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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!

One Banking Indicator Is Flashing Bright Red for Stocks

The signal is coming from the ratio of xxxx xxxx to total bank deposits, as reported weekly in the Fed’s composite banking system data. That ratio is at an all-time record, tying the peak reached when the stock market topped out in December 2021. Non-subscribers, click here for access.

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It’s only flashing red, not solid red. It means that we must stop, look, and listen for the next few weeks to see if this signal goes full red stop, or back to flashing yellow. Non-subscribers, click here for access.

Other indicators similarly suggest caution. They’re not outright bearish for the big picture, but they’re in position to develop that way in the weeks ahead. By the same toke, they are also in position to break out and go higher. Non-subscribers, click here for access.

Taken together, it means that the market is at a significant inflection point. The information coming from the banking data in the weeks ahead should give us a significant signal on the market’s intermediate term direction. Non-subscribers, click here for access.

This report shows current charts so that you can see for yourself. I’ll track this data for you in the weeks ahead as we stay on the lookout for something big. Non-subscribers, click here for access.

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More Supply is Just a Lie But Withholding Weakens

Market pundits worried this week about the coming massive increase in Treasury note and bond supply. There’s just one problem. It’s not true. The issuance schedule is exactly the same as first forecast in May. And T-bill supply is coming down. Non-subscribers, click here for access.

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But there’s a big problem despite that. Withholding tax collections have gone flat. This is real time, actual collections data, not some retrospective, manipulated government economic statistic. So we know that the jobs data is BS. Non-subscribers, click here for access.

A deeper dive tells us that there’s no immediate reason to expect material change in stock price trends. But at the same time, conditions for change will ripen over the next couple of months. We need to be ready. This report tells you what to look for. Non-subscribers, click here for access.

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Let the Scary Pictures On Primary Dealer Financing Do the Talking

Dealer fixed income positions have shrunken recently. Is that because they are selling and deleveraging or is it because they must mark to market while their inventories lose value.  Non-subscribers, click here for access.

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It looks like the latter. Because they have been adding T-bills and taking on a massive amount of new leverage via the private repo route. It’s clear that that leverage is being put to use, and the evidence shows that it’s not going into the bond market. It’s going to stocks.  Non-subscribers, click here for access.

But what does it tell us about what the markets will do now? Here’s your answer.  Non-subscribers, click here for access.

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Correlations Don’t Matter Until They Do, Like Now

I have been meaning for weeks to hunt for correlations in the data between bank loans to shadow banks and stock prices, and between bank repo loans to the direction of stock prices. The road to hell is paved with good intentions, right? I spent a couple of hours looking at the data every which way, and I found some occasional correlation, but other times there was none. Sometimes hunches don’t pay. It was a lot of time spent for nothing. But some time spent for something. Non-subscribers, click here for access.

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Where I continue to find a strong correlation is between the direction of the Fed’s RRP slush fund (down) and stock prices (up). That has been persistent over the past year. The evidence supports the idea I first put out here a couple of years ago. That is that when the RRPs would start coming down, it would be a bullish signal for stock prices. Here’s the proof, with the amount of RRPs outstanding plotted on a negative (or inverse) scale. See chart in report.  Non-subscribers, click here for access.

The implication here is that as long as the total RRPs are decreasing (rising on this chart), then stock prices are likely to continue rising.  Non-subscribers, click here for access.

So, we will continue to keep an eye on that. This week, there was an uptick in the RRPs, and stock prices started to waffle. A precursor to something? Maybe…  Non-subscribers, click here for access.

There are other signs that something big is about to happen.  Non-subscribers, click here for access.

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We’re Not There Yet

The private money and credit creation process and the resulting bull market in stocks is at loggerheads with the Fed’s policy of shrinking the balance sheet. Traders and investors are now in clear violation of The First Commandment, Rule Number One, “Don’t fight the Fed.”  The question now becomes who blinks first. The lawbreakers, or the law? Non-subscribers, click here for access.

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A couple of high frequency, real-time measures show us important sources of the money funding this stock market rally. These measures should give us hints of when this process is coming to an end, which will correlate with, if not cause, a stock market top. Non-subscribers, click here for access.

So, if you fight the law, will you win? Here’s the answer. Non-subscribers, click here for access.

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Withholding Tax Rebound Sets Up a Bearish Fed Catch 22

Since the beginning of June, withholding tax collections have rebounded a bit, and stabilized at a level that is certainly better than the negative readings of the past 3 months. However, the nominal year to year gain of x% as of July 3 is still below the inflation rate of employee earnings of x% in recent months, so it continues to signal a weak economy. But it is stronger than it was in the March-May period, in other words, sequential growth, month to month. Non-subscribers, click here for access.

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The BLS nonfarm payrolls survey of employers is dated as of the 12th of the month. While it is supposed to represent conditions in June, the fact is that as of June 12, HR managers report conditions mostly based on end of May payrolls. At the end of May, half-month payrolls were down x% year to year, not adjusted for inflation. Non-subscribers, click here for access.

That compares with a x% year to year decline at the end of April. It suggests that as of the June 12 survey date, there was significant jobs xxxxx. The June nonfarm payrolls report would be strongly xxxx if it were accurate. Non-subscribers, click here for access.

Unfortunately, as we have noted month in and month out, the BLS survey methodology and adjustment process results in so much distortion and noise in the first release that there’s virtually no correlation between what the BLS reports and employment tax receipts. Non-subscribers, click here for access.

As a result, the BLS has been overstating jobs gains for months. Maybe this will be the month where the rubber band snaps back to the real trend. Eventually the BLS will get there through its monthly revisions and annual benchmarking when the biggest adjustments occur. That’s when the BLS fits its survey data to tax data. Non-subscribers, click here for access.

Consequently, interpreting the first monthly release and attempting to relate to stock prices and guesses about Fed policy is a fool’s errand. Obviously everybody on Wall Street wants to participate. Non-subscribers, click here for access.

The jobs release only matters for a millisecond as the market reacts to it. Then the market returns to trend. The real significance of the withholding data is not what it tells us about the jobs report. It is what it reveals about current revenues and the trend of revenues. It is the variability of revenues that tells us what to expect about Treasury supply in the near term. Non-subscribers, click here for access.

And Treasury supply is what matters. Here’s what to expect, based on the current real time tax collections data. Non-subscribers, click here for access.

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It’s Not Your Daddy’s Liquidity Anymore

That’s right. It’s not the Fed any more. This ain’t the QE era. Non-subscribers, click here for access.

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The stock market has mounted a seemingly sustained rally despite the fact that the Fed continues to steadily withdraw money (aka liquidity) from the financial system.  Non-subscribers, click here for access.

This is not the good old QE days when the Fed steadily pumped money into the system, and we knew that the market would always rise, except when the Fed paused its pumping. We saw a market hiccup under Janet Yellen’s balance sheet shrinkage program in 2018, but then Panic Jerry set new standards of QE pumping in 2019 and 2020.  Non-subscribers, click here for access.

I thought that once the new QT started that the market would be mostly bearish, with occasional rallies. Uh huh. Not. Non-subscribers, click here for access.

I am reminded that in the pre QE days of blessed memory that we often had bull markets with the Fed managing balance sheet growth at a nominal pace of 2-5% per year, year in and year out. But even that is different from today when, yes Virginia, there really is a QT, and the Fed really is shrinking its balance sheet. Except when it isn’t. Non-subscribers, click here for access.

Alas, the world is not so simple any more. The system can, when investors and bankers are of a single mind, create ample liquidity on its own simply by self-expanding credit. Bankers can decide to offer more credit. Investors can decide to use it. Non-subscribers, click here for access.

Or if asset prices, in this case stock prices, start rising far enough for long enough, players at the stock tables can simply decide to do it on their own. That includes not just the big investors and traders at the tables, but also the dealers running the games. Everybody winks and gets in on the winning action. Prices rise. Rising collateral value means more margin is available. Traders borrow against it. And away we go. Non-subscribers, click here for access.

Today the market has an added bonus: massive T-bill issuance by the US Treasury. Here’s where things get perverse. I had expected, wrongly, that the enormous supply would put downward pressure on all asset prices as the market was forced to absorb the new T-bill supply that would come when the debt ceiling was lifted. But my analysis was faulty. Non-subscribers, click here for access.

Two things happened that I did not expect. Fortunately, the technical analysis (TA) that I do in tandem with the liquidity side told me a few months ago that it was time to get long stocks. So I followed the TA, while trying to guess at what the liquidity source would be. This was just the opposite of the way things worked under QE, when we knew exactly what the source was, how much was coming and when. The TA naturally followed.  Non-subscribers, click here for access.

The first thing that happened is that the big hedge funds hedged away the likelihood that Treasury note and bond prices would fall when the wave of new supply was released onto the market. So far that hedge has worked, by preventing bond prices from falling. I do not think that hedge will work indefinitely, but for now it is, and that’s all they needed to continue speculating on the long side in stocks.  Non-subscribers, click here for access.

The second thing that happened, which I neglected to consider in my initial analysis of what would happen when the debt ceiling was lifted, is that T-bills are perfect collateral. They can instantly be used as collateral for repos — repurchase agreements (RPs) – which are very short term loans from banks or the Fed for nearly 100% of the face value of the T-bills. And use it, they have.  Non-subscribers, click here for access.

At the same time, money market funds had over $2.3 trillion sitting in the Fed’s Reverse Repo (RRP) slush fund back in April. The Fed’s RRP program takes in excess cash from dealers, banks, and particularly money market funds. I had long noted that it would be used at some point to fund absorption of Treasury issuance and possible to support a rally in stocks. I had warned in these pages for the past year and a half that when the RRP started to decline, look out for stocks to rally.  Non-subscribers, click here for access.

Voila, here we are. As of Monday, July 3, cash in the RRP slush fund had dropped from $2.275 trillion on May 22 to $1.909 trillion. That’s $356 billion in cash that came out of the RRPs to fund the absorption of the T-bill issuance. Those T-bills became collateral for an increase of private bank to dealer and bank to hedge fund RPs, instantly creating a massive amount of new credit for players to play with. And play they did.  Non-subscribers, click here for access.

So here we are in a brave new world of automatic, self-created market finance, which will be indefinitely funded by the issuance of new Treasury securities. The tidal wave of $600 billion of new issuance in 2 months post debt ceiling suspension will slow after July. But we can still expect an average of $100 billion per month in issuance. And instead of new supply always pressuring the market, we must face the fact that the dealers and gamblers at the tables can, at will, increase the use of virtually automatic credit whenever they want to. The T-bills will provide the fodder.  Non-subscribers, click here for access.

Is this system infinite and unbreakable? Of course not. The longer this goes on and the bigger it gets, the more fragile it becomes…Especially because the Fed, the ECB and BoJ are still working to control inflation. The Fed will continue to shrink its balance sheet, withdrawing cash from the banking system. Its two cohorts are a little less predictable, particularly the BoJ, but as long as the inflation numbers continue to run hot around the world, then the central banks will continue to attempt to drain money from the system by shrinking their balance sheets.  Non-subscribers, click here for access.

So there’s that as an offset to the will of the players to continue borrowing and leveraging to drive asset prices higher. This rally will end, and it is likely to end hard, in tears. But for now, we can’t see from liquidity alone, when that will be. There are some things that suggest that the time is growing near for the first big correction. I will continue to monitor the liquidity measures for any hints of reversal, but as always, the technical analysis will determine when we should change tactics, even if, in this new world, it’s not always clear why, at first.  Non-subscribers, click here for access.

In this report I present the most current banking, money market fund, and Fed balance sheet charts to illustrate what’s going on, and give us a leg up on specifically what to expect and look out for in the stock and bond markets. Non-subscribers, click here for access.

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We Now Know What is Driving the Rally

Tick Tock. No not the app. That’s the sound of the clock ticking. Non-subscribers, click here for access.

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 The story is told in the Fed’s weekly data on the US banking system, released Friday night with a 9 day lag. Yeah, the rally may still have life, but as with all life, it’s finite. So enjoy it while you can. Because tick, tock. Non-subscribers, click here for access.

From Whence Cometh the Rally Money

I have pointed out in recent weeks that when the Treasury would start issuing mass quantities of T-bills that they could be used as collateral for leveraging other purchases. And that maybe, just maybe, dealers and hedgies might use that leverage to buy stocks. Lo and behold, as I reviewed my banking system charts, the evidence of just that process appeared. Non-subscribers, click here for access.

I present forthwith for your dining and listening pleasure, the chart of bank repo (Repurchase Agreement) loans. These are typically overnight loans that banks make to dealers and hedge funds in exchange for Treasury collateral. Non-subscribers, click here for access.

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The Fed’s Slush Fund is Working

The Fed’s Reverse Repo (RRP) operations act primarily as a money market fund for money market funds (MMFs.) The MMFs were forced out of their T-bills in 2021-22 because the US Treasury was paying them down. The Treasury redeemed the T-bills and the MMFs got cash back. Not what they wanted. They need to earn interest on those funds.  Non-subscribers, click here for access.

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The MMFs were therefore in trouble. The Fed came to the rescue by opening its RRP operations to the MMFs. Previously, only Primary Dealers could participate. In effect, the Fed began subsidizing MMFs. As the Fed raised the rate it paid on RRPs, that increased the subsidy to MMFs, and their holders, mostly big investors. Non-subscribers, click here for access.

In this program, the MMF’s could place their excess cash with the Fed overnight and get a nice big fat, risk free, interest payment in return. The Fed imagines that money into existence. Non-subscribers, click here for access.

But the interest payments cut into the Fed’s surplus (aka profit). If the Fed loses money, that reduces the amount of surplus and ultimately, the taxpayer ends up paying for that. Nice. Taxpayers fund welfare payments to MMFs which are typically held by the wealthiest of the wealthy anyway. Therefore the Fed’s interest payments on RRPs are welfare for the rich. Non-subscribers, click here for access.

But I digress.

Once the RRPs were opened up to MMFs, RRPs outstanding ballooned. They got up to $2.6 trillion when the Fed rescued those couple of failed banks in March. Non-subscribers, click here for access.

Meanwhile, I have constantly warned that when the debt ceiling was lifted and the US Treasury started issuing T-bills again, MMFs would pull cash from RRPs to buy T-bills. It’s now happening. RRP balances have fallen by $275 billion since May 24, as the Treasury has been issuing wads of T-bills, including a net of $175 billion this week. Non-subscribers, click here for access.

The RRPs aren’t funding all of that, but they’re absorbing most of it. With T-bills being perfect collateral, they can be, and are, used for repurchase agreements from banks (RPs) whereby the bank will provide credit up to nearly the amount of the T-bill. RPs are like margin loans in that respect, except that the haircut is almost nothing. So the reintroduction of T-bills into the market provides collateral for more credit. More credit means more money to buy hot paper. Non-subscribers, click here for access.

And they’re buying it. Non-subscribers, click here for access.

Some of you have pointed out correctly that MMFs, particularly government MMFs, can only buy T-bills with their cash. But MMFs are only intermediaries. Who holds MMFs? That’s right, major investment institutions, hedge funds, and you and me, aka Ma and Pa investor.
We investors, both big and small, participate in the Fed’s RRP program through these intermediaries. And when we as a group start feeling bullish on balance, for no reason in particular, then we pull money out of MMFs and buy stocks, bonds, real estate etc. etc. etc. Non-subscribers, click here for access.

That’s what is happening now. The rationale for it DOES NOT MATTER. The fact that interest rates are higher now than last October when stocks bottomed, DOES NOT MATTER. The fact that the Fed is still steadily tightening monetary policy via QT DOES NOT MATTER. Non-subscribers, click here for access.

Yet.

QT will matter.

I’ll tell you when, and why, and what it will mean for your dining, listening, and investing pleasure. Non-subscribers, click here for access.

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Investors Breathe Sigh of Relief But D-Day Is Now

The debt ceiling issue has been settled. Investors breathed a sigh relief and bought stocks. But they did it on margin, because the cash liquidity for it sure isn’t there. So we can probably count the longevity of this rally with the fingers of our hands, and it won’t be in months. And probably not weeks either. Non-subscribers, click here for access.

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Of course, liquidity isn’t a timing device. It merely establishes context. And the context ain’t bullish. Animal spirits and increased leverage have a shelf life, and this one is about to run out. The timing is likely to depend on the onslaught of new Treasury supply that’s about to hit, now that the debt ceiling has gone away for a couple of years. Non-subscribers, click here for access.

In the short run, anything can happen, especially when hedge funds have a record short position in Treasuries, which we have discussed elsewhere. But the liquidity context argues for the rally in stocks to end soon. Timing that is a matter for technical analysis. Non-subscribers, click here for access.

This report tells what to expect, why, and how. You need to know that so that you are prepared to react properly when the time is right. Non-subscribers, click here for access.

My swing trade screens for stock picks have led me to select only buys lately, until this week when I began to tentatively nibble on the short side. The liquidity picture now suggests that we start to look more closely for opportunities to go short, and to put in trailing stops on our long side trades. Non-subscribers, click here for access.

As for the bond market, once the potential for a short squeeze is out of the way, it will be time to get out yet again. Non-subscribers, click here for access.

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