As an old adage from Marty Zweig goes, "don't fight the tape, don't fight the Fed". But in 2021, the Fed has become more bipolar, dumping or removing hundreds of billions of dollars worth of liquidity at a time. Making things more complicated, an equally temperamental Treasury, driven by various stimulus bills and funding requirement, also releases and removes hundreds of billions of dollar of liquidity in a single day, a few times a month.
So do you even know whether you are fighting the Fed today?
To help you better anticipate major liquidity events in this unusual environment, I have created this newsletter to guide you through these "extreme weather events" with ample lead time and analysis. I do the research, polish the models, and digest the result into bite-size actionable scenarios, so that you can focus on your trading and risk control.
What do I need to know beyond QE and stimulus on auto-pilot?
Even though the pace of QE has been steady since June 2020 at $120Bn per month, and stimulus money has been flowing nonstop as well. The actual disbursement has been extremely chunky. For example, the weekly bank reserve chart since June 2020 has never exhibit monotonically increasing trend, and so was the market!
Many organizations from the US Treasury Department to IMF and Fannie Mae, all use their Fed accounts as their major checking account, which can cause the available liquidity to banks and their clients fluctuate by hundreds of billions of dollars a day.
Charting the single-day liquidity changes from the Fed and the Treasury actions clearly shows the presence of outlier days with massive ($50Bn+) liquidity injections or withdrawals occurring 3-5 times a month. Many of these outlier days lead or coincide with days of massive market moves. Our proprietary models have been tracking these events for more than a decade and can predict their occurrence weeks ahead.
Market regime changes
Although owning risk assets during loose monetary conditions (QE & rate cuts) and fiscal stimulus is generally a profitable strategy, the relation between the Fed & Treasury actions and asset prices is far more complex, especially at short time frames of 1-3 days. The transmission mechanism involves a varieties of market participants and a wide range of intermediaries, including wholesale funding market, FX market, and bond market. Often times these transmission mechanisms produce opposing forces, plus regulatory changes can also shift their relative weights in influence market. It is therefore crucial to identify the correct the market regime when utilizing liquidity forecasts.
A large part of analysis in the Liquidity Matters newsletter will be focusing on this exact area: the way of slicing and dicing the liquidity data will be adjusted deftly, and will be communicated clearly, when the market regime changes.
Time is money, and I value signal-to-noise ratio greatly.
I am confident that this newsletter format will help you to step up your trading game with the least amount of effort.