The Real Pivot

The "Yellen pivot" is why it the markets are acting like it’s QE5

Here is the idea, from Luke Gromen:

Luke Gromen @LukeGromen

"Everyone was looking for the next Michael Jordan on the basketball court, but he was walking up the fairway." -Phil Knight, circa 2000 Everyone was looking for the Fed to pivot, but Treasury pivoted in October 2022: Left = Yellen on Oct 11th; Right = Yellen on Oct 12th

The idea is that the real pivot came in October 2022 with Yellen running down the Treasury General Account, which can be thought of as the US Treasury’s checking account. Her doing this adds liquidity to the system, opposing the force of QT.

Let’s take a look:

(The money in this account is considered outside of the financial system, so when bills are paid and money leaves this account, it increases liquidity in the financial system.)

Now take a look at the timing of the “Yellen pivot” compared to the strength of the US Dollar:

You can really see it when you look at bond volatility - the MOVE index:

Here is a look at real net liquidity in green, vs SPX in blue, and the timing of the pivot:

The red line above is the 200 day moving average of real net liquidity — its slope represents the rate at which liquidity is being removed from the financial system. We can see that it is flattening, after dropping at a faster rate from April through September of 2022.

---

Here is a look at the relationship between the bear market rallies (yellow arrows) in 2022 and real net liquidity — SPX topped out sharply (blue arrows) when liquidity dropped (green arrows):

So there may not be another dramatic drop, since those that recently occurred happened under completely different liquidity conditions.

---

The market’s expectation is that the remaining half trillion dollars in the Treasury General Account will be there to continue to provide liquidity to the system until around June 2023, due to the politics of the debt ceiling.

This, the CPI rule change, Jerome’s behavior at the press conference this week, employment, and all the stars align to give him the cover he needs to cut rates later this year, if he needs to (is told to).

This is what the markets are expecting, and this is the fuel for the current rally. This puts a floor on the downside, until something changes.

Something will change, of course. Please also keep in mind that this isn’t your grandfather’s pivot (it’s not exactly a March 2020 type pivot… sorry) and that none of the above is financial advice.

We will continue to monitor the behavior of Janet’s checking account and Jerome’s Jedi mind tricks. Stay tuned