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Category: 1 – Liquidity Trader- Money Trends

How Fed and Treasury policy, Primary Dealers, real time Federal tax collections, foreign central banks, US banking system, and other factors that affect market liquidity, interact to drive the financial markets. Focus on trend direction of US bonds and stocks. Resulting market strategy and tactical ideas. 4-5 in depth reports each month. Click here to subscribe. 90 day risk free trial!

We Can Now Project When Fed Will Pause, But Not Reverse

Lee Adler

The PPI reading on Wednesday includes data which now enables us to project when the Fed will stop raising the Fake Funds rate. I call it fake because it merely mimics the market, but isn’t actually the short term money market. Nevertheless it’s what the Fed and the Street want you to pay attention to, and it’s what most sheep do pay attention to. I say Bah!

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I was able to make this projection using a highly sophisticated algorithm developed by artificial intelligence, that being my brain drawing trendlines. It’s a technique that I have developed over my nearly 60 years of studying technical analysis, including 40 years of computer generated analysis. Non-subscribers, click here for access.

Naturally this formula is far too simple, direct and obvious to be recognized by the high priests of Economism. But I have spent my life specializing in simple, direct, and obvious, which is all that I am capable of. And so, I will attempt to the best of my ability to illustrate it for you. Non-subscribers, click here for access.

Using this secret algorithm I was able to determine that the Fed should announce a pause in rate increases next xxxxxxx. The market will briefly celebrate that, but that will be a big mistake. Because the Fed has never actually raised rates and rates aren’t the problem. They are a symptom. The market has driven rates up and the Fed has rubber stamped that, while never quite getting to where the market already was. Non-subscribers, click here for access.

Now, for the illustration of how xxxxxxx was projected to be the point at which the Fed decides to pause. xxxxxx is when the trend of the Fed raising the Fake Funds rate intersects with a somewhat likely trend of the Fed’s favorite inflation measure, the Core PCE. Non-subscribers, click here for access.

CHART Non-subscribers, click here for access.

I use the just reported PPI for core final demand consumer goods (PPI-CFDCG) as a leading indicator of where the PCE is likely to be headed. The PPI-CFDCG dropped from an annual rate of +8.5% to +8% in September. This was the first decline in this series, which tends to lead CPI and the Fed’s favorite measure, core PCE, by anywhere from 3 to 12 months. Non-subscribers, click here for access.

Note that this downturn follows the beginning of the Fed’s Quantitative Tightening or QT, by 6 months. That’s also normal. Non-subscribers, click here for access.

I then drew a trendline extrapolating this downturn into the future. The validity of doing that is supported by the fact that the upswing rose on nearly a straight line basis as it followed Fed pandemic era QE with a lag of about 6 months. As goes the money supply, so goes inflation, the one thing that Milton Friedman got right. Non-subscribers, click here for access.

By the way, “inflation,” doesn’t mean only consumer prices. Inflation is classically defined as a rise in the general level of prices. General means everything. That includes asset prices. Modern priests of Economism exclude asset prices from the definition of inflation, so that they can conveniently ignore the jillion percent increase in asset inflation we’ve seen over the past 13 years. Non-subscribers, click here for access.

The only inflation they accepted as real was consumer price inflation. And that is utter nonsense. The refusal to recognize asset price inflation as an element of general inflation is at the very crux of the intractable problem we face today. Now we must pay the price for that willful ignorance. Non-subscribers, click here for access.

So now we see the impact of reducing money supply on both types of inflation. The problem the central banks have in their drive to reduce consumer price inflation is that asset prices react immediately and directly to tightening money supply. Consumer prices react with a lag. Asset prices, both stocks and bonds, have already collapsed. Consumer prices haven’t budged yet. Non-subscribers, click here for access.

And now we can see that this process will continue for months. It has the potential to cause unfathomable financial destruction. Non-subscribers, click here for access.

This is a huge problem for Wall Street. Because of the nature of the Fed’s inflation fight, the tightening of money supply versus rising money demand, is absolutely destroying asset prices in a process that will continue until the Fed stops tightening. Non-subscribers, click here for access.

Again, the Fed Funds rate is irrelevant. To halt the downtrend in asset prices, the Fed must stop reducing the money supply and must start increasing it again by an amount sufficient to absorb almost all Treasury issuance.  Non-subscribers, click here for access.

The Fed pretends that it will only stop tightening when the Funds rate that it sets every 6 weeks is supposedly neutral. The Fed’s focus is on the PCE, and the PCE follows the curve of the PPI finished core consumer goods series by a few months, at a lower level. We can therefore project the trend of PCE by mimicking our favorite PPI trend as I showed in the chart above. Non-subscribers, click here for access.

In so doing, the falling core PCE would meet the rising Fed Funds rate in xxxxxx. The Fed will yell “Pause” in a crowded theater, and everybody will rush into the market. There will be a buying panic when that happens. Non-subscribers, click here for access.

But the buying panic will quickly die and the collapse of asset prices will resume unless the Fed also reverses from QT back to QE. Because the money market would otherwise continue to tighten, and short term rates would resume rising. Non-subscribers, click here for access.

The markets get a break in xxxxxxx because the US Treasury xxxxxx xxxxx xxx xxxxxx xxx then. That enables the Treasury to pay down T-bills in xxxxxxxx xxxxxxx xxxxxxx xxx x xxxxxxxx.  This will take the pressure off the money market for a few weeks in this coming xxxxxxxx. Non-subscribers, click here for access.

But supply pressure will explode in xxxxxxx because the xxx xxxxxxxx xxxxxxx xxxxxx xxxxxx that month, while at the same time tax revenue xxxxxxxxx xxxxxxxxx xxxxxxxxx xxxxxx xxxxxxpoints of the year. The government’s cash need will soar, and so will its short term borrowing. At that point the markets are very likely to crash again. Non-subscribers, click here for access.

I say again, because the supply demand imbalance in the financial markets between now and xxxxx xxxxxxxxx xxxxxxxxx xxxxxxxx will be the worst it has been in this market. There will be immense pressure on asset prices for the next xxx months. The conditions for a crash are in place. That may force the Fed to act weeks before it gets Fed Funds to a so-called “neutral” rate, which looks like x.x%. A xx and a xx would get us there. Non-subscribers, click here for access.

Surprise, surprise, surprise! This is essentially the consensus outlook. But so what! Non-subscribers, click here for access.

The destruction of stock and bond prices will be epic by the time this rate path is complete in January.  Might that be enough for the Fed’s resolve to crack before they’ve gotten to x.x%? Of course. Or might the Fed hold out until that x.x% rate is reached? Sure. We just don’t know. Non-subscribers, click here for access.

But remember, the Fed merely follows market interest rates, such as on the 13 week T-bill. That rate is merely a meter of just how tight the money market supply-demand balance is. And it is the imbalance of supply of securities over effective demand for them that causes falling prices, and their mirror, rising short term rates and bond yields. Non-subscribers, click here for access.

The dynamic of prices trending lower WILL NOT CHANGE until the Fed reverses from QT, back to QE. And it must do so in enough size to once again absorb most Treasury issuance as it did during the 12 years of the bull markets. Non-subscribers, click here for access.

Anything less than aggressive QE will not end the bear markets in stocks and bonds. It may alter their courses. It will generate rallies on the bear market slope of hope. But it will not end the bear markets. That would take a massive policy reversal by the Fed. Non-subscribers, click here for access.

The other thing to keep in mind is that it will do us absolutely no good to anticipate this so called Fed “pivot.” Markets turn on money flows. The bear market will end when the Fed supplies enough money to end it. Any speculation on when it will end, even if the guess is correct, will hold no advantage whatsoever. What’s the point of being early? Non-subscribers, click here for access.

Buy the markets when the monetary facts change. Not before. Non-subscribers, click here for access. 

Simple, direct, obvious.

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Look Out For the Real Fallout of Declining Withholding Tax Collections – Part 2

Lee Adler

We track Treasury supply because Fed policy comprises only one side of the supply/demand equation. Treasury supply makes up the bulk of the other side. The information we have on Treasury supply is known, either in advance or at least in real time. Tax revenue is the primary determinant of changes in supply. We merely need to monitor the tax revenue trend, and legislation that affects the Federal Budget to get an idea where supply is headed in the near term.

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We’ve now seen xxx months of falling withholding tax collections. That’s a xxxxx, but it was mitigated in September by very strong quarterly estimated individual and corporate taxes. But those are lagging because they are based on the third quarter as a whole, not just September. Non-subscribers, click here for access.

On the other hand, excise tax collections were up, an indication of strong retail consumption. So that’s a fly in the ointment in terms of the idea that the economy is contracting. But it’s too small an item to matter to total revenue.   Non-subscribers, click here for access.

September revenues got a boost from quarterly estimated taxes, as always. We expected that. As a result, the Treasury paid down a significant amount outstanding T-bills during the month. Again, no surprise. But it certainly didn’t help the markets much. Maybe the Treasury market a little toward the end of the month. But if that’s all a “good” liquidity month can do, watch out for the next two months. Non-subscribers, click here for access.

The point is that September was as good as it gets, and as good as it will be, until xxxxxxx, when the xxxxxxxxx xxxxxxxx xxxxxxxxx xxxxxxx will again create a temporary budget surplus. That will be used to pay down T-bills again. But xxxxxxx xxxx xxxxxxxx will be a drought, with heavy Treasury supply, which would be made worse by weakening tax revenues. Non-subscribers, click here for access.

The Fed will exacerbate the problem with QT. It will tell the Treasury to redeem $60 billion a month of the Fed’s Treasury holdings. That’s an extra $60 billion a month in Treasury supply that the US government will need to issue so that it can repay the Fed. Investors and dealers will be forced to absorb that, because the Fed cavalry isn’t riding to the rescue to take up the bulk of supply.  Non-subscribers, click here for access.

The xxxx xxxxx months will be the worst supply demand imbalance we have seen so far in this bear market. I would expect both stock and bond prices to xxxx xxxxxxx xxxxxxxx xxxxxxx. Any rallies should be xxxxx xxxxx, and should xxxxx be xxxxxxxx xxxxxxxxxxx. Non-subscribers, click here for access.

Furthermore, xxxxxx the xxxxxx will continue to be a really bad idea, just as it has been all year, unless you plan on, and in fact do, xxxxxx the xxxxx. Non-subscribers, click here for access.

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Look Out For the Real Fallout of Declining Withholding Tax Collections

Lee Adler

Federal withholding tax collections declined in September for the third straight month. Predicting the BLS jobs data is always a crapshoot, but after 3 months of real weakness in withholding taxes, this should be the month when reality catches up with the BLS.

But will the BLS report a decline, when the consensus is for a gain of 275,000 jobs? Not likely.

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But more importantly, declining revenue means more harsh reality for the Treasury market in the form of more supply than the TBAC had forecast that the Treasury would issue. We can’t project that indefinitely, but at least in the near term it means additional supply on top of already heavy forecast supply. Non-subscribers, click here for access.

And that has implications for the market, which I cover for you in these reports. Non-subscribers, click here for access.

9/3/22 But the fact is that if tax revenues are weakening, Treasury supply will only increase, regardless of what Wall Street says about the economy. Treasury supply will increase just as the Fed requires the Treasury to add $60 billion a month in new debt sales to the public to pay off the Fed. Non-subscribers, click here for access.

In addition to that extra supply from QT, and a weaker economy, the Fed is causing demand to weaken. Not only is  the Fed no longer the primary buyer and financing agent in the market, but it is also choking demand by removing the cash from the banking system that would otherwise be available to fund Treasury purchases. Non-subscribers, click here for access.

The accompanying weaker economic data will be spun as bullish, while in fact it will not be. At least at first. The bottom line is that the weaker tax revenues are not bullish. It will only be bullish when the Fed finally reverses policy. All I can say is, “xxxx xxxx xxxx!” Non-subscribers, click here for access.

Here’s how to view the data, and what it means for investment strategy and tactics. Non-subscribers, click here for access.

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Markets Face Catastrophe as Dealers Mitigate Too Little Too Late

Lee Adler

The dealers have significantly hedged their bond longs since April, but the price damage that we expected, in both bonds, stocks, and everything else, was an inevitable result of that. To deleverage means to liquidate existing positions. Liquidate means sell. The dealers and their biggest customers have been doing just that. To build up hedges, they’ve also been selling futures, adding to the pressure.

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But unfortunately, they reduced hedges during the recent bond market selloff. The dealers are the Wrong Way Marshalls of the bond market.

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This market selling pressure comes as no surprise to us. The forces of this spiral have been building for the past two years, first as Treasury supply overwhelmed the market beginning in August 2020, and then subsequently, as the Fed moved to tighten policy.  The dealers have never been properly positioned for this. It’s the mirror image of their massively wrong positioning in 2007 that triggered the 2008 crash. Non subscribers, click here to read this report.

The problem now is that their hedging may not be enough. The spiral of falling prices, collateral calls, and more liquidation has now taken on a life of its own. The technical analysis of the Treasury market says there’s more of that to come, with conventional price projections pointing to the xxx% range on the 10 year yield as the next target for the bond market. Needless to say, that should also be catastrophic for US stocks. Non subscribers, click here to read this report.

From past reports:

7/27/22 The bottom line is this. Don’t be fooled by what the media is touting as a massive rally in bonds. Yes, it looks big, and it probably has a little further to go over the next couple of weeks. But in the big picture, it’s nothing. And it’s likely to stay that way. Non subscribers, click here to read this report.

Meanwhile, the dealers have mitigated some of their risk, but they and their big bank parents remain at great risk if bond prices start declining again. That should happen as liquidity begins to tighten again in the second half of August. Non subscribers, click here to read this report.

The bond rally should have a bit further to go, but I’d be a seller on the first technical signs that the trend is turning. And when bond yields start to rise again, and bond prices start falling again, I’d expect stocks to suffer from the same adverse liquidity factors that would be pulling the bond market down.  Non subscribers, click here to read this report.

LATE BULLETIN! HOLY COW, as I was proofreading this report, I just checked the Treasury issuance schedule for this week, and the Treasury will issue $40 billion in new T-bills on Monday. That will upset the apple cart, but at this point I won’t rewrite this entire report. Let’s just accelerate the time frame for when I expect the market to begin experiencing tighter liquidity from mid-month, to the beginning of August. We need to be on the lookout for signs of reversal in the bond rally sooner that I originally thought. Non subscribers, click here to read this report.

But at least this news confirms my earlier forecast that the T-bill paydowns would end in July, making for tighter liquidity in conjunction with the Fed’s QT program. And lest we forget, they plan to double the amount of system withdrawals in that program beginning in September. Non subscribers, click here to read this report.

6/13/22 Primary dealers have finally taken aggressive action to mitigate the losses in their bond portfolios. But it is too late. The damage is done, and the pressure will only get worse as the Fed pulls money out of the banking system and forces the Treasury to borrow even more money to pay off the Fed. Non subscribers, click here to read this report.

In everything we look at in the Primary Dealer positions and related data we see only stress and more stress. This is unfolding exactly as we expected. There are no secrets here. We knew all this was coming simply by watching the data and Fed policy as we have month in and month out. It only proves again and again, Rule Number One. Don’t fight the Fed. Non subscribers, click here to read this report.

Shockingly, the Dealers seem not to have followed the Rule, and now they’re screwed, and so is the world of investors. For those who can’t sell short, there are no good options. No pun intended. Non subscribers, click here to read this report.

5/14/22 That all means that a double whammy will hit the market in mid June, at a time when Primary Dealers and the banking system are already weakened by huge losses in their bond portfolios. Some of these highly leveraged dealers will be forced by their lenders or their parent bank holding companies to liquidate anything that they can to pay back the margin and repo loans that funded the purchases of all this paper. Non subscribers, click here to read this report.

There are no doubt other big leveraged players out there with massive losses that will be forced to liquidate by margin calls. The selling will not be limited to the bond market. It will hit stocks too, and anything else that isn’t tied down. Non subscribers, click here to read this report.

If this analysis is correct, the weakness that we have seen in the market over the past couple of months will be seen as but an opening act. Conditions will worsen. Stocks and bonds will decline even faster this summer. Non subscribers, click here to read this report.

Consequently, the strategic and tactical outlook remains the same. Sell all rallies. Non subscribers, click here to read this report.

4/11/22 So what would I do with this information? The same thing I’ve been doing for the past 20 months.  They’re gifts to us on the way to Dante’s Inferno.  If I owned bonds, I would sell them. If I owned stocks, I would sell them. And I would keep looking for stocks to short on the rallies. Non subscribers, click here to read this report.

I know. Cash is trash when inflation is high and interest rates are negative to inflation, but it’s less trashy than assets that are actively losing value. The strategy that I think makes the most sense in such an environment is to trade stocks from the short side. I publish the weekly swing trade chart picks for those who are looking for ideas along those lines.  https://liquiditytrader.com/index.php/category/technical-market-timing/ ….Non subscribers, click here to read this report.

The problem after that is that the Primary Dealers and the biggest banks who own them have enormous hidden losses that aren’t showing up yet on bank earnings statements or balance sheets.  As market conditions tighten in the second half of this year and margin calls beget losses, which beget more margin calls, those hidden losses will start to show up. Banks will be forced to liquidate some of their assets and will be forced to report some of those losses. Non subscribers, click here to read this report.

2/20/22The bottom line is that the financial market is moving toward a crisis. Fast. It will continue to do so as the Fed cuts QE first to zero. It will do so even more as the Fed shrinks its balance sheet by allowing maturing paper to be paid off rather than rolled over. If they do that, the pressure on on Primary Dealers will only get worse. They have not established the net short positions needed to manage it. Non subscribers, click here to read this report.

On average, their positioning is not good for a decline in bond prices (rise in yields.) Some Primary Dealers are probably well positioned. That means that some, if not most, are not. Those who are not well positioned are almost certainly already in trouble. Non subscribers, click here to read this report.

This won’t end well.Non subscribers, click here to read this report.

I’ve opined to stay away from the bond market for the past 18 months. Nothing has changed. Bond rallies are selling opportunities. The pressure on the bond market has infected the stock market, and will continue to do so. I continue to look for swing trade short selling opportunities in the Technical Trader reports. Non subscribers, click here to read this report.

1/25/22But now the Fed is getting out of the buying business. No more backstopping the dealers with constant massive funding. Meanwhile, the dealers are still REQUIRED, by virtue of their status as Primary Dealers, to still buy Treasuries. Non subscribers, click here to read this report.

How exactly will they be able to do that without steadily being cashed out by the Fed to the tune of a hundred and some billion per month, month in and month out? Non subscribers, click here to read this report.

The Fed will probably tell us tomorrow that it’s going to zero purchases after March.  The dealers must keep buying. There are only two ways they can fulfill that responsibility. They’ll either have to sell stuff first. Stuff, as in other Treasuries, other fixed income instruments, OR, drum roll please…… Stocks! Or they will need to borrow more money, that is, increase their leverage even more. Non subscribers, click here to read this report.

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Fed Speeds Into Dead Man’s Curve, More Black Tuesdays Ahead

Lee Adler

The Fed remains shockingly behind the curve in raising rates. It hasn’t even been fully rubber stamping the market’s moves. This isn’t a yield curve or an inflation curve. It’s a dead man’s curve. The Fed will speed into it in an effort to try to catch up with inflation. You don’t want to be in the vehicle when it crashes.

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There Will Be More Black Tuesdays

Lee Adler

What happened in the stock market on September 13 (-178 on the S&P and -1276 on the Dow), was inevitable. The timing was a complete surprise, at least to me, but sooner or later, there would have been a day like this. And I’ll go out on a limb and say that there will be more of them… until the Fed reverses course.

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Special Bulletin – T-Bill Paydown

Lee Adler

In the last Treasury Supply update for subscribers I warned that the Treasury could do a big T- bill paydown at mid month, but that it was not certain. It would be short term bullish if it does. There’s a complete discussion of the implications of that in that report, with more to follow in the next update.

Today, the Treasury confirmed that it will do a $60 billion T-bill paydown on September 15. That’s enough to fund almost the entire coupon issue the same day.

 

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Withholding Tax Collections Collapsed in August But BLS Data Didn’t Show It – Part Two

Lee Adler

Part 1 is here.

First, I want to reinforce the point that there are no accidents. So I’ll rehash the summary of this monthly tax revenue report as a reminder of the progression of how we got here.

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The information we have on supply is known, either in advance or at least in real time. We merely need to monitor the tax revenue trend, and legislation that affects the Federal Budget and therefore, Treasury supply. We track Treasury supply because Fed policy comprises only one side of the supply/demand equation. Treasury supply makes up the bulk of the other side. Non-subscribers, click here for access.

8/2/22 Federal tax collections were solid in July. The recession that mainstream economists have been predicting, may be coming. I don’t know. But it’s not here yet. Withholding tax collections are still going gangbusters despite a bit of slowing in July. Non-subscribers, click here for access.

That slowing isn’t out of the ordinary. Collections fluctuate month to month. They’re still solidly positive on balance. Non-subscribers, click here for access.

Government finances also benefitted from a sharp drop in spending. The usual July deficit became a surplus. Non-subscribers, click here for access.

Treasury supply was therefore light. In fact, nonexistent for the first 3 weeks of the month.  There were $12 billion in net paydowns from July 1 to July 21. The markets were flooded with cash. Non-subscribers, click here for access.

The bond market had a stupendous rally. I had expected bonds to rally based on the light supply, but this was ridiculous. As usual, Wall Street overdid it. Now the time has come to pay the piper. [Reminder- this was posted on August 3.] Non-subscribers, click here for access.

While revenue growth shows no sign of going negative, Congress just passed a spending package that will increase spending. The deficit will begin to grow again. That translates to more Treasury supply. At the same time, investors and dealers will have less cash to absorb it. That will translate to lower prices and higher yields. Non-subscribers, click here for access.

We already saw the effects of the Treasury running out of excess cash in the last couple of weeks. T-bill paydowns ended as I had projected they would in July. New T-bill issuance is suddenly mushrooming. This will pull cash out of dealer and investor accounts and into the US Treasury, which will instantly spend it to pay its bills and obligations. Non-subscribers, click here for access.

That spending increase might even keep the US economy perking along at a solid growth rate, surprising Street economists and portfolio managers. But the cash to support that growth will come from investor accounts and dealer accounts. More money for economic spending, less money for stock and bond purchases. Non-subscribers, click here for access.

The bond rally should reverse, perhaps violently. The stock rally should also end. If there’s something that would sustain these rallies, I haven’t thought of it. [Again, all posted August 3] Non-subscribers, click here for access.

The end of month data for August looked better than it was… Here’s why, and what it means for the markets, looking ahead. Non-subscribers, click here for access.

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Withholding Tax Collections Collapsed in August But BLS Data Won’t Show It

Lee Adler

Federal withholding tax collections declined in August. This was the second consecutive monthly decline after rising sharply and persistently throughout June.

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Collections steadily declined throughout the month. This is consistent with the usual 3 month pulse of the US economy, where it accelerates for the first 6-7 weeks, then slows for the second part of the period. However, the current slowdown started earlier than usual and has therefore had a longer downstroke. That downstroke is due to end now. Non-subscribers, click here for access.

Despite the slowdown, revenue growth year to year remains positive, thanks to employee earnings inflation.  From the perspective of the markets, only nominal revenue matters, not the real economic growth rate. Because revenue is a key determinant of Treasury supply. Non-subscribers, click here for access.

Nominal withholding grew xx% year over year. That would be great except that it’s a big drop from the +11.3% at the end of July. Non-subscribers, click here for access.

It suggests a rapid slowing in the US economy. But it’s only slightly weaker than the xx% gain 3 months earlier, at the end of May. As JP Morgan said, markets will fluctuate. Well, guess what! So does US economic activity. Non-subscribers, click here for access.

So is the US economy decelerating or not? With wage inflation reportedly hovering around 5-5.5%, the xx% gain in withholding tax suggests that jobs growth has xxxx xxxx xxxxx. However, this should be the trough of the normal 3 month cycle, and it is no lower than the last two troughs. While the short term cyclical breather phase is a bit more extended than usual, there’s been no breakdown from the range of the past 6 months. The economy is xxxxx xxxxx xxxxxx, not xxxxxxxxxxxx. Non-subscribers, click here for access.

Of course we never know what the BLS jobs release will show. Instead of reflecting the data collection date of the 12th of the month just completed, I’ve gotten the impression in recent months that it relates more closely to where things stood at the end of the previous month. So it’s possible that the BLS imaginary number for August will reasonably strong positive growth, reflective of July tax collections, even though we know from the tax data that the jobs market began to collapse in the second half of July and continued through August. Non-subscribers, click here for access.

The monthly average has a little over two weeks of built in lag. The 5 day average of collections is whippier, but gives us a picture of weekly action in near real time. That rolling 5 day average held above the June low, but edged slightly below the February lows twice during the month. These were not material breaks. Non-subscribers, click here for access.

On the other hand, you can see in the above chart that the trend of the 11 day total collections, which is the whippiest of all, but still subject to trends, has been xxxxxxxxxxxxx xxxxxxxxx xx xxxxxxxxx xxxx xxxx xxxx  the February-June lows. Non-subscribers, click here for access.

8/3/22 If Friday’s BLS jobs report bears any semblance of reality, the number shouldn’t differ much from the growth rate in June. But given the timing of the data collection as of July 12, and the various “adjustments” that the BLS applies to their survey data, we really never know what the first release for the month will show. They then fit their data to actual data over 7 subsequent monthly revisions and annual benchmark revisions. The first release is garbage, and hit or miss as to whether it reflects reality.

The fact of the tax data shows that so far, the much feared recession isn’t here yet.

So here we are Friday morning, a few hours before the BLS jobs data release, and as usual, I can’t predict what the BLS’s fictional artistic impression of the August jobs market will look like. The fact is that it was weak and getting weaker throughout the month. But if the number is more reflective of July, that weakness won’t show up until next month. When it does show up, whether this morning or next month, the bond market and stock market will get a short lived boost from those who expect that it will mean that the Fed will soon loosen policy. Non-subscribers, click here for access.

But the fact is that if tax revenues are weakening, Treasury supply will only increase, regardless of what Wall Street says about the economy. Treasury supply will increase due to weaker tax revenue just as the Fed requires the Treasury to add $60 billion a month in new debt sales to the public to pay off the Fed. Non-subscribers, click here for access.

In addition to that extra supply from Quantitative Tightening, and a weaker economy, Fed QT also causes demand to weaken. Not only is the Fed no longer the primary buyer and financing agent in the market, but it is also choking demand by removing the cash from the banking system that would otherwise be available to fund Treasury purchases. Non-subscribers, click here for access.

The bottom line is that the weaker tax revenues are not bullish. The accompanying weaker economic data will be spun as bullish, while in fact it will not be. At least at first. It will only be bullish when xxxxxxxx xxxxxxxxx xxxxxxxx xxxxxxxx. All I can say is, “Wait for it!” I’ll give you a heads up, right here. Non-subscribers, click here for access.

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Warnings of August Liquidity Crash Come to Fruition – Here’s What to Do

Lee Adler

I wrote the following in this Fed QT/Treasury Supply report on August 6.

8/6/22 Well, guess what. Time’s up. Party over. The Treasury has revised its issuance forecast as we knew it would. It will now be slamming the market with both coupon supply (notes and bonds) and T-bills. That’s the biggest difference. The Treasury had been paying down massive amounts of T-bills for months, stuffing cash back into the accounts of dealers, banks and money market funds. That game is now running in reverse. The Treasury is now sucking money out of the system from those same players. And the Fed isn’t replacing it. The cash that the Treasury uses to repay the Fed disappears from the firmament.

For the first 3 weeks of August the market decided to fight the Fed. The money didn’t come out of the Fed’s RRP fund, and the Fed sure wasn’t funding the buying, in fact the opposite. It was pulling cash out of the system. So it would appear that traders funded the rally with margin and bank repo, with a dose of short covering for good measure.

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But when traders violate Rule Number One, eventually, they must face the punishment. I warned in other reports in the past couple of weeks that the clock was ticking and that reality was about to set it. It finally did on Friday. Non-subscribers, click here for access.

No doubt the selloff was helped along by a massive new T-bill issue totaling $60 billion on Thursday. I had penciled in about $40 billion per week in bill issuance, so that was a bit of a shocker. Then on Friday it had to absorb another $22 billion in long term Treasury coupon paper. Non-subscribers, click here for access.

Apparently, that $82 billion in paper to be paid for, put the stock market in a choke hold. When Powell affirmed the magic word, “No Pivot,” as if like magic there was suddenly no cash around to support stock prices. Only it wasn’t magic. There really was no cash. And there won’t be no mo any time soon. And now the players have awakened to the fact that there’s no reason to borrow on margin or put up other collateral to buy stocks. In fact, they’re probably out of collateral, or soon to be. Non-subscribers, click here for access.

The outlook for the next couple of months looks xxxx xxxx, except for … Non-subscribers, click here for access.

Here’s what to expect, when, and what to do about it. Non-subscribers, click here for access.

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