Max Notes
What lies beneath: There’s a liquidity crisis brewing.
At some point it will bleed out and wreak havoc in the financial markets. It’s just a question of when and where. The upshot is that the banking sector will be fine this time because they’re playing with the house’s money and mechanisms were built in the wake of the Global Financial Crisis to handle this type of catastrophe. But at some point in the very near future, the Federal Reserve is going to have to print money; and everyone knows it. That’s where things get hairy.
As we kick off Q4 of 2025, we’re flying blind on government data, with the typical releases being halted due to the government shutdown and more questions than answers from the data dumps ending Q3. Inflation is persistent and rising based on manufacturing and services data. The labor market continues to soften. Layoffs are up and people are out of work for longer. So the last visuals we had on the economy were pretty rough, and now we’re flying through the storm with zero visibility.
We’ll be able to see treasury market activity in real-time, however, and that provides a few clues about the balancing act the Trump administration is attempting with mounting deficits eating away at cash reserves.
In fact, the Treasury just finished a record-setting short-term auction of more than $100 billion to pad its own checking account, the Treasury General Account (TGA). It had to do this because the Fed’s checking account is all but depleted at the moment, and we have trillions due before the end of the year that we don’t have. Bank reserves have also fallen in recent weeks to below $3 trillion as the Fed continues its policy of quantitative tightening (QT).
At the end of Q3 the Fed felt a little pressure as it had to backstop cash in the overnight settlement markets. This was not unexpected because large institutions move a ton off and on their balance sheets, so the Fed built a buffer to prepare for this. But it still had to inject $5 billion into the market and keep some money flowing for the next couple of days. That’s unusual.
If that all sounds a bit wonky, here’s how I look at it.
Money circulates between friends and family of the U.S. government. The Fed does business with family (banks) and the Treasury does business with friends all over the world (corporations, other governments, sovereign wealth funds, family offices, hedge funds, etc.) Like a good head of a family, the Fed lets family members sit on a bunch of money at very favorable rates. The Treasury loans money to everyone—friends and family alike—at slightly higher rates. At the moment, the government needs money for its own bills, so it’s looking to get back some of that family money and is lending out even more money to friends and family. The problem is, not everyone is so keen to part with their funds right now because they’re starting to think we’re a little over our skis, and that we might have a drinking problem.
As a result, in order to bring more money into the government, both the Fed and the Treasury are having to lend at the high end of their rate thresholds.
Then there’s this formula:
Nonsensical Tariff War + Huge Deficits + Government Shutdown + Insane Head of State + Destabilizing Foreign Policy + Concerns about Fed Independence + Everyone Realizing They Can Get by Without Us = A Devalued Dollar.
As you’ll see in the Chart of the Week, gold is at an all time high. So is silver, by the way. Our treasury auctions are getting bigger and the interest rates aren’t budging. Companies are beginning to revise earnings forecasts and the Challenger jobs report indicates that cut backs are about to turn to mass layoffs. A weak dollar means that everything we import is more expensive (on top of the ridiculous tariffs), so we’re heading into a stretch of even more inflation and worse employment figures.
The first break in the dam has already happened in the subprime auto loan market. Tricolor, one of the largest subprime auto lenders, just filed for bankruptcy. While this might seem contained, remember that’s what they said about the subprime housing market in 2007.
And that’s the concern right now. It’s not just about what we can see in the Treasury markets or the capital flight to non-dollar denominated assets like gold. It’s not even flying blind with no data during the shutdown. It’s the massively leveraged private credit market estimated at between $1.5 and $2 trillion in 2025, up from $1 trillion in 2020. This market is incredibly opaque and we only catch glimpses of it when lenders like Tricolor disclose their losses in bankruptcy or when more money is needed in the overnight settlement markets than anticipated.
What we can see doesn’t look good. It’s hard to imagine the things we can’t see somehow looking better. |
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