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You Really Should Read This to Prepare for Fed Ketchup Day 2/1/23

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Yes, today is the day the Fed catches up with the money markets. Since the last Fed increase in the Fake Funds rate, which is used by absolutely no one except a few banks doing fake trades, the 13 week T-bill has risen by approximately 40 bp. The 4 week bill has risen by around 30 bp.


The Fed's straw people are saying .25. I don't know and I don't care. Rates are a barometer of market tightness. Market tightness is determined by the interaction of the supply of money (credit) with the demand for money (borrowing).  Demand creates supply in the banking system when banks lend.

But the Fed has a history of creating more money than the banks through QE. It has reversed that in the last year, withdrawing money from the system by QT. That puts more pressure on the banks who have their deposits being withdrawn and still need to lend money, particularly to the US Government, but other borrowers as well, as credit demand has remained strong. Thus rates rise. 


So the tendency toward tightness continues. But the new wrinkle is the fact that the debt ceiling is now cutting the flow of Federal Government paper into the market. That means less paper for investors, banks, dealers, and funds to buy. At the same time, the Treasury will likely be paying down some paper. This will put cash back into the accounts of the former holders of the paper. So more cash in the market. Less debt supply. Voila. Rates moderate. The Treasury paid down a couple hundred billion in T-bills in December. Rates stopped rising. Now they've sucked some of that cash out again in the past two weeks, but in the weeks ahead, expect more paydowns. That will keep a lid on money rates. 

There's been a lot of discussion here about inflation. As you know, I think that thinking about that is irrelevant. As the Fed shrinks the amount in the money in the system, inflation has already reversed. Housing prices and rents are headed down. That's deflation, not inflation. But again, traders should focus on the supply and demand for money. That's what determines market trends, not theoretical narratives about inflation or the economy. 

Inflation Indicesimage.png


Inflation Rates

Another real time inflation measure is average mortgage size issued weekly. That's down 10% since last March. When has that ever happened? Once before 2008-09. Remember that? Suppressed mortgage rates for 12 years under QE were inflationary for housing. Higher mortgage rates under QT are deflationary.


Bond yields, not short term interest rates, drive mortgage rates. They should ease while the debt ceiling is in place. Home sales and prices will have a false spring. If you been thinking about selling, this will be your opportunity.

This one is real time. Data as of last week. See the beginning of the false spring when bond yields fell last month. embed.png?s=usaams&v=202301251605V202203

Now back to our regularly scheduled programming. 

Today the market will gyrate in advance of Dr. Jay mumbling some horseshit in front of the teevee cameras as Wall Street's finest PR flacks toss softball setup questions for Holy Jaysus, blessed be he. He'll hit some out of the park, and muff a few, and the market will react stupidly each time. Tomorrow, we return to trend. So sit back, grab some popcorn, and enjoy the show. I placed my bet on Monday based on the swing trade charts, so I come in long today. Long and wrong, lose a lot. Long and right, sleep well tonight. 


Since today will be a day of stupid, useless meanderings, it would obviously be perfectly suitable for my comments. But for now, I will refrain. Maybe later I'll have something particularly dumb to say. Meanwhile, please subscribe to Liquidity Trader if you want serious analysis and insight!  Subscriber attrition is starting to bite me (ouch). It always happens in extended rallies, as people often join because they want bear porn. When I can't oblige they get sad and cancel me. But I cannot tell a lie. I can't give bear porn unless I'm really feeling it. So please give my pieces a chance. Chances are you'll be glad, not sad! 

I'll do a quick update in Liquidity Trader on near end of month withholding taxes later today. That will give you a framework for viewing Friday's BLS bullshit. Their adjustment process results in randomized artificial impressionist art on the first release for the recent month. 

For moron the markets, see:

If you're serious about the underlying forces of supply and demand that drive the markets, join me

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that would be a bullish change becasue market would think that Fed could change the pace of rate rise, and even cut when economy would be hit and be in recession.


"Some anal cysts do expect the Fed to remove from its policy statement the current, open-ended promise of "ongoing increases" in interest rates, a phrase used since the central bank began its tightening cycle in March. Any new language, however, would still leave the door open for further increases depending on incoming economic data, particularly on inflation and jobs."


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Had a very large number of final swing trade buy signals in my trading screens today. Final buy is the second or third of the past week, using both price cycles and up and down volume cycle criteria.

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TSLA having back tested $175 from underneath looks to be headed down... but it can turn and recover all its losses in one 10-minute candle.  Like playing with dynamite.... be careful.

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