US Government Debt Ceiling

The congress will need to increase the government debt ceiling come June 2023 - This is the main reason why we have seen net liquidity raise in recent weeks. This is something to be wary of, as when the debt ceiling is resolved, the US Treasury will have to rebuild the Treasury General Account from its relatively depleted levels, thereby removing liquidity from markets.

Net Liquidity Rebound in now year, with Yellen running down Treasury account into debt ceiling negotiations. As you can see, Bitcoin is highly sensitive to net liquidity, and rallied strongly as liquidity bounces......Net liquidity is likely to be relatively flat, with QT offset by fals in the RRP and treasury accounts.

Reverse Repo Facility Rebalance - The end of year liquidity drain into the RRP has reversed somewhat. Refer to updated chart below (blue line). Net liquidity will continue to face headwinds for the medium term through quantitative tightening. It coincides with the China re-opening narrative, potentially positive US inflation data (January 12), and big options expiry (OpEx) dates - 20/01/2023 & 17/02/2023. Options expiry dates often provide momentum to macro catalysts.

Next FOMC meeting is on February 1, 2023.

We could see equities rally in the short term on improved liquidity, Chinese reflation sentiment (despite the liquidity trap & dire demographics), and improving inflation data. However, this may well be short lived. The Feds hawkish pivot in December, where they flagged the need to tighten to ensure inflation does not return in the medium/long term, even if it means the economy falls into recession (without explicitly saying so).

With the US labour market remaining resilient, with high wage growth, the US Fed pivot may be further away then the market is currently pricing in. We could see the FOMC meeting or US labour data providing the catalyst for a sharp reversal at Feb OpEx. Something to be careful of.....I don't think we have hit the equities bottom (The bottom has never occurred prior to the US Fed pivot - which we are still waiting for).

@Rapstar I agree. Downturns in the last 14 years have been met by central bank responses to avoid them. But inflation wasn’t a thing then. All the major research I am reading over the holidays (and the central bank press conferences themselves) are now saying inflation must be controlled as a priority, even if the economy goes backwards.

The problem is that so much of the inflation problem is a supply issue (which China COVID rampage in 1H23 will likely exacerbate.)

Reading Blackrocks December outlook, their view is that Fed and other central banks will fight the inflation bogeyman until the economic pain is too much, but that even then inflation will be around 3%+ because of structural factors.

Equities are still not cheap (assuming higher discount rates) and a recession and can fall further.

IRL I am now sitting at 35% cash but holding on to all my high conviction stocks. I start the year sharpening my pencil on which stocks will outperform even if overall equities will have a sluggish year (or two). I’m leaving my strawman portfolio unchanged as a reference case. How much will I beat it by as I deploy cash through 2023?