Support the Wall Street Examiner! Choose your level of support to receive a free proprietary report as my thanks. Click the button below to see your options. Become a Patron!

Raising The Debt Ceiling – Is The M-FAT Indicator Wrong?

Contrary to conventional wisdom, raising the debt ceiling is normally bearish. When the debt ceiling is in force, it’s bullish.

That’s not opinion. It’s an observation. And with good reason.

Liquidity moves markets!

Follow the money. Find the profits! 

When the debt ceiling moratorium expired March, the debt ceiling came back in force. The US Government could no longer issue net new debt. It could only replace already outstanding debt. I wrote the following in the Liquidity Trader June Macro Liquidity report:  

6/12/19 But for the time being, with the debt ceiling in place, the Treasury has not been issuing net new supply. So the line has turned flat since March, when the debt ceiling was reimposed. This will continue until the debt ceiling is lifted.

In addition, June 17 quarterly estimated tax receipts will result in Treasury paydowns for a couple of weeks. That will push the line higher as it injects cash back into the accounts of dealers and institutions. Offsetting that to some degree, the Fed will still be pulling money out of the market through August as continues its balance sheet normalization until then, albeit at a slower pace.

The market’s real problems will begin when the debt ceiling is lifted and the Treasury returns to the market with a vengeance. That supply will turn the line lower again.

So here we are. Congress and the Trump Regime have made a deal. The debt ceiling is going up.

Will animal spirits and burgeoning speculative leverage be sufficient to prevent the expected bearish outcome?

The M-FAT Indicator which I feature in Liquidity Trader Macro Liquidity reports is a composite of the impact of both the Fed and the US Treasury on the stock market. It correlated well with stock prices between 2007 and 2018. Logic suggested a cause and effect relationship.

Raising the Debt Ceiling Will Turn the M-FAT Lower

This indicator has been on a long term sell signal since March 2018. At the very least, this signal looked early. But is it completely wrong?

The imposition of the debt ceiling in March 2019 has helped the market dodge the bullet and extend the rally that began at year end 2018. The debt ceiling forced the reduction in new Treasury supply. That Coupled with paydowns of T-bills, that pumped cash into dealer and institutional investor accounts. Dealers and investors used some of that cash to buy stocks.

Raising the debt ceiling will allow the Treasury to come back into the market. It will initially need to issue several hundred billion in new supply to replenish the internal accounts it raided to maintain spending while the debt limit was in place. It will continue to need to issue more than $1 trillion per year in new debt after the initial surge.

When the Treasury sells new supply into the market it will resume putting downward pressure on the M-FAT. Stock prices are now extremely overbought relative to systemic liquidity (shown by the Composite Liquidity Indicator). They should follow the M-FAT trend lower, just as they did in 2008-09.

But as the current Liqudity Trader Macro Liquidity Report shows, there are other forces that could derail the expected outcome. Extreme self-reinforcing bubble mechanics are at work.

To get the big picture, subscribe to Lee Adler’s Liquidity Trader. 

Get this report right now and read Lee Adler’s Liquidity Trader risk free for 90 days! Satisfaction guaranteed or your money back. Then click here to download the report (Subscribers Only)

90 day risk free trial offer is for first time subscribers only.

Try Lee Adler's Technical Trader risk free for 90 days! Follow the money. Find the profits!

Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish LiquidityTrader.com, and was lead analyst for Sure Money Investor. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both analytical and sales capacities. Prior to starting the Wall Street Examiner I worked as a commercial real estate appraiser in Florida for 15 years. I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. My perspective is not of the Ivory Tower. It is from having my boots on the ground and in the trenches of the industries that I analyze and write about today. 

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.