S&P Futures Another Bullish Pattern on the Hourly Chart 1/7/22

[DrStool]

Calling "Reserves" a bank asset is misleading. They are only a small fraction of a bank's cash assets. 

Reserves are the minimal amount of cash that banks set aside to handle customer demand for cash. It can be vault cash, or cash deposited at larger banks, or the Fed. 

What's that have to do with stock prices?

Nothing.  

Excess reserves are the amount set aside in excess of the reserve requirement. Total "reserves" in the banking system, are a function of monetary policy. Banks have no say on the amount of total reserves. That's purely up to the Fed. The Fed injects cash into the financial markets via the Primary Dealers, resulting in reserve creation as a second order effect. The amount of cash injected is orders of magnitude greater than any reasonable amount of loan demand. What are banks supposed to do? 

They do as much lending as they can to meet loan demand. But they still have all this excess cash. They can freely use it to buy other assets without restriction up to reserve and capital requirements. And so they must, because there's not enough loan demand to absorb it all. 

Turns out, the Fed was injecting so much cash because the US Treasury was asking for it, with massive, unprecedented debt sales. Had the Fed not bought this paper, god knows what interest rates would be right now.  

Well, the Treasury is now demanding less cash, and the Fed has decided to experiment with seeing how far it can cut its purchases before the system chokes. 

What does that have to do with bank lending?

Nothing. 

 

 

[Jimi]

1 hour ago, DrStool said:

That's both irrelevant and untrue. 

 

[Jimi]

I listened to your podcast appearance.

It was terrific.

Thought you showed much patience at the outset when the focus was "M1" & "M2."

Your discussion of repo/reverse-repo was clarifying, and I am going to listen to it again.

[DrStool]

5 minutes ago, Jimi said:

I listened to your podcast appearance.

It was terrific.

Thought you showed much patience at the outset when the focus was "M1" & "M2."

Your discussion of repo/reverse-repo was clarifying, and I am going to listen to it again.

Thank you! 

[sandy beach]

On 1/7/2022 at 9:42 AM, DrStool said:

We know from the real time US Federal tax withholding data that the December jobs gain was NOT just 199k jobs. Withholding had a 3.2% higher annual growth rate in December than in November. That would equate with not 199,000 new jobs. More like 1.99 million. 

Now before you get too excited, not all of that increase in withholding was an increase in the number of jobs. The average weekly earnings rose by 0.8% M/M so that the real rate of change was 2.4%. 

We also know that withholding taxes include distributions other than regular income, particularly employee 401K and IRA distributions, which are subject to withholding. We can assume that these were higher this year than last year, but we don't know how much. It's unlikely that this would account for all of the difference between November and December.

The 2.4% month to month real increase in withholding is the biggest since the initial post pandemic y/y surge in May. That surge settled down in June.  December's is the strongest monthly performance since then. It is a full 1 % better than the previous peak in the year to year growth rate, in October. 

The BLS said that October jobs increased by 648,000. We have a 1% stronger annual increase in withholding taxes in December and yet the BLS reports only 199,000 gain in jobs? I mean WTF are they doing? Where are the other 447,000 jobs? Plus 1%. How did they miss that? Forget the tax data.

Their own data says they missed a huge chunk of the jobs that were added last month. 

Let's use the BLS's own data. Let's look at December, not seasonally manipulated data, in other words, the actual number that they derived from their survey's before seasonal adjustment, for the previous 10 years. This is the month to month change that they themselves derived from their own surveys. 

What do you notice about this data?

That's right. Every single December there were fewer jobs versus November.

Except for one. This year.

December 2021 has the only gain in jobs in the last 11 years. It was the best performer, by far, of all of the last 11 Decembers. Yet the BLS managed to see only a tepid gain of 199k in its headline number.  

Now let's see how the BLS ranks this December with the past 10 Decembers on the basis of their seasonally adjusted headline number. The M/M column shows the change from November each year. Rank is how that December ranked among the 11 years. December 2021 ranked 7th, that is, fourth worst of the last 11 years. 

How is is that they only managed to see an increase of 199k, ranking  the 4th worst in the last 11 years, when last month was actually the best of the 11 years. 

How is that reasonably possible. It's ridiculous. It's absurd. It's criminal. And yet Wall Street takes this garbage seriously. 

Here's another way to look at it. Based on the BLS headline number, the December 2021 M/M change increased over December 2020's performance by 505K. That makes sense because December 2020 was terrible. 

But the actual data, NSA, says that it really increased by 591K. The BLS's own data shows that it missed at least 85,000 jobs. It also shows that the NSA data for December was +74,000 over December 2015 which BLS says was the best December of the previous decade.  If last month was 74K better, then the headline number should have been 273k+74k= 347k. 

So even the BLS own data shows that they undercounted by anywhere from 85k to 306k. 

The only miss here was by the BLS. It missed the creation of a couple hundred thousand jobs. Based on the withholding tax data, they actually missed far more than that. 

Bond traders are not fooled by the BLS's statistical garbage. 

The 10 year yield has broken out and is headed for the projections I reported yesterday.

 

 

+1

[sandy beach]

On 1/8/2022 at 12:01 PM, DrStool said:

As a rule, I don't read anybody else's work except Doug Noland. I used to repost Jeff's work. But I gave up on it. He likes to say that QE Isn't Money Printing, among other things that seem increasingly detached from the facts. 

I see his headlines and tweets from time to time. Last I noted he was arguing that there's no inflation, or can't be, because the Fed isn't printing money. Or something equally incomprehensible. 

To me, it's gibberish. Trying to comprehend his logic is harder than learning Polish. And for a native English speaker, that's as hard as it gets. 

The Fed doesn't exchange bank reserves for assets. It buys assets from Primary Dealers by creating a credit in their accounts at the Fed. The Primary Dealers have accounts at the Fed that are hybrid deposit/trading accounts. Again, the Fed buys paper from a dealer and to pay for it, instantly creates a deposit in the dealer's Fed account. This is money that did not exist before, but it does exist the instant that trade takes place and the Fed pays for it. 

Initially, this deposit is not an official bank reserve. It sits on the Fed's balance sheet in a Liability line item called Other deposits. These Other deposits consist almost entirely of the accounts of the Primary Dealers at the Fed.  

After the Fed's purchase (Permanent Open Market Operation or POMO), paid for with new money to the dealer, the dealers then use that cash to trade with counterparties. The dealers use the payment from the Fed, which the Fed just imagineered (printed) into existence to buy other assets from other parties. That transfers the deposit from the dealer's account at the Fed to the trade counterparty's bank account at the Fed. It's that second step that transfers cash to the receiving bank, and moves the liability from Other deposits to "Other deposits held by depositary institutions," which are, in essence, the excess reserves of the banks. They're excess because the reserve requirement is constantly zero. Any bank can do whatever it wants with that cash. There's no requirement that it be held on deposit at the Fed. 

A bank's "reserves" may be currency or a deposit at the Fed. To the bank, it is simply a cash asset.

It's the result of the transmogrification of Fed printed money into a Primary Dealer cash asset held at the Fed (a Fed liability called Other deposits). Then when the dealer trades with someone else, that money gets transmitted into a Fed bank deposit liability on the one hand, and the third party bank's cash asset on the other hand. Money always exists as a double entry. A credit to the holder's cash assets, and a debit to the bank deposit liability and in turn the bank's cash asset/Fed  deposit liability. 

It's false to say that banks can't spend reserves. They can and they do, constantly all the time. What is true is that reserves can't leave the system until the Fed sheds assets. The total reserves on the Fed's balance sheet are a constant, but they flow from bank to bank within the Federal reserve system.  A bank can exchange that cash for any alternative asset it wants. 

But these arguments are all second order effects, as I've pointed out repeatedly through the years. The first order effects are the ones we are interested in because they're the ones that drive stock and bond prices. Those first effects are the Fed's trade with the Primary Dealer, where  the Fed creates new money to pay the dealer. The dealer then uses that money to accumulate more inventory, mark it up, and distribute it at higher prices. 

When the Fed doesn't print enough money to absorb enough of the financial assets being created by the US Government, other governments, corporations, or other creators of financial assets, then prices decline. We are in the early days of that process. If the Fed ever truly attempts to reduce its assets again, as it did under Yellen, the result will be market chaos. 

I have written about this process for the last 21 years here. Last February I wrote an explainer which I've made freely available and have promoted extensively. 

FREE REPORT – Proof of How QE Works – Fed to Primary Dealers, to Markets, To Money

I am only interested in tracking primary data published by the Fed itself and the US Government itself. This data is primarily the Fed's weekly balance sheet, the weekly balance sheet of the US commercial banking system, the Fed's daily data on its money printing operations, both permanent and temporary, and its weekly data on Primary Dealer positions and financing. 

In 55 years of following the markets closely I have found that the 3 rules that matter most in correctly identifying the near term to intermediate term direction of stock prices to be:

1. Don't fight the Fed
2. The trend is your friend aka, Don't fight the tape
3. News is noise

As I see it, my job is to stay relentlessly focused on these concepts, and the primary data that enables us to visualize them in action in the real world. 

For those who find my approach wanting, there are billions of other opinions out there to choose from. As my sainted father used to say, "Opinions are like assholes. Everybody has one." 

If my considered opinion is not to your liking, find another asshole. 

+1

[sandy beach]

4 hours ago, DrStool said:

That's both irrelevant and untrue. 

So not only is it irrelevant and immaterial, it's simply false to say that banks are not lending. Next, what does bank lending to consumers have to do with stock prices? 

Absolutely nothing.  

Bank lending has nothing whatsoever to do with reserves. Banks lend to the extent that there's loan demand. Apparently there is. 

Now, is it true that when the Fed pumps 3 trillion into dealer accounts in a year, that banks can't lend that much? Why, yes. Yes it is. 

Why are the banks mostly buying safe assets? BECAUSE THAT'S WHAT IS BEING SUPPLIED. The loan demand is coming from the US Treasury. What are Treasury securities? They are loans to the US Treasury. That's who is borrowing. The Fed is buying those assets from the dealers as they are being created week in and week out. The dealers buy more assets from counterparties. Bank accounts swell. 

Are businesses and consumers also borrowing? Yes. Are they borrowing as much as the US Treasury? No. Not even fractionally. 

Who cares? What possible relevance does that have?  

In this business we're only interested in the direction of stock prices. We are only interested in the first order effects of QE on stock prices. The Fed sends the new money direct to Primary Dealers. Bank lending has zero, zilch, nada to do with it. The fact that banks use cash to acquire Treasuries is simply not relevant. It's not material. It's after the fact. The money is initially created when the Fed does a trade with a Primary Dealer. The Primary Dealer then does another trade IN THE MARKET. It pays for that by sending cash to a counterparty, whereupon it enters the banking system. 

The bank cash asset is only created after there's been a market transaction where a dealer purchases some financial asset. Alternatively, the dealer can lend the cash as margin. It can hypothecate etc. 

Meanwhile, what are the banks supposed to do with the cash they get from these infusions, anyway? Nothing? They lend to the extent that there's demand. They put the rest into whatever paper is available. What paper is available? Treasuries. 

I cover all this in my research. I've covered it thoroughly, over and over and over, for the past 21 years.

If you want to get lost in the forest of irrelevant information and misinformation out there, be my guest. 

You are absolutely free to waste your time as much as you want. 

Thanks for again providing me the opportunity to explain my approach to analyzing the trend of stock prices. 

I've answered this question enough for now.  

 

You and Doug Noland +1

[Jimi]

Doc + Doug Noland = +3