The balance between QE and Treasury supply remains bullish. This should provide an underpinning preventing the stock market selloff from going too far. At the same time, Treasuries have apparently put in an intermediate term low.
May will be even more bullish, but there are trends in place that will end the party, and we have a pretty good idea of when.
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Primary Dealer data is always among the most important types of data for us. I look at it in as many ways as possible with the data that’s available.
On rare occasions the data tells us that change is under way. Most of the time, it simply confirms what we already had concluded.
Today, the macro data on the Primary Dealers and the big banks does not support the strong bank earnings that the big boys reported this week. The data suggests that a supply tsunami will hit the market soon (at the time projected in one of our recent reports). The Primary Dealers’ difficulties will become paramount, and the Q1 bank profits will have proven illusory.
The markets will have foreshadowed the reporting of that before the news is out, as always. Technical Analysis should sound the clarions as the turn gets under way. In the meantime, this analysis tells us that the conditions for a turn are building toward a crescendo.
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I just want to give Liquidity Trader Money Trends subscribers a quick heads up. We always expect extra liquidity around the middle of the month, and we look for rallies at this time because of it. But we just got a little more juice from Doctor Yellen.
The US Treasury is again going hog wild with T-bill paydowns, announcing $62 billion over the past week alone. There’s actually a net paydown in April, after new coupon issuance. Extra slosh for the party.
And, of course, this week is the Fed’s regular monthly MBS QE purchase settlement week April 14-21. They’re pumping $93 billion into Primary Dealer accounts this week. The dealers have been up against it in managing their bond inventories, and the Fed and Treasury are, as always, doing whatever it takes to rescue them.
So all the explanations that you are seeing in the media about why Treasuries are rallying are just so much BS from the clueless mob. It’s about money plain and simple. The Fed and US Treasury are doing a great job of manipulating prices in the short run by pumping a combined $185 billion into the markets, most of it directly into the accounts of Primary Dealers in a very short period.
We were prepared for and expecting this liquidity to boost the markets this week as usual in the third week of the month, but the additional T-bill paydowns over the rest of the month are a new wrinkle that will add even more liquidity than we expected. The end of month period may not be as dry of funding as usual.
This too shall pass, and we know that the end is nigh!
I will cover the issues in depth in one or two subscriber reports this weekend. That will include additional detail on Primary Dealer positioning. Stay tuned!
We have finally seen the effects of the bond market crisis in dealer inventories, and it isn’t pretty.
Dealer inventories have plunged by $166.6 billion since February 24. This is not simply repricing of the inventory. This is active, aggressive liquidation. We have reason to believe that it is forced liquidation. We know that because we know the degree to which this inventory was bought and carried with insane levels of leverage.
One chart in the report shows the scale of the drop, and relates it to the direction of Treasury securities prices.
Another shows total dealer Treasury collateral repo versus the yield on the 10 year note on an inverted scale. That shows the direction of Treasury prices relative to their total repo borrowings against their Treasury holdings.
Another chart shows all Primary Dealer net borrowings, which is the net of their repo and other financing from their reverse repo and margin lending operations. That’s plotted versus their total Treasury holdings. This chart is interesting because it shows the total amount of leverage employed against the only the safest collateral held.
Then there’s the mother of all charts. The chart shows a four year history of the direction of Treasury prices, overlaid with total dealer fixed income positions, and net dealer borrowings used to finance those positions. At the bottom is the ratio of the net debt financing to the total fixed income portfolio value.
The correlation between all 4 series is clear. The past is prologue. The implications are horrifying.
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Oh What a Tangled Web We Weave When First We Update a Spreadsheet from Fed Data
I got into a bit of a pickle this weekend when updating my Primary Dealer position and Financing charts. The spreadsheets that I use to create them are massive aggregations of multiple New York Fed data tables. I need to create dozens of linked tables to collect and aggregate that data into two coherent story telling charts.
I made one small change in one of the two workbooks by adding a couple lines to accommodate an extra week of data. Simple, right? That caused a series of cascading errors in the two linked worksheets. The New York Fed doesn’t make it easy, to aggregate this data. In fact, they make it nearly impossible, which is probably why I’m the only one crazy enough to try this at home.
I didn’t realize the error until I was finished and looked at the chart. It was trash. It was all trash.
I spent 3 hours, until midnight last night, rebuilding all of it, after spending 3 hours building it. So I don’t have a finished report on that data as I had intended, nor was I able to get to the technical report on Sunday night as I usually do.
That’s my sob story excuse for presenting the Technical Trader report for you in two parts this morning, which may be a better way to do it anyway. 😀 First, I’ll start with the chart picks, herein. I’ll get the technical market overview out to you well before New York opens.
If I’m lucky, I’ll get that Primary Dealer report out to Liquidity Trader Money Trends subscribers this morning also.
Thanks for your commiseration and support!
Lee
And now, on with the show.
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As a thanks to Liquidity Trader Money Trends subscribers for your patience, here’s a link for you to download this report, if you’re interested.
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These reports are not investment advice. They are for informational purposes, intended for an audience of investment and trading professionals, and other experienced investors and traders. Chart pick performance changes week to week and past performance may not indicate future results, as you know. Trading involves risk, and these reports assume that you understand those risks and manage them according to your tolerance.
Back on February 5th, I wrote in this report:
The withholding data strongly suggests that more stimulus isn’t needed. As vaccine distribution widens, the economy should heat up on its own. Any additional government juice will heat it up even more.
What the unintended consequences of that will be, we can only guess. Here’s one guess. Institutional balanced fund managers will dump Treasuries and buy stocks.
That will first lead to a blowoff in stocks, which seems to be underway now. But a collapse in the bond markets that’s not offset with equal profits for Primary Dealers from stocks, could lead to a crash in stocks too.
I repeated that message in early March based on the February tax data.
So we knew very well that blockbuster jobs numbers were coming. The BLS (Bureau of Liar Statistics) may lie sometimes, but the tax data doesn’t. All you need to do is look at it. Wall Street eConomists can’t be bothered.
The US Treasury is kind enough to report its tax collections to us EVERY SINGLE DAY, one day after it is collected and counted. Who could ask for better data than that? Pure, raw, unmanipulated, hard data, that not a single Wall Street, or academic, eConomist pays any attention to.
Instead, they watch the heavily manipulated, after the fact, subsequently massively revised, government economic data. Then they spin it to fit their narrative. Wall Street has something to sell you. Academic eConomists are either selling, acting as paid shills, or are simply on ego trips.
There are a handful of good ones out there, and some who are doing serious research, I guess. We don’t hear about them. But the ones who show up repeatedly in the Wall Street media are shills often getting paid to represent a certain political or business point of view.
Conversely, we focus on the hard data. No interpretation needed. It is what it is. Compare this year with the same period last year. Put it on a chart or two. See how that comparison is moving along month to month. And you know EXACTLY what the economy is doing in real time without having to guess what some lying liar eConomist is trying to sell you.
In March, withholding taxes rose at the same rate as in February, which was very, very strong. I show you the trends via a nice chart and a couple of tables in this report, and I tell you what it means for the Treasury market, and what it implies for stocks.
And that is that we are headed for a big cliff. Enjoy the party while it lasts. I’ll tell you when we’re near the cliff.
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In past reports I’ve covered the fact that the proximate cause of the US Treasury’s massive intervention in the Treasury market is the crash in Treasury bond prices and not yields. Dealers are underwater. They’re drowning. And surprise, surprise, they have engaged in more stupid behavior of the kind that causes systemic crashes.
Why are we surprised? These same Wall Street Mafiosi are behind every financial crash, and they are never held responsible. Quite the contrary, the Fed bails them out and rewards them for their disgusting, criminal malfeasance and wild gambling with other people’s money.
The financial system with the Fed as corrupt cop on the beat, stinks to high hell, but it is what it is. We just have to understand their corrupt rules and play by them in order to preserve and grow our capital. Understanding that game meant that we’ve had to be bullish most of the time for the past dozen years.
Sad.
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On February 23, the US Treasury pumped $55 billion in cash into the accounts of Primary Dealers, banks, money market funds, and other institutions who had held the T-bills that were expiring that day. These redemptions began the US Treasury’s series of massive, twice weekly paydowns of the US government’s short term debt.
The purpose of the paydowns was twofold. First, the Treasury is required by the current budget law to whittle down its cash from a peak of $1.8 trillion last year, to $133 billion by August. Treasury Minister Janet opted to start the process by paying down existing short term debt.
That accomplished the second goal, which was to force holders of the expiring paper to buy longer term debt. Despite their protestations that all is well, economic policy makers know that the crash in Treasury note and bond prices is causing a crisis in the Primary Dealer system.
Minister Janet works very closely with Lord Jaysus of the Fed, of course. They expected that the T-bill paydowns would help to reverse the decline in the prices of Treasury notes and bonds by forcing cash into the accounts of dealers and investors. It didn’t work. At least not to the extent that they needed. The full report is reserved for subscribers.
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In the March 21 report on bank deposits I mistakenly posted an old chart from January. Here is the correct chart through March 10 on deposits and through March 17 on the Fed’s SOMA, along with an update on the impact of the correction on the analysis and conclusions.
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First, I want to repeat something I wrote in January:
1/18/21 A while ago I made the huge call that the stock market would follow the bond market in crashing, because Primary Dealers were overloaded with long inventory and overleveraged in financing it. I set a line in the sand of 1% on the 10 year. Last month, they crossed that. Stocks are still going up.
My technical analysis, based on the Cyclical Analysis techniques that JM Hurst published in 1970, first forecast an ultimate price target of 3900 on the S&P 500 on July 26, 2020. Three months later that projection rose to 3900-4000, and just a few weeks ago, the latest revision pointed to 4300-4400.
I don’t think it will get there, but what I think does not matter. I will follow the trend indicators until a clear sign that the fever has broken. I acquiesce in the knowledge that there’s dark matter and energy in the financial universe that I can’t see and don’t understand.
The visible part of the financial universe that I can see and of which I have some grasp, tells me that the system is fragile, that it could crash, and that the risk of such a destabilization is as great now as it ever has been.
Again, I wrote that, two months ago. So now what?
Lee Adler