Liquid
Posted on Sunday, March 5th, 2023
Why won’t this market go down? Technical analysis and options positioning have been overriding fundamentals. Why? Central banks around the world have been adding liquidity. China, Japan, Europe, and the US have been adding liquidity! Yes I know we have all been talking about QT and the US draining liquidity. The debt ceiling debate changed all of that. The Treasury department has been spending the cash they have lying around using emergency measures so they don’t breach the debt ceiling. That has the effect of adding liquidity and stocks have responded. China has been adding liquidity in their post COVID world and Japan is maintaining their yield curve effectively adding liquidity. That is all about to change in the coming months.
You may have heard from the media that you should put your money into 6 month T Bills. We are a step ahead. We have been happily adding to money market funds in recent months. In a rising rate environment, a money market fund may have several advantages over 6-month T-bills. As interest rates increase, the yield on a money market fund is likely to rise as well, which can provide higher returns for investors. In contrast, the yield on a 6-month T-bill is fixed at the time of purchase, so if interest rates rise after the T-bill is purchased, the investor will not benefit from the higher rates. Finally, money market funds may offer greater liquidity than T-bills, which can be particularly valuable in a rising rate environment where investors may need to move their funds to take advantage of higher rates or if we get a broad market selloff. That liquidity would allow us to take advantage of lower asset prices much better than owning T Bills.
I feel like we are watching a tennis match as the bulls and bears take turns influencing the market. We are still stuck where we were in May of 2022. In January of 2002 I wrote that we were entering an 18 month bear market. The buying of single day call options has brought support to this market and bailed it out on several occasions. We point to the March options expiration on the 17th. That is the key date when the market has the potential to unlock again.
It appears that the yield curve is starting to un-invert. That means we expect the technical recession to begin within 5 months. That brings us to June/July at the earliest. The debt ceiling debate will land squarely in the summer period. Realize that a debt ceiling solution may not be all good. The Treasury department has been adding liquidity to markets by spending down their account by using emergency measures to not breech the debt ceiling. This has had the effect of adding liquidity while the Fed is trying to take it out. When the Fed resumes its (net) tightening markets may struggle.
“Short term volatility is greatest at turning points and diminishes as a trend becomes established.”– George Soros
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.