I want to thank you for reading these pages. It is my honor to have the privilege of writing my thoughts about the markets for you. I am thankful that hundreds of thousands of you care enough about your investments to have an interest in those thoughts from time to time. I know that my message has not been an easy one to digest, certainly not as easy as that tiny plate of turkey, stuffing, and cranberry sauce you had on Thursday afternoon!

Meanwhile, the stock market has finally begun to confirm what macro liquidity analysis has been telling us for many months. You MUST preserve your capital! But while you’re doing that, there are always ways to profit from the markets regardless of their direction,

Read on to see why for now and the foreseeable future, you must preserve your capital. And I’ll also give you a suggestion on how you can still profit.

Macro Liquidity Analysis Told Us Precisely What Would Happen!

Today, I was thinking about how the market has played out along the lines of what macro liquidity analysis suggested over a year ago. It may have taken a brief detour in the final stock market blowoff in the third quarter, but the scenario we expected has started to play out since then. Meanwhile, the bond market has behaved according to Hoyle almost throughout the period.

Today, I’d like to reprise and update a post that I wrote more than a year ago, on October 17, 2017. It turns out to have been exceptionally prescient then, and its message continues to be extremely important.

As you know, I spend most of my time analyzing macro liquidity trends, not just as they apply to stock prices, but also as they apply to the U.S. Treasury market. These are the forces that establish the market context. The question is whether these forces are bullish or bearish.

That establishes the bias for analyzing the price charts of stocks and bonds, which is where we attempt to fine tune the timing. Charts can be ambiguous. Understanding the underlying liquidity trend helps to clear up that ambiguity.

Analyzing Treasury yields and Treasury bill interest rates can also help to clarify how the forces of supply and demand affect both the Treasury market and stock prices.

The worldwide pool of liquidity that drives the demand for Treasury securities is the same pool of money that drives stock market demand. But we’re not looking for a one-to-one correlation that says “If the price of this goes up, the price of that should go up.” It doesn’t work that way. Sometimes bond yields and stock prices move in the same direction, which means that their prices may move in opposite directions.

We do not look first at the bond yields and interest rates. We look at the creation and destruction of liquidity (the fancy word for “money” or “cash”), and then we look at where that liquidity is flowing. Prices and yields are the directional signals.  They are also meters that show the underlying supply and demand conditions.

Under the dear departed Fed quantitative easing (QE), stock prices moved up, and bond yields moved down (bond prices higher) with them. That was because the Fed was creating so much money that there was more than enough to drive both markets in a bullish direction.

Now that the Fed has been draining liquidity from the system for 13 months, we see bond yields generally rising and stock prices under waves of pressure.

We Recognized That The Stage Was Set Over A Year Ago

I wrote in that October 2017 piece:

“We don’t have tight liquidity, yet. But we know that we’re headed in that direction as the Fed increases the amount of money it pulls from the system under its program of balance sheet “normalization.”

“We also know that if the Treasury follows the recommendation of the TBAC (the committee of bankers that advises the Treasury on its borrowing needs), the Treasury will pound the market with enormous amounts of new supply over a couple of months. The amount of new supply would be multiples of net new issuance the market normally must absorb. That supply will soak up most available cash, especially when the Fed isn’t adding any to the system. Some dealers and big investment firms may also sell stocks to raise the cash needed to absorb the new Treasury supply.”

“Yields on longer term Treasuries and interest rates on T-bills should rise as that supply hits the market.”

“That problem will be made worse when the Fed starts withdrawing large amounts of cash from the system. We would normally expect interest rates and bond yields to rise and stock prices to fall. We would give the benefit of the doubt to the bearish interpretation [of the charts].

That’s the environment we are heading into over the next year as the Fed pulls money out of the system. This will be the largest tightening of the supply of money available to fuel stock and bond purchases in the Fed’s history.”

That established the context under which I have interpreted the charts of stock and bond prices over the past year. It still applies today. Despite the pained bleating from Wall Street, there’s no sign yet that the Fed intends to reverse or even pause its planned course of draining money from the banking system until its balance sheet is normalized. That isn’t likely to be until the second quarter of 2020.

However, a big accident in the markets that dramatically slows the economy is likely to happen first. The Fed will then relent, but it will be too late for your stocks.

Here’s An Easy Way To See Where Liquidity Is Driving The Markets

The best meters of the tightening of liquidity conditions are the interest rates on short term Treasury bills. The Treasury sells these instruments at weekly market auctions. The bills are freely traded in the market. The relentless, virtually straight line rise in these bills is a sign of just how vicious the tightening liquidity conditions are and continue to be.

I pointed out the usefulness of following the 4 week T-bill as a measure of market tightness in that October 2017 piece. The rate then was 0.95%. It’s now 2.23%.

I have also recently featured the 13 week bill as a good place to park the bulk of your investment funds while interest rates rise. Back in October 2017 it was trading at 1.10-1.15%.

Here’s what the 13 week T-bill looks like today. The blue channel shows how the market has risen relentlessly since the Fed started bloodletting program in October 2017. As long as this trend is in force, stay away from buying bonds, notes, or stocks.

The rise in these rates means that money is still tightening. Bonds may be a buy when rates start falling, but stocks usually continue to decline in the first months after the Fed starts to loosen and interest rates start falling. Technical analysis of the stock market averages will tell us when it’s safe to buy again.