The huge inflows of cash into the US banking system of the past month ended in the latest reporting week. That was the last bullish liquidity indicator.
While the trend of that money flow indicator is still bullish, the liquidity tide is going out in every other measure. Primary Dealers have been getting squeezed on their Treasury shorts and are gasping for air, with virtually no help from the Fed. Foreign central banks aren’t buying enough US paper to keep the markets on an even keel, and banks are sucking wind, unable to accumulate Treasuries, unable to lend, and starting to see losses in their equity trading. Commercial paper outstanding is shrinking and there’s evidence of a run on institutional money funds. Any weakness in bank inflows at all will be like the kiss of death. And there’s no reason to think that any of this will change any time soon, unless and until the Fed steps in.
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