Let's talk about today's 30 Year T-Bond Auction.....fascinating stuff....
I normally don't have time to post as often as I have lately, but there's so much happening, I feel compelled to comment on it. Finance, when it works well, is relatively boring. It's "making the donuts" day after day, no comment needed. When finance doesn't function well, when there are so many odd, generationally unique, structurally cataclysmic events taking place, as is the case today, as an observer, hot topics abound. We're in a "target rich environment" as they say.
The 30 Year T-Bond Auction - 1/10/19....Ouch!
The 30 Year Treasury Auction was just completed a few hours ago...and it didn't go well. As you know our incredibly wealthy Uncle Sam was looking for a small 30 year mortgage (He tried to sell $16 Billion...30 Yr. bonds...a paltry sum in the grand scheme of things....chump change really) and as normal for really wealthy guys, he summoned the world's preeminent bankers and dealers over to his place (the "Treasury") and had them compete for the privilege of loaning him some money. Well, the general consensus was that these astute financiers were perfectly OK with giving Uncle Sam some short term "Payday loans" at some hefty interest rates, as per the recent T-Bill auctions, but they were really uncomfortable with giving old Sam a 30 year mortgage, locking their money up on anything close to what good old Uncle Sam was hoping for. Here are the results:
Offering Announcement:
https://www.treasurydirect.gov/instit/annceresult/press/preanre/2019/A_20190103_5.pdf
Auction Results:
https://www.treasurydirect.gov/instit/annceresult/press/preanre/2019/R_20190110_3.pdf
We can note a couple of things.....
1.) BTC (Bid-To-Cover is the measure of interest in the auction. BTC = $ bids/$ accepted bids) was abysmal at 2.19. The average 30 YR BTC for 2018 was 2.4. Recent T-Bill (safe money) Auctions have had BTC's running at 3+. The BTC for Direct Bidders fell to 1.2. This auction probably should have been canceled for lack of interest.
2.) As far as we can tell, Indirect Bidders (Foreign Central Bank buyers?) bought most of the bonds: $9.2 Billion (57% of the Bonds). The grass is always greener I guess. The Indirect Bidder ratio was 63% for 2018 Auctions.
3.) The yield moved up slightly to 3.035% on the 3-3/8% Coupon.
4.) Direct Bidders represented 15% of the Accepted bids.
Of course Uncle Sam was probably pretty bummed out by this. His party was a flop and he most likely took it as a personal insult. Did I mention that our Rich Uncle Sam has become a bit of a belligerent wind bag in his old age? Lately, he's been going, well, a little berserk when he doesn't get his way.
Below is the transcript from the hypothetical (Dick Fuld Banker Speak Translator - BST) discussion that took place during the auction this afternoon:
Uncle Sam: "Come on guys.....buy these things....it's all guaranteed... risk free.....you'll get your money back....I promise!.....or if you don't buy 'em at least give me some competitive bids. Come on....the show must go on....This is bullshit...."
Bankers/Dealers: "I don't know.....we have so many better places to put our money.....given everything that's going on we really don't want to get into a 30 Yr. /Coupon at 3-3/8% at par value. Can't you just do more of those 2 month bills? Anything under a year is fine....we'll buy it all day. We can get 4% short term AAA debt in the Cayamans, Hong Kong, Luxembourg, Singapore, you name it, if you guys raise rates we're going to get killed on the 30 yr."
Uncle Sam: "C'mon Man.....don't you clowns remember 2009?....I saved your collective asses....I gave you the FDIC & opened the window, I shit-canned the Volker Rule, Glass Steagall, Dodd-Frank and got rid of all kinds of regulation.... and I even looked the other way when you clowns started doing all that off-shore shit in the Caymans and Luxembourg.....I made you rich.....you f&%ing owe me! I'll even loan you the money to buy this shit!........ Besides....I've got Powell in my back pocket...he'll buy it if you don't......what could possibly go wrong?"
Bankers/Dealers: " Geezzz....when this goes South are you going to bail us out? How about our jobs? Bonuses? Those are still "no touchies" right?"
Uncle Sam: "Of course, of course, come on, have I ever let you guys down before? If you can't trust me...who the hell can you trust? Those schmucks in Hong Kong and the Chinese banks aren't going to bail you out...."
Bankers/Dealers: (short pause while thinking about Dick Fuld, Jimmy Cayne and Angelo Mozilla, etc. etc....)
Saudi Banker - Representative from JPM: "I'm in for $1 Billion...."
Chinese Banker - Representative from NYB/Mellon: "We will do what we can...." (Thinking: is my jet ready? I gotta get out of here......Caymans for the weekend...)
Here's the problem......
Under normal circumstances, Investors understand the time value of money. They expect to receive a lower interest rate (compensation) for the flexibility of a short term commitment (a few months) than they would receive for 10, 20 or 30 years. Better said, they should expect a significant premium for a 30 year commitment. They expect that the Federal Reserve would keep their social contract with the American Worker and Investor and manage interest rates and the money supply, keeping inflation in check, while also keeping the economy (and asset values) chugging along properly and in proportion.... and like Goldilocks, everything should be just right.
This makes perfect sense in a "guaranteed" Treasury environment where there's (theoretically) no risk of default. The time value of money is a given. It's understood. The problem is that often, the math doesn't work. Investors lose faith. They lose faith in institutions, politicians, the FED, asset valuations and become conflicted by their own perceived inability to cope with the forever looming risk du jour. Like an attractive, young, bright, single woman who can't decide on which lucky young man she should settle on, in times of uncertainty, investors want to keep their options open. They shy away from any 10, 20 or 30 year commitments.
Generally, when there's a bit of uncertainty (or as I've described in this blog for the last few years, questionable asset valuations, global bubbles and misrepresentations, the likes of which have never been seen before in financial history) Investors, once they start to figure it out, of course, begin to look for a safe place, usually, cash, money market, short term high grade & government debt, etc.. They move out of risk assets (stocks/funds/low-grade-long bonds, etc.). They want to hide out until the mess blows over and things settle down.....but you all know that.
Wealthy foreign investors and Multi-National Businesses who can put their money anywhere, generally choose the most regulated, stable (and/or least taxed) financial systems, markets and vehicles, wherever located. They look for places around the globe to park money when their respective economies "hiccup". Historically, the US, the dollar and US government securities have been such a destination. "In God (and Uncle Sam) We Trust". Of course, when we see investors flock to T-Bills and short term government debt, they bid up the price (and push down the yield). People and institutions are willing to pay dearly to park money in safe places. When the world is in flames, I'd be happy to pay $1,001 for a one month $1,000 T-Bill (-1.2% Yield) if I absolutely know, with certainty, I'm going to get my $1,000 back in a month. That's how we get to 0% (or negative) Interest rates. People fight over access to "Will Rogers Money" ...they are more concerned about the "return of" rather than the "return on" their money.
Interestingly, this hasn't happened... yet. Yields on T-Bills are at about 2.5% and the 30 Year Long Bond is, as of a few hours ago, just over 3%.....we've got a "flat" yield curve.
Yield Curves - Today vs. the Last Three Recessions....
All data, except the yield on today's Auction (inserted ad hoc), is derived from Treasury.gov.
Daily Treasury Yields - Treasury.gov
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2019
I've charted the current yield curve (1/10/19 Solid RED Line) and compared it to the "Great Recession" 12/31/07 Pre-CrisisYield Curve (Dashed RED Line) and the 12/31/09 (Slightly Healthier looking, more normalized, Post Crisis Dashed GREEN line)
When we compare the current curve to the curves prior to and following the Great Recession we note a couple of things.
1.) The slope of the curve today more closely resembles the "Pre Recession" curve than the "Post Recession" curve.
2.) The 30 Year Bond Yield held relatively constant at about 4.5% through the 2008/2009 Recession.
3.) When we look at the "Post Recession" curve, we see that the yield on short term Treasuries collapsed as dealers bid up the price of the notes and bills. Dealers/Investors at the time, apparently had no problem making low interest "Pay Day" loans to our Rich Uncle Sam in exchange for flexibility and his guarantee that nothing could possible go wrong. They were concerned about the "return of" not the "return on" their money.
We also note that the pattern is similar for the two recessions prior to the "Great" one.
When we examine the curves from the Dot-Com (2000-2001) Recession (below), again, we have a flat "Pre-Recession" curve with rates running between 5% and 6% for the length of the curve. The 2007 "Post Recession" curve exhibits similar characteristics as the 2008/2009 Post-Recession curve. The (Safe Money) short term yields collapsed and the long end of the curve held relatively constant at Pre-Recession levels (5.5%), about 2.5% higher than today.
Now let's take a look at my favorite recession, the 1990/1991 "Post Reagan Recession". At the time, I had been working my way up the corporate ladder and had just been given my first controller-ship. I was promptly handed both the "Crash of 1987" and the 1990/1991 Post Reagan Recession to work my way through. I had no idea what the hell was going on. Good times!
We can see that the Pre-Recession and Post Recession Curve comparisons are consistent with both the above 2008/2009 Financial Crisis and the 2000/2001 "dot-com" implosion.
We also note that the "Post Reagan" Pre-Recession Curve was again flat, with all rates hovering at about 8%, a full 5% higher than the flat curve today. Post recession, once again, we note that short term yields fell significantly lower (4% less...about half of the Pre-Recession yield) while the long term rates remained about the same as Pre-Recession levels (8%)
Again, thinking through what's happening today, if the curve shape holds, we can anticipate that once the flight to safety hits, short term rates will most likely move to zero or marginally negative (that "Will Rogers rule" again), while longer term rates will remain at roughly 2.5% to 3%....or GAP UP!. Unfortunately, because rates have been so low for so long, I'm not sure how much rate relief our friends at the FED will be able to give us.....or our rich Uncle Sam.
As Uncle Sam continues to go to the bond markets and starts to unload an increasing number of those awesome 10,20 and 30 Year Bonds, trying to finance his drunken sailor deficit spending, my guess will be that, like today, these bond issues will stumble a bit and will eventually fall flat on their face. Investors will demand that the "time value of money" must be restored.....so Uncle Sam is in the unenviable position where his Treasury holds the auction and private investors, dealers and banks are only willing to submit outrageous bids (by Uncle Sam's standards). If the bonds are to be sold, the primary (and perhaps only) buyer could be the FED.....the Treasury will be printing fresh American "Troubled Assets" and the FED will be implementing auto-TARP the second the bonds hit the street.....Ouch!
My Little Cheat Sheet...
If you fully, really, truly, absolutely understand how bond math works, feel free to skip ahead to "What the 30 Year Auction Told Us Today...." Personally, I just find bond math fascinating to think about....
I've used this handy little chart (below) for years. Remember, common stocks are Voodoo and magic....stock pricing requires guesses about the business, management, prospects, products, projections, business models, opportunity, CEO persona, etc. It's lots of fun and really invigorating!
High Grade Bonds are just boring old math.....no Voodoo involved.
We know exactly how a Treasury bond/note is going to behave as interest rates change....unless that "risk free return" concept somehow goes awry.
The following comments refer to my "cheat sheet" below.....
(Note that these calculations are based on the Net Present Value - NPV of one coupon payment paid the end of each year. There are more sophisticated products/calculations which take coupon timing and exact days outstanding into account and accurately calculates the precise yield of a specific issue. You can make one quite easily on any spread sheet program. My "full" Cheat Sheet starts at an interest rate of 0.5% and runs to 20.0%. I've pasted the section from 2.0% to 5.0%. (today's relevant range) to illustrate. The "Cheat Sheet" is for illustration purposes only and should be "directionally" correct.....again, because of variables with each bond/note issue, it's more of a guideline than a rule...)
When you buy a bond, and hold it to maturity you are buying two things 1.) The present value (NPV) of the principal payment you'll receive down the road, and 2.) The present value (NPV) of the income stream (coupon payments) you'll receive on a periodic basis.
The "Cheat Sheet" below describes the NPV of the Principal Repayment and the NPV of the Coupon/Interest payments for a $1,000 principal invested at various terms from 1 yr. through 30 years. (I've omitted the "Bill" calcs for simplicity) You can see that as the term of the bond increases the present value of the principal repayment decreases. The greater the interest rate, and the longer the term, the more "discounted"and the less valuable the principal becomes. Using the 2% rate, $1,000 paid back next year (NPV $980.39) is worth much more than $1,000 paid back 30 Years from now (NPV $602.41), or discounted at 5% 30 years from now (NPV $377.36)
Further, at higher interest rates, the present value of the coupon income increases. At a 2% interest rate, the present value of the coupon stream on a 30 Year Bond is $447.93. It's $768.52 at a 5% Interest rate.
As a bond owner, if interest rates and inflation remain constant at 2% you get $20/yr. for "renting" your money out to Uncle Sam. After 30 Years, you've got a NPV of both the Principal Repayment and the Income Stream of $1,050.34. You're $50.34! ahead! ....and you've incurred zero default risk!
We also note, sadly, that as interest rates go up, bond holders get...well....to be blunt....killed. If I own a 30 Year Bond with a 3% coupon, and interest rates go to 5%, the NPV of my Bond Principal (To be paid back in 30 Years) decreases by $125. ($502-$377=$125) and I'm stuck with the 3% Coupon ($30/yr.) which would also be discounted at the "new" 5% rate, when I should be getting my 5% Coupon ($50/yr.). So a 2% increase in interest rates destroys $127 of my Coupon NPV ($588-$461 = $127). By holding the bond to maturity I lose $252 ($125+$127) or about 23% of the NPV of my bond. If I were to sell the bond I'd experience this $252 loss immediately, since my bond NPV is only worth $838 now....rather than the NPV of $1,090 I was expecting.
Note that on the way down the math actually works in reverse.....the NPV of the principal payment INCREASES and we get to KEEP the income stream from the higher coupon. So the value of my bond INCREASES by (about) 23% as interest rates fall 2%! If you bought a ton of 30 Year T-Bonds in 1991 and held on to them, you've done pretty well....your NPV on the Principal has increased substantially and your 8% Coupon is looking pretty good right now...and has been for quite sometime. Talk about stimulus!
After all of the above calculations, given that UST's are "guaranteed undefaultable", even though their NPV can change dramatically as interest rates move, they remain the ultimate collateral. Which, of course, also means that sharp traders and investors can design all sorts of awesome devices to lever up. Futures, swaps, derivatives, ETF's, etc. etc. are all designed to hedge risk, or amplify speculative gains (and unfortunately... losses). Then of course, we had to invent "Credit Default Swaps" which protect the holder of derivatives and related securities from default by the institution backing the derivative, which is tied to all of this guaranteed safe collateral. Let's just hope everyone knows exactly what they are doing.
To sum it up, that's why it drives me nuts when people say things like "what's the big deal...it's only 25 basis points"!....it's not the move in rate that causes the disruption....the problem is that the rate change impact is compounded over 10, 20 or 30 years and has an immediate, guaranteed impact on the NPV of the security as well as anything else tied or leveraged to it.
In other words Jay Powell has absolutely no idea what's going to happen when he announces an interest rate change. Nobody does....and nobody could.
What the 30 Year Auction told us today......
Last year in my discussions with my very knowledgeable, bond trader friend, Tim Bergin, we discussed why so many bond market transactions were "failing" as well as the possibility of a "gap up" in interest rates. You can read (or reread) the discussion here. Treasury Fails Revisited....
The "gap up" occurs when the price a buyer is willing to pay for a T-Bond drops significantly (and the yield pops) since the security has fallen out of favor and trust in the FED, the economy and the implied social contract, or all of the above, are broken. Like Cinderella, today, the 30 Year T Bond wasn't invited to the Prince's ball.
There are dire consequences to this. My guess is that we will be seeing this play out in future auctions on a regular basis. Once note/bond owners/buyers/holders collectively decide "hey...we need a better return" they bid less for the bonds and push the yield up. Possibly wayyy up.
At some point, the FED will no longer have control of interest rates. No matter how dovish FED policy becomes, once long bond holders even sniff the hint that debt will be monetized, interest rates will go where the debt owners (lenders) choose to take them. Either the time value of money will be restored to their satisfaction, or they won't buy the bonds (make the loans).
Here are two Dallas FED charts I really like. The first shows the total Federal Debt (Treasury Securities) outstanding over time. The second shows the aggregate debt in relation to par value.
Total US Debt Markets (Public & Private) are somewhere around US$70 Trillion now (or about 3x Us Equity Markets). "Risk-Free" Government Debt (UST's, etc.) are about $22 Trillion of the US$70 Trillion total. By definition, the $48 Trillion of "non Treasury" debt has at least some level of default risk. These notes and bonds may (or may not) have been underwritten properly and may (or may not) have a proper risk premium attached. In any case.....it's not "chump change".
It's also interesting to note that for the first time since 1995 (Chart 3 Above) the Market Value of government debt has dipped below par value, which would be expected in periods of rising interest rates (see circa Volker days) even though the FED Funds target has only increased 2% in the last two years. We're seeing more debt bought/sold at a discount to par than any time in recent history, again due to the impact higher interest rates have on the NPV of longer term debt.
So....Why is the Stock Market Selling Off? and why will the Sell Off continue?
I know you want answers, you deserve the truth....I just hope you can handle it...
As I've described above, people who really, truly understand what's happening, know that the Bond Markets (eventually) set long term interest rates, not the FED. Our Rich Uncle Sam has been borrowing money from us (Investors) via the Debt Markets at an ever accelerating pace. Like you, me or our businesses, when we are employed, sales are up, we're successful, we have paid down our debts and have some savings in the bank, lenders are clamoring to loan us long term money (mortgages, car loans, business loans, etc.) at favorable rates. They trust us. When times are tough, perhaps we're between jobs, we've not been wise with our money, had a bad break or two, or we've acted like drunken sailors on leave, lenders decline our loan requests and saddle us with higher interest rates, fees and usurious "Pay Day" style options. They raise the rates and fees because there's an increasing probability they won't be paid back. (i.e. we'll default)
Now, remember those charts above? The flat yield curve with the bottom dropping out of the short end (Pay Day Loans) when times get tough? We also see the long end (20 yr. & 30 yr.) "Gapping Up", as it did a teeny tiny bit today and when lenders (Debt Markets) require ...you know....a little something for the effort.....other than "total consciousness".
When we look at the balancing that's been done over the years we see that, to elaborate, our financial leadership (Greenspan, Bernanke, Yellen and now Powell) seems to have backed us into a bit of a corner. The two Wharton Charts below (Wharton kids, for the most part, are pretty sharp cookies!) illustrate the problem pretty well. In 2007, Marketable Government debt amounted to $4.52 Trillion, of which $1.94 Trillion (43%) had a maturity of 4 years or more.
Now, let's fast forward to 2017, described in the second Wharton chart below. Marketable Government Debt amounted to $14.38 Trillion, of which $7.2 Trillion (50%) had a maturity of 4 years or more. So today we have about $5 Trillion more longer term debt out there ($10 Trillion total) than we did "Pre-Crisis". Remember my "Cheat Sheet" above? All of this debt will have to be discounted, and the present value of both the principal and the coupon flows will be beaten down as interest rates rise. The longer the term of the debt, the more brutal the beating. Discounts on this debt will be exaggerated (and yields will spike) as they always do, until we reach some sort of equilibrium. Even the rating agencies (who normally don't pull their heads out of the sand until well after the insolvency or bankruptcy filing(s)) are beginning to take notice.
With perfect 20/20 hindsight, this problem would have been much easier to solve and unwind had our Rich Uncle Sam been less aggressive and issued short maturity debt rather than long maturity. It would have been much less painful to bring interest rates back up to normalized levels. Uncle Sam did exactly what any smart borrower would do.....he locked in favorable rates for as long as possible. The problem is....that the lender is the American people....it's us.....our Rich Uncle Sam screwed us....we American voters are not getting paid enough for letting him piss away our money.....he really got the best of us on that deal.
Again, with the benefit of perfect 20/20 Hindsight, I'd imagine that if all of the American savers, workers and retirees were still getting 4% on their really simple, straight forward "golden passbooks" and Certificates of Deposit and had been adequately compensated for the time value of their money, they wouldn't have blindly redeployed all of their savings into hot, indecipherable funds and vehicles brimming with risk assets which had those assets anonymously shipped off shore... and the world would have never become one giant "risk on" bubble....but I digress.
Today, the FED can only cut the Funds target so much (2.5%) by my rudimentary math. Of course, the debt markets can force the yield negative if the demand for safe money accelerates. After today's relatively pathetic showing on a paltry US$16 Billion Auction, the Markets are flashing the Treasury a pretty clear signal....They are saying....please stop.
Are we entering an era where we have a yield curve with 0% on the short end and 15% (October 1981) on the long end?.....since the market will soon be loathe to make a 30 year commitment? Or will Uncle Sam take the less embarrassing road and simply stop issuing long dated debt (Like they did in Circa 2002 thru 2006). Will our government financing be done on a Pay Day Loan basis forever?....will that be our only option?
In the past, the FED has cut rates going into the recession/panic (see VenabalePark.com chart below) in an effort to stabilize markets and/or save the financial system. At a 2.5% T-Bill Yield I might question whether going back to zero would even be enough. If you've read my past work in this blog, the Chinese have "created" out of thin air, an additional US$50.1 Trillion of brand spanking new Financial Assets that are just a hiccup or two away from going bad.
@CoryLVenable
As I peruse the after-market-close postmortem commentary and Twitter feeds from the talking heads every day, I can only emphasize that what's happening to markets today (both debt and equity), no matter what you are being told, even though it's incredibly entertaining, what's happening today has nothing to do with the Trade War, White House Tweets, the Wall, the Shutdown, Democrats, Republicans, Mexicans, Russians or Bob Mueller.....it has everything to do with a decade of horrific, politically motivated, easy way out, global monetary policy. And we are at risk of forfeiting the American Dream because of it.
Advice....
Finally, for all of you moon-phase watching, double shoulder fanatic, contango observing, "Buy the Dip", "Stocks ALWAYS go up in the long run", "Oooppsss I hit a rogue wave" dudes and dudesses out there who have somehow convinced people that you know exactly what you are doing and fully understand what's happening......You don't! This post was dedicated to you. I'm trying to help you.
You are continually told about the "strong economy" and that everything is going along just fine and dandy. You are repeatedly told about low unemployment (where everyone has three jobs just to get by, unless you work in healthcare of finance), low inflation (that's true, we may never have CPI inflation again, at least in my lifetime, since none of the monetary expansion has made it down to the "three jobs" people who would actually spend the money), average wages continue to rise (that's true as well, wage increases for six-figure finance and healthcare workers by far outpace the wage increases for the "three job" people). You absolutely should not be listening to this "everything is just fine and dandy" folly. We are already in the middle of a crisis, you just don't see it yet. Please take steps to protect yourselves and your clients if you can.
To be clear, unless you are a global titan of finance, you have no idea what the next 24, 48 or 72 hours holds in store for you, much less the next six months. (Hint: If you are running ads on Sunday morning local TV and/or holding "informational meetings" at Applebee's or Red Lobster trying to convince retirees and grandmothers to pony up their/your $10,000 minimum so you can "protect" their hard earned money....you are probably not a "titan of finance".)
I want you to really think about this and try your best to protect your and your client's money. This is not a "buy the dip....don't worry be happy" event....this is the beginning of an Armageddon-like financial meltdown of Biblical proportions.
Here's the last chart of the day....
Referring to the chart above. To sum up what's been happening over the last few months in both the bond and equity markets, it's an unmistakable flight to safety. Remember... "Smart" money, defined as that invested by "Titans of Finance" (higher volume RED BAR) "gets out" on the way down...."Dumb" money, defined as money invested by nice naive folks like you and me (lower volume GREEN BAR) continues to buy the dip....at least as long as they/we have money to buy it with.
Oh....and I almost forgot.....if you've been following my work you already know that because of China/CCP/PBOC monetary policy and the world's opaque off-shore banking system, the global financial system is also imploding....
Happy investing....and don't say I never warned you.....
Finally, I know exactly what you are about to ask......
You want to know how I can possibly write all of this analysis so soon after the results of the auction are published? Literally just a few hours ago? The answer is relatively straight forward. I wrote most of this last weekend when I had a little free time. I just filled in the details today, updated the charts and hit the publish button once today's Auction and Market Results came in. It's relatively easy to analyze things, and life becomes much simpler, when you are pretty sure you know exactly what's going to happen. I just can't tell you exactly when it will happen.
But I'm sure you already knew that I was going to say that.....
Additional References
Daily Treasury Yields - Treasury.gov
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2019
Market Value of US Government Debt
https://www.dallasfed.org/research/econdata/govdebt#tab2
Fitch UST Downgrade warning 1/9/19
https://www.reuters.com/article/usa-rating-fitch-idUSL8N1Z92B1
I normally don't have time to post as often as I have lately, but there's so much happening, I feel compelled to comment on it. Finance, when it works well, is relatively boring. It's "making the donuts" day after day, no comment needed. When finance doesn't function well, when there are so many odd, generationally unique, structurally cataclysmic events taking place, as is the case today, as an observer, hot topics abound. We're in a "target rich environment" as they say.
The 30 Year T-Bond Auction - 1/10/19....Ouch!
The 30 Year Treasury Auction was just completed a few hours ago...and it didn't go well. As you know our incredibly wealthy Uncle Sam was looking for a small 30 year mortgage (He tried to sell $16 Billion...30 Yr. bonds...a paltry sum in the grand scheme of things....chump change really) and as normal for really wealthy guys, he summoned the world's preeminent bankers and dealers over to his place (the "Treasury") and had them compete for the privilege of loaning him some money. Well, the general consensus was that these astute financiers were perfectly OK with giving Uncle Sam some short term "Payday loans" at some hefty interest rates, as per the recent T-Bill auctions, but they were really uncomfortable with giving old Sam a 30 year mortgage, locking their money up on anything close to what good old Uncle Sam was hoping for. Here are the results:
Offering Announcement:
https://www.treasurydirect.gov/instit/annceresult/press/preanre/2019/A_20190103_5.pdf
Auction Results:
https://www.treasurydirect.gov/instit/annceresult/press/preanre/2019/R_20190110_3.pdf
We can note a couple of things.....
1.) BTC (Bid-To-Cover is the measure of interest in the auction. BTC = $ bids/$ accepted bids) was abysmal at 2.19. The average 30 YR BTC for 2018 was 2.4. Recent T-Bill (safe money) Auctions have had BTC's running at 3+. The BTC for Direct Bidders fell to 1.2. This auction probably should have been canceled for lack of interest.
2.) As far as we can tell, Indirect Bidders (Foreign Central Bank buyers?) bought most of the bonds: $9.2 Billion (57% of the Bonds). The grass is always greener I guess. The Indirect Bidder ratio was 63% for 2018 Auctions.
3.) The yield moved up slightly to 3.035% on the 3-3/8% Coupon.
4.) Direct Bidders represented 15% of the Accepted bids.
Of course Uncle Sam was probably pretty bummed out by this. His party was a flop and he most likely took it as a personal insult. Did I mention that our Rich Uncle Sam has become a bit of a belligerent wind bag in his old age? Lately, he's been going, well, a little berserk when he doesn't get his way.
Below is the transcript from the hypothetical (Dick Fuld Banker Speak Translator - BST) discussion that took place during the auction this afternoon:
Uncle Sam: "Come on guys.....buy these things....it's all guaranteed... risk free.....you'll get your money back....I promise!.....or if you don't buy 'em at least give me some competitive bids. Come on....the show must go on....This is bullshit...."
Bankers/Dealers: "I don't know.....we have so many better places to put our money.....given everything that's going on we really don't want to get into a 30 Yr. /Coupon at 3-3/8% at par value. Can't you just do more of those 2 month bills? Anything under a year is fine....we'll buy it all day. We can get 4% short term AAA debt in the Cayamans, Hong Kong, Luxembourg, Singapore, you name it, if you guys raise rates we're going to get killed on the 30 yr."
Uncle Sam: "C'mon Man.....don't you clowns remember 2009?....I saved your collective asses....I gave you the FDIC & opened the window, I shit-canned the Volker Rule, Glass Steagall, Dodd-Frank and got rid of all kinds of regulation.... and I even looked the other way when you clowns started doing all that off-shore shit in the Caymans and Luxembourg.....I made you rich.....you f&%ing owe me! I'll even loan you the money to buy this shit!........ Besides....I've got Powell in my back pocket...he'll buy it if you don't......what could possibly go wrong?"
Bankers/Dealers: " Geezzz....when this goes South are you going to bail us out? How about our jobs? Bonuses? Those are still "no touchies" right?"
Uncle Sam: "Of course, of course, come on, have I ever let you guys down before? If you can't trust me...who the hell can you trust? Those schmucks in Hong Kong and the Chinese banks aren't going to bail you out...."
Bankers/Dealers: (short pause while thinking about Dick Fuld, Jimmy Cayne and Angelo Mozilla, etc. etc....)
Saudi Banker - Representative from JPM: "I'm in for $1 Billion...."
Chinese Banker - Representative from NYB/Mellon: "We will do what we can...." (Thinking: is my jet ready? I gotta get out of here......Caymans for the weekend...)
Here's the problem......
Under normal circumstances, Investors understand the time value of money. They expect to receive a lower interest rate (compensation) for the flexibility of a short term commitment (a few months) than they would receive for 10, 20 or 30 years. Better said, they should expect a significant premium for a 30 year commitment. They expect that the Federal Reserve would keep their social contract with the American Worker and Investor and manage interest rates and the money supply, keeping inflation in check, while also keeping the economy (and asset values) chugging along properly and in proportion.... and like Goldilocks, everything should be just right.
This makes perfect sense in a "guaranteed" Treasury environment where there's (theoretically) no risk of default. The time value of money is a given. It's understood. The problem is that often, the math doesn't work. Investors lose faith. They lose faith in institutions, politicians, the FED, asset valuations and become conflicted by their own perceived inability to cope with the forever looming risk du jour. Like an attractive, young, bright, single woman who can't decide on which lucky young man she should settle on, in times of uncertainty, investors want to keep their options open. They shy away from any 10, 20 or 30 year commitments.
Generally, when there's a bit of uncertainty (or as I've described in this blog for the last few years, questionable asset valuations, global bubbles and misrepresentations, the likes of which have never been seen before in financial history) Investors, once they start to figure it out, of course, begin to look for a safe place, usually, cash, money market, short term high grade & government debt, etc.. They move out of risk assets (stocks/funds/low-grade-long bonds, etc.). They want to hide out until the mess blows over and things settle down.....but you all know that.
Wealthy foreign investors and Multi-National Businesses who can put their money anywhere, generally choose the most regulated, stable (and/or least taxed) financial systems, markets and vehicles, wherever located. They look for places around the globe to park money when their respective economies "hiccup". Historically, the US, the dollar and US government securities have been such a destination. "In God (and Uncle Sam) We Trust". Of course, when we see investors flock to T-Bills and short term government debt, they bid up the price (and push down the yield). People and institutions are willing to pay dearly to park money in safe places. When the world is in flames, I'd be happy to pay $1,001 for a one month $1,000 T-Bill (-1.2% Yield) if I absolutely know, with certainty, I'm going to get my $1,000 back in a month. That's how we get to 0% (or negative) Interest rates. People fight over access to "Will Rogers Money" ...they are more concerned about the "return of" rather than the "return on" their money.
Interestingly, this hasn't happened... yet. Yields on T-Bills are at about 2.5% and the 30 Year Long Bond is, as of a few hours ago, just over 3%.....we've got a "flat" yield curve.
Yield Curves - Today vs. the Last Three Recessions....
All data, except the yield on today's Auction (inserted ad hoc), is derived from Treasury.gov.
Daily Treasury Yields - Treasury.gov
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2019
I've charted the current yield curve (1/10/19 Solid RED Line) and compared it to the "Great Recession" 12/31/07 Pre-CrisisYield Curve (Dashed RED Line) and the 12/31/09 (Slightly Healthier looking, more normalized, Post Crisis Dashed GREEN line)
When we compare the current curve to the curves prior to and following the Great Recession we note a couple of things.
1.) The slope of the curve today more closely resembles the "Pre Recession" curve than the "Post Recession" curve.
2.) The 30 Year Bond Yield held relatively constant at about 4.5% through the 2008/2009 Recession.
3.) When we look at the "Post Recession" curve, we see that the yield on short term Treasuries collapsed as dealers bid up the price of the notes and bills. Dealers/Investors at the time, apparently had no problem making low interest "Pay Day" loans to our Rich Uncle Sam in exchange for flexibility and his guarantee that nothing could possible go wrong. They were concerned about the "return of" not the "return on" their money.
We also note that the pattern is similar for the two recessions prior to the "Great" one.
When we examine the curves from the Dot-Com (2000-2001) Recession (below), again, we have a flat "Pre-Recession" curve with rates running between 5% and 6% for the length of the curve. The 2007 "Post Recession" curve exhibits similar characteristics as the 2008/2009 Post-Recession curve. The (Safe Money) short term yields collapsed and the long end of the curve held relatively constant at Pre-Recession levels (5.5%), about 2.5% higher than today.
Now let's take a look at my favorite recession, the 1990/1991 "Post Reagan Recession". At the time, I had been working my way up the corporate ladder and had just been given my first controller-ship. I was promptly handed both the "Crash of 1987" and the 1990/1991 Post Reagan Recession to work my way through. I had no idea what the hell was going on. Good times!
We can see that the Pre-Recession and Post Recession Curve comparisons are consistent with both the above 2008/2009 Financial Crisis and the 2000/2001 "dot-com" implosion.
We also note that the "Post Reagan" Pre-Recession Curve was again flat, with all rates hovering at about 8%, a full 5% higher than the flat curve today. Post recession, once again, we note that short term yields fell significantly lower (4% less...about half of the Pre-Recession yield) while the long term rates remained about the same as Pre-Recession levels (8%)
Again, thinking through what's happening today, if the curve shape holds, we can anticipate that once the flight to safety hits, short term rates will most likely move to zero or marginally negative (that "Will Rogers rule" again), while longer term rates will remain at roughly 2.5% to 3%....or GAP UP!. Unfortunately, because rates have been so low for so long, I'm not sure how much rate relief our friends at the FED will be able to give us.....or our rich Uncle Sam.
As Uncle Sam continues to go to the bond markets and starts to unload an increasing number of those awesome 10,20 and 30 Year Bonds, trying to finance his drunken sailor deficit spending, my guess will be that, like today, these bond issues will stumble a bit and will eventually fall flat on their face. Investors will demand that the "time value of money" must be restored.....so Uncle Sam is in the unenviable position where his Treasury holds the auction and private investors, dealers and banks are only willing to submit outrageous bids (by Uncle Sam's standards). If the bonds are to be sold, the primary (and perhaps only) buyer could be the FED.....the Treasury will be printing fresh American "Troubled Assets" and the FED will be implementing auto-TARP the second the bonds hit the street.....Ouch!
My Little Cheat Sheet...
If you fully, really, truly, absolutely understand how bond math works, feel free to skip ahead to "What the 30 Year Auction Told Us Today...." Personally, I just find bond math fascinating to think about....
I've used this handy little chart (below) for years. Remember, common stocks are Voodoo and magic....stock pricing requires guesses about the business, management, prospects, products, projections, business models, opportunity, CEO persona, etc. It's lots of fun and really invigorating!
High Grade Bonds are just boring old math.....no Voodoo involved.
We know exactly how a Treasury bond/note is going to behave as interest rates change....unless that "risk free return" concept somehow goes awry.
The following comments refer to my "cheat sheet" below.....
(Note that these calculations are based on the Net Present Value - NPV of one coupon payment paid the end of each year. There are more sophisticated products/calculations which take coupon timing and exact days outstanding into account and accurately calculates the precise yield of a specific issue. You can make one quite easily on any spread sheet program. My "full" Cheat Sheet starts at an interest rate of 0.5% and runs to 20.0%. I've pasted the section from 2.0% to 5.0%. (today's relevant range) to illustrate. The "Cheat Sheet" is for illustration purposes only and should be "directionally" correct.....again, because of variables with each bond/note issue, it's more of a guideline than a rule...)
When you buy a bond, and hold it to maturity you are buying two things 1.) The present value (NPV) of the principal payment you'll receive down the road, and 2.) The present value (NPV) of the income stream (coupon payments) you'll receive on a periodic basis.
The "Cheat Sheet" below describes the NPV of the Principal Repayment and the NPV of the Coupon/Interest payments for a $1,000 principal invested at various terms from 1 yr. through 30 years. (I've omitted the "Bill" calcs for simplicity) You can see that as the term of the bond increases the present value of the principal repayment decreases. The greater the interest rate, and the longer the term, the more "discounted"and the less valuable the principal becomes. Using the 2% rate, $1,000 paid back next year (NPV $980.39) is worth much more than $1,000 paid back 30 Years from now (NPV $602.41), or discounted at 5% 30 years from now (NPV $377.36)
Further, at higher interest rates, the present value of the coupon income increases. At a 2% interest rate, the present value of the coupon stream on a 30 Year Bond is $447.93. It's $768.52 at a 5% Interest rate.
As a bond owner, if interest rates and inflation remain constant at 2% you get $20/yr. for "renting" your money out to Uncle Sam. After 30 Years, you've got a NPV of both the Principal Repayment and the Income Stream of $1,050.34. You're $50.34! ahead! ....and you've incurred zero default risk!
We also note, sadly, that as interest rates go up, bond holders get...well....to be blunt....killed. If I own a 30 Year Bond with a 3% coupon, and interest rates go to 5%, the NPV of my Bond Principal (To be paid back in 30 Years) decreases by $125. ($502-$377=$125) and I'm stuck with the 3% Coupon ($30/yr.) which would also be discounted at the "new" 5% rate, when I should be getting my 5% Coupon ($50/yr.). So a 2% increase in interest rates destroys $127 of my Coupon NPV ($588-$461 = $127). By holding the bond to maturity I lose $252 ($125+$127) or about 23% of the NPV of my bond. If I were to sell the bond I'd experience this $252 loss immediately, since my bond NPV is only worth $838 now....rather than the NPV of $1,090 I was expecting.
Note that on the way down the math actually works in reverse.....the NPV of the principal payment INCREASES and we get to KEEP the income stream from the higher coupon. So the value of my bond INCREASES by (about) 23% as interest rates fall 2%! If you bought a ton of 30 Year T-Bonds in 1991 and held on to them, you've done pretty well....your NPV on the Principal has increased substantially and your 8% Coupon is looking pretty good right now...and has been for quite sometime. Talk about stimulus!
After all of the above calculations, given that UST's are "guaranteed undefaultable", even though their NPV can change dramatically as interest rates move, they remain the ultimate collateral. Which, of course, also means that sharp traders and investors can design all sorts of awesome devices to lever up. Futures, swaps, derivatives, ETF's, etc. etc. are all designed to hedge risk, or amplify speculative gains (and unfortunately... losses). Then of course, we had to invent "Credit Default Swaps" which protect the holder of derivatives and related securities from default by the institution backing the derivative, which is tied to all of this guaranteed safe collateral. Let's just hope everyone knows exactly what they are doing.
To sum it up, that's why it drives me nuts when people say things like "what's the big deal...it's only 25 basis points"!....it's not the move in rate that causes the disruption....the problem is that the rate change impact is compounded over 10, 20 or 30 years and has an immediate, guaranteed impact on the NPV of the security as well as anything else tied or leveraged to it.
In other words Jay Powell has absolutely no idea what's going to happen when he announces an interest rate change. Nobody does....and nobody could.
What the 30 Year Auction told us today......
Last year in my discussions with my very knowledgeable, bond trader friend, Tim Bergin, we discussed why so many bond market transactions were "failing" as well as the possibility of a "gap up" in interest rates. You can read (or reread) the discussion here. Treasury Fails Revisited....
The "gap up" occurs when the price a buyer is willing to pay for a T-Bond drops significantly (and the yield pops) since the security has fallen out of favor and trust in the FED, the economy and the implied social contract, or all of the above, are broken. Like Cinderella, today, the 30 Year T Bond wasn't invited to the Prince's ball.
There are dire consequences to this. My guess is that we will be seeing this play out in future auctions on a regular basis. Once note/bond owners/buyers/holders collectively decide "hey...we need a better return" they bid less for the bonds and push the yield up. Possibly wayyy up.
At some point, the FED will no longer have control of interest rates. No matter how dovish FED policy becomes, once long bond holders even sniff the hint that debt will be monetized, interest rates will go where the debt owners (lenders) choose to take them. Either the time value of money will be restored to their satisfaction, or they won't buy the bonds (make the loans).
Here are two Dallas FED charts I really like. The first shows the total Federal Debt (Treasury Securities) outstanding over time. The second shows the aggregate debt in relation to par value.
Total US Debt Markets (Public & Private) are somewhere around US$70 Trillion now (or about 3x Us Equity Markets). "Risk-Free" Government Debt (UST's, etc.) are about $22 Trillion of the US$70 Trillion total. By definition, the $48 Trillion of "non Treasury" debt has at least some level of default risk. These notes and bonds may (or may not) have been underwritten properly and may (or may not) have a proper risk premium attached. In any case.....it's not "chump change".
It's also interesting to note that for the first time since 1995 (Chart 3 Above) the Market Value of government debt has dipped below par value, which would be expected in periods of rising interest rates (see circa Volker days) even though the FED Funds target has only increased 2% in the last two years. We're seeing more debt bought/sold at a discount to par than any time in recent history, again due to the impact higher interest rates have on the NPV of longer term debt.
So....Why is the Stock Market Selling Off? and why will the Sell Off continue?
I know you want answers, you deserve the truth....I just hope you can handle it...
As I've described above, people who really, truly understand what's happening, know that the Bond Markets (eventually) set long term interest rates, not the FED. Our Rich Uncle Sam has been borrowing money from us (Investors) via the Debt Markets at an ever accelerating pace. Like you, me or our businesses, when we are employed, sales are up, we're successful, we have paid down our debts and have some savings in the bank, lenders are clamoring to loan us long term money (mortgages, car loans, business loans, etc.) at favorable rates. They trust us. When times are tough, perhaps we're between jobs, we've not been wise with our money, had a bad break or two, or we've acted like drunken sailors on leave, lenders decline our loan requests and saddle us with higher interest rates, fees and usurious "Pay Day" style options. They raise the rates and fees because there's an increasing probability they won't be paid back. (i.e. we'll default)
Now, remember those charts above? The flat yield curve with the bottom dropping out of the short end (Pay Day Loans) when times get tough? We also see the long end (20 yr. & 30 yr.) "Gapping Up", as it did a teeny tiny bit today and when lenders (Debt Markets) require ...you know....a little something for the effort.....other than "total consciousness".
When we look at the balancing that's been done over the years we see that, to elaborate, our financial leadership (Greenspan, Bernanke, Yellen and now Powell) seems to have backed us into a bit of a corner. The two Wharton Charts below (Wharton kids, for the most part, are pretty sharp cookies!) illustrate the problem pretty well. In 2007, Marketable Government debt amounted to $4.52 Trillion, of which $1.94 Trillion (43%) had a maturity of 4 years or more.
Now, let's fast forward to 2017, described in the second Wharton chart below. Marketable Government Debt amounted to $14.38 Trillion, of which $7.2 Trillion (50%) had a maturity of 4 years or more. So today we have about $5 Trillion more longer term debt out there ($10 Trillion total) than we did "Pre-Crisis". Remember my "Cheat Sheet" above? All of this debt will have to be discounted, and the present value of both the principal and the coupon flows will be beaten down as interest rates rise. The longer the term of the debt, the more brutal the beating. Discounts on this debt will be exaggerated (and yields will spike) as they always do, until we reach some sort of equilibrium. Even the rating agencies (who normally don't pull their heads out of the sand until well after the insolvency or bankruptcy filing(s)) are beginning to take notice.
With perfect 20/20 hindsight, this problem would have been much easier to solve and unwind had our Rich Uncle Sam been less aggressive and issued short maturity debt rather than long maturity. It would have been much less painful to bring interest rates back up to normalized levels. Uncle Sam did exactly what any smart borrower would do.....he locked in favorable rates for as long as possible. The problem is....that the lender is the American people....it's us.....our Rich Uncle Sam screwed us....we American voters are not getting paid enough for letting him piss away our money.....he really got the best of us on that deal.
Again, with the benefit of perfect 20/20 Hindsight, I'd imagine that if all of the American savers, workers and retirees were still getting 4% on their really simple, straight forward "golden passbooks" and Certificates of Deposit and had been adequately compensated for the time value of their money, they wouldn't have blindly redeployed all of their savings into hot, indecipherable funds and vehicles brimming with risk assets which had those assets anonymously shipped off shore... and the world would have never become one giant "risk on" bubble....but I digress.
Today, the FED can only cut the Funds target so much (2.5%) by my rudimentary math. Of course, the debt markets can force the yield negative if the demand for safe money accelerates. After today's relatively pathetic showing on a paltry US$16 Billion Auction, the Markets are flashing the Treasury a pretty clear signal....They are saying....please stop.
Are we entering an era where we have a yield curve with 0% on the short end and 15% (October 1981) on the long end?.....since the market will soon be loathe to make a 30 year commitment? Or will Uncle Sam take the less embarrassing road and simply stop issuing long dated debt (Like they did in Circa 2002 thru 2006). Will our government financing be done on a Pay Day Loan basis forever?....will that be our only option?
In the past, the FED has cut rates going into the recession/panic (see VenabalePark.com chart below) in an effort to stabilize markets and/or save the financial system. At a 2.5% T-Bill Yield I might question whether going back to zero would even be enough. If you've read my past work in this blog, the Chinese have "created" out of thin air, an additional US$50.1 Trillion of brand spanking new Financial Assets that are just a hiccup or two away from going bad.
@CoryLVenable
As I peruse the after-market-close postmortem commentary and Twitter feeds from the talking heads every day, I can only emphasize that what's happening to markets today (both debt and equity), no matter what you are being told, even though it's incredibly entertaining, what's happening today has nothing to do with the Trade War, White House Tweets, the Wall, the Shutdown, Democrats, Republicans, Mexicans, Russians or Bob Mueller.....it has everything to do with a decade of horrific, politically motivated, easy way out, global monetary policy. And we are at risk of forfeiting the American Dream because of it.
Advice....
Finally, for all of you moon-phase watching, double shoulder fanatic, contango observing, "Buy the Dip", "Stocks ALWAYS go up in the long run", "Oooppsss I hit a rogue wave" dudes and dudesses out there who have somehow convinced people that you know exactly what you are doing and fully understand what's happening......You don't! This post was dedicated to you. I'm trying to help you.
You are continually told about the "strong economy" and that everything is going along just fine and dandy. You are repeatedly told about low unemployment (where everyone has three jobs just to get by, unless you work in healthcare of finance), low inflation (that's true, we may never have CPI inflation again, at least in my lifetime, since none of the monetary expansion has made it down to the "three jobs" people who would actually spend the money), average wages continue to rise (that's true as well, wage increases for six-figure finance and healthcare workers by far outpace the wage increases for the "three job" people). You absolutely should not be listening to this "everything is just fine and dandy" folly. We are already in the middle of a crisis, you just don't see it yet. Please take steps to protect yourselves and your clients if you can.
To be clear, unless you are a global titan of finance, you have no idea what the next 24, 48 or 72 hours holds in store for you, much less the next six months. (Hint: If you are running ads on Sunday morning local TV and/or holding "informational meetings" at Applebee's or Red Lobster trying to convince retirees and grandmothers to pony up their/your $10,000 minimum so you can "protect" their hard earned money....you are probably not a "titan of finance".)
I want you to really think about this and try your best to protect your and your client's money. This is not a "buy the dip....don't worry be happy" event....this is the beginning of an Armageddon-like financial meltdown of Biblical proportions.
Here's the last chart of the day....
Referring to the chart above. To sum up what's been happening over the last few months in both the bond and equity markets, it's an unmistakable flight to safety. Remember... "Smart" money, defined as that invested by "Titans of Finance" (higher volume RED BAR) "gets out" on the way down...."Dumb" money, defined as money invested by nice naive folks like you and me (lower volume GREEN BAR) continues to buy the dip....at least as long as they/we have money to buy it with.
Oh....and I almost forgot.....if you've been following my work you already know that because of China/CCP/PBOC monetary policy and the world's opaque off-shore banking system, the global financial system is also imploding....
Happy investing....and don't say I never warned you.....
Finally, I know exactly what you are about to ask......
You want to know how I can possibly write all of this analysis so soon after the results of the auction are published? Literally just a few hours ago? The answer is relatively straight forward. I wrote most of this last weekend when I had a little free time. I just filled in the details today, updated the charts and hit the publish button once today's Auction and Market Results came in. It's relatively easy to analyze things, and life becomes much simpler, when you are pretty sure you know exactly what's going to happen. I just can't tell you exactly when it will happen.
But I'm sure you already knew that I was going to say that.....
Additional References
Daily Treasury Yields - Treasury.gov
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2019
Market Value of US Government Debt
https://www.dallasfed.org/research/econdata/govdebt#tab2
Fitch UST Downgrade warning 1/9/19
https://www.reuters.com/article/usa-rating-fitch-idUSL8N1Z92B1
great. great. great!
ReplyDeleteI sure as hell hope you're wrong
ReplyDeleteI actually hope I'm wrong too....
DeleteThank you for sharing amazing insights and information. what do you think of the intriguing MMT theory which i understand is urging for debt monetization as a technically good solution for controlled long term interest rates. their contention is that fears of debt monetization are unfounded as govts are not financially constrained to fund deficits itself if it chooses and that we need to worry about inflation only when the economy is operating at full capacity.
ReplyDeleteI talk about MMT concepts in my "Financial Gravity" Post....my conclusion is that, aside from the moral hazard of devaluing savings & forcing investment in risk assets, in a synchronized, floating rate, transparent, world, it works just fine.....until, of course, it doesn't....
Deletehttps://deep-throat-ipo.blogspot.com/2016/08/the-theory-of-financial-relativity.html
This comment has been removed by the author.
ReplyDeleteYou’ve become part of the broken clock crowd. Maybe I haven’t read you long enough.
ReplyDeleteYou’ve conveniently neglected to discuss the Fed’s direct influence in the markets now. “One day the Fed will lose control of interest rates” or something like that. I’m too lazy to find it & quote exactly, the post is endless. Yes, one day. So your saying they won’t tone analyze each utterance of Jay Powell? It will take years just to end that annoying practice. Meanwhile how much besides $50B did they buy last month? $600B/yr being monetized now. The 10 yr yield just went from 3.2 to 2.7.
Where you been?