Liquidity Drain May Signal Further Trouble for Risk Assets
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Three Takeaways
Liquidity continues to be drained from the system, primarily through Treasury issuance and rising TGA balances, putting pressure on risk assets.
Bitcoin and other liquidity-sensitive assets are signaling stress, and historically, they tend to lead broader equity markets lower.
Market structure looks increasingly fragile, with leverage, options, and ETFs amplifying moves and raising the risk of cascading declines.
Silver’s implied volatility climbed to over 100%, and, as noted on Monday, it apparently sent a warning message.
Observations
I think the most important takeaway right now is that liquidity conditions are quietly tightening, even though many investors seem focused on price levels rather than funding dynamics. Treasury settlements and a rising TGA are steadily draining reserves, and the Fed’s balance sheet expansion has been too slow to offset that pressure. To me, this is not a supportive backdrop for risk assets.
I’m also watching Bitcoin closely because I believe it tends to lead broader equity markets, particularly the Nasdaq, by a few weeks. When reserves fall, Bitcoin usually struggles first, and that weakness often shows up later in equities. If that relationship holds, it suggests that the recent softness in Bitcoin could be an early warning rather than an isolated move.
Finally, I’m increasingly concerned about market structure. The violent moves we’ve seen in silver, software stocks, and private equity names highlight how leverage through options, ETFs, and leveraged ETFs can quickly unwind. I think this makes markets more vulnerable than many realize, especially if a larger, more systemically important asset experiences a similar shock.
Fully Edited Transcript by ChatGPT
Hey everyone. Today I wanted to take a quick look at the liquidity picture in the markets. Before we get into it, please remember to subscribe to the channel, like the video, and share it with your friends. Also, don’t forget to check out the membership area. I recently relaunched it, so pricing has changed slightly, but the content flow and overall approach remain the same.
Looking at what transpired this week, there are some unusual developments worth noting. Last week, we saw a significant amount of liquidity pulled out of the market due to Treasury settlements, roughly eighty billion dollars. In the coming week, we’re likely to see another sixty to sixty-five billion dollars drained, spread across the third and the fifth. I believe this ongoing drain will continue to pressure risk assets.
As a sign of tightening liquidity, reserve balances have fallen again, now below three trillion dollars, currently around 2.88 trillion. Much of this decline is tied to the Treasury General Account ramping back up to roughly 950 billion dollars as of the twenty-eighth.
On Monday, the second, we’ll get the quarterly refunding announcement. That should tell us whether the Treasury plans to keep the TGA target at 850 billion dollars or raise it closer to 950 billion. I’m speculating that they may raise the target, largely because the overall debt level has continued to grow and, since the end of the debt ceiling, balances have been closer to 900 billion than 850 billion.
Despite the Federal Reserve expanding its balance sheet for back-to-back weeks, the pace has been slow. As a result, reserve balances continue to decline. This dynamic is likely to persist. Complicating matters further is the incoming Fed chair in May, Kevin Warsh, who has previously expressed concerns about the balance sheet being too large. If asset purchases stop, we may return to a more natural balance sheet contraction.
These liquidity pressures are already visible in risk assets, particularly Bitcoin. Bitcoin fell another three percent this weekend and appears to be forming a bear flag. Based on the pattern, a move toward the sixty-three thousand area is possible, though there is support near seventy-five thousand that could slow or halt the decline. If seventy-five thousand breaks, that would be more concerning.
There is little support for Bitcoin between current levels and lower prices, and while the RSI is around thirty and price is near the lower Bollinger Band, that doesn’t preclude further downside. Bitcoin could consolidate, bounce, or continue lower, but the broader liquidity backdrop suggests continued pressure.
When viewed in log terms, Bitcoin has shown a fairly strong relationship with reserve balances. Reserves peaked last August and have been falling since, and Bitcoin has struggled throughout that period. I also believe Bitcoin tends to lead the Nasdaq by roughly twenty to twenty-five days. Historically, that relationship has held reasonably well.
If reserves continue to decline, it wouldn’t surprise me to see broader risk assets, including the Nasdaq 100, weaken further. That’s consistent with recent history.
In the member area, we’ve also followed a 1966 analog that tracks closely with today’s S&P 500. While not perfect, the alignment from 2020 onward has been fairly consistent, suggesting we may be entering a topping phase. Depending on which version of the analog you look at, both imply a meaningful market decline in the weeks or months ahead, on the order of about twenty-two percent in the historical comparison.
Looking at the Nasdaq, the index is only about two percent off all-time highs. Recent breakout attempts failed, and price has fallen back below key resistance around 25,800. This looks like a failed breakout, and a continued decline could fill the gap near 25,300 and potentially lead to a retest of the January lows.
The S&P 500 shows a similar pattern. Over the past couple of months, it has gained less than one percent, far from the melt-up many expected. Price action suggests the market is struggling, with a rising wedge pattern failing and the index trading below the ten-day exponential moving average and just above the twenty-day simple moving average. A break below 6,900 would open the door to much lower levels.
Leadership stocks are also showing vulnerability. Palantir, for example, appears to be forming a head-and-shoulders pattern, though it is currently oversold and may find near-term support. Many software and SaaS names have been hit hard, including ServiceNow, Salesforce, Intuit, and Adobe, with Adobe trading at levels not seen since late 2022.
Private equity stocks are also weakening. Blackstone has started to roll over again, and historically it tends to peak before the S&P 500. Apollo shows a similar pattern, having peaked well ahead of broader markets in prior cycles.
Finally, gold and silver deserve attention. Gold recently experienced a blow-off top, followed by a sharp decline, while silver sold off violently. The implied volatility measure for the silver ETF spiked to extremely high levels, which in my view often signals a rally killer. When implied volatility rises that much, option prices surge, speculation peaks, and demand can quickly fade.
Because many ETFs hold physical silver, reduced demand for options and ETFs can quickly translate into falling metal prices. Leveraged ETFs amplify this effect. When volatility peaks, it often signals a regime shift, which may explain the sharp selloff we’ve just seen.
All of this highlights how fragile today’s market structure is. With so much leverage embedded through options, ETFs, and leveraged products, it doesn’t take much to trigger a cascade. As an investor, that’s something worth thinking carefully about.
I know this was a bit different from the usual format, but I wanted to change things up. I’m still recovering from being sick, so I appreciate you sticking with me. Thanks for watching, and please remember to subscribe, like the video, and share it with your friends. I’ll see you again soon.
Defined Terms and Jargon by ChatGPT
Liquidity: The availability of cash or funding in the financial system that supports asset prices and trading activity.
Treasury General Account (TGA): The U.S. government’s checking account at the Federal Reserve, which affects system liquidity when balances rise or fall.
Reserve Balances: Cash held by banks at the Federal Reserve, often used as a measure of system-wide liquidity.
Bear Flag: A technical pattern that typically signals continuation of a downward price trend after a brief consolidation.
RSI (Relative Strength Index): A momentum indicator that measures whether an asset is overbought or oversold.
Bollinger Bands: A volatility-based technical indicator showing price levels relative to a moving average.
Analog: A historical comparison used to identify similarities between past and current market behavior.
Rising Wedge: A chart pattern often associated with weakening momentum and potential downside risk.
Implied Volatility: The market’s expectation of future price fluctuations, derived from option prices.
Gamma Squeeze: A situation where option hedging activity amplifies price movements in the underlying asset.
Disclaimer
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
Thanks for the update Michael! Agreed - market feels more fragile than ever. Hope you feel better.