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Category: Liquidity Trader

Reports on the Fed and Treasury, Primary Dealers, real time Federal tax collections, foreign central banks, US banking system, European banking system, and other factors that affect market liquidity. Resulting market strategy recommendations. 8 reports each month. Click here to subscribe. Now published at Lee Adler’s Liquidity Trader.

Short Term Liquidity Relief Will Turn To Big Pain

We’ve had two working theses over the past few months. One is that the Fed is no longer pumping enough cash into dealer accounts to keep an endless bull trend going. Instead, at best, there’s only enough for rotation between stocks and bonds.

The second thesis was that because dealers are so leveraged, any fall in bond prices, reflected in an increase in bond yields, would mean big trouble for the markets.

Mr. Minuschin’s Erection To Boost The Election

We have known for a couple of months that there would be a mountain of Treasury supply hitting the market at the end of September. We also knew that Fed QE would be far from adequate to absorb this supply. So I have expected something bearish for stocks at the end of September. This could spill over into the first week of October.

But then things get hairy for bears, with potentially happy days for bulls. Unfortunately, we have a little problem this week. There’s no visibility. We don’t know what they have planned for the next couple weeks. That’s different from usual, where we can usually see ahead for a week or two because we know the Fed’s QE schedule, and also pretty much know how much Treasury supply to expect.

Now, thanks to the exigencies of the past pandemiconomic US Treasury fund raising back in March and April, we don’t have that luxury on Treasury supply, which forces us to surmise some things.

Here they are.

Macro Liquidity Rising But Other Issues Intrude

Composite liquidity continues to rise, but at a slower pace than in the second quarter as the Fed has slowed QE. That reduces the cash flowing into Primary Dealer accounts, which in turn contributes to a slowing in secondary liquidity drivers.

“Slowing” is a relative word, however. Historically, the numbers remain gargantuan.

No, something else is holding the market back. Here’s what that something is, and what we’re going to do about it.

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