Bank Lending Collapsing

RRP hit floor last week, Go Michigan

After a week of consolidation on the highs and after quite a dramatic systematic run up in equities, things are looking quite different now. The complete alpha control systematic algo, run by who knows who, took the Nasdaq and SP500 (dragging the Dow and R2k) straight up from Oct 26th till Nov. 23rd. Then we saw about a weeks worth of consolidation and then finally a new high on Nov. 29th where the Nasdaq futures breached the 16200 level and the SP500 hit 4600, actually putting in a higher high on Dec. 1.

Since this new high and consolidation the Nasdaq has lost some 500 points. Not much really but surely a sign of some major profit taking as happens when we hit highs, is that the reason for the consolidation is that FOMO retailer buyers are buying into the hands of much smarter institutional algo driven sellers. This causes the market to consolidate and trade sideways as these buys and sells are matched. Now it can go both ways, we can consolidate and the buyers could break out to the upside, or the selling institutional pressure could overwhelm as the buyers get exhausted.

What we are seeing is just that right now, whether or not this is a top remains to be seen but we know 16200 is now the bulls hurdle in the Nasdaq. Regain it and we can move higher, move further away and the top is in. We don’t complicate things! On the daily Nasdaq futures chart we are below the 21 Vwap and 15800 is the initial resistance to use here for now, below 15600 and we open up renewed downside pressure:

We continue to watch the MEGA8s as the technical setup there on the market cap chart of the group is not good. This has the looks of an ominous 3 peaks and doomed house set up which would drop this thing below $11T in short order. So we would like to see some consolidation or the risk is a continued sell off and diversification out of this grouping:

As far as the fundamentals, well many continue to cheer the lower inflation numbers and the fact that the FRB may be done hiking. Well let us be the first to tell you, if that is true than that means the FRB sees major trouble on the horizon.

Many mistakenly use this at first, expecting rate cuts as a good sign to buy assets. It happens every time, it happened in late 1999 and 2007 and that didn’t end well. Today the risks are much greater, the debt is much greater, the concentration of wealth is much greater and that means the effects will be that much more magnified.

We know the banking sector has supports with the BTFP, with the Discount Window and that all the claims of “unrealized losses” pushing doom and gloom are really not that warranted, not yet at least. This only becomes a concern if deposits start to fall, which they are not. Bank lending was the old way of money creation, that is really not the case any longer, the FRB changed banks balance sheet makeups long ago, it is the FRB itself and QE that creates base money to be levered out into the economy. Then when you get fiscal stimulus like post Covid, you truly see the inertia and kinetic energy of high powered direct stimulus. We saw it in the form of inflation in 2021 and 2022 exacerbated by zero rates out of the FRB. They should have known better, but as always is the case,

“inflation is caused in one place and one place only, Washington DC.” -Milton Friedman

So when we see bank lending numbers, we aren’t too surprised, the banks themselves are encumbered and this is more of a natural protection mechanism, but its also a recipe for massively reduced earnings as taking too little risk leads to less profits and a banks job is to lend and make money. What this tells us is that the banks themselves do not see a soft landing, but rather a much worse outcome and this isn’t good news for the consumer base either:

We are moving into the end of the year where we might see some decent volatility as some funds play alpha catch up trying to compete with the Nasdaq returns. This should provide some ample two way flows. This should give way to initial January run up seasonality to be followed by a more downward pressure rest of Q1. That is our vision for the short term here at least.

We also believe the bond markets have grown far too optimistic on the future path of rate cuts, pricing in some 100bps for next year. We doubt the FRB cuts at all to be honest and we would rather see them continue to run off their balance sheet. Speaking of the FRB, we saw the lowest RRP level or highest drain last week in quite some time as the RRP lost $119bn in one day, coming very close to that all important $700bn level many speak of:

Magnelibra readers know why this matters, the RRP drain is the liquidity for the markets and it has offset QT by over a trillion dollars, leading to a dampening effect. However as this thing gets reduced, then all that high powered sidelined money gets put to use and if risk assets fail to rise, well then look out below. We suspect the FRB will continue QT even if the RRP hits zero, but we doubt it will go down as fast as it has. If it continues this pace, then we will begin to worry about risk assets.