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No Seller, Let Alone China, Can Disrupt US via Selling US Treasury’s…But the “Why” Ain’t Good

August 16, 2018

No Seller, Let Alone China, Can Disrupt US via Selling US Treasury’s…But the “Why” Ain’t Good

I often read that China may retaliate against US trade sanctions by further decreasing their US Treasury holdings, sending Treasury yields significantly higher, thus blowing out US deficit spending on interest payments.  Trouble is, Chinese Treasury holdings peaked in 2014 (on an annualized basis) and have been declining since.  The Chinese have not only ceased accumulating US Treasury debt, despite continued record trade surplus’ with the US resulting in significant dollar surplus’, but have been decreasing their holdings.  All this, according to the Treasury International Capital (TIC) system.

But this postulation that the Chinese could wound the US via selling a portion (or all) of its Treasury holdings (as Russia recently did) is submarined by the recent actions of the Federal Reserve.  I say this based on the magnitudes greater accumulation and subsequent dumping of specific maturities of US Treasury debt done by the Federal Reserve.

The Federal Reserve accumulated almost $800 billion in 7 to 10 year US Treasury debt (red line, chart below) from 2009 to 2013, and then subsequently dumped $600 billion from early 2014 through the most present August 2018 data.  And the impact on the 10 year yield (blue shaded area, chart below)…essentially zero.  Yes, while the Fed rolled off and/or sold off 7 to 10 year holdings, they were busy buying short term debt.  But this still meant someone had to step up in duration and buy all that longer duration debt the Fed no longer wanted.

To put the relative size of China’s 7 to 10 year holdings in perspective to the Fed’s like holdings, the chart above estimates that a third of Chinese Treasury holdings (likely an overestimation) were of the 7 to 10 year variety (gold line).  The Fed has already rolled off / sold off 1.5x’s more 7 to 10 year debt than the Chinese even have.  

…click on the above link to read the rest of the article…

The Writing on the Wall

February 19, 2018

The Writing on the Wall

Many times people’s eyes glaze over when it comes to macro analysis and I get it. Macro analysis is by definition: Macro. It’s like watching a glacier melt and it only becomes of concern when the glacier structure collapses and you just happen to be in front of it. And then everybody says: Nobody could’ve seen it coming.

Yet following the macro pieces is so incredibly important and I continuously try to dedicate some time to dissect the big data pieces and the data keeps screaming the same message: The Writing is on the Wall.

For reference I keep track of these observations in NT blog and the Macro Corner.

Here’s a few that stuck out in the past few days.

Goldman Sachs sees red ink everywhere, warns US spending could push up rates and debt levels

“Goldman Sachs sees a tidal wave of red ink — and it may drag the U.S. economy into its undertow.

Federal deficit spending is headed toward “uncharted territory,” the firm said on Sunday, suggesting that the Trump administration and Congressional Republicans may not be able to count on the economic boost of tax reform for very longer. Goldman Sachs warned that the economic impetus from tax reform may have diminishing returns after this year. “The fiscal expansion should boost growth by around 0.7pp in 2018 and 0.6pp in 2019, but will likely come to an end after that”—listing a litany of reasons why spending and debt would conspire to undermine the world’s largest economy. 

Goldman’s analysts wrote that the “growth effect comes from the change in the deficit, not the level, and further expansion would put the U.S. onto an even less sustainable long-term trend. Second, some of the recent deficit expansion relates to changes unlikely to be repeated, such as the temporarily large effect of certain tax provisions.”

…click on the above link to read the rest of the article…

Albert Edwards on Trump’s Legacy:15% Deficits then a Deflationary Bust

February 17, 2018

Albert Edwards at Society General does not have kind words for Trump’s stimulus package.

In his latest Email, Albert Edwards at Society General fires a shot at Trump’s tax cut.

Edwards says the “fiscal expansion is probably the most foolhardy escapade in modern economic policy, and the timing of the fiscal stimulus that is utterly ridiculous and will only accelerate the collapse of US financial markets as the Fed hikes rates even more quickly.”

I doubt this is the most foolhardy expansion in history, but it is reckless and ill-timed.

Here are a few clips from Edwards.

After some eighteen months of surprising to the downside, US wage and price inflation are rising briskly, putting intense downward pressure on financial markets. Yet another Fed-inspired financial Ponzi scheme now looks set to collapse into the deflationary dust. But the post-mortem will identify President Trump’s ludicrously timed fiscal stimulus as a key trigger for the collapse. A 15% deficit will be his legacy.

Whatever the arguments are in favour of tax reform in the US (and there are many), this is probably the singularly most irresponsible macro-stimulus seen in US history. To say it is ill-timed and ill-judged would be a massive understatement.

The outcome of this front-end loaded stimulus package is patently obvious. It will rapidly accelerate the end of the economic cycle.

Tim Lee of pi Economics opined recently on why the VIX will struggle to regain the very low levels of a couple of weeks back. “We are much further into the cycle of what might be thought of as an underlying tightening of monetary conditions. The Fed is contracting its balance sheet and raising interest rates. On top of that … US imbalances are worsening with the personal savings rate set to fall to a new low while US government finances deteriorate further. Nominal and real bond yields are rising.”

…click on the above link to read the rest of the article…

The U.S. Deficit Is Beyond Control: Markets Don’t Like Long-Term Government Insolvency

February 15, 2018

The U.S. Deficit Is Beyond Control: Markets Don’t Like Long-Term Government Insolvency

johnwilliams

Economist John Williams sat down with USA Watchdog‘s Greg Hunter to discuss the dire state of the dollar and United States economy.  The monetary path the US is on is out of control, and the unwillingness of government officials to reduce the deficit and stop spending money will cause major problems in the very near future.

Years of socialist policies and reckless spending will eventually end in a complete collapse. Williams is not the only economist to sound the alarm either. As the tax cuts are always positive (people keeping more of their money is always good for the economy) the unwillingness to decrease the size and scope of the government with an expanded deficit will be the downfall of a once great nation.

The interview with Williams begins with him declaring the drop in the stock market to be the fault of the federal reserve. “Did the Fed trigger this most recent round of selling?” asks Hunter.

“It looks like it. If you recall, the story was, bond yields are rising. Rising bond yields means someone’s selling bonds. The Fed wasn’t actually selling bonds, they just were not rolling over the bonds that they normally would…I think you’re gonna see the dollar selling off very rapidly and gold rallying as a flight to safe haven.”

Then the discussion of the tax cuts comes up, as Hunter asks Williams to deliver his take on the lower taxes.

“The tax cuts are generally positive. Anytime you cut taxes that is generally a plus for the economy. The problem is the average guy is still not making ends meet. Anything that increases the disposable income is a plus.

…click on the above link to read the rest of the article…

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