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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!

TBAC Magic 8 Ball Cloudy

Lee Adler

In the second month of each calendar quarter the US Treasury gets together with a shadowy group called the TBAC, which stands for Treasury Borrowing Committee of the Securities Industry and Financial Markets Association.

The Treasury tells the TBAC how much money it will need to borrow to pay its bills for the rest of the current quarter and the subsequent quarter. The TBAC tells the Treasury how to schedule it. In other words, it sets out the type of issuance and the timing for the rest of the quarter and the next one.

In case you’re wondering, here are the current TBAC members. They change from time to time.

I just note that the Vice Chair is good old Brian Sack, who ran the NY Fed trading desk for several years. He was the guy who was in charge of executing the Fed’s trades with Primary Dealers in implementing QE. Now he’s making the big bucks on Wall Street as a “global eConomist.”

How would you like to be the firm that snagged him and his insider connections at the Fed? I wonder what that cost them.

But I digress.

The TBAC’s quarterly borrowing schedules are central to us because they tell us the schedule of expected new Treasury debt issuance (supply), months in advance. In the good old days, before pandemics and debt ceiling crises, that was extremely useful information to have because the Treasury rarely digressed from the TBAC schedule.

That has changed during the last couple years of the Trump Regime, because the mechanism for being able to reasonably forecast the Treasury’s borrowing needs broke down. First, they broke down because the Regime wanted to manipulate Congress by using the Federal Budget as a cudgel. Then things got worse when the pandemic came.

Last week the TBAC issued its revised estimates for the current quarter, and its first stab at Q1 2021.

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Real Time Tax Collection Data Supports Jobs Report

Lee Adler

Tax collections improved in October, but are still well below pre-pandemic levels. The US may look like it’s recovering, but it’s still in the hole it dug when Covid19 first hit. That means that Fed policy isn’t likely to change any time soon.

And it also means that we should expect a stimulus package of some kind, at some point. With the uncertainties surrounding a divided government regardless of whether a new Administration takes over, guessing how much stimulus there will be, and its timing, is a fool’s errand. The one thing that we do know is that whenever it comes, the bigger it is, the more bearish it will be.

And if they spend the $1.7 trillion on hand mostly to pay down debt, that would be very bullish.

Meanwhile, economic data is useful for guessing what Fed policy will be, and under normal circumstances might be useful for making an educated guess about fiscal policy. It’s not possible to translate this data directly into an expected market outcome. It always comes down to measuring the strength and persistence of the trend through technical analysis, and more direct liquidity inputs, such as the PONTs. That’s essentially the difference between the quantity of Fed QE versus the amount of new Treasury issuance.

This data gives us an outline of where the economy really stands, and what it means for the outlook for stocks and bonds.

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Short Term Liquidity Relief Will Turn To Big Pain

Lee Adler

We’ve had two working theses over the past few months. One is that the Fed is no longer pumping enough cash into dealer accounts to keep an endless bull trend going. Instead, at best, there’s only enough for rotation between stocks and bonds.

The second thesis was that because dealers are so leveraged, any fall in bond prices, reflected in an increase in bond yields, would mean big trouble for the markets. Based on technical analysis, I guessed that the Maginot Line for the bond market was 0.80 on the 10 year Treasury yield.

It’s early yet but, last week we saw evidence in the stock market that these theories are working in practice. The 10 year yield traded persistently above 0.80, and stocks sold off.

Not only wasn’t there rotation, where selling in one market translates to buying the other, but both markets were weak. The selling was contagious, leading to net portfolio liquidation, losses, and equity destruction. This increases the danger of margin calls, which can become self-feeding.

The big question is just how much pain will the Fed tolerate?

Because more pain is coming. A lot more.

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Disjointed Economy Points To Bad Things

Lee Adler

Last week I was surprised when the US Government’s retail sales data hit a new high. No way, I said.

Well, Way!

Yes, some retailers are seeing booming sales, particularly online, and … wait for it…

Grocery stores. Even after pulling back from the lockdown spike, they’re still up more than 7% year to year.

Now there’s a basis for a thriving, growing US economy.

Not.

And of course, there’s the surging growth in e-commerce. I’ve put it on a chart along with grocery sales going back 5 years for perspective. The average growth rate, which was already a sizzling 10-15% per year, has roughly doubled in e-commerce. The average growth rate for groceries has tripled. Apparently pandemics are good for some businesses.

Something struck me about this chart, apart from the COVID driven surge. Over the past few months, the annual growth rates in both series have been plummeting. “Growth” ain’t what it used to be. This drop implies contraction since July.

But my purpose here is not to pretend to be an eConomist. I just wanted to point out the government statistics, particularly those that the financial news headline writers feature, don’t tell the whole story.

Furthermore, we know that these sales are just coming out of the hides of other businesses. Lodging, travel, recreation, and transportation sales have collapsed. Gross tax collections show us the truth. The US economy is dead in the water, not growing at all, while remaining at a level a few percent below what it was last year at this time. It’s hard to gauge just how much in real terms, because we really have no clue how high inflation really is. But the nominal actual totals are lower and flat.

That’s what this report focuses on.

The issues then facing us are whether this will be the basis for more stimulus. That would mean more spending, more debt issuance, more pressure on the financial markets, and a need for more Fed support to prevent a market meltdown.

Here’s what the current Federal tax collections data tells us about what the real condition of the economy is, and what to expect as a result.

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Intervention Attention

Lee Adler

The market has the benefit of $115 billion in Fed mid-month QE MBS purchase settlements this week. That would normally be very bullish.

It’s notable that the market has not done more with it. And why not? Still massive Treasury supply along with surging corporate debt and equity issuance is absorbing most QE. There’s not enough left to power an endless bull trend in stocks.

That has been our thesis for the past month or few, and the market seems to be bearing that out. Stocks are stuck in a broad trading range and bonds are weakening.

$83 billion of the MBS settled last Thursday. That helped put $82 billion in Treasury coupon issuance to bed the next day. Whodathunk that the Fed would pump into dealer accounts almost the exact amount that the market needed to absorb the Treasury issuance!

Amazing how that works.

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Normally this much QE every month would be wildly bullish. But the supply of financial assets has risen to meet the demand driven by QE. We’ve reached stasis – equilibrium, so to speak.

But it is fragile. Bonds are teetering on the brink of an abyss. If they go over, and bond prices fall (yields rise), the system would collapse without another round of massive Fed intervention.

So we need to pay attention. Do bonds go over the cliff? How long would it take the Fed to react if they do? And will it be enough, yet again?

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“Slow” Fed Balance Sheet Growth Hides The Truth

Lee Adler

The Fed’s balance sheet has now grown by over $2.8 trillion since March. That’s when the pandemic panic was at its extreme and the Fed went into high gear.  Lately that growth has slowed drastically, to around $51 billion per month on average since July. But that is decidedly not the whole story.

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Federal Tax Collections Now Say Damned If They Do, or if They Don’t

Lee Adler

Tax collections have leveled off at a negative year to year rate. The Fed has gone to Congress begging for fiscal support for the US economy, as a result.  Without a deal to raise spending, the economy will continue to languish, and the Fed will continue to print money to support the markets.

Ironically, if and when a new pandemic relief spending program is enacted, that would be bearish.

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If Bonds Sell Off, Dealers are in Trouble and So Is the System

Lee Adler

Primary dealers have maintained huge and heavily leveraged long bond positions. They are only lightly hedged. Just today, the bond market is threatening to reverse the long term downtrend in yields/uptrend in prices. It’s bad news for the bond market, and for the system as a whole. And that includes stocks.

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The Endless Bull is No More, Bear Awaits

Lee Adler

The outlook for the most of the rest of October is bullish. But it’s not an endless bull any more.

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Mr. Minuschin’s Erection To Boost The Election

Lee Adler

We have known for a couple of months that there would be a mountain of Treasury supply hitting the market at the end of September. We also knew that Fed QE would be far from adequate to absorb this supply. So I have expected something bearish for stocks at the end of September. This could spill over into the first week of October.

But then things get hairy for bears, with potentially happy days for bulls. Unfortunately, we have a little problem this week. There’s no visibility. We don’t know what they have planned for the next couple weeks. That’s different from usual, where we can usually see ahead for a week or two because we know the Fed’s QE schedule, and also pretty much know how much Treasury supply to expect.

Now, thanks to the exigencies of the past pandemiconomic US Treasury fund raising back in March and April, we don’t have that luxury on Treasury supply, which forces us to surmise some things.

Here they are.

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