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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!

Here’s What the Treasury Buying Stampede Really Means

Lee Adler

We’ve been following the story of the US Treasury paying down outstanding T-bills since late February. $680 billion of paydowns led to a big turnaround and rally in longer term Treasuries as the Treasury pumped that money into the accounts of former bill holders and simultaneously removed that paper from the market. Some holders sought greener pastures in longer term paper, leading to the rally in the 10 year yield and other maturities.

In recent weeks we’ve taken note of the Treasury reducing those paydowns, and we saw a few hiccups on the Treasury market. But over the past week, the rally resumed, thanks to this being the Fed’s monthly MBS purchase settlement week. Then the Treasury piled on again on Thursday, announcing another $48 billion in bill paydowns for this week.

The Fed holds MBS settlements in the third week of every month, for forward purchase contracts it made over the past two months. This week’s settlements total $128 billion, which is yooge. They started last Wednesday (July 14) with a down payment of $83 billion. The second installment is for $15 billion today. They finish up on Wednesday, injecting another $29 billion into the accounts of the Primary Dealers from whom they buy that paper.

Then late last week, the Treasury announced, in its infinite wisdom, that it would pay down another $40 billion in T-bills tomorrow (July 20) and $8 billion on Thursday. Drowning in cash, enough fixed income guys turned blue and bought further out on the curve on Friday and this morning to send bond prices soaring and yields crashing.

Apparently the dealers and others have wanted nothing to do with stocks, so they ploughed all of the cash into Treasuries. The stock selloff exacerbated the yield rally, and vice versa.

Traders and pundits tend to talk rotation when these events occur. For now, they’re blaming a resurgence of COVID cases, which is unwarranted because with a majority of US and European citizens at least partially vaccinated, few people are dying. It’s just mindless panic.

But here’s where Treasuries are really headed, and why. And what you should do about it.

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QE Vs. Treasury Supply Will Never Be More Bullish than Right Now

Lee Adler

I finished my two dose vaccination regimen on June 14, and travel restrictions have lifted here in Europe since July 1. It’s been an interesting few weeks as I’ve made my way from my recent base in Zadar, Croatia, up through wonderful Ljubljana Slovenia, Bratislava Slovakia, and currently, the amazing city of Krakow Poland. I’ll be heading to Warsaw on Thursday, where I plan to hang out for at least a couple of months this summer as I do genealogical roots and look for evidence of family left behind here after my grandparents left in 1900.

As I return from vacation mode and a light publication schedule, I had a big day planned for tomorrow. I’ll be visiting Auschwitz all day. Therefore, I wanted to get at least a short overview of the current QE situation out to you tonight. This report covers the most important basics and outlook.

We already know that the bond market has rallied as a result of the massive Treasury paydowns. That’s all about to end, and I think that the Treasury rally may be in the process of reversing.

All good things come to an end. Here’s what to expect in the weeks ahead as a result of the things we already know, and a few that we can deduce as a result.

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Real Time Tax Data Hot Like the Weather

Lee Adler

I wanted to take a short break from my short vacation to get this post out. I’ll take a few more days hiatus and get back to a regular schedule posting next Monday.

My headline for the revenue update last month was Seven More Weeks of Bond Market Nirvana. Well, that’s four weeks down and three to go. But it could be 3 months. Because tax revenue momentum is still, hot, hot, hot, like the weather where I am in central Europe. They’re calling for a high of 100 on Thursday, here in Bratislava, where I’m currently sweating out a short visit.

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Available at this link for legacy Treasury subscribers.

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The Debt Ceiling Looms Over the Fed Balance Sheet

Lee Adler

Note: Holiday Publication Schedule- I’ll be taking a brief break from publishing over the holiday week. I expect to resume publishing on July 6. Enjoy your holidays! 

The Fed’s balance sheet continues to grow. But the often repeated figure of $120 billion per month in Fed asset purchases is inaccurate and misleading. The Fed’s balance sheet grew by $198 billion for the 4 weeks ended June 23. The Fed’s total QE purchases for the month of June were $202 billion, including the weekly Treasury purchases, and all the forward MBS purchase contracts that settle in the third week of the month.

I wanted to get this report out before the holiday weekend, and my planned travels over the next two weeks. I’ve been planning the trip and at the same time packing up for my exit from Croatia after residing in this wonderful country for the past 18 months. I apologize for this report being perhaps more disjointed and incoherent than usual. Hopefully, the ideas I want to communicate are clear enough.

The Fed’s balance sheet continues to grow. But the often repeated figure of $120 billion per month in Fed asset purchases is inaccurate and misleading. The Fed’s balance sheet grew by $198 billion for the 4 weeks ended June 23. The Fed’s total QE purchases for the month of June were $202 billion, including the weekly Treasury purchases, and all the forward MBS purchase contracts that settle in the third week of the month.

Other Wall Street observers don’t count everything. They ignore the Fed’s MBS purchases bought to replace those MBS holdings that were prepaid because borrowers paid off their balance either by sale or refinance.

That money comes out sale or refinancing proceeds of individual mortgage borrowers. It has no impact on the financial markets. To replace those prepaid MBS, the Fed buys more MBS from Primary Dealers. The cash the Fed pays to replace those prepaid MBS goes right into the accounts of the dealers. It makes absolutely no difference why the Fed bought the paper. It doesn’t matter if it’s new paper or rollover paper. All $202 billion went into Primary Dealer accounts. Not $120 billion.

Another factor boosting the markets lately is the Treasury’s T-bill paydowns, which I’ve been reporting for you regularly. They totaled $133 billion in June, coming out of the Treasury account on the Fed’s balance, sheet, and mostly going into RRPs. You would think that the markets would have done even better with all this cash flooding in. But most of the paid off T-bills were held by money market funds. They’re not going to put that cash into longer term Treasuries or stocks. They had no place to put the cash, so they sent it off to the Fed for safekeeping, in the Fed’s RRP program, while they wait for T-bill issuance to pick up again.

That will happen, but the question is the timing. The debt ceiling is the wildcard.

This report examines what it means for the stock and bond markets, particularly when we can expect bullish to turn bearish. Click here to download the complete report.

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Now The Balance Begins To Shift

Lee Adler

The balance between QE and Treasury supply will begin to shift in July. The underlying bid it has provided for stocks and Treasuries will begin to fade.

This report tells why, and what to look for in the data and the markets.

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Bond Market Has Mitigated Some of the Risk, But Don’t Go To Sleep

Lee Adler

In Part 1 of this report, I covered dealer positions, financing, and hedging.  Dealers have mitigated a significant amount of risk by selling paper to the Fed, reducing their inventories, and increasing their hedges. They’ve also benefitted from the rally in prices over the past few weeks. That rally has largely been driven by the Treasury paying down T-bills.

This report looks at several large bank measures, including net unrealized profits or losses of large banks on trading positions, and week to week changes in total bank capital. Those changes indicate the profits of the entire banking system, or in this case, the 25 largest US banks.

The data suggests that the big banks who are largely the parent firms of the primary dealers, haven’t been as profitable as their earnings report suggest, or that at least they have not increased their capital at all.

They aren’t required to mark their investment portfolios of long term bonds to market. If they need to liquidate any of that, then those losses will be recognized. There’s some chance that they will need to liquidate later in the year, as Treasury supply increases, putting downward pressure on bond prices.

Meanwhile, Treasury paydowns will continue to support a bid for both bonds and stocks, for as long as they continue. Rip roaring tax collections have slowed the drawdown in the Treasury balance, so the paydowns will probably continue at their current pace, if not more, until xxxx (see subscriber report)

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Despite the weakness in stocks and bonds in the wake of today’s FOMC announcement, these conditions argue for the churning slight uptrends in stock and bond prices to continue until xxxx. Conditons will then turn more bearish. I tell you when that will be, and what my strategy is.

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

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Have Primary Dealers Built a Muddle Through Scenario?

Lee Adler

For several months, I’ve been positing the idea that when the Treasury gets its cash level down to the legally required limit, the stock and bond markets would be in big trouble. The risk of a crash would be as great as it ever is. I posted an expected time window (in subscriber version)  where it would be a good time to get out of both the stock and bond markets.

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That conclusion came from the idea that:

• Primary Dealers were overleveraged in their fixed income portfolios.

• That the market has been artificially buoyed by the Treasury paying down T-bills. It has now injected $620 billion into the accounts of dealers and investors since February 23.

• That when the Treasury reaches the required cash level of XXX billion (reported in subscriber report), the paydowns will stop.

• That record levels of deficit spending would then no longer be partly funded out of the Treasury’s cash on hand. That would require a dramatic increase in debt issuance.

At first I estimated that that would happen in xxxx (see subscriber version), but lately I’ve pushed that estimate back to xxxx (subscriber version). At that point, the increase in Treasury debt supply would supposedly begin to push bond prices down both in Treasuries, MBS, and corporates.

Highly leveraged dealers would then face forced selling as they were required to meet collateral calls on the inventories they had financed with repurchase agreements (repos). Repos are just a fancy kind of short term borrowing to finance securities purchases, similar to when we use margin debt to buy stocks.

All of that still looks likely to happen. But instead of a crash, I can now see the possible outline of more of a “muddle-through” scenario. I still expect trouble to arrive around xxxxx (in subscriber version), with maybe a few weeks of Wile E. Coyote market action.

But maybe that trouble won’t be quite as bad as I first thought.

There are two reasons for that. Discussion in subscriber version.

The end of Treasury paydowns will, no doubt, cause yields to rise over a short period of time. And that could have been catastrophic.

But lo and behold, we see Primary Dealer data that suggests it won’t be as bad as I had feared. I show that data in a couple of tables and charts in this report.

We won’t know for sure until we get there. I’m still looking at xxxx (in subscriber report) as a likely top in the markets. We’ll just have to see how conditions evolve over the next (time period in report), and take action accordingly. For now, while the Treasury continues to pay down outstanding T-bills, we can follow this strategy (discussed in report).

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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Real Time Tax Data Shows Nirvana for Stocks and Bonds, But It’s Temporary

Lee Adler

Withholding tax revenues rose sharply again in May (chart in subscriber version). Non withheld taxes also rose sharply. The economy is growing faster than the Fed would have you believe, and that the Wall Street mob seems to believe.

Revenue momentum is hot, hot, hot. But spending is hotter (table in subscriber version). The impact of economic stimulus will lead to economic overheating and embedded inflation.

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Meanwhile, the Treasury’s bloated cash account is coming down slowly. To get to the level legally mandated by the budget law by the deadline (reported in subscriber version), the Treasury will need to continue T-bill paydowns. This will continue to provide a bid for both stock and bond prices.

But that will all reverse, and we know when. The Treasury’s excess cash will be gone. Enormous monthly deficits will then need to be fully funded by borrowing. Hundreds of billions in new Treasury debt will start hitting the market for months to come. The pressure on the markets will multiply instantly.

Both bond and stock prices would begin to decline rapidly. The Fed would be forced to act.

The media is reporting the Fed is thinking about getting ready to talk about tapering bond purchases. Forget about it. It’s ridiculous. When the Treasury gets down to its required cash level, not only will the taper talk masturbation end, but Fed yield control, with unlimited QE, would be in play.

A slow Fed response would come too late to prevent real, and possibly lasting, damage to market prices of stocks and bonds (Treasury yield and price charts in subscriber version).

Meanwhile the US Treasury has pumped $600 billion into the accounts of holders of expiring T-bills since late February. Those holders are mostly money market funds, but include dealers and other big institutions. Dealers and big investors deploy that cash to buy longer term Treasuries and, in some cases, stocks. More paydowns are coming. That’s short term bullish for both bonds and stocks.

But beware! The end is nigh! And we know when. This report shows you how we reach this conclusion, and when you need to take action to either take advantage or get out of the way. With 9 beautiful charts and tables to show you exactly how and why we reach this conclusion!

Subscribers, click here to download the report.

Available at this link for legacy Treasury subscribers.

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Have a question about Liquidity Trader? Click the chat link at the bottom right of the page, and I’ll be happy to answer your questions. I am often available to chat with you directly between the hours of 5 AM ET and 4 PM ET weekdays. At other times I’ll respond by email.

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

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Goldilocks Correlation is Still Bullish, Still Bullish After All These Years

Lee Adler

Stock prices are currently right in the middle of the channel surrounding the liquidity line in the Compositite Liquidity Chart (viewable in subscriber version). By this measure the market isn’t overbought, as so many bearish pundits are bellowing. Nor is it oversold. It’s just tracking the growth of systemic liquidity. Not too hot, not too cold, but just right. Goldilocks.

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Here’s Why the Treasury Paydowns Aren’t As Bullish As Expected

Lee Adler

The balance between QE and Treasury supply will remain bullish through through xxxx (subscribers only). This should provide a boost for stocks. It should keep the Treasury selloff at bay for another month or two.

However, this is not as bullish as I first thought. It appears that around 75% of the T-bill paydowns are going to money market funds and other institutions who must hold short term instruments instead of lengthening maturities or buying stocks. So most of the cash from the paydowns is ending up in Fed RRPs.

Only about ¼ of the money has been used to buy stocks and bonds. So the effect has been muted. There’s no massive blowoff. Instead conditions lend themselves to a churning topping action lasting through xxxx (subscribers).

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