The Treasury General Account absorbed a heap of cash last week as taxes poured in, bringing the TGA balance to $908 billion, the highest since May 2021:
Given these taxes were previously somebody’s deposits, this resulted in the largest weekly decline in bank reserves on record: a whopping $466 billion! (See above) That’s a lot of cash no longer chasing after T-bills – the short-duration US bonds which many consider to be the “grease” of our banking system (banks buy them with excess reserves). We are already experiencing the worst bond bear market in over 50 years. Removing liquidity at the bottom of the food chain will not bode well for the Keynesian abomination that is our financial system. To echo what others have asked these days, “How long before something breaks?”
Some of you may remember, about a year ago, when Janet Yellen announced a major drawdown of the TGA. Veteran trader Kevin Muir, aka The Macro Tourist – whose newsletter is definitely worth checking out – documented the event and its impact on markets (April 26, 2021):
“Well, we still have another few months of TGA wind-downs. The Treasury Department has guided towards a TGA balance of $500 billion by the end of June. Given that we are still at $1 trillion, the liquidity will keep flowing in the coming months.
The end of the TGA liquidity tsunami will likely mark the end of this stage of the rally. It might not line up perfectly, yet when we look back at a longer chart, it will be close enough.”
This prediction was nearly spot on, as you can see by juxtaposing the S&P with the TGA account balance, which bottomed October through December while S&P peaked within the same range:
Note the April 2020 accumulation in the above chart did not crash markets due to corresponding Federal Reserve stimulus equating to almost double the magnitude. Today, no such offset exists as we enter QT beginning as early at May 5. As The Macro Tourist puts it:
“In Marty Zweig’s day it was as simple as ‘don’t fight the Fed’, but now it’s “don’t fight the Fed, but also don’t fight the fiscal and keep your eye on the timing mismatches from the TGA account changes, and while you’re at it – don’t forget to watch that reverse repo balance.”
Well, the Fed is tightening, the TGA is extracting cash at record levels, and the reverse repo balance has gone relatively flat since last December (i.e. excess cash in banks has not been increasing). None of these developments are bullish.
Keep in mind, the TGA cannot be drained until congress spends the money, and the latest news on the Build Back Better agenda indicates the 6-month deadlock is going strong. Therefore, as the Treasury withdraws private liquidity at record rates (with the Fed soon to follow), it looks like those funds will not be re-released anytime soon. The only remaining reason to be bullish is that everyone else is bearish too. But, as I try to remind myself, there are still people out there buying JPEGs for thousands of dollars. These people have definitely not gotten the memo.