Dear Fellow Trader: |
Greetings on a Sunday afternoon. I'm gonna be quick because I'm going to see the 30th Anniversary of Toy Story with my daughter in 20 minutes… |
This week carries critical events that could reshape the market for the rest of 2025… |
Let me explain what's about to happen this week... |
Imagine you're at a party and everyone suddenly needs to use the bathroom at once. |
But there's only one bathroom. |
That's our financial system tomorrow. |
Three things happen at the same time… |
Companies pay their taxes - Think of this like everyone at the party suddenly needing $20 for the pizza guy. Cash leaves everyone's pockets at once. The government needs to be paid for all those Treasury bills. Remember when the government hit its debt ceiling earlier this year? They issued a ton of IOUs afterward. Now those bills are due. More cash is leaving the system. It's quarter-end: Every fund manager has to show their books. They all adjust positions at once. It's like everyone trying to leave the party through one door.
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Why This Matters to Your Money |
Banks need a certain amount of cash on hand to function - think of it like the oil in your car engine. Right now, they have $3.2 trillion. Sounds like a lot, right? |
Here's the problem… |
If that figure falls under $3 trillion, the engine starts seizing up. We're almost there. |
There used to be a backup tank of cash (called the Reverse Repo) with $2.6 trillion in it. Now it's essentially empty, down to $29 billion. |
That's like having a spare gas can with a few drops left. |
When banks run low on cash, they start charging each other crazy rates to borrow money overnight. It's like Uber surge pricing but for banks. |
Currently, the overnight rate (known as SOFR) is already rising. It hit 4.42% on Friday. That might not sound high, but it's like seeing your temperature hit 101°F - you're not dying yet, but you're definitely sick. |
This all means it's becoming more expensive to borrow money WITH collateral than without it. |
That's like a pawn shop charging you more interest than a credit card. |
It's completely backwards. |
The last time this happened, overnight lending rates went from 2% to 10% in a single day. |
The Fed had to rush in with $75 billion in emergency cash. |
The banks were dying of thirst, and the Fed had to helicopter in with water bottles. |
Markets still fell 5% that week. |
Things could get even more interesting… because… there's a Wild Card… |
The Fed Meeting This Week |
On Wednesday, the Fed meets to decide on interest rates. Everyone expects them to cut rates by 0.25%. |
However, a fight is underway over who will be on the Fed board. |
They're trying to remove one governor and fast-track a Trump appointee. |
During the most important meeting of the year. |
It's like having a family argument while trying to defuse a bomb. |
If the funding markets break this week… |
Bond funds could get hammered… The dollar should see a rise… Stocks will dump (especially leveraged tech) Money market funds might temporarily freeze (worst case scenario…)
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If the Fed panics and cuts rates more than expected: |
Everything rallies hard (temporarily) Inflation expectations explode Gold and commodities rocket higher But it's just kicking the can down the road
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Tomorrow starts the most important week for markets in 2025. |
We are facing a liquidity crisis, a Fed meeting amid political chaos, and everyone needs cash at the same time. |
This isn't about predicting the apocalypse. |
It's about understanding that the plumbing of our financial system is about to be tested. |
Sometimes it holds. Sometimes it breaks. |
Either way, by Friday, we'll know if this rally continues or if reality finally catches up. |
Watch SOFR tomorrow morning. |
If it spikes, get defensive fast. |
If it stays calm, we might muddle through to the Fed meeting. |
But don't be caught sleeping. This is the week that could change everything. |
Join me tomorrow at 8:45 at Market Masters for your pre-week gameplan… |
Stay safe out there, |
Garrett |
P.S. - If you don't understand something I wrote, just reply and ask. This stuff is confusing on purpose. Wall Street likes it that way. |
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