.

Here’s why, and what that means for investors. Non-subscribers, click here for access.

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The Fed is playing a new game. The problem is that nobody knows what the rules are, not even the Fed. In fact, nobody even knows what the game is. Especially not the Fed. Non-subscribers, click here for access.

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So now we’re faced with contradictory policy aims. They can stabilize the banking system in the short run, or they can continue to fight inflation. But, sorry, they can’t do both. Non-subscribers, click here for access.

The policy tools for each are not only different, they are mutually exclusive. Continuing to fight inflation will cause the final collapse of the financial system. Reflating the financial system now will bring simmering inflation to a full boil. Non-subscribers, click here for access.

They’ve opted for that. Then what comes after? And what can we investors do about it to protect ourselves. Non-subscribers, click here for access.

The answer for now is, … Non-subscribers, click here for access.

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It’s that time of the month again. The tax collections are complete for February so we know how the jobs market really did for the month. Meanwhile, the BLS will announce its fictitious jobs number for the month a week from tomorrow, which is a week later than usual.

The BLS bases its estimate on a haphazard and poorly conceived survey of employers, which the BLS then manipulates to the point of uselessness. Furthermore, apparently fewer employers are taking part in the survey, rendering this monthly exercise even less accurate than in years past. When it wasn’t very accurate to begin with. Subscribers, click here to download the report.

BOTTOM LINE: Revenues were weak. The jobs number should be weak. But fade any rally on that, both stocks and bonds, because xxxx xxxxxxx xxxxxxxx xxxxx xxxxxxxxxx xxx xxxxx. 

Here’s what’s critical for you to know. Non-subscribers, click here for access.

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Yesterday, February 15, 2023, a day that will live in… nobody’s memory, the S&P 500 closed at 4147.60. It first notched that price on the way down on April 29 of last year. Since then the market has traded through this level on no fewer than 19 days.

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In other words, the market has been range bound for nearly 10 months. And so it would seem that everyone can claim victory, bulls, bears, and the flat market crowd, whose number are legion. Not. But because no one is wrong, all of the children of Wall Street are above average, while the stock market is… average. Non subscribers, click here to read this report.

The liquidity picture has told us that the market should be lower, mainly because the Fed is draining $95 billion per month from the banking system and the markets. At the same time, the US Treasury has continued to pound the market with supply (mostly) even with the debt ceiling holding back an increase in the total debt in recent weeks. Non subscribers, click here to read this report.

I say “mostly” because there have been periods of a month or more where the US Treasury, in its infinite wisdom, has decided to pay down hundreds of billions in outstanding US Treasury bills. We’ve recounted those moments here as they happened. Non subscribers, click here to read this report.

When the Treasury does that, it is, in essence and actuality, pumping that money back into the markets. Holders of the T-bills get cash back, and some of those holders use some of that cash—economists say “at the margin”—to buy stocks or bonds. So, typically, during periods of paydowns the asset markets move higher because those erstwhile holders of the T-bills being redeemed, buy stocks or bonds with the cash they get back. Non subscribers, click here to read this report.

Partly as a direct result of that, we saw the lowest low in stock prices last October. But the paydowns had a secondary effect. I recounted in these pages recently that the paydowns enabled the Primary Dealers to do some balance sheet repair, despite the Fed pulling cash out of the banking system via QT. Non subscribers, click here to read this report.

The Primary Dealers are still required to pick up their fair share of Treasury issuance. The burden the has been particularly difficult without the Fed taking that inventory accumulation off their hands as it did under QE. However, the US Treasury’s big campaigns of T-bill paydowns also sent cash back to the Primary Dealers who held some of those bills. They used the cash not to buy more T-bills, but to pay down the repo debt behind the original purchases. They were able to reduce leverage, and position themselves to take on more inventory. Which they have done. Non subscribers, click here to read this report.

Regardless of that, we had seen from the banks’ weekly data on their fixed income holdings that some of them were sitting on hidden losses in their not-marked-to-market long term portfolios. I forecast that we would soon start to see some of them in trouble as they were forced into liquidation mode. So far, only CreditSweets (CS) has floated to the surface, but there are surely other bloated bodies about to be revealed, as the current round of falling bond prices persists. Non subscribers, click here to read this report.

Since October, stocks have made a higher low, followed by a higher high. Transpiring over 4 months, it looks like the start of a bull market. But in my recollections, it would be the weirdest start to a bull market that I’ve seen in 56 years of closely following markets. They typically don’t start until the Fed starts reversing tight policy. Non subscribers, click here to read this report.

Wall Street likes to think that markets anticipate; that they discount the future. They don’t, and they don’t. So I don’t agree that this market is correctly anticipating anything. It has merely been bouncing around on temporary shifts in government liquidity manipulation. Non subscribers, click here to read this report.

I won’t try to directly correlate these actions by the US Treasury with market movements. Others have purported to show that a direct day to day or week to week cause and effect relationship exists. While it is indeed cause and effect, it’s not predictive on a daily basis. It works on trends. Non subscribers, click here to read this report.

First of all, the timing of the deployment of the cash varies among recipients. And second, they choose to deploy it in different asset classes—i.e. stocks, bonds or “other.” If Goldman is going one way on a particular day and JPM is going another it’s not going to show up on the charts as a coherent message. When the Fed is creating a surfeit of cash, it doesn’t matter. But when cash is relatively scarce, it makes a difference. Non subscribers, click here to read this report.

Technical analysis remains the best method for estimating timing of market effects, and in rangebound, illiquid markets, even that is fraught with peril. Non subscribers, click here to read this report.

Last week, we talked about the bizarre decision by the US Treasury to issue even MORE short term debt, while under the constraints of the debt ceiling. Non subscribers, click here to read this report.

This week (February 13-17), the Treasury has shown that it intends to continue pounding the market. Here’s the issuance table since January 31. Another $34 billion today, and $23 billion next Tuesday. That’s on top of the $153 billion in bills since January 31. How in the world are the markets absorbing that without being torn apart? Non subscribers, click here to read this report.

I have the answer, and now you do too. It’s information that will help you understand this game, and win at it. Non subscribers, click here to read this report.

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I started this update before the jobs report, was interrupted, and came back to this Yooge upside surprise. I apologize for this reading being disjointed. However, it’s clear that this BLS report is makeup for severely understating the December jobs gain, which was apparent from the huge surge in December withholding. January’s withholding has largely reversed that. Here’s what this means for your trading.

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