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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!

Withholding Tax Collections Solid in July, But Here’s Why the Party is Over

Federal tax collections were solid in July. The recession that mainstream economists have been predicting, may be coming. xxxxx xxxxxxxx xxxxxxxxx. But it’s xxxxxxxx xxxxxxx xxxxxxxx . Withholding tax collections are still going xxxxxxx xxxxxx despite xxx xxxxxx xxxx.

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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 xx xx xxx x x. 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 xxxxx xxxxx to xxxxxxxxxx xxxxxxx supply. At the same time, investors and dealers will have less cash xxxxxxx xxxxx xxxxxxx. 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 xxxxxxxx xxxxxxxxxxxx xxxxxxxx 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 xxxxxxxx, xxxxxxxxx xxxxxxxx. The stock rally should xxxxxxx xxxxxxxx xxxxxxxx. If there’s something that would sustain these rallies, xxxxxxxxx xxxxxxxxx xxxxxxxxx. Non-subscribers, click here for access.

Tomorrow I’ll issue a report on Fed QT vs. Treasury supply that examines the recent rally, and a more in depth look at why and where it’s likely to reverse. Non-subscribers, click here for access.

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The Bond Rally That Fooled The Majority And Didn’t Help Dealers

As you may know, I recently moved to Nice, France, purchased an apartment, and began renovations. I’m living and working in a construction site, and personally managing the renovation. I’m having a blast, but it’s not without its challenges, particularly on leaving enough time to fulfill my obligation to you to get these reports out to you on a timely basis. I’m a little late this week, and I ask your forbearance in this process.

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This undertaking being in France means that those doing the work here will disappear for the month of August. I’ll “relax” by getting these reports out to you on a more regular schedule, at least until the second phase of my reno gets going in September. Everything should be done by the end of September. Then I won’t have any more excuses for late postings. I can’t use strolling the Promenade des Anglais, or Nice’s Old Town just two blocks from here, as an excuse (Non subscribers, click here to read this report).

If you have never been to the South of France, or even if you have, I encourage you to visit. It’s an amazing part of the world. The options for things to do around here are endless, whether it’s beaches, outdoor activities, sightseeing, or culture and food. The last two in particular. It’s France, after all (Non subscribers, click here to read this report).

Fall is gorgeous here, with daytime highs in the low to mid seventies through October, and the mid to high sixties in November. And it is sunny almost every day. If you would like to come, and have questions, drop me a note. Of course, we’ll meet for a cup of coffee, or a drink, or a meal on one of the hundreds of terrace restaurants all over this city. There are thousands of outdoor cafes and restaurants for you to enjoy all around the region, with the some of the world’s best sightseeing (Non subscribers, click here to read this report).

Now on with the show. This is the Primary Dealer update, which I last did in mid June. First, I’ll replay the summary from the last report, then update you on the details through this week. Non subscribers, click here to read this report.

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. It’s likely to xxxx xxx xxxx xxxx (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 xxxxxx xxx xxxxxx xxxxx. (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.

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. Let’s just accelerate the time frame for when I expect the market to begin experiencing tighter liquidity from xxxxxxx xxxxxxxxx, to the xxxxxxxxx x xxx xxxxxx. We need to be on the lookout for signs of reversal in the bond rally xxxxxx xxxxxxx  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).

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As Good As it Gets, Before the End of Time

The setup for both bond and stock market bulls will be as good as it gets for the next 3 weeks. So don’t be fooled. Get ready to do some more selling, or short selling, if you’re of that disposition.

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The US Treasury announced in its May Quarterly Refunding statement that it wanted to hold $650 billion in its cash account at the end of Q3. After the April tax windfall, its cash had risen to nearly $1 trillion, so it had to whittle that down by redeeming T-bills. Each month it paid down $100 billion or more of existing T-bills to reach its goal. Finally, last week the Treasury hit the mark. Non-subscribers, click here for access.

Based on recent trends I had projected that this would happen in July, and that when it did, the T-bill paydowns would end. Last week the Treasury announced that on June 19 it would issue $15 billion in net new bills its first new bill issuance since just before the April tax windfall began. Non-subscribers, click here for access.

It’s the beginning of the middle of the end. Non-subscribers, click here for access.

This report looks at the trends in Treasury cash, Fed RRPs, the TBACs Treasury supply schedule, and the technical charts of interest rates and bond yields to review how we got here, and estimate how it all plays out, based on known facts and government issuance schedules. And I suggest what you can do about it to protect yourself and play what’s to come. Non-subscribers, click here for access.

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Are the Fed and Treasury Geniuses, or Just Lucky? Part One

We’ve been in a bad bear market in stocks for over 6 months. And a really bad bear market in bonds for almost two years. It could have been worse. Why hasn’t it been? Because even though the Fed hasn’t been absorbing any Treasury supply, supply has been so light that stock and bond prices have reached an  equilibrium range. It’s been volatile. It’s been unsteady. But it hasn’t collapsed.

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In June, the Fed began actually withdrawing cash from the banking system at the rate of $47.5 billion per month. They call it QT, or Quantitative Tightening. $30 billion of that is in Treasuries, and $17.5 billion is in MBS. They plan to double those amounts in September. I’m doubtful they’ll even get through August, but we’ll see.

Reason number one that the end of QE and beginning of QT has not triggered a collapse is that these withdrawals are not simply the opposite of QE. QE was injected into the financial markets directly through the conduit of bond purchases from Primary Dealers. The Fed paid for the purchases by crediting the dealers’ accounts at the Fed with new cash. The dealers than used that cash to accumulate more securities, promote and mark up those securities, and distribute them. As long as the Fed was pumping money into dealer accounts, this process pushed stock and bond prices higher.

Under QT, the withdrawals are not done in trades with Primary Dealers. The money is not sucked directly out of dealer accounts. The QT process only hits the dealers indirectly, and in reduced amounts relative to QT.

The Fed withdraws the money from the financial system by telling the Treasury to repay some of its debt to the Fed. The Treasury must raise the cash to repay the Fed through sales in the market. The buyers of the new paper pay for it by withdrawing cash from their bank accounts. The Treasury sends that cash to the Fed in repayment of the debt. And just like that, the money disappears into the Treasury Black Hole Account.

OK, I kid. It’s not a black hole, but the effect is similar. The Fed sucks the money in, and it disappears from the financial universe. Indeed, the Fed can make it reappear whenever it wants to, but for now, it’s like the South Park episode where Kyle deposits $100 in a new bank account. And it’s gone. The banking system shrinks. There’s more Treasury debt to be absorbed week in and week out, and less cash to absorb it week in and week out. Drip, drip, drip.

Only the boyz have had it good since March. Tax collections have been so enormous on the big quarterly and annual tax due dates that the US Treasury has been able to continue paying down T-bills at a rate in excess of $100 billion per month. Withholding taxes also surged in June.

The result has been that net Treasury supply of coupons less the bill paydowns has only been in the neighborhood of $30 billion over the past month. In April and May, and part of June, the Treasury was actually disgorging cash into the market. It had so much cash it paid down more in T-bills than it issued in coupons. In June it issued only $25 billion net, and over the past 4 weeks only about $35 billion.

The market can handle that. Shakily, yes, but it can absorb that without the Fed’s help.

That all ends now.

This report illustrates how we got here, estimates how it all plays out, based not on conjecture, but known facts and government issuance schedules. And I suggest what you can do about it to protect yourself and play what’s to come.

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Recession? What Recession?

Federal tax collections rebounded sharply in June, including the all-important withholding taxes. I can’t explain why this happened, nor does it matter. My job is to report the data, and follow wherever it leads.

As Professor Lawrence Berra taught us, you can observe a lot by watching. And the observation that taxes rebounded in June tells us that we are not currently headed into recession.

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But that’s beside the point.

The point, the only point, is that tax revenue rebounded sharply. We will therefore not see an immediate increase in Treasury supply beyond the TBAC’s optimistic forecast. However, that still leaves plenty of coupon supply on the way in the third quarter. The recent rally notwithstanding, the market will have trouble absorbing any net supply at all without the Fed taking its share. And the Fed is not only not taking any, it’s forcing the Treasury to add supply that the public must pay for to repay the Fed for its holdings that it is redeeming.

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Then there’s also the fact of the increasing interest expense of the Federal government. That too will add to the deficit, and add to Treasury supply. Non-subscribers, click here for access.

Tax collections are reality — actual hard data, in real time, and not statistically massaged. The economic data will follow with a varying lags. Just like the past month when econ data weakened after I tabulated and reported the collapse in May tax data. I reported that on June 2. Now “everybody” agrees that we’re on the verge of recession. Non-subscribers, click here for access.

Except, oops, we’re not. Tax collections are soaring. We will now see the opposite to the process we witnessed last month. The seers and soothsayers are now all looking for signs of recession. They will be gobsmacked when the lagging econ data starts going the other way again. Non-subscribers, click here for access.

And so will the bond market. The xxxxxxxxx in bond prices, and xxxxxxxx in yields, will xxxxxxxx. The recent rally will soon xxxxxxxxxxx xxx xxx xxxxxxxx. The market has given bond sellers and would be bond sellers xxxxxxxxxxxx.  Non-subscribers, click here for access.

You have to wonder how the Fed and econ soothsayers will now react to a return to booming data AND booming inflation. I suspect xxxxxxxx xxxxxxxx xxxxxxxxx. Some will conclude that inflation expectations are becoming embedded, and that consumers will increase spending now to beat inflation tomorrow. The data suggests that this is already happening. Businesses wouldn’t be increasing payrolls if they weren’t seeing higher sales.  Non-subscribers, click here for access.

There are already reports that the Fed is worried about this and is resolved to prevent it. Now the revenue rebound in June suggests that, as usual, not only is the rent too damn high, but the Fed is too damn late. The other fact is that when things finally do slow down, the Fed will again be too late to respond. Instead of being too loose for too long, it will stay too tight too long. Non-subscribers, click here for access.

Therefore, the strategic message of this data remains the same. If you xxxxxxx xxxxxxxxxx xxxxxxxxxxx xxxxxxxxxxx xxxxxxxxxx. That applies to both bonds and stocks.

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Stocks Are Even More “Oversold” Versus Liquidity

The thing is, there’s no such thing as “oversold” in a bear market. OK, maybe there is, but it’s at a much lower parameter than that which applied during the 13 year bubble.

Therefore we should not expect the market to turn up from extremes similar to those of the past 12 years. And we should not expect the rebounds to be sustained. They’ll correct the extreme, and then the downtrend to new lows will resume. So, what I wrote previously, recapped below, still applies. Stock prices still look oversold, even more so than in late May when I last updated the CLI.

But the bottom line remains the same. Here’s what it is. Here’s why. And here’s what you might consider doing about it if you want to profit from what lies ahead.

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We Knew QT Would Be Devastating, But You Ain’t Seen Nothing Yet

Nothing has changed since I last updated this Fed QT report three weeks ago. I have updated all the charts and details in the body of the report.

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Short term reaction rallies, and dead cat bounces notwithstanding, the intermediate outlook, and longer term, remain bearish, pending xxx xxxxxxxx xxxxxxx xxxxxxxxx xxxxxxx. That will follow the coming crash, not precede it. Anyone holding out for that xxxxxx xxxxxxxx is likely to get crushed, battered, steamrolled, destroyed, decimated, and cooked. Non-subscribers, click here for access.

Holding and hoping is not a strategy. When Wall Street tells you not to panic, they may as well be deer frozen in the headlights of an oncoming train. Smart people don’t panic. They just calmly get the hell out of the way. Cash, despite it being depreciated by inflation, still has utility. When opportunity presents itself, you’re going to need it to take advantage.

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This report will show you in charts and clear discussion, how we got here, where we are, exactly where the markets are headed, and what you can do about it to protect your assets, and even grow your capital in the dangerous, even deadly, months ahead. Non-subscribers, click here for access.

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Dealers Assume the Position, as 75 BPs Coming Wednesday

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.

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.

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.

Meanwhile, the Fed will need to raise its Fake Funds rate by 75 BP this week to keep up with the market. It’s already there as liquidity conditions tighten rapidly and dramatically.

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The US Economy, Including Jobs, Collapsed in May

Federal tax collections plunged in May, withholding taxes in particular. Those worried about a slowing economy now have real data to back them up. In fact, the consensus of worried economists isn’t worried enough. That consensus is for a gain of 328,000 jobs, versus 428,000 in April. But regardless of what the BLS’s, seasonally adjusted, randomized, and otherwise statistically tortured non farm payrolls report shows, the reality is much worse.

That reality is tax collections—actual hard data, in real time, and not statistically massaged. And they were down. Big time.

This means that, if reported accurately, subsequent economic data reports will be weak. They should show economic contraction. So the economy is contracting but inflation isn’t yet. Bad combination. But it’s not enough to give the Fed an excuse to reverse policy.

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The Fed typically isn’t quick enough on the trigger to respond to economic trend changes, and it has not yet shown any propensity to rescue the financial markets in this cycle.

I’ve warned about this before. Eventually weakening financial markets would trigger economic weakening. These two facets of the monetary coin are tied at the hip. Central bank tightening triggers visible effects first in the financial markets. But nearly concurrent effects, or at most slightly lagging, occur in economic activity. They’re just not as visible and as obvious at first. Mostly because economic data lags. But also because the initial economic changes are more subtle than the more visible changes in stock and bond prices and yields.

Furthermore, government agency statistical manipulation of the data adds a random element that often creates the misimpression that the economy is doing better or worse than it is. We don’t have that problem with the tax data. It is what it is.

Now we have the first real, hard data that shows that the economy is in fact weakening, along with the financial markets. But we have yet to see any evidence that inflation is coming down.

The Fed is now in that Catch 22 phase that we knew had to come. And because of the fraudulent way that the Federal Government economic reporting agencies report inflation, the popular inflation gauges will lag as inflation moderates.

The Fed will follow the reported data, so it will be slow to respond to disinflation, when it comes, just as it was slow to respond to inflation, even after it was obvious. The Fed just refused to believe. It will likely be equally disbelieving in accepting the first signs of disinflation.

So the adverse monetary conditions are likely to persist until after financial markets have passed the point of no return. Don’t pin your hopes on economic weakness to rescue the markets. Stay focused on monetary policy, and on liquidity. This report show exactly what the real data is telling us. It shows the impact of that, the implications for the trends of stock and bond prices, and it gives you clear analysis about what to do about it to protect, and even grow your capital under these conditions.

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Quantitative Tightening is Here, and the Effect Will Be Devastating

At its May meeting, the Fed announced the beginning of its program to shrink its balance sheet. That program is colloquially known as QT or Quantitative Tightening. It will begin with reductions of $30 billion per month in its Treasury holdings, and $17.5 billion per month in its MBS holdings. That will last through August. Then in September it plans to go to $60 billion per month in reductions of Treasuries, and $35 billion in reductions of MBS.

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For comparison, under Janet Yellen’s attempt to shrink the Fed’s balance sheet in 2017-2019, the peak monthly reduction was $30 billion per month in Treasuries, and $20 billion in MBS.
That resulted in plenty of havoc in the markets, and Powell was forced to abandon the process in 2019.

This new attempt is a big deal, because through this program, the Fed will actually pull money out of the banking system at a time when the system is already under duress. Inflation is raging, and bond prices have been plummeting, and yields surging, for 22 months. Banks have hidden losses on their books from that. Those losses will start to be recognized as the Fed puts additional pressure on the system.

Stocks have also been cratering. Financial markets are likely to become even weaker than we have already seen as the Fed embarks on this additional level of tightening. As stock and leveraged bond portfolios decline in value, there will be margin calls. And that will exacerbate the situation.

Not only will the Fed now not be the biggest buyer of Treasuries in the market, it will force the US Treasury to issue even more supply. By demanding that the Treasury repay a portion of the money that the Fed lent it via its purchases of Treasury securities, the Fed will force the Treasury to sell more debt to the public to raise the cash to repay the Fed. That cash will then be extinguished. It will leave the banking system and be gone. Poof. Just like that.

At the same time the Treasury will continue to need cash to fund its regular outlays.

Recently, the TBAC (Treasury Borrowing Advisory Committee) has raised its forecast for tax revenue and lowered its estimate of Treasury supply. As usual with economic forecasts, they are backward looking and ignore current, actual conditions. The booming tax revenue trend that we saw beginning over a year ago is already showing signs of weakness in the economic component that is hidden by the inflation component. If revenues are not up to expectations, Treasury supply will increase beyond the modest levels that the TBAC expects. But even those levels are sufficient to pressure the markets.

The money to repay the Treasury’s debt to the Fed will have to come from somewhere, and that somewhere will be investors, banks, and dealers. They’ll need to liquidate other securities, and other assets of all kinds.

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This report will show you in charts and clear discussion, how we got here, where we are, exactly where the markets are headed, and what you can do about it to protect your assets, and even grow your capital in the dangerous, even deadly, months ahead. Non-subscribers, click here for access.

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