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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 Why Macro Liquidity Still Signals Record Danger

Lee Adler

Composite Liquidity is flat and will almost certainly remain no better than flat for as long as the Fed continues to shrink its assets. There’s been just enough private credit creation, that is, money creation, to offset the Fed’s QT. So total liquidity goes nowhere. If bank deposits or foreign central bank purchases of US securities shrink, or if bank sales of Treasuries increase, the CLI will turn more negative. Non-subscribers, click here for access.

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That’s bad news for stocks and bonds, which have lately been doing poorly enough even with flat liquidity. That’s because constant massive Treasury issuance sucks more money out of the financial sphere than buyers of Treasuries have been creating by using repo to finance their purchases. Non-subscribers, click here for access.

Since the Fed started QT and liquidity turned flat, we have seen a shift in the overbought/ oversold parameters from what they had been under QE. We have an idea of where oversold is from the low one year ago. But as for overbought, we don’t have any idea. We only know that liquidity remains a constraint to upside progress, and an incentive for liquidation. So there’s reason to think that even if the CLI stays flat, the S&P will xxxxx xxxxx xxxxx xxxxx low around 3585. Non-subscribers, click here for access.

Meanwhile, an opinion I stated in June proved itself. Non-subscribers, click here for access.

6/6/23 Just imagine for a moment how bullish sentiment would become if the market tested the old high. The froth would be off the charts as virtually everyone would conclude that it was a new bull market. But without QE, it would not be. It would be a major top to end a cyclical bull market within a secular bear market. Non-subscribers, click here for access.

We’ll leave that determination to technical analysis. For our purposes here, the current liquidity tableau simply doesn’t support a long-term bull trend. But neither does it rule out an extension of the current rally. Non-subscribers, click here for access.

By July, Wall Street had turned bullish. Even the long-term technical indicators that I follow looked bullish. But these liquidity indicators were flashing red, which I noted in reports in August and September. Non-subscribers, click here for access.

The conditions that led to those red flashing lights have not been corrected. Non-subscribers, click here for access.

Such liquidity indications tend to precede long major cycle swings in prices. In that respect we are probably in the first stage of another major cycle bear market within a secular bear market similar to the late 1960s to 1982 and 2000-2009. Non-subscribers, click here for access.

Here’s the supporting evidence including charts showing exactly why we should expect this outcome. And I’ll tell how I’m looking at it tactically and strategically for your consideration. Non-subscribers, click here for access.

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Dealers Pull In Their Horns

Lee Adler

This report was originally sent yesterday under the wrong headline. 

Mid-July was a period of extreme risk in dealer positioning. The subsequent weeks until October 4 indicated a shift toward deleveraging that could become persistent, and persistently bearish, for both stocks and bonds. Any rallies would be swimming against the tide.  Eventually, they will be exhausted. Here are the pictures of the data that prove this view, and tell us what to do with it.  Non-subscribers, click here for access.

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Tepid Tax Collections Mean It’s the Supply

Lee Adler

Which stupid Wall Street is finally starting to recognize. You would think that after 3 years of a bond bear market they would have understood sooner. This reminds me of the markets of the late 1960s and 70s where I cut my teeth in this business. Every broker on the planet was shilling bond funds and the new fangled REITs as they all went to hell in a handbasket. Non-subscribers, click here for access.

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Withholding tax collections strengthened a bit in recent weeks, but not enough to narrow the deficit and meaningfully reduce the flow of Treasury supply. That supply has been gargantuan over the past month. That has caused the market to liquidate both stocks and bonds to absorb the new supply.

That should moderate somewhat in the next few months, but not enough to change the long term bearish outlook. This is an ongoing catastrophe whose effects have begun to show up across all asset classes as leveraged portfolio losses lead to liquidation pressures. Holders of leveraged bonds portfolios are forced to sell not only bonds, but stocks and whatever else they can get their hands on. It has had a deflationary pressure on asset prices.

In this report we look at the charts and the data to explain what’s coming so that you’ll understand what to do about it.

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The Rhymes of History

Lee Adler

I’m thinking in particular of the late 1960s to 1982, the era when I got my start in this business. It was a time of high inflation, tight money, rising interest rates and bond yields, and falling bond prices.

Sound familiar?

I want to replay comments from the August 16 update because they are important context.

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8/15/23 Liquidity analysis provides context, and some liquidity indicators, particularly those based on real time data, can give us timely hints of whether and when to expect a top, in conjunction with the TA. The banking data that I focus on here is released with a 9 day lag, but it can confirm what we’re seeing on the price charts. In addition, it often has enough lead time over the market trend that it can be timely in signaling and not just confirming a turn that’s about to happen. Non-subscribers, click here for access.

The Fed’s weekly H41 balance sheet data is, with the exception of occasional emergency measures, a constant until the Fed changes policy. The Fed’s balance sheet reduction program steadily reduces money in the system by a net of about $70 billion per month. That’s a discussion that we’ve had in other reports. That’s the key negative force that is a background constant which private money creation must overcome to drive stock prices in a persistent uptrend. Non-subscribers, click here for access.

Those forces were in control from May to July, but they’ve lost their grip since then. During the rally, animal spirits raged, and traders of all stripes were happy to take on more leverage to buy stocks. Lately, those animal spirits have flipped, especially over the past few days. Non-subscribers, click here for access.

How easily the market switches from greed to fear is a hallmark of the fact that with the central banks out of the money printing business, money creation is now entirely dependent on the willingness of market participants to borrow to buy. When they borrow and buy, collateral prices rise and money increases. The process is like a dog chasing its tail. When the dog gets tired, it just lays down on the floor. Non-subscribers, click here for access.

Over the past 3 weeks, traders tired of the game. Now they’re sleeping and prices are falling. They’d better watch out, or soon the margin man will come to the door to take the sleeping dogs to a kill shelter. Non-subscribers, click here for access.

We can get a picture of those forces from bank deposit data and bank repo data. Non-subscribers, click here for access.

Other key real time measures that we can watch are Money Market Fund Assets (MMF) and the Fed’s Reverse Repo (RRP) slush fund. During the rally in June and July, both shrank as investors piled into stocks. Institutional investors and hedge funds withdraw the money to buy stocks from their MMF. Banks and dealers also withdraw cash to buy stocks directly from the Fed’s RRP fund. Non-subscribers, click here for access.

Those funds have stabilized, and in the case of Fed RRPs rebounded a little, in August . It means that they’re selling, which we already know from watching the price charts, and depositing the proceeds back in their MMFs and Fed RRPs. Non-subscribers, click here for access.

This report updates the data and tells you exactly what it means along with what to look for and what to do about it. Check it out! Non-subscribers, click here for access.

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Here’s Why This Stuck Market Is Not Surprising

Lee Adler

Maybe we shouldn’t be surprised about the stuck market. No wonder it’s going nowhere. Flat is as flat does. Composite Liquidity is flat. There’s been just enough private credit creation, which is the same as money creation, to offset the Fed’s QT program. So total liquidity goes nowhere and stock prices are stuck, both over the past two months and since 2021. Non-subscribers, click here for access.

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It may feel like a big bull market since last October, but in the big picture, it’s nothing. What we are left with is a range of motion based on the usual market sentiment swings that happen regularly every 2-4 years. But those swings have limits. They are constrained by the liquidity trend.  Non-subscribers, click here for access.

The current composite liquidity picture tells us that we face a critical juncture in about two weeks. Here’s what the that picture  tells us about where stocks are headed next.  Non-subscribers, click here for access.

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Beware! Jobs Really Much Weaker Than They Say

Lee Adler

In the early August update we saw that withholding tax collections had gone flat. They have not improved since then. Collections remain weak. Non-subscribers, click here for access.

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BLS jobs reports have begun to adjust to that fact with tepid growth reported for August, but the reality is much worse. Over time the numbers will reflect that. But we don’t know when. Nor do we know how the market will react to the news when that adjustment finally comes. Non-subscribers, click here for access.

We do know however, that weak tax collections mean bigger deficits. Bigger deficits mean more supply. For the time being there are no increases scheduled in long term paper during the current quarter or Q4. The supply hits will come in the T-bills. And that often works in favor of stocks as market participants use the bills for collateral. It means more money and more leverage. Stock prices rise, but the system grows increasingly fragile as leverage increases. Non-subscribers, click here for access.

We live in “interesting” times, and the longer this goes on, the more interesting it becomes. There’s opportunity, and there’s risk. This report should help you take advantage of the former and minimize the latter. Non-subscribers, click here for access.

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Here’s Why This Is a No Clickbait Market for Primary Dealers

Lee Adler

Please feel free to carry on with your late summer vacation. So what if the kids go back to school. Why should you have to go back to work! Besides, most of our kids are grown. So sit back and enjoy these pre Labor Day dog days.  Non-subscribers, click here for access.

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Yesterday’s bond market rally appears to be but a brief respite in a relentless trend toward lower prices and higher yields. A reaction rally is nothing new, and isn’t likely to change the fact that a market steadily getting pounded with new supply when dealers are already net long, will continue to see generally lower prices until something changes. Change is xxxxxx xxxxxxxxx current picture, xxxx xxxxx xxxxxx xxxxx xxxxxx future.

That rally in the bond market notwithstanding, there’s no reason to change my long-term xxxxxxxxx view of the bond market. The pressure on bond prices ultimately will exact a price on stocks as well.

However, the key word is “ultimately.” These are not market timing measures. They merely provide context. These measures of primary dealer market risk say yes, there’s risk, but they are not at xxxxxxxxx that suggest an xxxxxxxxxxxxxx that stock prices are xxxxxxxxxxx another major xxxxxxxxxx.

This is just a lukewarm endorsement of the bullish trend in stock prices for most of this year. The pullback of the last month does not appear to be in the context of xxxxxxxxx xxxxxxxxxxx xxxxxxxxxx , either in technical terms or in terms of the liquidity context represented in this data.

All things considered, I can only endorse xxxxxxxxxxxxxxxxxx chart opportunities on xxxxxxxxxxxxxxxxxthe ledger, as opposed to xxxxxxxxxxxxxxxxxxxxxx. Non-subscribers, click here for access.

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One Banking Indicator Is Flashing Bright Red for Stocks

Lee Adler

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

Lee Adler

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

Lee Adler

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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