Banks Stuffed With cash… Fed Had to Take in $351billion Overnight…

Hey There Income Hunters,


I can’t stress this enough — we have to keep an eye on the amount of cash parked at the Fed.


Why? Because it reveals a decrease in the balance sheet capacity banks have to support Treasury bond auctions.


And if banks are unable to provide that support, interest rates will have to be raised dramatically to entice non-banks to invest in them.


The excess cash is lent to the Fed via the reverse repo facility, or RRP. This is an overnight loan to the Fed collateralized with the bonds the Fed buys when they execute quantitative easing (QE).


Last night, the RRP number jumped to $351 billion…


There is something very interesting about years in the recent past when it reached similar levels  …


Overnight Reverse Repo Program (RRP)


Notice 2016 and 2017 above. The market narrative then was similar to what we’re hearing today — the Fed should begin reversing QE, meaning the Fed should begin that dreaded taper process (cutting back on quantitative easing).


At the time, that caused a large “risk-off” trade.


We can look at the market in two ways: investors are either putting risk on or taking risk off. Risk-off could be buying calls on the VIX — i.e. the fear trade — to hedge a portfolio. Or it could mean liquidating holdings and moving into cash.


High levels of cash, then, are a signpost for “risk-off”. That, in turn, is  a great clue as to how the market is positioned, and it’s also why Option Pit CEO Mark Sebastian has seen the VIX rise even as the market has gone up.


The question is what this means for the market going forward — and, more importantly, what it means for you going forward.




Risk is coming off for the wrong reasons …


First, the consensus view is the Fed may have to taper sooner than expected.


But the narrative is wrong.


Why? Because the unemployment rate — currently 6.1% — is much too far away from the Fed’s goal of full employment at 3.5%… They will not taper until unemployment hits that 3.5% level.


On the money printing side, the graph below shows that with all the money sitting in banks PLUS the money now stashed at the Fed, there is a ton of pent-up cash that can go back into the stock market …


Stocks are very cheap compared to how much money is in the banking system.


As I often say, Trade the Fed … If the amount of cash in the system is rising, buy stocks. Cash levels are sky-high right now the S&P should continue its up-trend.


The other good news is the trend in initial jobless claims. We are still far away from full employment, but an improvement is also bullish for equity prices…



The Technicals in the Market Also Show Potential for a Melt Up


      • Think about the recent combination of the inflation scare and rise in bond yields that triggered billions of sales in unprofitable, high-valuation tech stocks like Tesla (Ticker: TSLA)

Then consider the China- and U.S.-led crypto collapse …

And where is S&P 500 Index (Ticker: SPX) trading? Within touching distance of the all-time high.


      • I also think right now the crowded trade is the inflation scare and the Fed may taper earlier themes. Longtime #IncomeHunters know how much I like to be on the opposite side of a crowded trade …

        It will not take much for the “market is going down” crowd to do a 180 and have to cover their shorts and then get long again.


      • My opinion all along has been the crash may come in the third quarter and that hasn’t changed yet …


I like the solid China companies that are coming to life, including (Ticker: JD) and Taiwan Semiconductor Manufacturing (Ticker: TSM), and I am also going to add Kraneshares China Internet ETF (Ticker: KWEB).


Here are three showing percent returns over the past month …



Bring It Home


The #IncomeHunter’s approach is to stay ahead of the crowd and prepare for the next big move …


The infrastructure spending bill and massive amount of cash on the sideline will drive the next big move.


I also think it’s time to revisit the blue wave stocks and green energy. They have been beaten down and there is a lot of upside … 


I will be in Costa Rica next week hunting for Marlin instead of income for a week. But I will be watching so I can keep my finger on the pulse of the market.


Until then ..


Live and Trade With Passion My Friends,


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