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US Facing Mounting Debt Amid Global Pandemic – ABC

US Facing Mounting Debt Amid Global Pandemic – ABC

Good interview with Professor Barry Eichengreen of UC Berkeley, a good friend of GMM, and odds on favorite to be a Nobel laureate one day.   We agree with him that now is not the time to worry about the public debt as we are already down this rabbit hole and the economy is on the verge of complete implosion, risking plunging our society into anarchy without another rescue package.

We also hate what we see: large well-capitalized corporations and entities getting PPP loans, which will be forgiven, some dead beats using their PPP loans to buy Teslas, trade stocks, and gamble in Las Vegas, not to mention the lack of planning and total incompetence of the policymakers.    He quotes Voltaire’s famous exhortation,  used many times here at the Global Macro Monitor,  “do not let the perfect be the enemy of the good.”

Voltaire

No MMT Discussion? 

Did you also notice not one peep about the Fed buying up all the Treasury debt and effectively monetizing the deficit…err MMT…and supporting other debt markets?

We heard some bozo on CNBC today saying the Treasury is having no problem floating its debt to the market.  Are. You. Fricking. Kidding. Me?  What market?

Nobody really knows for certain,  but our priors are if the U.S. Treasury was completely dependent on the markets to finance itself – that is no central bank (Fed and foreign) buying of its marketable debt — the 10-year yield would be well north of 6 percent, and that is very generous, in our opinion.

Do Your Homework

Folks, do your homework.   Granted, it’s impossible to completely grasp all the intricacies of the global economy and markets with their infinite feedback loops, and futile to even try,  but at least try and grasp the basics.

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

Fed Launches Repo Facility To Provide Dollars To Foreign Central Bank

Fed Launches Repo Facility To Provide Dollars To Foreign Central Bank

With US dealers no longer using the Fed’s repo facilities (this morning we had another “no bid” overnight repo with just $250MM in MBS submitted for a $500 billion op) as the Fed soaks up all securities via its aggressive QE which is still buying $75BN in paper each day, perhaps Powell felt a bit unloved and at 830am this morning the Fed unveiled yet another “temporary” emergency liquidity providing facility, this time to foreign central banks, in the form of a repo facility targeting “foreign and international monetary authorities”, i.e. foreign central banks which will be allowed to exchange Treasuries held in custody at the Fed for US dollars.

In other words, just a week after the Fed “enhanced” its swap lines with central banks and included a bunch of non G-5 central banks to the list of counterparties, it has found that this is not working – perhaps due to the prohibitive rates on the facility – and is now handing out dollars outright against US denominated securities. We wonder if the central bank uptake will be any higher than the repo facility aimed at US dealers and which is now redundant. Of course, when that fails the Fed can just offer to buy all central bank securities in what even reputable FX strategists now joke is a Fed on full tilt, and intent on buying out all foreign central banks.

And so, just as the financial situation was starting to stabilize, the Fed reminds everyone just how broken everything still is.

Fed launches ANOTHER temporary facility to provide $USD liquidity to foreign central banks (this time foreign central bank holdings of US Treasury’s can be exchanged for dollars).

At this rate, Fed is on course to buy out foreign central banks… and call it an M&A facility pic.twitter.com/iAXRCVoZS9— Viraj Patel (@VPatelFX) March 31, 2020

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

Recession “Tipping Point” Triggered: 10Y Yield Crashes Below 1.40%; Countdown To 0% Rates Begins

Recession “Tipping Point” Triggered: 10Y Yield Crashes Below 1.40%; Countdown To 0% Rates Begins

Last night, when the implied 10Y yield (Japan was closed) dropped to just 1 basis point above 1.40%, we said that we are literally this close from BofA’s “tipping point” for the 10Y Treasury, below which a recession is virtually assured according to the NY Fed’s recession probability indicator, and which also triggers a 12-18 month countdown to 0% rates.

Well, this morning, with risk assets crashing, the yield on the 10Y has sliced below the 1.40% “tipping point” like a hot knife through butter…

… and is now less than 1 basis point away from the all time low of 1.3579% hit on July 8, 2016.

Why does 1.40% matter again?

Because, as we explained yesterday, breaking below this “tipping point” level requires more than 50% probability priced for the Fed cutting rates back to 0%! This means that breaking 1.4% in an on-hold context for the Fed creates a significant inversion of the curve, pushes recession signals higher, and pressures a further inversion of the FF1/FF6 spread which we found in Pricing cuts ahead of the Fed to have no false positives for Fed cuts following a -30bp inversion (currently -16bp).

What this means in practical terms from a duration perspective is that “the market may gap lower on a break below 1.4% for the 10Y Treasury”, as this corresponds to phase transition higher in recession probabilities and a clear challenge to the on-hold Fed stance, “particularly as convexity flows add to what would likely be a broader risk-off move. “

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

Is Powell Playing Fed Games?

U.S. Federal Reserve chair Jerome Powell speaks during a discussion at the Economic Club in Washington on Jan. 10, 2019. (SAUL LOEB/AFP/Getty Images)
U.S. Federal Reserve chair Jerome Powell speaks during a discussion at the Economic Club in Washington on Jan. 10, 2019. (SAUL LOEB/AFP/Getty Images)

Is Powell Playing Fed Games?

The Federal Reserve will be adding assets to its balance sheet again, but Powell insists it’s not “quantitative easing”

The Federal Reserve will be adding assets to its balance sheet again, but Powell insists it’s not “quantitative easing”James GorrieWRITEROctober 10, 2019 Updated: October 10, 2019Share

Apparently, the “repo market” purchases by the Federal Reserve we discussed earlier this week —which don’t count as quantitative easing (QE)—were just the beginning of the new, non-quantitative easing but money printing period.

Fed “repos,” you may recall, are now necessary to boost weak overnight liquidity reserves of the big banks and don’t permanently expand the Fed’s balance sheet, unless they go on forever, in which case they would be QE. Now they are more of a short-term bail-out.

It’s Time for “Non-Quantitative Easing”

But in his Tuesday speech, Federal Reserve Chairman Jerome Powell explained that for the first time in five years, the “time is now upon us” for the Fed to resume buying U.S Treasury bills and bonds. That means that come November, the American economy will officially enter into another period of quantitative easing, you know, the Fed buying assets to expand its balance sheet.

Or not.

Typically, when the Federal Reserve buys Treasury assets, it’s because of weakness, either in the economy or in the financial system. A weakness that needs to be papered over by money printing, expanding the Fed’s balance sheet and bank reserves. Or the Fed buys other assets that nobody wants to buy at a decent price, like the purchases of mortgage backed securities (MBS) it conducted after the financial crisis.

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

“Panic At The Repo”: One Of The World’s Top Repo Experts Explains What Really Happened

“Panic At The Repo”: One Of The World’s Top Repo Experts Explains What Really Happened

Panic At The Repo

As a professional trader, I keep an eye out for the next panic or market crisis. Since the beginning of my career, there was a crash or panic every few years in one market or another. You try to think about what market is overbought. What market is in a bubble. What market just appeared on the cover of Time Magazine! Little did I ever imagine the Repo market would experience the next big panic. This is a market consisting of AAA-rated risk-free securities backed by the United States of America! How can there be a crisis in U.S. Treasury securities? We didn’t even make the cover of Time Magazine!

I write about the Repo market every day. As a service to our clients, I decided to put everything I know about the Repo market collapse down on paper. So here it is!

Modern Day Bank Run

We’ve seen the old pictures or films of people lining up outside of a bank to collect their deposits. Think of the Depression in the 1930s. Knowing that a bank can’t make good on all of their customers’ deposits means the first people to get their money are more likely to get their money. Period. Banks never keep all of their customers’ deposits as cash on hand. They invest those customers’ deposits by making loans – like a mortgage loan to a family to buy a home or loan to a business to help start a new venture. Banks invest in loans and borrow money through deposits. That also means they loan long-term and borrow short-term. Don’t worry, this is important later on.

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

Japanese Bond Crash, Margin Call Sends Shockwaves Around The Globe

Japanese Bond Crash, Margin Call Sends Shockwaves Around The Globe

For a dramatic preview of what will happen in a flash to all those record low interest rates without the backstop of central banks and ravenous pension fund, look no further than what happened in Japan overnight, where bond futures suffered the biggest one-day crash since August 2, 2016, sliding as much as 0.97 yen to 154.05, and triggering margin calls for investors after the worst 10-year debt auction in three years.

More ominously, once the rout started it quickly spread outside of Japan, because as yields jumped, the sell-off spilled into US Treasuries and European debt.

There were three things behind the swift collapse: the first catalyst was the Bank of Japan’s Monday decision to slash bond purchases in October for the four major maturity buckets in order to steepen the curve and avoid further flattening which Kuroda has repeatedly expressed concern about in the past; the BOJ had indicated it may even stop buying debt of more than 25 years. It also sought to anchor yields from the one-to-three year zone by raising purchases in a regular operation earlier in the day and lifting the purchase band for the sector in October.

“The BOJ is showing its clear intention to correct distortions in the curve through flexible adjustments in market operations,” said Mari Iwashita, chief market economist at Daiwa. “While cutting the lower end of purchases in bonds maturing over 25 years to zero looks shocking, the BOJ will probably cut buying in this zone slowly.”

“The BOJ’s operation change had a huge psychological impact,” said Eiji Dohke, chief bond strategist at SBI Securities in Tokyo. “Investors are reluctant to buy given the risk of the BOJ skipping a purchase.”

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

David Rosenberg: “These Are Truly Historic And Dangerous Times”

David Rosenberg: “These Are Truly Historic And Dangerous Times”

We are living in dangerous times.

Mostly, everyone I speak to lives in the here and now. They seem more interested in telling people how crazy cheap the stock market is and how crazy expensive the ‎Treasury market is, rather than trying to look at the current environment in a historical perspective. We are living through a period of history that will be written about in textbooks in years and decades to come, and the undertones are none too good.

Instead of telling people there is no recession, these bulls should be discussing why the markets are busy pricing one in. What do these pundits know that the markets don’t know? We have a bond market in which a quarter of the universe trades at a negative yield. The long bond yield has gone negative in Germany. More than half of the world’s bond market is trading below the Fed funds rate. Investment grade yields, on average, are below zero in the euro area.

This is completely abnormal because it reflects an abnormal economic, financial and political backdrop. Those who point to the stock market’s performance with glee, because of its V-shaped recovery, don’t bother telling you that in the past 12 months the total return is marginal in real terms and the best performing sectors are the ones you can only typically rely on in a deflationary recession – real estate, utilities and consumer staples.

One of the problems coming out of the most recent recession is that the global debt load is infinitely larger now than it was at the peak of that prior credit-bubble cycle. The world is awash in debt. Years of monetary intervention among the world’s central banks created artificial asset-price inflation and exacerbated wealth inequalities at the same time. Fiscal policy failed to arrest the increasingly wide income disparity, a global dilemma that has become acute in the United States.

China’s Nuclear Option to Sell US Treasurys, Report 19 May

China’s Nuclear Option to Sell US Treasurys, Report 19 May

There is a drumbeat pounding on a monetary issue, which is now rising into a crescendo. The issue is: China might sell its holdings of Treasury bonds—well over $1 trillion—and crash the Treasury bond market. Since the interest rate is inverse to the bond price, a crash of the price would be a skyrocket of the rate. The US government would face spiraling costs of servicing its debt, and quickly collapse into bankruptcy. America could follow the path taken by Venezuela or Zimbabwe.

How serious is this threat?

The Independent Institute wrote (replete with a graphic purportedly showing a “nuclear bomb”) about it:

What would happen if the Chinese government were to weaponize its holdings of U.S. Treasury bonds by suddenly selling off all of them?
That’s an option that has been suggested by Hu Xijin, the editor of the government-controlled Global Times.
Dumping its U.S. national debt holdings is considered to be China’s “nuclear option” for retaliating against the U.S. government in the trade war…

The Financial Time headline says it all: “China dumps US Treasuries at fastest pace in two years”. The body of the article uses that word “weaponise” (British spelling).

Bloomberg warns that, “Trade Feud Has Treasury Investors Eyeing China’s Holdings at Fed”. At least their article does not reiterate “weaponized”.

CNBC adds a new element, that in killing America, China would be destroying itself too. The article uses the word “weapon”, as well as calling it the “nuclear option.”

Capital Outflows

Ambrose Evans-Pritchard at the Telegraph is one of the few voices looking at the “accelerating pace of capital outflows from China”. He provides lots of good analysis that we would say is common sense, except it is presently uncommon (yes, yes, we know that common, here, refers to base logic not ubiquity).

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

Saudis Threaten To Ditch Petrodollar As “Nuclear Option” To Block NOPEC Bill

Saudis Threaten To Ditch Petrodollar As “Nuclear Option” To Block NOPEC Bill

Three year ago – almost to the day – Saudi Arabia rattled its first sabre towards the United States, with an implicit threat to dump US Treasuries over Congress’ decision to allow the Saudis to be held responsible for the 9/11 attacks.

In a stunning report at the time by the NYTimes,  Saudi Arabia told the Obama administration and members of Congress that it will sell off hundreds of billions of dollars’ worth of American assets held by the kingdom if Congress passes a bill that would allow the Saudi government to be held responsible in American courts for any role in the Sept. 11, 2001, attacks.

Then, six months ago, the Saudis once again threatened to weaponize their wealth as the biggest importer of arms from America in the world.

Infographic: The USA's Biggest Arms Export Partners | Statista

You will find more infographics at Statista

And nowReuters reports, citing three unidentified people familiar with Saudi energy policy, Saudi Arabia is threatening to drop the dollar as its main currency in selling its oil if the U.S. passes a bill that exposes OPEC members to U.S. antitrust lawsuits.

While the death of the petrodollar has long been predicted (as the petroyuan gathers momentum), this is the most direct threat yet to the USDollar’s exorbitant privilege…

“The Saudis know they have the dollar as the nuclear option,” one of the sources familiar with the matter said.

“The Saudis say: let the Americans pass NOPEC and it would be the U.S. economy that would fall apart,” another source said.

Riyadh reportedly communicated the threat to senior U.S. energy officials, one person briefed on Saudi oil policy told Reuters

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

Treasury Announces Record Debt Sale In Upcoming Refunding Auction

Treasury Secretary Steven Mnuchin is about to surpass Timothy Geithner’s achievement of selling a record amount of notes and bonds as he seeks to finance America’s soaring budget deficit.

According to the latest quarterly refunding statement, the US Treasury is about to sell a record amount of debt, surpassing levels seen both in the aftermath of the Great Depression and the Global Financial Crisis.

On Wednesday, the US Treasury Borrowing Advisory Committee unveiled that it will increase the amount of debt to be sold at the upcoming quarterly refunding auctions to $83 billion from $78 billion three months earlier. This will be the fourth straight quarter of increasing refunding auction sizes and is driven by the soaring US deficit shortfall, which in 2018 hit $779 billion the highest since 2012, as well as the Fed’s ongoing balance sheet shrinkage.

Here are the details of the TBAC’s proposal:

  • Auctions for 2-, 3- and 5-year notes will increase by $1 billion in both of the next two months; last quarter Treasury implemented increases in all three months
    • As a result, the size of 2-, 3-, and 5-year note auctions will increase by $2 billion, respectively, by the end of January.
  • Auctions for 7-, 10-, 30-year notes to be raised by $1 billion in November and then kept steady through January
  • Auctions for 2-year floating-rate note will rise by $1 billion in November
  • Auctions for TIPS will see various changes with total tips issuance rising $20 billion-$30 billion in 2019, however there will be no TIPS supply changes over next three months; a new CUSIP 5-year will be added to the TIPS calendar, with the new security to be introduced October 2019

In total, the Treasury will sell $83 billion in long-term debt next week – consisting of $37BN in 3 Year notes, $27BN in 10 Year notes and $19BN in 30 Year notes, versus $78 billion in August’s refunding week sales.

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

China & Japan Dump Treasuries As Dollar’s Reserve Status Slumps To 5 Year Lows

Treasury International Capital flows showed Brazil the biggest buyer of Treasurys in August (followed by Ireland and France), but it was China and ‘ally’ Japan that dumped the most Treasurys in the month…

Brazil is Steve Mnuchin’s best friend…

As China reduced their holdings of US Treasurys for the 3rd straight month…

Japan flipped to a seller again in August back to the lowest holdings since October 2011…

And while the Saudis were buying in August…

the broad trend among other majors has been selling…

All of which has driven the USDollar’s share of global central bank reserve to its lowest since 2013

And, according to economist Zach Pandl at Goldman Sachs, Washington’s aggressive policy against Moscow could be the biggest driver behind the recent fall of the dollar’s share of global central-bank reserves, who noted that Russia’s Central Bank sold some $85 billion of its $150 billion holding of the US assets from April through June after the US Treasury Department announced new sanctions on Russian businessmen, companies and government officials.

At the beginning of April, as RT reports, Washington expanded its anti-Russian sanction list, including seven Russian tycoons, 12 companies and 17 senior government officials over alleged meddling in the 2016 US presidential election, and according to Pandl, the co-head of global FX and emerging-market strategy, the US policy of unilateral tariff hikes and sanctions is putting at risk the greenback that is still dominating the global currency reserves.

“The Central Bank of Russia likely sold a large portion of its dollar-denominated assets, and perhaps all of its US Treasuries held by US custodians, and transferred them to euro-denominated and yuan-denominated bonds in the second quarter,” the economist said.

“This would account for more than half of the decline in the share of dollar reserves during the quarter.”

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

 

US Treasury Issues More Bonds, But No One Wants Them

US Treasury Issues More Bonds, But No One Wants Them

In an attempt to feed the soaring debt and spending habits of the United States government, the US Treasury is issuing more bonds.  But they’ve run into a big problem: no one wants to buy those worthless bonds anymore.

Debt is going to be a big problem for the United States government sooner rather than later.  Rising interest rates will eventually push the government’s interest bill higher than that of their military bill (which is astonishing, quite honestly.)

The new debt will be issued in a three-year, 10-year, and 30-year bond supply this week, Reuters reported, quoting US Treasury data. In late September, the Treasury sold a combined $106 billion of debt amid cooling demand from investors. With countries like Japan, China, Russia, and Turkey buying less and selling more US debt, foreign purchases at Treasury auctions have slowed down.  Bond dealers have been buying more US debt, but they quickly resell it to make a profit.

There are concerns that US debt is growing out of control. According to RT, America’s debt currently stands at $21.5 trillion, while the Treasury said the US government paid $523 billion in interest in the fiscal year 2018, the highest ever on record. According to the US president Donald Trump’s chief economist Kevin Hassett, the president intends to announce a policy aimed at tackling the debt. The deficit is absolutely higher than anyone would like. As you watch our next budget come out – and you’ll start to see things in the next few weeks – then you’ll see a much more aggressive stance in tackling it, he said, as quoted by Bloomberg. But no one is holding their breath.

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

Amid Market Rout, Decade of “Financial Repression” Ends, Capital Preservation Suddenly is a Thing

Amid Market Rout, Decade of “Financial Repression” Ends, Capital Preservation Suddenly is a Thing

This will dog the stock market going forward.

Fixed-income investors – a financially conservative bunch buying Treasury securities, FDIC-insured CDs, and similar products that largely eliminate risk – have been getting crushed for a decade: Except for brief periods when inflation dipped to near zero or below zero, their minuscule returns have been eaten up by inflation, or worse, they lost money after inflation, as was the case with shorter-term Treasuries and just about all savings products. But it has ended.

The Consumer Price Index (CPI) rose 2.3% in September (2.27%), compared to September a year ago, the Bureau of Labor Statistics reported this morning. This was down from the 2.9% increase in July. These numbers are volatile, but the trend is pretty clear: Outside of the Oil Bust and a few quarters during the Financial Crisis, inflation is a fixture in the US economy:

The CPI without food and energy – “core CPI” – rose 2.2% in September. Cost of shelter rose 3.3%. Cost of transportation services rose 4.0%. So prices are going up as measured by CPI.

What has changed is that interest rates and yields are also going up, and they’re now higher than inflation as measured by CPI across nearly the entire spectrum of US Treasury securities – and if you shop around, across many CDs too.

This ends a decade of “financial repression” — a condition when the Fed repressed interest rates below the rate of inflation.

The chart below shows the US Treasury yield curve across the maturity spectrum, from 1-month to 30 years, at the close yesterday. The 1-month yield, at 2.18%, was the only yield still below the rate of inflation. The 3-month yield at 2.27% is right on top of CPI (green line). Every Treasury security with a maturity longer than three months is beating inflation.

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

“Monster Move” In Treasuries Unleashes Global Market Rout

A sea of red has greeted stock traders across the world this morning after what one analyst called “monster moves” in U.S. Treasury yields.

The bond rout that sent 10Y Treasury yields to the highest since May 2011 promoted by stronger than expected US economic data, and which accelerated after upbeat, hawkish comments from Fed Chair Jerome Powell after the close, spread into Asia and Europe on Thursday, spurring more gains for the dollar and triggering widespread declines in equities.

The catalyst for the selloff was the stronger than expected ADP private payrolls print and the near record print in the Services ISM survey which showed activity at its strongest since August 1997, sparking speculation the payrolls report on Friday could also surprise, with some suggesting a print as high as 500,000 was possible. Subsequent comments from Powell who said the economic outlook was “remarkably positive” and that rates might rise above “neutral” helped the 10Y yield climb to 3.18% on Wednesday. U.S. jobs data on Friday may stoke boosting expectations for rate hikes into 2019, with the jobless rate seen dropping to 3.8 percent, matching the lowest since 1969.

“Fixed income is the center of the financial world, and it’s hard to have a conversation without talking about the monster moves we saw in yesterday’s U.S. trade,” said Chris Weston head of research at Pepperstone Group. “It’s a very rare occurrence to see U.S. Treasuries undergo such a huge move.”

The selloff in 10Y Treasuries, which caught traders by surprise with both its velocity and magnitude, continued overnight on Thursday sending the yield on 10Y TSYs as high as 3.2325%, the steepest daily increase since the shock outcome of the U.S. presidential election in November 2016, before fading to catch its breath amid massive trading volumes.

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

The Gathering Storm In The Treasury Market

The Gathering Storm In The Treasury Market

Summary

  • Our analysis provides kind of a Grand Unified Theory (GUT) of what is currently taking place in global financial markets
  • The massive borrowing by the U.S. Treasury is crowding out emerging markets capital flows
  • The structural factors that have kept long-term interest rates low and term premia repressed are fading
  • We expect a measured move in the 10-year Treasury yield to 4.25 to 4.40 percent, much sooner than the market anticipates

Reagan proved deficits don’t matter.” – Dick Cheney

Memo to Dick Cheney:

  • Deficits and the public debt are starting to matter. Really. 
  • It is now more strikingly true than ever given the U.S. public debt-to-GDP is more than 3.4x higher than when President Reagan took office.  

Emerging Market Debacle 

Go no further than the debacle currently taking place in the emerging markets (EM), which began in the second quarter of this year, to witness the consequences of the U.S. Treasury’s trillion-dollar-plus demand shock for global funding.

 

Treasury_EM_Currencies

 

EM_Relative FX Vol to DM

In a closed financial system and a non-QE world,  price (interest rates) would adjust to move the capital and debt markets back to a more sustainable equilibrium.   The rise in interest rates would force the government to borrow less as higher interest rates crowd out other spending.  Also, the supply of loanable funds to the government would rise as savings increase.

That is not the world we now inhabit, however,  where global financial repression by central banks has resulted in a “rent control” like shortage of dollar funding.   The shortfall is now being plugged, in part, by the residual capital flows, which had been chasing yield in the emerging markets over the past several years.

That is the sucking sound you have heard since late April.

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

Olduvai IV: Courage
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Olduvai II: Exodus
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