You probably think that banking data is boring stuff. And it is, mostly. Except for one thing.

Hidden in that data are secrets about the amount of money available to drive stock and bond prices.

If you know where to look, that information can be extremely useful to you for making money in the stock and bond markets. Even more importantly today, it can help you to keep what you’ve made. I’ve been tracking this data for my readers for years. I know where to look, and I give that critical information to you in these pages whenever it’s relevant.

For instance, every week, the Fed issues a report on the total balance sheet of the US commercial banking system. It comes out just 9 days after the date covered by the statement. Not only does that make it timely, it’s chock full of useful information hidden among the hundreds of line items.

I ferret out those hidden gems for you.

These gems don’t give us exact market timing, but they do help show us the context for the current market trends, and whether they’re likely to continue or not.

The Fed’s Bloodletting Is Bad News

The Fed’s banking data has been telling us that the money trends are turning bearish for the markets as the Fed goes about pulling money out of the markets under its program of balance sheet “normalization.” I call it bloodletting. The Fed is bloodletting the beast of QE. That beast drove the last gasp of a massive, decades-long bubble in bonds. It also drove a great, if somewhat shorter bubble in stocks.

As a result of the bloodletting, rallies in stocks and bonds are not sustainable. The data tells us that over time the bear will take a bigger bite out of the markets. It’s simple. The law of supply and demand rules. As the growth rate of money falls and eventually turns negative there isn’t enough money to absorb all of the bond issuance gushing out of the US Treasury. Supply is catching up with demand, and it will soon overwhelm it.

I have been reporting this story to you right here for the past 15 months. The stock market hasn’t broken yet, but this year, it has begun to bend.

There’s More Bad News For Our Portfolios, from Europe!

I also report similar data on the European banking system. The ECB (European Central Bank) isn’t as kind to us as the Fed in terms of timeliness. It only reports monthly, and with a lag of about 4 weeks. But that’s ok. These trends change slowly and predictably. What’s important to us is seeing the trend.

Now most of us aren’t invested in European stocks. So you’re probably wondering what the heck the European banking data has to do with the US stock market.

It’s more important than you might think. Europe is an exporter of capital. And it exports lots of it to the US, via the US Treasury market and stock market. When there’s excess capital in Europe, holders of that capital look for opportunities elsewhere around the world.

When there’s a shortage of money in Europe, the process can run in reverse. Europeans sell their US stocks and bonds, and take their money out of the US and bring it home. There’s a name for that. It’s called repatriation. When Europe repatriates capital from the US, it’s bearish for the US markets.

If they’re feeling particularly fearful, Europeans will use the cash to pay down some of its own domestic debt. When it’s used to pay off debt, that money leaves the European banking system deposit base, no longer available to return to the US.

Ultimately, all financial roads lead to Wall Street. The big investment banks and trading firms known as Primary Dealers who make markets in stocks and bonds in the US like Goldman Sachs, JPM Morgan, and Bank of America Merrill Lynch, and big European banks like Deutsche Bank, and Barclays, and UBS, all play in one worldwide money pool. So when the ECB prints money, it’s not just available to Europe, it is also instantly available to Wall Street. What happens in Europe doesn’t stay in Europe. That’s why it’s important to keep track of the performance of the European banking system.

By watching this data, we knew that the much ballyhooed synchronized recovery in Europe and the US in 2017  was not showing up in European banking data. Flash forward to today and minimal and scattered signs of manufactured growth in European banking data that had appeared over the summer showed signs of ending in September.

Probably the biggest problem is that the ECB began tapering its QE program in 2018. In 2017 it was injecting €60 billion per month into the banking system. Then in January 2018, it cut to €30 billion. In September, it cut to €15 billion. That’s no longer enough to keep the central bank’s assets stable as older holdings reach maturity and are paid off.

The ECB has announced that it will end its purchases in December. As the ECB’s bond holdings mature, the central bank’s assets will then begin to decline significantly each month. The governments and corporations who sold debt to the central banks must now pay it back. That cash will come out of the banking system and be extinguished. It will no longer be available to be used to purchase US stocks and bonds.

There will be less money in Europe. On balance, European institutions will stop exporting capital to the US.

European buyers play a huge role in the US Treasury and stock markets. As their buying recedes from the US, that has compounded the bad news of the Fed’s bloodletting for US bonds and stocks.

Smoke and mirrors have driven minimal lending and deposit growth in the European banking system in 2018. The inflation of the European housing bubble, with increases in mortgage balances outstanding, and interbank fun and games with the ECB’s TLTRO (Target Long-Term Lending Operations) have been the sources of the apparent growth.

This Chart Shows You Why You Need to Protect Capital

But rather than get into the nitty gritty of all that let me just show a picture. It shows that European bank deposits follow the direction of the size of the ECB’s asset base. And US stock prices follow both.

The ECB has been cutting its QE program. It will end all bond purchases in December. Its balance sheet will start to shrink. That will translate to a downturn in deposits. Watch out for that. It’s bad news for the US stock market.

Here’s How You Can Still Profit!

Now I have been telling you for months to get out of stocks and bonds and to protect your capital by buying T-bills as the interest they pay continues to rise. Meanwhile, there have been some wild swings in the market over the past 10 months. While you may be preserving the bulk of your capital in T-bills, there’s money to be made by trading the swings, both up and down, using a small portion of your capital. Let’s call that your trading capital or risk capital.