Next leg down, and then higher?

Trump administration is pushing to relax the Supplementary Leverage Ratio (SLR), which currently forces large banks to hold 5 % capital against Treasuries (3 % baseline + 2 % GSIB buffer) instead of treating them as zero-risk assets.

This should boost demand for Treasuries amid record issuance, helping keep borrowing costs down.

Relaxing the SLR will increase banks’ liquidity. By exempting (or lowering the capital charge on) U.S. Treasuries from the Supplementary Leverage Ratio, large banks free up balance‐sheet capacity they’d otherwise have to hold in reserve. That means:

• More high-quality liquid assets count toward their liquidity buffers without eating into capital ratios.

• Greater capacity to intermediate—banks can step in as market‐makers in the Treasury market more readily, supporting trading desks and repo operations.

In plain terms, a 1 percentage‐point cut in the SLR is estimated to unlock up to $185 billion of extra capacity at the big banks, making short-term, secured financing (i.e. liquidity) more plentiful and cheaper.

This excess liquidity has to flow someplace, I don't expect a windfall of bank lending to small businesses.  I expect  liquidity finding its way to what many consider less risky assets including Bitcoin, gold, and some stocks to benefit from this liquidity injection.  The Trump administration is also cutting taxes, decreasing spending on the bottom 90% of citizens.  AI is enabling companies to have capacity increase with half their tech workers increasing corporate profits even if their topline is reduced. 

These changes will supercharge some assets and corporations.  

What we are witnessing is the final separation of the rich vs the poor, and the rich have liquidity to put money into assets. This will continue until the people require it to stop.

For me, the pivot here is to cover my shorts - again - on this next leg down, and go long less risky assets that will catch the liquidity. 

This all ends very badly, but not in 2025 once SLR is changed.  The administration is shifting the crisis to the private sector.

This videos covers some indicators of we are getting closer to the next leg down.  

Breaking the dollar

Last few posts have been focused on the current administration getting ready to break the dollar.

This video discusses how the Fed will be "absorbed" into the Fed.
Can't stress enough diversify into international and assets.

USA Debt Train accelerates

 

The Big Beautiful Bill is positioned to break the promise of lowering USA debt machine.  Surprise!
The Treasury must roll over 7 trillion in debt AND add to that whatever deficit the new bill brings, I expect additional 2 trillion dollars.

What should happen is the USA bond prices rise, and President Trump will blame the Fed for not lowering rates.  What is missing is the Fed does NOT control treasury rates, the willingness of the world to by Treasuries sets the rates.   The Fed COULD just print money, buy US treasuries and lower rates.  Since 2008 the Fed has done this using "Quantitative easing".

I expect however a new twist, and that is to change the laws around USA banks on amount of US Treasuries they can own and even mandate they purchase more treasuries. If this comes to pass the potential Treasury crisis in 2025 will be kicked.   The next one in the years ahead will be when USA banks cannot buy more treasuries due to fiscal constraints, and the world cannot buy treasuries.  As rates rise, bank treasury holdings will decline materially and cannot be sold without taking a material loss.

The Fed can then buy those treasuries as a "Swap" for cash, but at some point this will become a problem for the world politically.  At that point, we have finally reached the end of the USA debt train line.

So I do think we have years for this to run through, but in the mean time we should see Gold, Bitcoin, and other assets with limited quantiles accelerate.   Silver is taking off like a rocket, and is positioned to do a 4x in short order.  Bitcoin IMO should exceed $1M a coin by 2028.  Buying international assets can help maintain value through the rocky roads ahead.

For a more normal POV of the debt train, see this video.

US Dollar Red Line

Below is a US Dollar chart from 2008 to today.  The red uptrend line, when broken, will be an indicator to the world President Trump is successfully 'revaluing' the USD.  Once broken we may see the market finally pull back, and with risk off push the dollar back up.

However, at some point, we could see the USD depreciation pick up, but I suspect that will be next year. 

If or when the lowest green line is penetrated, it will be panic time for USA, for all time lows will be achieved.  I would expect imports to materially rise in price.

See next chart about the stock market.

The US stock market relative to the world hit an all time high on Jan 21s.  Although the S&P 500 is only 2.5% below all time highs inside the USA, outside the USA the market is a full 10% off all time highs.

The green line represents the SPY adjusted for USD value.  This is how the USD will be devalued, in a manner of which people inside the USA think they haven't lost savings.  When infact, USD devaluation is removing their asset values.

For example, if the USD drops 20% more from all time highs, even if the SPY is at todays level, the US assets would be a full 30% from all time highs.

Please see https://websurfinmurf.blogspot.com/2025/04/american-assets-declining-ahead.html

Global Financial System

A good video explaining the global financial system and challenges.

Up before down?

I have to say, I am completely underwhelmed by any downside action.  I sold majority of index shorts, but do have shorts on 'weak' companies.  And perhaps the issue here, maybe the market leaders are pulling the index up while weak companies go down.

My puts on individual companies are doing fine, and I'll let that ride. I am long gold, GBTC, and some nuclear companies (SMR).
If we break above last Fridays high, then we will likely go up to retest the all time highs.
That puts us into July-August for any material weakness.

The backdrop of lower USD, higher interest rates, and some international bond issues still exist.  If other countries, like Japan, have bond issues, that HELPS American bonds.  So perhaps as the world has increasing pressure on their debt, it will kick the can for USA for a bit.

I still like international as a long term investment and I am looking to add.

I'll take the long weekend and rethink how to deploy.

Enjoy the ride!

Recessions, US Dollar, and Interest rates

This post covers some indicators of US recessions, that typically negatively affect stock market valuation, US dollar valuation, interest rates, and implicitly real estate.  

For details on my concerns see American Assets declining ahead.

Fed Funds and Recessions

 

The chart above shows with the red lines when USA had a recession.  The blue line is when the Fed Funds rate.  Notice each time before a recession the Fed Funds Rate moves higher.

This is yet another indicator of a recession approaching.  I do think AI/Robotics will be the sector to purchase in next upswing.  While a recession isn't guaranteed, as we see from raising rates in 1995, it has a pretty good track record.

US Dollar Valuations

Below is US Dollar valuation as per DXY.  If the USD breaks below 96, we will have broken an up trend in USD since 2010.  The next levels of support is 78 and 70.  A break below 70 is an unknown target.  DXY is not a complete picture, as its about half Euro and other currencies, not including Asia.  Currencies are valued against other assets such as other currencies, gold, bitcoin, or other assets.  So even though DXY is weaking, its not a full picture, but does indicate vs major currencies like the Euro its weakening.

Holding above uptrend 2011 line will show USD is maintaining value relative to 2010 to now.
I think at minimum USD will lose 20 of value from it's high in 2022.

10 year US bond Yields

10 year treasury is linked to US mortgage rates, which in turn affects real estate prices.
The US interest rates bottomed in 2020, and marked a breakout of the 38 year downtrend since 1982.
A break above 5.25% indicates we are likely to see much higher rates in the years ahead.