How a money drain in 2023 could upset the banks again and cause another market meltdown, investor warns

NEED TO KNOW Wall Street is pointing to a weak open ahead of Tuesday’s earnings from Microsoft and other big names. That’s a day after soft-economic landing hopes

fueled fresh 2023 highs for the S&P 500 and Nasdaq Composite Diving straight in, our call of the day taps into a potential market worry that may be off

investors’ radars, from Stock Traders Daily and portfolio manager at Equity Logic, Thomas H. Kee Jr., who warns that liquidity leaving the financial system could upset markets in

2023. In a recent report to clients, Kee noted similarities between current markets and 2019, when big banks started questioning levels of liquidity due to a Fed drain,

and ultimately pushed overnight lending rates to over 8.5%. The Fed got things under control in a short space of time via massive liquidity injections. Kee is worried

about a 2019-style event for this year amid an increasingly “aggressive” Fed balance sheet runoff —the bank lets a portion of the securities that mature each month fall off its

books — and already higher rates. But things could get ugly as it can’t “buy its way out of the problem” this time, he says. Back then, the Fed “stopped the balance sheet

reduction, slashed rates to 0% again, started asset purchases again, and the market took off in 2019.” Unlike now, back then “very few people were pointing to stimulus and asset

purchases as catalysts for inflation and inflated asset price appreciation.” He notes that another $1 trillion needs to come off the Fed balance sheet before it matches the

2019 balance sheet reduction.