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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!

Beware- Debt Ceiling Uncertainty Darkens the Outlook

Lee Adler

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We approach another debt ceiling drop dead date. The next month is thus fraught with unknowns. It makes projecting our QE and PONTs charts beyond the next two weeks all but impossible. We’ll just have to wait and see along with everybody else. Of course we view the world a little differently than everyone else.

Here’s the view through that prism.

Word is that Yellen says the new drop dead date (DDD Day) when the Treasury runs out of money will be December 18. You’ll get no argument from me on that score. The extrapolations of Treasury cash spending and revenue seem to support a mid December deadline. At that point, all new debt issuance will stop, and Treasury spending will be severely curtailed. The Federal government will be unable to pay somewhere around 40% of its bills on average.

Everybody else thinks that a debt default would be a catastrophe. I’m not so sure. No doubt it will throw the Treasury market into chaos, but there will still be vultures buying any dips, knowing that a technical default will be cured sooner or later. A stoppage of issuance will mean that new supply will be zero. How much supply will come from panicked sellers, and whether that will overwhelm demand from dealers flush with QE cash, and hedge funds that are short Treasuries, remains to be seen.

The consensus seems to be that a default will trigger a really bad something something something, in the stock market and economy. The economy? Make me laugh. Irrelevant for our purposes.

But the stock market? A complete halt in government debt issuance could be very bullish…

Get the rest of the story and ideas on how to handle what’s to come all spelled out and illustrated in the subscriber version.

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FREE REPORT – Proof of How QE Works – Fed to Primary Dealers, to Markets, To Money

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The Fed Pulls The Plug, Macro Liquidity Cruiser Starts Its Turn

Lee Adler

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In the financial markets, money talks. I have observed and reported for many years that talking about a change in monetary policy, announcing that change, and actually executing it, are entirely different matters. The market tends not to anticipate change, it responds to actual changes in liquidity.

While the Fed and the mouthpieces of the mob have talked about tightening policy for months, the Fed only announced that it will finally tighten policy this month. The policy has yet to begin. That changes next week.

The new policy implementation begins now. The Fed actually will reduce its QE purchases for the first time since September 2019. That’s when the Fed undertook its emergency “Not QE” policy in response to the money markets freezing up. That came about from a Fed policy of non-intervention after Powell ended Yellen’s balance sheet normalization in December 2018. From December 2018 until September 2019, the Fed stood by while an onslaught of Treasury supply crushed the money markets.

The new policy that begins now is a tightening because it will reduce QE purchases. Anything that isn’t the status quo purchase rate of a total of $200 billion or so a month including MBS replacements, is effectively a tightening. The Fed will be buying less paper each month.

And so, the actual effects of the new policy begin now. The Fed will reduce its Treasury purchases by $10 billion for the mid November- mid December period. It will cut MBS purchases by $5 billion. It will continue to roll over maturing Treasury holdings and prepaid MBS. The net effect will be a reduction of $15 billion in the first month, and then $15 billion the following month.

They said they’d be flexible. In other words, if the markets tank, they’ll be back with more QE. The idea that they’ll continue cutting purchases for the 7 months it would take to get to zero, is a pipe dream. But it’s possible that they could cut for at least xxx-xxx months (subscriber version) before running into problems big enough to stop them.

I wrote months ago that the Fed could only reduce QE if the Treasury cuts issuance. That’s on the schedule this month, particularly as the new debt ceiling again restricts issuance.

But reduced issuance isn’t no issuance. After the dust settles and the debt ceiling is finally lifted or suspended for the long haul, the US Treasury will still be issuing an average of $150 billion per month in net new debt. If the Fed cuts QE for two months to new purchases of $90 billion per month after two months, and MBS replacement purchases average another $50 billion or so, the Fed will still be taking down directly or financing indirectly 93% of new issuance. No problem there. The market could sail right along with that.

But higher bond yields mean higher mortgage rates. Higher mortgage rates mean fewer refinances and fewer MBS prepayments. We don’t know exactly how much. But it will be an exacerbating factor. At the peak of the refi boom, Fed MBS purchases totaled $120-130 billion per month. Now they’re down to $100-110 billion per month, and they will drop more as mortgage rates rise.

If the stock market remains relatively stable going into January, the Fed will continue to cut its total outright purchases of Treasuries and MBS. They’ll go to $75 billion in January, and $60 billion in February. At that point, let’s say MBS replacements drop to around $40 billion a month. Then total Fed purchases would be around $115 billion and Treasury issuance would still be $150 billion. Then we’re talking about 77% of new issuance.

The benchmark for the Fed for the past dozen years has been to directly absorb and indirectly fund a total of  xx% (subscriber version) of new issuance. The only time they went lower for any length of time was during the Yellen balance sheet bloodletting from October 2017 to December 2018. That did not go well. Once the 10 year breached 3%, the panic was on. Powell took over, panicked, reversed course, and began QE to infinity and beyond.

Now we’re going to find out again how far they can push the “tapering” fantasy. They told the market that they’re going to be “flexible.” Which means that they’ll reverse course at the first sign of trouble.

The issue is where that will be. First benchmark to watch on the 10 year is txxxx xxxx xxxx xxxx (subscriber version). If that’s cleared, and I have little doubt that it will be, the pressure will be on.

The Fed’s media mouthpieces will start floating the trial balloons around then. But remember! Guidance schmidance. Money talks, and BS, even Fed BS, walks. Once the pressure on the markets begins to manifest itself, the market won’t reverse course just because of a few words from the Fed. The market will only reverse when the money starts to flow again.

As Johnnie Cochrane famously said, “The Fed must pump, or the market will dump.”

With that in mind, we look at the macro liquidity chart (subscriber version) to this point and see that nothing has changed. Stock prices continue to track with rising liquidity. But that rise is about to slow, and month after month for the next xxx-xxx months (subscriber version) months at least, the Fed will tighten the screws. My guess is that around xxxxxxxx (subscriber version), we should start to see negative impacts in the financial markets. Treasuries will come under pressure first. Stocks will follow.

Be ready for things to change. The Fed is tightening. Rule Number One now points in the other direction for the first time since the Yellen bloodletting of 2017-18.

All spelled out and illustrated in the subscriber version.

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FREE REPORT – Proof of How QE Works – Fed to Primary Dealers, to Markets, To Money

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Why Jerome Powell Had a Frog In His Throat

Lee Adler

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Available at this link for legacy Treasury subscribers.

Did you notice in yesterday’s press conference how Jerome Powell kept clearing his throat. He was apparently choking on the vomit of his own double talk. The lies, self contradiction, and obfuscation were  breathtaking. This man has no conscience. But then, he’s a central banker. What should we expect.

It’s a good thing that Powell doesn’t own a big bond portfolio.

Well, actually, he does. A lot of munies. A lot of real estate funds, and lots and lots of stock funds. But he makes policy to benefit American workers, who can’t afford to buy houses from the real estate ETFs that Powell owns. Supposedly.

That will be the extent of expressing my disgust with yesterday’s spectacle. The purpose of this report is to review the state of real time tax collections as they accurately show what the US economy is actually doing, and to relate that to the unusually important twin pieces of news that came out yesterday. One was the TBAC schedule for the first quarter of 2022, and the other was the Fed’s taper announcement.

The Fed plans to cut $15 billion a month from their purchases until they get to zero net purchases next June. It’s no surprise that at the same time, less Treasury issuance is forecast. The TBAC says that issuance will be cut in half in Q1.

We knew that the strong tax collections would cause issuance to begin to shrink. We knew that the Fed would only taper QE when Treasury issuance began to decline. There’s no surprise in any of this.

One Bloomberg story highlighted the fact that the Fed’s taper was simultaneous with the Treasury “tapering” issuance. There’s just one problem. While issuance will be cut in half from Q4 to Q1, assuming that the next lifting of the debt ceiling doesn’t screw that up, the Fed’s purchases would go to zero under their plan. At the same time, half of the current level of Treasury issuance still amounts to $150 billion per month on average.

Let me say this about that.

The market cannot absorb $150 billion a month in new issuance at current price levels. Bond prices will crater before the Fed ever gets remotely close to zero QE. In fact, just 2-3 months of reduced QE might be all the market can bear.

We know that for the past dozen years with QE, the Fed has funded 85-90% of Treasury issuance month in and month out. They’ve done it with a combination of outright purchase, and indirect funding through cashing out dealers via MBS purchases.

Yellen tapered for a year. Treasury yields soared. Powell came on the scene, choked, stopped tapering, and soon started printing again like there was no tomorrow.

They’ve suppressed bond yields as a result. They have screwed yields to the floor, screwing risk averse savers in the process.

The mirror of that is that they nailed prices to the ceiling. Most of the world’s wealth is tied up in bonds and real estate. Powell and his cronies benefitted immensely from the Fed’s direct suppression of yields and inflation of bond prices.

When Treasury issuance increased, the Fed increased QE to insure that bond holders suffered no losses, and that the residential and commercial real estate bubbles continued to inflate.

But even with that increased support, the yield on the 10 year has risen from 0.50 to 1.50-1.70. We’re about to see what happens when the Fed cuts its absorption to less than 85%. The Fed says it will be flexible. The taper isn’t on autopilot.

I’ll say. Watch what happens when the 10 year yield explodes past 2%. Let’s see how long they stick with this “taper” while Powell and friends’ personal holdings of bonds and real estate funds crater.

We have a couple of wild cards in the mix. These include the xxxx xxxx xxxx (subscriber version only), which is already again beginning to stifle issuance. The Treasury returned to T-bill paydowns last week after issuing $254 billion in net new bills since October 15. They’re already running into the new higher debt ceiling, so they have to start paying down T-bills again while they continue to issue coupon (longer term) debt.

So the games will begin again. With that $254 billion that the Treasury raised in T-bill sales, they managed to rebuild the Treasury cash account from around $50 billion to $311 billion as of November 2.

That’s probably enough to hold off the dogs until xxxxxxx (subscriber version only). At that point, we’re going to have to have another debt ceiling increase. Hopefully this one will be more or less permanent, simply because it’s easier to forecast when we know what the limit will be or not be, for the foreseeable future. Otherwise we’ll have to keep floating like a butterfly as we go.

For now there are things in place that will buy a lot of market shenanigans for a few months. They include the $311 billion in the Treasury account, the presence of the xxxxxxxxxxxxxx (subscriber version only),, and the $1.35 trillion still sitting in the Fed’s RRP slush fund.

The day of reckoning is not today. It probably won’t be xxxx (subscriber version only), because they get a xxxx xxxxxx xxxxxxxxx xxxxxxxx (subscriber version only), that xxxxxxxx xxxx. It might be xxxxxxxx, or xxxxxxx, or xxxxxxxx. I’d guess closer to the later part of that period, but it all depends on whatever develops day to day. That’s why we track this data. We’ll see the changes coming in time to act.

The smart money has already been tiptoeing out the side door. We see that in the 10 year yield bumping up toward the highs again. That’s what I’d key on. I’ve said for months that I don’t want to be holding Treasuries or longer term fixed income investments. That doesn’t change.

Assuming that the 10 year yield does break out above xxxx (subscriber version only), that’s where I think we’ll really start to see the wheels come off. First in the bond market. But down the road in stocks too. It may not be an immediate worry, but at some point in xxxx xxxxxxx xxxxxxxx xxxxxxxx (subscriber version only), it will be.

The technical analysis of the stock market itself should tell us when the turn is under way. I wouldn’t short the market stock market heavily until the TA tells me that it’s safe to do that. It hasn’t told me that yet. Although I have a couple of toes in the water in the swing trade chart picks list in the Technical Trader reports.

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Subscribers, click here to download the report. Available at this link for legacy Treasury subscribers.

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It Only Takes One House Fire to Start a Conflagration

Lee Adler

Subscribers, click here to download the report.` Primary dealers have reduced their long fixed income positions but they have dramatically increased their leverage. On the one hand, they have reduced their risk exposure, and on the other hand, they have increased it.

It doesn’t make much sense on the surface. But the leverage increase appears extreme, and that’s something to note as the government moves toward its ultimate resolution of the debt ceiling. That will allow a tidal flow of Treasury issuance to batter the market. At the same time, the Fed will almost certainly begin to “taper” its bond purchases. In other words, the supply of Treasuries will increase, while the market’s largest source of demand will diminish.

These facts argue for much higher yields and lower bond prices. The short term timing is uncertain. We’ll rely on the technical analysis of the charts for that. But beyond the next couple of months, all the pressure on yields should be to the upside. Which means bond prices will head lower. That could set off a firestorm in not only Primary Dealer inventories, but bank long term bond portfolios as well.

It doesn’t bode well for a neat and clean outcome for the Fed’s tapering attempt. At some point it will be forced to reverse course. But they’ll try for a while. I think that the outcome in the markets will be chaos to the downside in prices.

This report looks at the particulars of dealer positions, financing, and hedges, as well as the profits and capital trends of the big banks in the aggregate (charts and discussion in subscriber version). These aren’t timing tools but give us some idea where the risk of a blowup lies. Then I discuss the technical charts, key benchmarks and strategy (subscriber version).

Subscribers, click here to download the report.`

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KNOW WHAT’S HAPPENING NOW, before the Street does, read Lee Adler’s Liquidity Trader risk free for 90 days!

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FREE REPORT – Proof of How QE Works – Fed to Primary Dealers, to Markets, To Money

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US Treasury Says, More Beans, Mr. Taggart! – LINK CORRECTED

Lee Adler

Apologies for the bad link in this report I posted yesterday! Now corrected!

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The Fed poured $132 billion of QE into the accounts of Primary Dealers between October 14 and 21, the regular monthly MBS settlement week. As a result, we got the usual predictable result of a rally in stocks.

But there was only a weak, late holding action in Treasuries. They sold off for most of the week. That’s understandable, considering that the US Treasury sucked $218 billion out of the market that week after the debt ceiling was lifted.

It will pull another $196 billion out this week. At this rate, they’ll hit the new debt limit by xxxxx xxxxxxxxxx (subscriber version). Then the extraordinary measures game and the political/fiscal brinksmanship will begin anew.

At the same time, the Fed will begin cutting its outright QE purchases, and MBS replacement purchases will also decline because of higher rates and few mortgage refis, and thus prepayments. That would normally be very bearish, but remember! They have a slush fund! The Fed’s RRP account, which currently still holds about $1.4 trillion in cash ready to absorb the flood of new T-bills.

In the context of all this new supply pounding the financial market, the stock market rally was pretty remarkable. Stocks rose despite the fact that there was more Treasury supply than there was QE. True, there’s still plenty of cash sitting in the Fed’s RRP slush fund. As I’ve pointed out, this will cushion and help to absorb the supply hit coming from the US Treasury.

Think of the RRP slush fund as a big pot of beans simmering on the money manager cowboy camp fire. Fed QE adds more beans to the pot. The US Treasury keeps eating mass quantities of the beans. It constantly refills its plate, consumes the beans, and passes the gas into the US economy. It can continue to consume those beans until they’re gone, as in when the RRP fund is exhausted. That will happen in some months, especially as the Fed gradually stops adding beans to the pot (tapering QE).

Or maybe not that long. Maybe some of those money managers tending the pot will at some point will be like Mr. Taggert. In response to the Treasury asking for still more beans, they’ll say “I think you’ve had enough!”

That’s when both the stock and bond markets will get really interesting for bears. Of course in my view, the bond market is already plenty “interesting,” and has been for some time.

Media reports have pointed out that professional money managers are overwhelmingly bearish on bonds, as if that’s some kind of contrarian bullish omen. I hate to be a party pooper, but market consensus is often right for long periods, especially when the facts support it. In this case, the facts support the consensus. So I’m xxxxxxxx xxxxxxx xxx xxxxxxx (subscriber version). Treasuries. I wouldn’t want to hold long term debt in this environment.

Subcscribers click here to download the complete report.

For the rest of the story, including the multi colored charts and discussion that will entertain, delight, and enlighten you about what to expect, and what to do about it, subscribe!

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US Treasury Says, More Beans, Mr. Taggart!

Lee Adler

Subcscribers click here to download the complete report.

The Fed poured $132 billion of QE into the accounts of Primary Dealers between October 14 and 21, the regular monthly MBS settlement week. As a result, we got the usual predictable result of a rally in stocks.

But there was only a weak, late holding action in Treasuries. They sold off for most of the week. That’s understandable, considering that the US Treasury sucked $218 billion out of the market that week after the debt ceiling was lifted.

It will pull another $196 billion out this week. At this rate, they’ll hit the new debt limit by xxxxx xxxxxxxxxx (subscriber version). Then the extraordinary measures game and the political/fiscal brinksmanship will begin anew.

At the same time, the Fed will begin cutting its outright QE purchases, and MBS replacement purchases will also decline because of higher rates and few mortgage refis, and thus prepayments. That would normally be very bearish, but remember! They have a slush fund! The Fed’s RRP account, which currently still holds about $1.4 trillion in cash ready to absorb the flood of new T-bills.

In the context of all this new supply pounding the financial market, the stock market rally was pretty remarkable. Stocks rose despite the fact that there was more Treasury supply than there was QE. True, there’s still plenty of cash sitting in the Fed’s RRP slush fund. As I’ve pointed out, this will cushion and help to absorb the supply hit coming from the US Treasury.

Think of the RRP slush fund as a big pot of beans simmering on the money manager cowboy camp fire. Fed QE adds more beans to the pot. The US Treasury keeps eating mass quantities of the beans. It constantly refills its plate, consumes the beans, and passes the gas into the US economy. It can continue to consume those beans until they’re gone, as in when the RRP fund is exhausted. That will happen in some months, especially as the Fed gradually stops adding beans to the pot (tapering QE).

Or maybe not that long. Maybe some of those money managers tending the pot will at some point will be like Mr. Taggert. In response to the Treasury asking for still more beans, they’ll say “I think you’ve had enough!”

That’s when both the stock and bond markets will get really interesting for bears. Of course in my view, the bond market is already plenty “interesting,” and has been for some time.

Media reports have pointed out that professional money managers are overwhelmingly bearish on bonds, as if that’s some kind of contrarian bullish omen. I hate to be a party pooper, but market consensus is often right for long periods, especially when the facts support it. In this case, the facts support the consensus. So I’m xxxxxxxx xxxxxxx xxx xxxxxxx (subscriber version). Treasuries. I wouldn’t want to hold long term debt in this environment.

Subcscribers click here to download the complete report.

For the rest of the story, including the multi colored charts and discussion that will entertain, delight, and enlighten you about what to expect, and what to do about it, subscribe!

Subscription Plans

Get the complete report, including charts, tables, analysis, and outlook. and access to all past and future reports, risk free for 90 days!

FREE REPORT – Proof of How QE Works – Fed to Primary Dealers, to Markets, To Money

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Our Outlook On the Money

Lee Adler

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Visibility into the near future has been pretty good lately, so I’ll start with a review of what we expected, where we are now, and any changes likely ahead.

9/29/21 Secretary Yellen Says that the Treasury will run out of cash on October 18. Sounds about right.   

When the Treasury runs out of cash, Congress will be forced to raise the debt ceiling. When it does, look for a big increase in Treasury issuance.

They didn’t quite get to the zero Treasury balance. The widespread predictions of disaster by the “experts” proved too much for the politicians to bear, for them to allow a test of  zero Treasury cash.

But they only kicked the can to December by raising the debt limit by $480 billion. That’s only supposed to last until December 3, according to news reports. So we’re not finished here. We’re going to go through this exercise again in about 7 weeks.

Meanwhile, we are getting a preview of the expected increase in Treasury issuance. $110 billion in new T-bills will be issued next week. Then $109 billion in new coupon paper is tentatively scheduled for the end of the month.

I’m still expecting the Fed’s RRP slush fund to cushion the blow of that new supply. It is the ready cash that should fund the absorption of the new paper. But we really don’t know what the big money managers will do. This is Brave New World stuff. What if the money market funds decide they like the Fed’s paper just as much as the US Treasury’s? If even a few of them sit tight with RRPs instead of buying the newly issued T-bills, we could start to see xxxxxxxxxxxx xxxxxxxxxx xxxxxxxxxxx (subscribers’ version). I’d expect that to show up first in xxxxxxxxx xxxxxxx  on T-bill rates.

Again, we won’t know until we see the first new T-bill settlement on Monday, and see how much comes out of the Fed’s RRP fund.

9/29/19 Given the current political climate, a government shutdown is a given. A delay in lifting the debt limit, and a technical default by the US government is a definite maybe. It would almost certainly be disruptive to the markets in the short run, but in the longer run, the default will be cured, and the effect will fade into the background.

This did not happen. Yet. All they did was reset the clock. They have time to avoid a crisis, but will they? No doubt the news will be misleading until the deal is done. Forget about what they say. It could cause us to anticipate and act on a scenario that won’t come to pass. Watch what they do when the rubber hits the road. We’ll have time to react if we’re paying attention.

9/29/21 The Fed’s RRP slush fund is now nearly $1.5 trillion. That will fund the new supply tsunami for a few months. Everything could look ok during that time. The Fed will be praised for its brilliance, and the markets will have an uneasy peace, if not a resumption of bullish trends.

However, as that fund begins to run out, the cracks will appear. And once that fund is drawn down to zero, the ingredients for a massive dislocation in the markets will be in place. The bitter fruit of QE, and tapering QE, will be tasted.

The timing of that is uncertain. It depends largely on how fast the Treasury wants to replenish the funds it drew down or raided to avoid the debt ceiling.  

All of the above remains true, as they’ve only pushed back the Drop Dead Date.

This month, Fed QE has been covering, and will continue to cover 104-107% of new Treasury issuance, until the debt ceiling is lifted.

That should have been a short term bullish factor for bonds and stocks, as it pumps cash into the dealer and other institutional accounts that had been the holders of the T-bills being redeemed. But it hasn’t gotten traction. Smart money is getting out ahead of what they know is coming. The China Evergrand situation plays a role in generating margin calls that trigger liquidation pressures in other assets held by holders of Evergrand paper. That includes especially, highly liquid US assets.

Another factor pressuring prices is record corporate debt and equity issuance.

That’s partly on the money. There’s still an excess of QE over new supply. That will go back to a normal or below normal coverage ratio in the weeks ahead. We should start to see xxxxxxx xxxxxxxx (subscribers’ version) for stock and bond prices when that happens, especially with the increase in Treasury supply, and double especially if the Fed actually, really, no kidding, begins to taper QE in December.

There’s a lot more in this report on what to expect, including charts showing how we got here, and why we’re going where we’re going. I also post my idea on what would be a good way to deal with it successfully (subscribers’ version).

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FREE REPORT – Proof of How QE Works – Fed to Primary Dealers, to Markets, To Money

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Booming Tax Revenues, Overheating Risk, and The Real Crisis Starts Now

Lee Adler

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Federal tax revenues are still growing rapidly, signaling an overheating economy. The debt ceiling will be lifted. And the Fed will begin reducing its QE purchases.

9/3/21 These three things coming together as soon as October will pose a grave threat to the Treasury market, to short term interest rates, and ultimately to the stock market. 

In this report, we’ll focus on the threat to the bond market. Just keep in mind that stocks won’t be immune. I cover that perspective in the Technical Trader reports, but I will refer to them in these reports at critical junctures.

In view of Friday’s BLS nonfarm payrolls report, I just want to remind you that tax data is fact. The BLS jobs data is fiction. It’s constantly repainted after the fact to represent past reality, but it is not current reality. BLS jobs estimates are SWAGs based on severely flawed methodology. They rarely accurately represent actual current conditions, and then only accidentally.

If you want to play the jobs growth guessing game,  the tax data for September showed that the pace of growth in September was 16% stronger than the August number. However, given the BLS’s statistical massagery, their number could be anything. This is really just a game of chance each month.

The August BLS nonfarm payrolls reported increase was 235,000. If that was accurate, then the gain for September would be 235,000*1.16=  273,000. According to Bloomberg, the current consensus for that number is +455,000. But the BLS estimate for August should be revised upward.

Note post BLS release:  It was. The change for August was revised up by 131,000, from +235,000 to +366,000.” Adding that 131,000 to the reported gain of 194,000 = 325,000. That’s still an overstatement relative to the tax data reality. They’ll need to revise down next month. Meanwhile, clueless economists will revise their October estimates down even more, and the stupid guess the number game will go on. 

Furthermore, the jobs data is irrelevant for our purposes. It is tangential to the knowledge we need to understand and successfully trade the markets. Supply and demand rule the prices in the securities market, just is they rule the commodities markets, real estate, labor, and the day to day prices of the things we buy. Each market has its own forces of supply and demand.

For Treasury prices, and their inverse, yields, we’re interested in the supply of demand for Treasuries. There’s no need for secondary or tangential data. We have the primary data. We know the near term supply outlook, because the Treasury publishes it in advance. We can estimate how it might change because we have the real time data on Federal revenues and outlays, and hence the budge deficit and future issuance needs.

We don’t need the silly exercise of pretending to know how many jobs were created each month. We have the withholding tax data. That’s the primary data that tells us how much revenue the Federal Government is taking in, and whether it’s increasing or decreasing.

Withholding tax collections strengthened in September. While more revenue would normally reduce supply, we don’t know where spending will go. That will matter in the longer run.

In the shorter run, the big unknown is whether there will be only a temporary fix for the debt limit, as opposed to something longer term. If it is only a short term fix, we may see accelerated Treasury issuance. That would draw down the Fed’s RRP slush fund much faster than probably would have been the case under a long term lifting of the debt ceiling.

That would be more bearish, sooner.

Note: After I wrote that Congress did agree to a short term fix, with momentous implications. 

9/3/21 The next problem is that the Federal Government should run out of cash in early October. At that point, it must raise or suspend the debt limit. The Treasury will then begin issuing a torrent of supply to replenish the accounts it raided under the “extraordinary measures” it has undertaken since July 31 to avoid exceeding the debt limit.

The pile of cash in the Fed’s RRP program will act as a slush fund to buy the new T-bill issuance. There are a number of moving parts to the outlook for what happens then, including the mix of T-bills versus coupons in the new issuance schedule. Likewise, we don’t know for sure how holders of RRPs will react to any of this. We have no historical precedent to guide us.

The impacts could vary. Either short term rates, or bond yields could xxxxx xxxxx (subscriber version only). We should see the first hints of market impacts when xxxxxx xxxxxx xxx xxxxxx . But one way or another, once the RRP cash xxxxx xxxxx xxxxx (subscriber version only), the real problems will mushroom.

By then it could be too late. It’s possible, even likely, that significant market damage will already have occurred. Therefore the time to act is now. If I owned long term bonds I’d xxxx xxxxx xxx xxxxxx (subscriber version only). Or I’d need to be willing and able to hold to maturity while suffering the loss of purchasing power that rising inflation would entail.

Meanwhile, I would keep a close eye on stock market technicals for any sign that it’s time to stop trying to ride that bubble wave any further.

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Bond Market Bloodbath Gets A Head Start

Lee Adler

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Secretary Yellen Says that the Treasury will run out of cash on October 18. Sounds about right.

When the Treasury runs out of cash, Congress will be forced to raise the debt ceiling. When it does, look for a xxx xxxx xxx xxxx xxx xxxx (subscribers’ version).

Given the current political climate, a government shutdown is a given. A delay in lifting the debt limit, and a technical default by the US government is a definite maybe. It would almost certainly be disruptive to the markets in the short run, but in the longer run, the default will be cured, and the effect will fade into the background.

The Fed’s RRP slush fund is now nearly $1.5 trilllion. I had forecast that it would top out around $1.3 trillion. Bulls get a bonus. That will fund the new supply tsunami for xxxx xxxx (subscribers’ version) months. Everything could look ok during that time. The Fed will be praised for its brilliance, and the markets will have an uneasy peace, if not a resumption of bullish trends.

However, as that fund begins to run out, the cracks will appear. And once that fund is drawn down to zero, the ingredients for a massive xxxx xxxx xxxx xxxx (subscribers’ version) will be in place. The bitter fruit of QE, and tapering QE, will be tasted.

The timing of that depends largely on how fast the Treasury xxxxxxxxxx xxxxxxxxxxxx xxxxxxxxxxxx xxxxxxxxx (subscribers’ version). So far, that amounts to at least $600 billion to be added to structural supply needs over the course of a few months.

This month, the Fed’s QE has been covering, and will continue to cover 104-107% of new Treasury issuance, until the debt ceiling is lifted.

That should have been a short term bullish factor for bonds and stocks, as it pumps cash into the dealer and other institutional accounts that had been the holders of the T-bills being redeemed. But it hasn’t gotten traction. Smart money is getting out ahead of what they know is coming. The xxxx xxxxx (subscribers’ version) situation plays a role in generating margin calls that trigger liquidation pressures in other assets xxx xxxx xxxxxx xxxx (subscribers’ version). That includes especially, highly liquid US assets.

Another factor pressuring prices is record corporate debt and equity issuance.

Previously I wrote:

8/26/21 In fact, it’s surprising that the stock rally has been so muted, and that the bond rally has stopped in its tracks over the past 6 weeks. That’s because corporations have been rushing to issue new equity and new debt to take advantage of the high prices they can get. This is free money to them.

9/15/21 I had forecast this last year, and have reported on it several times this year. Just this week we began seeing mainstream media news reports confirming record levels of corporate issuance.

8/26/21 Once the Treasury begins to issue new debt, it will be on top of this gigantic wave of corporate supply. It won’t be pretty.

It also won’t be immediate. I estimate that by the time the debt ceiling is lifted and the Treasury supply tsunami starts, the Fed’s RRP slush fund will reach about $1.3 trillion. That’s how much new Treasury debt can be issued before the crisis becomes apparent.

8/26/21 We have a few months. Xxxxxx xx xxxxx xxx xxxx (subscribers’ version), but we’ll have the meters of the Fed’s RRP account, and the schedule of new Treasury issuance, as well as the QE schedule. If the Fed chooses to reduce that schedule, that’s their problem, and the market’s.

But it won’t be ours. Because we’ll be actively watching, with situational awareness. We’ll hopefully be prepared to take advantage with enough advance notice to act accordingly.

9/15/21 It’s been reported that the Fed will begin its “taper,” which are small reductions in the amount of QE purchases it makes, in November.

Meanwhile, the 10 year Treasury yield has broken out to the upside. We expected that. But I didn’t expect it to happen this quickly. I attribute it to front running, xxxx xxxxx (subscribers’ version), and record corporate issuance, all of which are sucking money out of the market as fast or faster than the Fed pumps it in.

In conclusion, I repeat what I wrote in mid September. 9/15/21 It’s a recipe for disaster. So I reiterate my view that xxxx xxxx xxxxx xxxxx xxxxx xxxxx, (subscribers’ version) a view that so far, appears to have been remarkably prescient.

Below are a few previous summary observations which remain relevant. Supporting data, charts and analysis follow that (subscribers’ version).

8/13/21 The Wall Street talking head community, with a few Fedheads chiming in, is now in a growing chorus that the Fed will start tapering soon. Our analysis has been that the Fed can only taper if the Federal deficit is shrinking, thereby reducing Treasury supply. If the Fed were to taper in the face of constant or rising supply, the market would need to adjust in order to absorb the additional supply. Bond prices would fall and yields would rise.

This is where the revenue trend is important. If it weakens, the deficit will grow and supply will increase. This is even before considering the infrastructure spending package. If revenue growth stays strong, the Fed could conceivably do a small cut in QE (aka taper) without crushing the bond market. That could turn into the muddle through scenario.

The Treasury market rally of recent months has meant that Primary Dealers have built a profit cushion that would provide some protection in the event of bond market price weakness. In addition, initially, the supply increase that results from the lifting of the debt ceiling will be funded by the trillion + dollars that has been deposited in the Fed’s RRP program. That is still growing as the Treasury continues to pay down T-bills.

Those two factors will delay a bond market crisis for a couple of months. It’s difficult to estimate for how long, with any certainty.

It depends on when the debt ceiling is lifted, how much tax revenue the US economy is generating, and how much the Fed cuts its purchases of Treasuries and MBS as it begins the “taper.”

A muddle through scenario is always possible, but a crisis is also possible, if not more likely. The timing is in question, but it should come xxxxxxxxx xxxxxxx xxxxxxxx (subscribers’ version). The timing will become clearer as the trends of the data begin to show themselves once the debt ceiling is lifted. That includes the supply schedule, the trend of Federal revenue, and the Fed’s schedule of reduced purchases.

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Liquidity Matters, The Fed’s BS Doesn’t

Lee Adler

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I didn’t watch Powell’s press conference yesterday. Instead, I followed my twitter feed, where I got the reports, reactions, and impressions of dozens of reporters, analysts, and other observers of various stripes. My reaction to it was predictable. The same old disgust.

These multiple perceptions of Powell’s performance, reinforced my opinion that Powell, and most Fed governors and presidents, are cynical, pathological liars. They will stop at nothing to defend the rigging of the markets to benefit only their cronies and themselves. Meanwhile, those least able or least willing to participate in their game, suffer the consequences.

End of rant.

For our purposes, I remind myself and you, to watch what they do, not what they say. There’s scant evidence that the market anticipates, aka “discounts” the future. There’s lots of evidence that market prices correlate with money flows. In fact, there’s so much evidence accumulated through the years that we would have to be delusional not to recognize cause and effect.

These Composite Liquidity Index reports illustrate that. They don’t tell us anything that we don’t already know, but they serve as a good reminder, as reinforcement. We need to stay focused on what matters! Not the sideshows like the one the Fed put on yesterday, which the Wall Street captured media willing played into.

So what if the Fed says it’s going to reduce its QE purchases? So what if it says that it’s likely to start doing it in November? And so what if they cut by $20 billion per month and stop after 6 months as Powell suggested they might?

Well, ok. One thought is that might coincide with the draining of the RRP slush fund that I’ve pointed out to you in these reports for the past several months. I estimated that the fund would top out at $1.3 trillion, coincident with the lifting of the debt ceiling, probably in early October. Well, here we are at $1.283 trillion in the RRP fund yesterday (9/22).

And all of the headlines are about the looming Federal budget and debt ceiling deadlines.
Something’s happening here. It will get done. Temporary default or not.

Take with a grain of salt all of the predictions of catastrophe if the government defaults. There will be short term dislocations, no doubt, but the politicians will, in God’s good time, pass a budget, and lift the debt ceiling, and the Old World, with all its financial power and might, will step forth to the rescue of the New (with apologies to Churchill).

Lifting the debt ceiling will start the clock on exhausting the RRP slush fund. The catastrophe will come when that fund approaches zero again.

So here we are. The Fed will cut QE. The RRP slush fund will need to be used to absorb the Treasury issuance. If the fund lasts 6 months, which I doubt, then the Fed can follow its $20 billion per month QE cut trial balloon.

But at the end of that time the bond market will collapse, because there won’t be enough money in the financial system to absorb the paper at an equilibrium price. Prices will fall, and will do so continuously, with a concomitant increase in yield.

Or it could come sooner than 6 months. It depends on how fast the Treasury will move to replenish its cash account and repay the other internal funds it raided. If they go low and slow, then they can stretch this charade to the maximum. If they move quickly, then the sheet will hit the fan much sooner. The Fed will not be able to continue cutting purchases for 6 months. It will stop and reverse much sooner.

Not being an insider, I don’t know what the plan is. So again, all we can do, and in fact all we need to do, is watch the data. It will tell us exactly what’s going on at just the right time that we need to know it. This report, and those to come, will show you, with charts and clear explanations (subscribers only), exactly what’s going on and when we’ll need to react .

All will unfold before us in good time. We did not need Jerome Jerry Jaysus Powell, or Janet Yellin’ Yellin to tell us that. We can see the trends for ourselves in the monetary indicators. It’s all there for us to view with our own eyes (subscribers only).

We can predict what they’ll say, and more importantly what they’ll do. But prediction isn’t all that helpful, because, again, the market does not discount. It responds to changes in liquidity, directly and immediately.

On occasion, rarely, it will react to an external shock, like a pandemic. But those events are always temporary. In the end, the market always returns to following the path of liquidity. You’ll see that again, and in the future, in these reports (subscribers only) so that you can act to preserve and grow your capital under the most adverse circumstances.

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