Market rallies continue to be well supported by adequate liquidity, but the end is drawing closer. Non-subscribers, click here for access.
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There are forces that could begin to hamper the price uptrend around the end of October. The first one is a large Treasury coupon issuance that will suck up liquidity at the end of the month. It will be interesting to see to what extent buyers use repo to fund the absorption of that paper. If they opt not to on balance, prices will fall and yields will rise. That could lead to problems for other asset prices. Non-subscribers, click here for access.
Meanwhile, the issuance of T-bills will moderate because the Treasury has excess cash on hand. T-bills serve as perfect collateral for repo borrowing that supports both economic activity and asset price speculation. They are instantly convertible into money. As long as animal spirits are raging, speculators and others will borrow against those bills and the money will get spent on goods, services, and asset speculation. Non-subscribers, click here for access.
We have seen that the more T-bill issuance the merrier. We might guess then, that any reduction in bill issuance might hamper that speculative impulse. Non-subscribers, click here for access.
A big source of money supporting the stock market rally has been the Fed’s RRP slush fund facility. It has been steadily spent down for the past 18 months. It rebuilt by a couple hundred billion at the end of the third quarter (window dressing), and hasn’t dropped back as sharply as I guessed last week it would. There’s still around $325 billion in that facility. Non-subscribers, click here for access.
That’s money that can be used to fund asset purchases, including Treasuries and stocks. If that facility xxxxxx xxxxxxxx, it means that money is being used to xxxxxxx xxxxxxx, other xxxxxx xxxxxxxx, xxx stocks. We have long seen a correlation between declining RRPs outstanding and rising stock prices as holders of the RRPs use the money to buy stocks at the margin. Non-subscribers, click here for access.
At some point that facility will run dry, either in absolute terms, or when the last holders decide that they’re not going anywhere. That will happen in xxxx months. When it does, it should be bearish. For asset prices to continue rising, investors, dealers, and traders will need to fund purchases out of other cash and borrowing. With the constant barrage of Treasury supply it will be a tall order to maintain rising prices. Non-subscribers, click here for access.
Finally, there’s the issue of whether stocks are overbought relative to total money. In terms of bank deposits only, the answer is xxxxxx. But in terms of total available money, it’s xxxxxxxxx. It was in June, but that has xxxxxxx. So we’re waiting for a more definitive sign that animal spirits are xxxxxxxxx. Non-subscribers, click here for access.
Given the degrees of extension that we’ve seen in the past 6 months, any rollover in these measures now is likely to signal a major market peak. We’re not there yet, but it is week to week. I’ll keep you updated when the first signs appear. Non-subscribers, click here for access.
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Lee Adler