Liquidity Trader

It’s the most bullishful time of the year. The annual corporate tax windfall just hit the US Treasury cash account this week. Individual annual and quarterly estimated taxes will hit on April 18. The Treasury’s coffers will be stuffed with cash, and they will use it to pay down T-bills. They already have begun.

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Treasury supply is currently nil on a net basis thanks to big T-bill paydowns over the past week. At the same time, it’s the Fed’s MBS settlement week. Cash is pouring into Primary Dealer Accounts, to the tune of $119 billion this week. $77.5 billion of that already hit on Monday, March 14, and $14.9 billion hit on Thursday, March 17. The rest comes Monday March 21. Pump that much cash into dealer accounts in a few days, with no Treasury supply to be absorbed, and we see the results, a big pop in stock prices.

But they continue to sell bonds.

The markets should experience a hit at the end of March from the downward price pressure of Treasury coupon supply issuance, while the Fed is doing nothing, which suppresses demand. But then a real tidal wave of cash flowing into the market will start in mid April, when individual tax collections come in to the US Treasury, and that should give both the stock and bond markets a boost.

After that, things will get really bad.

This report tells you what to expect, when to expect it, and shows you exactly why (subscriber version).

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KNOW WHAT’S HAPPENING NOW, before the Street does, read Lee Adler’s Liquidity Trader risk free for 90 days! Act on real-time reality!

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The last time we looked at the Composite Liquidity Indicator (CLI), 4 months ago, I warned that the process of flattening the indicator was beginning, and that that would lead to bad things happening. Those bad things have been under way for a couple of months, but they have barely scratched the surface of the potential of what’s to come as this line turns flat. See chart (subscriber version).

The stock market is approaching the low side of its normal band of motion from the CLI. If history is any guide, the stock market will remain vulnerable to further severe declines until a week or two after the line representing the S&P 500 penetrates the bottom of the normal range of motion from the liquidity line.

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Then we face the prospect that liquidity could be even tighter than during the period of October 2017 to September 2019 when the Yellen Fed was temporarily “normalizing” its balance sheet. See chart (subscriber version).  The Fed is again threatening to begin shrinking the balance sheet. But this time around the market must absorb a far higher amount of new Treasury supply than it did in 2017-19, when the Fed last tightened.

Shrinking the Fed’s balance sheet now would pull cash out of the banking system, causing deposits to at least turn flat, if not shrink outright. I would have to bet that the Fed will never get to that point. The effects of merely holding QE at zero will be bad enough.

As for the War in Ukraine, it’s not helping, but stocks were already down nearly 9% the day that Putin attacked. Furthermore, historically, periods of war have been bullish for stocks. That’s because central banks have typically printed reams of money during wartime. Today, the Fed doesn’t have that luxury, with the  CPI headline print almost 8%, and actual inflation at least 13%.

Wars don’t drive asset price trends. Central bank policy drives asset prices. Today, central banks simply cannot be easy during this wartime because of the devastating inflation already under way.

Under these conditions, where systemic liquidity stays flat, at best, my bet would be that we will see cataclysmic selloffs in stocks at times. Violent rallies will follow, but will inevitably result in lower highs.

Led by the Fed, the world’s biggest central banks have painted themselves, and us, into a corner. They can no longer continue to tilt the playing field in favor of the continuation of a long-running secular bubble. The consequences would simply be too dire.

On the other hand, there will be equally terrible consequences for maintaining tight policy. And I’m not talking about how much they raise interest rates. That’s a sideshow that is an effect of tight money. The market will tell the Fed what to announce about rates. It must simply rubber stamp the market, lest the public realize that the Fed doesn’t control rates the way that it wants the public to think that it does.

Now the Fed is not printing enough money to absorb virtually all new Treasury issuance, with additional cash left over to support stock prices. If it sticks to this new policy of no QE, money rates will rise. Bond prices will fall and yields rise, margin calls will go out. Stock prices will fall. More margin calls will go out. And so on.

But only when consumer prices start to fall will the Fed be able to resume QE. By then, asset prices should be much lower than they are today. Therefore, I will continue to focus on looking for good short to intermediate term stock xxxx xxxxx (subscriber version).. I would continue to xxxx xxxxx (subscriber version). the bond market xxxx xxxxx.

Even bondholders who hold to maturity will get robbed. Inflation will eat them alive.

Will gold be a long term hedge for all of it? In theory, it should be, but we all know about the difference between theory and practice. Meanwhile, the long term charts of gold and some gold mining stocks look more bullish.

I’ll continue to use technical analysis in the Gold Trader reports to try to identify when this gold bull breakout is overdone. And I’ll continue to look for good entry points for getting long the mining stocks.

Meanwhile, none of this has come as a surprise. We were forewarned.

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KNOW WHAT’S HAPPENING NOW, before the Street does, read Lee Adler’s Liquidity Trader risk free for 90 days! Act on real-time reality!

FREE REPORT – Proof of How QE Worked – Fed to Primary Dealers, to Markets, To Money will help you understand why going in reverse will be a disaster.

Federal tax collections looked strong for the full month in February.

Don’t be fooled. It was an illusion due to a calendar effect and inflation.

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That’s a sudden, dramatic sea change from the strong growth path of the past 6 months or so.

This bodes ill for my expectation that a booming economy would boost tax revenues to help offset the amount of new Treasury issuance that the market would need to absorb. Even taking that optimistic assessment of tax collections into account, I had expected the market to still be unable to digest all the new supply without the Fed doing the lion’s share of it. I had still expected an ongoing bear market in Treasuries.

Now the situation looks even worse, and the short term flight to safety rally isn’t helping the situation.

Here’s why (subscriber version).

Subscribers, click here to download the report.

Subscription Plans

KNOW WHAT’S HAPPENING NOW, before the Street does, read Lee Adler’s Liquidity Trader risk free for 90 days! Act on real-time reality!

FREE REPORT – Proof of How QE Worked to help you understand what will happen when it stops.