Dead Wrong, Two Days Straight April 22, 2022

OK, so fade me.

Yep, while yesterday’s turnabout was dramatic, and for me, surprising, it is not without information.

And since we are living beings, we both create, absorb, process, and transmit information. It’s but a fleeting moment, but it’s what makes us unique in the universe.

Information point one. Nothing broke yesterday. The rally failed to complete an upside breakout. The JayPo warning that they’re going fitty, triggered a smash. That smash did not break the low.

So what we had was an example of rangebound slot racing. It happens whenever a trading range has been often crossed over a short period of time. As a result of those repeated crossings, virtually all prior bids and offers within the range have been cleared from the trading books. The result it that the market moves to the edge of the range where the first big row of bids lies, in this case bids. We call these lines of bids “sport.” In the other direction, at the top of the range lies a line of offers, or asks. We call that line, “resistance.” When liquidity is in short supply, these moves can be especially dramatic.

The thing is, that in the short run, we had reason to believe that liquidity is plentiful. The market demonstrated to us yesterday that it is not. So we need to take note of that, and understand what it implies about the state of the market.

Yesterday the market turned down from resistance strong enough to overcome the bidders when Powell said BOO! And prices promptly fell to sport overnight–where there were enough buyers plying their trade in Asia and Europe to absorb the selling.

So now we have a double bottom with a slightly higher low and 3 to 5 day cycle indicators on the cusp of buy signals.

We are also in the midst of the annual tidal wave of cash that comes into the US Treasury every year at tax time in mid April, that the Treasury uses to pay down debt for a few weeks. Every single year. This is not new. It is not news. It’s a pattern. And we know all about it because all the data behind it is published daily in real time.

Over the week April 13-20, the Treasury took in a neat $499 billion in tax revenue. Now we all know that the government spends a lot, but it can’t spend that much all at once, so every April it uses most of that cash to pay down outstanding short term debt for a month or so. That usually amounts to hundreds of billions of dollars in T-bill paydowns over the space of a few weeks.

Consequently, dealers, banks, and other large investors who held T-bills see that paper redeemed and their pockets stuffed with cash. Most of them use that cash to buy other short term paper if they can or they simply deposit it at the banks for a few weeks until the Treasury starts issuing bills again on balance, usually in late May. But in the meantime, at the margin a few buy further out on the yield curve, and another few buy stonks for the short haul. That gooses the stock market every year.

That should be happening now. It’s snot. Yet. And that money is on top of the Fed’s delayed MBS purchase settlements that happen every month at mid month. That’s still happening because of the built in lag of several months between the Fed’s MBS forward replacement purchases and the settlement. The Fed’s MBS purchase settlements were still near their peak levels of the past year this month. That’s money that gets mainlined into dealer accounts. Yes, it is coming to an end, and will reverse when the Fed starts QT, but it’s still there for now.

There’s no secret here. It’s all been known and out in the open all the time. You merely need to keep track of it. And for some godforsaken reason that’s what I do for you, so you don’t have to. The Fed’s machinations of its monetary levers and pulleys in the financial markets have fascinated me since I first stood by the Wall Street news ticker in the offices of Walston and Company in Center City Philly, 55 years ago, waiting for the Thursday afternoon Fed M1 report, and Henry Kaufman’s explanation of its implications.

The Fed didn’t tell us much then, but for the past 30 years or so it has been “transparent,” telling us more, and more and more all the time, even publishing it on the www internuts. It did so not for our benefit, but for the benefit of the Fed’s banker and speculator cronies. After all, not all the boyz get to talk to the Fed’s trading desk in New York every day all day. That’s reserved for the Primary Dealers. So the Fed puts the information out there. All we need to do is pay attention to it.

So there’s information what the market did yesterday. As I have been warning Liquidity Trader subscribers for a long time, there’s a lot of leverage in the bond market, particularly in dealer accounts, and that prices would fall as the Fed withdrew QE. Then as prices fall, again I warned, the margin man would come calling, tire iron in hand.

That’s where we are now. And it’s why I’m only a little surprised that stonks stink, instead of rising on a tide of temporarily rising liquidity. Because on the holder side of the bond market ledger, collateral calls are rising too. Those collateral calls destroy liquidity. They extinguish money. And the Treasury paydowns, as huge as they are– $110 billion so far paid and scheduled to be paid this month, are not big enough to overcome what’s happening to all the leveraged fixed income bond managers, who, day by day, wake up with a bloody horse’s head in their bed.

This is a chart of the TLT, Twenty Year Treasury Bond ETF, a proxy for the entire bond market. Godblessuseveryone if 120 doesn’t hold here. Even if it does, it will only be a temporary respite.

On that note,

From the South of France,

I bid you

Bonjour et bonne chance.

Lee