US Treasury Says, More Beans, Mr. Taggart!

Lee Adler 1 - Liquidity Trader- Money Trends October 25, 2021

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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.

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Our Outlook On the Money

Lee Adler 1 - Liquidity Trader- Money Trends October 16, 2021

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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.

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.

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.

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

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

Lee Adler 1 - Liquidity Trader- Money Trends October 7, 2021

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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 1 - Liquidity Trader- Money Trends September 30, 2021

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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:

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).

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Liquidity Matters, The Fed’s BS Doesn’t

Lee Adler 1 - Liquidity Trader- Money Trends September 23, 2021

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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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Get Ready for the Coming Bond Market Bloodbath

Lee Adler 1 - Liquidity Trader- Money Trends September 15, 2021

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Janet Yellen has now confirmed that the Treasury will run out of money in October, as we already knew from our tracking of the data. Congress will be forced to raise the debt ceiling. Treasury supply will mushroom at the same time as the Fed begins to cut its market support operations. The RRP slush fund will affect the timing of the coming disaster. But we know its coming and we have a good idea of when.

Meanwhile the BLS has fomented a completely false picture of inflation. I explain that in this report. It’s blatant.

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Useless Banking Indicators Except for One Giant Red Flag

Lee Adler 1 - Liquidity Trader- Money Trends September 12, 2021

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I started to wonder how the banking indicators were looking lately. I’ve looked at the charts this morning. In updating this for you, I’ve again attempted to minimize the verbiage here. The charts are bad enough.

When it comes to banking indicators it’s best not to suffer paralysis by analysis. We’re seeing the same crazy insane, stuff, month after month year after year. As long as the Fed backstops this, who knows how long it can go on. Most of this data only reconfirms how historically extreme these conditions are. It tells us nothing about the timing of the next “adjustment.”

Besides, the markets will crack first and take the banking system down when they do, not the other way around.

So consider this report an interesting diversion. I post it because I did the work, so I may as well publish it (Sarcasm).

But I did come across one chart that appears to have timing implications.

Bank deposits.

The correlation with stock prices is stunning. But it gets even more interesting when expressed as a ratio of the S&P to deposits. That’s telling us that right now is a good time to at least get ready to dump stocks, if not do it now. This chart and the rest, all in the subscriber version of the report.

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Take the Threat of this Triple Whammy Seriously Now

Lee Adler 1 - Liquidity Trader- Money Trends September 5, 2021

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The stock and bond markets face a triple whammy at the end of this month. In this report I’ll show you what those three things are, why and how they will impact the market and what you should do about it (subscriber version only). These three things coming together as soon as xxxxxx (subscriber version only) will pose a grave threat to the Treasury market, to short term interest rates, and ultimately to the stock market.

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QE Still = 100% of Treasury Issuance, But Coming Change = Crash

Lee Adler 1 - Liquidity Trader- Money Trends August 26, 2021

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The Treasury is rapidly exhausting its cash as it continues to pay down T-bills. At this rate, it will run out of cash xxx xxxx xxxx xxxx (in subscriber report). Congress will then be forced to raise the debt ceiling.

The Treasury will need to issue immense amounts of new debt to repay the internal accounts it raided, and to rebuild its cash account to the TBAC recommended level of $400 billion.

For the past month, and until the debt ceiling is lifted, Fed QE has been covering and will cover 100% of new Treasury issuance. That’s a short term bullish factor for bonds and stocks as it keeps pumping cash into the dealer and other institutional accounts that had been the holders of the T-bills being redeemed.

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.

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 xxxx (subscribers only). That’s how much new Treasury debt can be issued before the crisis becomes apparent.

We have some time. And we have the meters of the Fed’s RRP slush fund 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 be prepared to take advantage with enough advance notice to act accordingly. Here’s our current situational awareness update.

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Despite the Rally Primary Dealers Are Still At Risk

Lee Adler 1 - Liquidity Trader- Money Trends August 21, 2021

This is a repost of the previous post, with corrected headline and link. I apologize for the redundancy.

Primary dealers have offset their losses of last August through February in the recent rally, and they have reduced their net long exposure somewhat since their highest levels of a year ago.

But that doesn’t mean that they’re not still at significant risk if the bond market begins to selloff. They are still positioned for stable or higher prices, and stable or lower yields. If yields rise and Treasury prices fall, as I have concluded they will, then it won’t be long before the dealers are in trouble again. And if they’re in trouble, all asset markets will be in trouble.

This report looks at the particulars of their positions, along with a quick update on the 10 year Treasury yield. That includes a few keys that should signal when the next decline in bond prices is starting.

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