MATASII JANUARY 2019 NOTES: THE GLOBAL BOND BUBBLE



A PUBLIC SOURCED ARTICLE FOR MATASII (SUBSCRIBERS & PUBLIC ACCESS) READERS  REFERENCE



MATASII SYNTHESIS:

  • Companies "don’t go and distribute cash to their shareholders in the form of buybacks or dividends if they have good investments to make of a long-term capital nature."
  • The surge in Bank payouts underscores that banks have limited opportunities to keep expanding their businesses profitably. So, they’re pumping out cash.

  • Additionally, as Primary Dealers their hoarding of UST's has now taken on ABSOLUTELY IMMENSE PROPORTIONS since Q4 2018,
  • We know Dealer holdings follow the rhythm of the Euro$ squeezes.
  • Maybe there really is no one to buy all these UST’s piling up on exposed dealer balance sheets?
  • It now seems only a matter of time before the Fed not only ends its balance sheet unwind, but proceeds with QE4 in order to fund America's gaping budget deficit.
  • However, whereas a new QE may be sufficient to monetize debt under normal conditions, it is unclear if even the Fed would be able to step up and monetize the tens of trillions in new debt that will have to be issued over the next few years should Ocasio-Cortez "Green New Deal" with its multi-trillion price tag, ever become a reality.

THE LOOMING $5.9T BIG KAHUNA

THE PROBLEM IS THE $5.9T IN BONDS HELD BY "US GOV'T ENTITIES' THAT MUST BE PAID OUT -- NOT 'ROLLED OVER'!!

WHAT LIES AHEAD

  1. Foreigners can be expected to sell at ever increasing rates as De-Dollarization advances,
  2. US Banks can't handle any more Treasuries without dramatically increasing excess Reserve payouts by the Fed and
  3. The Unfunded Pension Tsunami will completely, and VERY SOON consume the US Treasury's ability to fund US governmental needs.
  4. The EU Labor productivity growth has been almost non-existent over the past decade or so with almost all of  the EU issues having to do with Supply-Side problems. An EU Banking Crisis Looms on the Horizon.

 


ARE BANKS HOARDING US TREASURIES TO "LIQUIDITY HEDGE"?

  • MARCH 2016:
    • The dollar world was a smoldering wreck, and because of that global bond yields were still falling.
    • Liquidity hedging was prevalent as anyone might honestly expect.
    • As a consequence, US primary dealers were hoarding UST’s coupons and bills.
    • Their reported (net) holdings of these most prized instruments so very clearly rise and fall with each deflation/reflation cycle.
  • TODAY THEY SAY:
    • There is no such thing according to the Fed narrative.
    • There cannot be because four QE’s caused so much “money” to be “printed” something like that would be unthinkable
    • If it was ever the real thing it would reveal the whole corrupt nature of moneyless monetary policy.
    • It didn’t matter the global downturn and how the US economy was pushed right up to the edge of recession, there was no liquidity problem in dollars.
  • PRIMARY DEALERS
    • The world’s biggest bond dealers — include banks such as Bank of America Corp., Goldman Sachs Group Inc. and JPMorgan
    • The first business of any dealer is to warehouse securities; to purchase them in the primary market and then sell them off over time to brokerage customers. It is these dealers who buy at the federal government’s auctions in order to then distribute the bonds, bills, and notes out to the investing public.
    • The premium for the newest, easiest-to-trade Treasuries has recently soared to the highest since 2011?
    • The firms’ efforts to hedge all the Treasuries collecting on their balance sheets also roiled the futures market and a crucial corner of the financial system where traders lend and borrow securities overnight.
  • EURO$
    • Dealer holdings follow the rhythm of the Euro$ squeezes.
    • When it gets bad, they purposefully hold on to what’s in inventory because of perceived liquidity risks arising from all the other things dealers do (repo and FX just the start).
    • After Bear, AIG, Lehman, et al, nobody’s going to be so unprepared for when BONY Mellon comes calling for collateral.
  • CHRISTMAS 2018 CHAOS
    • This dealer hoarding has now taken on ABSOLUTELY IMMENSE PROPORTIONS.
    • It’s like nothing we’d seen before, even during 2008 (admittedly, dealers were still learning about the downside of illiquidity and prudent matching leading up to that big week in September).
    • As of last week, Jan 30, reported holdings (therefore hoarding) surpassed the record set the week of Christmas (when every market was a huge mess, except UST’s).
    • BUT: There is huge demand for pristine collateral types.

Both the Eurodollar futures and UST curves exhibit absolutely brutal liquidity hedging going on. While everyone is fixated on UST 2s10s, the space between the 12-month bill and 5-year note has gone bananas – during the exact same time frame dealer hoarding skyrocketed.

  • What we have is: Falling LIBOR and bond yields, confused and dazed central bankers and greater distortions to the major curves.

Maybe there really is no one to buy all these UST’s piling up on exposed dealer balance sheets!

 

PRIMARY DEALERS INCREASINGLY FORCED TO BUY TREASURIES AS FOREIGN BUYERS BALK

  • Foreign investor demand has been steadily declining in recent years.
  • Foreign investors additionally already hold significant dollar debt" which is why the US will have to increasingly rely on domestic savings to fund its future budget deficits.
  • Chinese holdings dropped for the 6th straight month, bringing their holdings to their lowest level since May 2017...
  • Foreign holdings of marketable Treasuries, as % of outstanding, have declined meaningfully from the pre-crisis peak (from 55% in March 2009 to 41% currently),
  • Primary Dealers' average net long Treasury position has rocketed higher since the beginning of October, and it leapt another $35.7 billion in Thursday's release to a record $259.3 billion.
  • Average primary dealer Treasury positions have generally been surging since March of last year, particularly in the front-end of the coupon curve, amid the deluge in new Treasury issuance and a lack of proportional increase foreign buyers.

WHAT DOES THIS MEAN

  • Dealers are rushing into bonds anticipating further upside, which however would suggest that the "smartest money" is convinced that the US economic slowdown is set to accelerate, with deflationary consequences, resulting in even lower yields (i.e., the P&L angle).
  • The more troubling conclusion is that as foreigners have failed, or refused, to match their buying of US paper to the ramp up in Treasury issuance over the past year in order to fund Trump's fiscal stimulus, Dealers - who are the failsafe bid to avoid a failed Treasury auction - have have no choice but to aggressively step up their purchases of US paper.
  • If this is the case, this has potentially troubling consequences, especially for US monetary policy, because there will come a point where Dealers are limited as to how much more paper they can buy simply due to regulatory and capital requirement concerns.
  • As such, should this buying spree continues and should foreign buyers refuse to accept the buying baton from Dealers, it will be up to the Fed to once again step in and begin monetizing US debt issuance.
  • In other words, as the US Treasury is set to issue over $1.1 trillion in net new bonds in 2019 even as the Fed continues to shrink its balance sheet, forcing market participants to pick up the slack from the Fed's QT...

It is only a matter of time before the Fed not only ends its balance sheet unwind, but proceeds with QE4 in order to fund America's gaping budget deficit.

However, whereas a new QE may be sufficient to monetize debt under normal conditions, it is unclear if even the Fed would be able to step up and monetize the tens of trillions in new debt that will have to be issued over the next few years should Ocasio-Cortez "Green New Deal" with its multi-trillion price tag, ever become a reality.

 

THESIS 2017: BANKS GOT A $21B TAX WINDFALL.. THEN FIRED THOUSANDS & REWARDED THEMSELVES

Companies "don’t go and distribute cash to their shareholders in the form of buybacks or dividends if they have good investments to make of a long-term capital nature."

  • On average, the banks saw their effective tax rates fall below 19 percent from the roughly 28 percent they paid in 2016.
  • While the breaks set off a gusher of payouts to shareholders, firms cut thousands of jobs and saw their lending growth slow. -Bloomberg
    • The 23 firms boosted dividends and stock buybacks 23% and slashed thousands of jobs with a few signaling that more layoffs are in store.
    • Wells Fargo and Bank of America slashed nearly 4,900 and 4,000 jobs last year - only to be outdone by Citigroup's 5,000 job cuts.
    • While the banks did not provide regional breakdowns, press reports reveal that at least some of the cuts were international.
    • More cuts are on the horizon as well.
    • State Street Corp announced in January that it will be laying off 1,500 people thanks to automation,
    • Citigroup may cut thousands of staff from their technology and operations areas in the coming years.
  • As customers are being shifted to mobile platforms and new technologies to handle banking needs, the many banks have announced increased investments in automation.
  • "The ratio of personnel costs to revenue declined as banks gave workers a smaller slice of the money they brought in."
  • Customers also, did not benefit significantly from Banks' tax windfall - as loan portfolios only increased by 2.3% in 2018 vs. 3.6% a year earlier.

The KBW Bank Index of the nation’s largest lenders tumbled 20 percent last year.

The surge in payouts underscored that banks have limited opportunities to keep expanding their businesses profitably. So, they’re pumping out cash.

The bank index has rebounded 13 percent this year, helped by the payouts and record results.

 

DILEMMA REFLECTS THE "SUPPLY SIDE" PROBLEMS EUROPE IS FACING

  • The European Commission’s statistics bureau "puts growth at its lowest levels in more than four years."
    • “Germany has slashed its growth projections from 1.8 percent to 1.0 percent for this year…”
    • Italy is now in a recession, having posted its second consecutive decline in economic growth in the fourth quarter of 2018. For the fourth quarter, Italy’s economy declined by 0.2 percent.
    • Then there are the disruptions to the economies in England and also in Europe as the “date of decision” is just around the corner for Great Britain and its “leaving” of the European Union. The disruptions have already begun for all concerned.
    • France is not doing all that well, and general weakness is being felt almost everywhere.
  • “The latest downturn comes off the back of far sharper recessions, in 2008, 2011, and 2014, from which the country has still not fully recovered.”
  • Labor productivity growth has been almost non-existent over the past decade or so.
  • “On a per capita basis, (current) real gross domestic product was lower than when Italy adopted the Euro in 1999.”
  • The urban/rural economic divide is massive.
  • The banking system is a mess, with many of the lending problems faced in the 2007 to 2009 worldwide financial collapse unresolved.

Almost all of  them (above issues) have to do with supply-side problems

The proposed remedy is for governments to spend and spend and spend.

  • The general undertone among the most dissatisfied groups in Europe is that government fiscal policies need to be dialed up toward a more aggressive effort to stimulate growth in both the individual countries and in the community itself.
  • What is needed is not more government spending or tax relief. What is needed is structural change and organizational reform. But, this is not what is on the agenda.
  • "The policy debates Germany needs concern chronic weaknesses that would be laid bare by a recession. Those include
    • A failure to cultivate entrepreneurial startups, especially in service industries;
    • A stubbornly unreformed banking system, made vulnerable by decades of political meddling in managements and years of profit-sapping ultra low interest rates;
    • A tax code that kills incentives and investments. That’s for starters."
  • Image result for supply side economicsIf you add the issues associated with Brexit and the dislocations and distortions that will be forthcoming for this exercise, regardless of the specific plan, you have economies that cannot fully compete in the current environment.

SUPPLY SIDE PROBLEMS

  • Supply-side problems cannot be corrected by simple spending programs that are supposed to provide a rapid response to the issues voters want attacked. This is why politicians focus on these problems because more and more spending makes sense to a lot of the electorate and this is what the electorate wants, a quick solution to their problems. This, the politicians play on because it is their pathway to re-election.
  • Focusing on demand-side solutions is not going to resolve Europe’s problems.

Conclusion: We should just continue to expect more of the same thing!

 

UNVEILS APOCALYPTIC LONG-TERM DEBT PICTURE - US SET TO BORROW OVER $1M FOR SECOND YEAR

  • The fiscal 2018 U.S. budget gap hit a six-year high of about $780 billion, and the Congressional Budget Office forecasts it will reach $973 billion in 2019 and top $1 trillion the next year.
  • Over the next decade, the U.S. government will spend about $7 trillion just to service the nation’s debt, according to the CBO.
  • Treasury’s total net new issuance in 2018 amounted to $1.34 trillion, more than double the 2017 level of about $550 billion. In 2019, it will be $1.4 trillion, with $1.11 trillion from more coupon-bearing debt and the rest in bills.
  • Gundlach: "The US has "$122 Trillion US unfunded liabilities per Debtclock. That’s 564% of Fiscal ‘18 GDP.  To fund would require 10% of GDP for 56+ yrs."
  • “Given the global backdrop with Brexit and China’s economy slowing down, there is really a bid for safety, liquidity and quality -- which means Treasuries -- and that’s keeping yields in check to some degree.”
  • At some point the market will finally start focusing on America's long-term - and very much unsustainable - debt picture,
  • When it does, and when there is another major selloff in stocks, US Treasurys will no longer be the "safe haven."

WHO IS THE "OTHER" DOMESTIC BUYER OF TREASURIES THAT HAS BOUGHT $2T SINCE 'TAPER' ENDED?

  • Public marketable debt is skyrocketing while debt held by Intra-Governmental trust funds continues slowing,
  • The domestic public has been left to purchase an unprecedented $3.2 trillion, or 84% of all issuance since QE ended.
  • The Domestic Public is "Other investors" with an assist from mutual funds.
  • "Other Investors" vaguely includes:
    • Individuals
    • GSE's (government-sponsored enterprises; Freddie Mac, Fannie Mae, Ginnie Mae, etc.)   [MATASII HIGHLIGHTED]
    • Brokers / Dealers
    • Bank Personal Trusts and Estates
    • Corporate and Non-Corporate Businesses
    • and yes, somehow the category titled "other investors" wasn't vague enough...even among the heading of "other investors" comes the bullet point of "other investors" which seems wide open to interpretation
  • We know who is not buying:
    • The Fed isn't buying and has in fact rolled off a massive quantity of mid duration US debt,
    • Foreigners aren't buying,
    • Banks aren't buying,
    • Insurers aren't buying,
    • American's aren't buying savings bonds,
    • State nor local governments are buying, and
    • There is little to no spread to compensate any leveraged "investors" to buy mid to longer duration US debt.
  • Yet the Treasury tells us that "Other Investors" (suddenly became hyper-interested just as QE ended) and have come up with over $3 trillion in cash since 2015 to buy low yielding US debt like never before?!?
  • Is there any party (aside from central banks or central bank conduits) that could come up with such gargantuan quantities of dollars to yield so little and do it essentially without leverage???
  • Tell me again, who buys US Treasury's...and particularly who buys mid and longer duration US debt (responsible for setting the 30yr mortgage rate)???
  • Otherwise......

..... this may sadly be the smoking gun of an active, accelerating, and perhaps unraveling Ponzi scheme?

WHO BOUGHT THE GIGANTIC $1.5T OF NEW US TREASURY DEBT OVER THE PAST 12 MONTHS?

  • FOREIGN FLOWS - De-Dollarization
    • -55B - China
    • -47B - Japan
    • -3B - Net ROW
    • -105B - Net Sellers
  • FEDERAL RESERVE
    • -204B - Net Sellers in 2018 (QT)
  • US GOVERNMENT ENTITIES
    • +20B - Net Buyers

=================

  • SUB TOTAL
    • -289B NET SELLERS
    • +1.26T New Debt Issuance
    • 1.549T of 2018 Requirement
  • BUYERS
    • American banks (very large holders),
    • Hedge funds,
    • Pension funds,
    • Mutual funds,
    • Individual investors in their brokerage accounts or at their accounts with the US Treasury
    • Other institutions

 =================

  • Increased their holdings by $1.36 trillion over the 12-month period

KEY POINTS

  1. American Banks are incentivized to hold US Treasuries for Capital Requirements Reasons & Excess Reserve payouts by the Fed.
    1. This is the reason why Excess Reserves of > $2T are held at the Federal Reserve,
    2. Banks hold more US Treasuries than their requirements require and are able to lend out as new loans
  2. The $20B of Net Buys above from Government entities (ie Social Security) is a complete distortion. Soon existing Government Bonds ($5.9T - green pie area above) will be forced to be sold for payouts to retiring Boomers (which is presently a $84T unfunded liability). The $5.9T of Treasuries is only ~25% of this requirement. The $78T will require additional debt to be financed.
  3. What Lies Ahead:
    1. Foreigners can be expected to sell at ever increasing rates as De-Dollarization advances,
    2. US Banks can't handle any more Treasuries without dramatically increasing excess Reserve payouts by the Fed and
    3. The Unfunded Pension Tsunami will completely, and VERY SOON consume the US Treasury's ability to fund US governmental needs.