Looking for safe harbor in US Treasuries now is akin to millenials hiding out in NFTs during crypto winter = fiat oxidation = ignorance

 

I am worried that the OZ government could freeze our bank account...

 

I'd bet on it.

 

You need to open one somewhere else no Oz or Canada or UK

 

Just look at this thread of tweets: https://twitter.com/Stimpyz1/status/1581284694519185409

 

how the heck would you do that?????
we were going to open an account in the Cook Islands years ago ......not easy

 

Bitcoin is the one energy commodity that makes the best money because the stock to flow ratio is infinite. It has perfect conservation of energy and it obeys all the laws of thermodynamics. It mimics a high redox state colony of mitochondria that lives inside the tropics and obeys all of Nature's laws.

 

Have a listen to these two guys, they get where the risk in macro is now: @FossGregfoss @JeffBooth https://fountain.fm/episode/10820226625

 

My advice for those interested in macro listen from 29:00 to 42:00. That is all you need to know. @LawrenceLepard gets to the point.

 

Oh and by the way that money you have in the bank that you think is yours and is insured.......ya' might want to do some math.
There is more than $22 trillion in the U.S. banking system. The FDIC has $124.5 billion on its balance sheet and a $100 billion line of credit from the U.S. Treasury. FDIC assets would cover only 1.26% of current deposits. Let that sink in when you think USD is a safe haven.
https://www.usgoldbureau.com/news/fdic-handle-banking-crisis

 

In this video, this CEO discusses the struggle of the individual vs. the overwhelming collective force of modern corporations & governments and explains why Bitcoin is the best hope we have to deliver human rights & prosperity to the world. Bitcoin is an economic machine that "unionizes" taxpayers collectively objectively against government monetary policy. It is based on a truth machine, poised to emerge as a freedom machine as the virus spreads globally. I'd like to share his wisdom with you.

 

For those of you who think the DNC did not know they were causing inflation:https://dailycaller.com/2022/10/20/...Z1oN_i42PlvsQNmAAFL5DafS1gSwQc3w4UBcCKK8ihSNQ

 

Treasury buybacks 101. Since the minutes of the last Treasury Borrowing Advisory Committee Meeting in early August mentioned a study being put together to have staff examine the costs and benefits of the US treasury engaging in a bond buyback program.
Many of the questions this raises for market participants hopefully in simple understandable terms. Let's start with why would the treasury want to buy back its debt. Their mandate is to first and foremost borrow money from the private sector in a way that ensures the lowest interest cost over the medium to long term for the US taxpayer. How do they achieve that goal? Firstly let's talk about how they get advice on achieving that goal. They meet formally with a standing committee to serve as a sounding board for optimizing the country's interests that committee called the Treasury Borrowing Advisory Committee is made up of a limited term of service of a group of economists and market participants from the large sell-side banks and buy-side investment management companies along with less large participants.

They meet quarterly the US Treasury also sends questionnaires about important issues to members and past members for feedback before such meetings. The next meeting is on 11/1/22. In addition, the Treasury has a public outreach program where they informally speak to market participants and others
Given the last minutes engaged in this buyback study, I do not expect any announcement of its results before the next TBAC meeting and thus the idea of this being used as a political effort seems like a narrow window of less than a week. That's the facts. Who knows what the politicians think? This is important. The US Treasury is a political organization. They are not the FED. This thread has nothing to do directly with the Fed. It's how a part of the Biden Administration operates. It is a political full stop. So let's get into the whys.

Imagine you are a grocer and you have 11 gorgeous apples on your fruit stand and one not-so-good one that looks a bit rotten. That rotten Apple might decrease the value of the otherwise lovely other apples. You would likely want to move it off the shelf. The entire yield curve of all the maturities of all the bonds that have ever been issued by the US treasury is on display every day. In illiquid times there can be a bunch of rotten apples. Let's use a concrete example. The most recently issued Five-year bond has a coupon of 4.125 and its price has fallen since its issue so now yields 4.38. There is also a bond with a 0.375 coupon that matures on the exact same day. How can that be? Well, when it was issued it was a 7-year bond and it's been two years since the issue. The yield to maturity of this old bond is 4.45%. Now!

Conceptualize and examine all old "off the run" bonds with all the nice new highly liquid on the run bonds and sort carefully and judge if everything is by and large fine or identify sizeable amounts of rotten apples! In a circumstance where the US Treasury sees dozens and dozens of rotten apples marring the value of the nice shiny new issued apples they may ask "what can we do about this?" Well, they can go into the market and buy the rotten apple bonds. Here's where the options on how to fork. Unlike the Fed, it can create an asset in a bank called a reserve to buy the bonds from the private sector (like the fed did during QT) the US Treasury either needs to spend taxpayer money that they have saved in their checking account at the FED (TGA) or raise money from the private sector by issuing a T bill, T note or T bond.
Get it? Buy a rotten apple bond with money you received from new bond issuance. In my example, they could sell the new 4.125 and buy back the 0.375 bonds and save the taxpayers the 7 bp while eliminating the rotten apple from the display. To be honest that's a super boring version of a buyback for most of us. It could be used if the difference is much larger in addition the holders of old bonds tend to be short the new bond. They are often dealers or hedge funds that are arbitraging that difference. Yes, LTCM did this.

This brings us to another reason why the US Treasury might engage in boring like-for-like buybacks. If these dealers and levered funds were seeing major markdowns in their inventory of long off the run short on the run bonds and were facing margin calls then that could really jeopardize the rotten apple market as there would be no one to buy the illiquid rotten apples. If these hedge funds and banks were systemically important financial institutions (SIFIUS) they would need Treasury to step in (or the Fed perhaps) to prevent a systemwide collapse. Anyhow that's how a boring need for a buyback gets exciting. Let's talk about the more interesting buyback. In this case instead of selling a new five-year bond to fund the purchase of a rotten apple five-year off-the-run bond let's assume they issue T-bills instead. Well, firstly the 1-month TBill yield is 3% while the rotten apple is 4.45 so for the moment the taxpayers win. But obviously, the 1 monthly T-bill yield is rising so that will cost taxpayers 4.5 per month in two months if the fed does what it plans to do. So maybe not a good plan. Let's step way up assuming they do fund the long-term bad apple purchases with bills. This will have a major impact on financial markets if the bills market excepts the supply easily. Because the number of long-term treasuries will be reduced. That's what QE did. Which inflated financial assets for a decade. In QE, the fed swaps reserves for long-term bonds. In Treasury buyback, the US Treasury swaps bills for long-term bonds. Duration is reduced flows through to all assets and even stimulates meme and Lambo buying. It is very inflationary. Seems exactly the opposite of QT by the Fed's goals.

Hell yes. It's a political decision to prop up bond and stock markets and 401K's in direct opposition to the fed's goals. At the same time, it's possible that QT is doing very little to fight inflation but proportionally a lot to destroy asset prices. Sterilizing QT via these bills for bonds swap could be something preferable to the fed stopping reducing their balance sheet. In addition, the issuance of bills if sizeable enough to push bill rates above the RRP facility would result in a reduction in this 2TN curiosity of the COVID MMT in the past.

One thing to note is the interest on the RRP is already paid for indirectly by the treasury and this whole scheme would reduce RRP interest and increase bills' interest so that the US treasury's exposure to short-term rates wouldn't vary. More after tweet okay so the RRP is a repo that provides no funding for the government but costs the government interest. Currently around 3.1%. It's $2TN+ and is a bizarre use of taxpayer money and is a rapidly rising floating rate exposure.

In some ways, it's worse than bills floating rate exposure. Because it's daily. This is why I have told you earlier in this thread watch RRP grow. It is a sign bad mojo is coming. In addition, RRP provides no funding for the government. If the government issued 2TN of bills with a yield a few bp higher than the RRP all of that money would exit the RRP and go into the bills. The "Problem" is that the government doesn't need the money so they won't issue the bills. Ah! Here's a purpose. Buybacks would be a good use of the money. Essentially the US taxpayer would reduce coupon interest costs without adding a penny of short-term interest rate exposure. Sounds brilliant if it were for that pesky QE asset inflationary response. Which is in direct conflict with QT. That said the fed could continue to rapidly reduce its balance sheet including the liability side with the weird RRP and perhaps asset prices were never the preferred way to fight inflation. I can imagine the spin. FED: we applaud the bills financed buyback as it returns liquidity to portions of the US treasury market that need it while also eliminating the RRP facility In addition it will allow balance sheet reduction to proceed at a rapid pace we have never felt that QT was an as effective as rate hikes for taming inflation while it did inflict potential damage on markets that could lead to systemic failures. We will kill inflation via our preferred tool of rate hikes and stand ready to adjust rates further blah blah blah.........

 

The discussion around buybacks is most interesting on the longer end of the curve due to the inversion. A buyback of 2’s at 4.6 funded by 30’s at 4.2 is a more significant roll than anything on the short end. It flattens the inversion which helps mitigate credit markets velocity

 

In June of 2022, the SF Fed estimates that the stimulus checks the Fed monetized account for 3 percentage points of the CPI, which is about half of the excess over their target of 2%. It has now entered the Fed’s collective mind that they are half to blame for inflation. Inflation has made real (inflation-adjusted) wages go down, not up, and this downward trend is now accelerating. While the Fed is scared that they got it wrong the last 14 years and QE *does* cause inflation — at least in the context of monetizing stimulus checks and simultaneous supply constraints — it is an indisputable fact that they are hurting wages.
Thus the political cover for running inflation hot to achieve more equitable wage distribution is gone, and in fact, they are achieving the complete opposite of what they said they wanted to do in 2019.
Now we have inflation persisting in late 2022, the Fed scared out of its mind and struggling to contain it at any cost by raising rates, and a looming recession. The Fed withdraws liquidity. Earnings fall before inflation does, while bond yields go parabolic causing massive pension and 401K losses. It also triggers margin calls and selling in bonds to deleverage risk and this further pushes yields and inflation higher.

Tax receipts go down. Corporate earnings go down. Debt monetization goes down. Interest rates — the cost of capital — go up. Money becomes scarce, and expensive to borrow.
The market widely believes the Fed will pivot when it is clear we are in a recession. This is delusional. This is true when there is no inflation. The Fed is terrified of inflation.
The Fed has mandates to keep stable prices and full employment. No mandate to avoid recession. No mandate to keep stocks up.
They have played with those other two goals when they thought they could do anything they wanted and it wouldn’t cause inflation. The game has changed. The luxuries are gone. Full employment is here. Their only relevant mandate is stable prices.
The strongest case I’ve heard for a Fed pivot is the argument that without it we will have a sovereign debt crisis. However, I don’t see why
they just issue long-term bonds to solve it.......but the math below explains it

The answer without math is: Issue long-term bonds to whom? The Govt can't afford positive real rates w/CPI here today, and without Fed monetization (QE), there is no "sucker at the card table" to pay negative real rates on long-term debt.


The US govt can't afford a terminal rate of 5% without Fed QE (without draconian entitlement reforms)
5% x $31T = $1.5T proforma in 2023
$2.9T Entitlements x 9% 2023 COLA (but no enrollment growth) = $3.2T
1.5T + 3.2T = 4.7T
$4.5T in ATH tax receipts down 20% in this recession = $3.6T in collections = balance of payment issue. Gov't can't cover its debt = real default
Those are well into banana republic territory right now

My tweet today
US Treasury status today: Budget deficit for September 2022: $430bn versus $65bn year over year = bond yields killing US interest payments is now a real phenomenon.

Is someone out there calling the Fed's bluff now? Do you know what a bond vigilante is?

A bond vigilante is a bond market investor who protests against monetary or fiscal policies considered inflationary by selling bonds, thus increasing yields.

 

Is there another Rx?

What is the Bear Steepening solution?

Bearish Steepening is a policy tool of QT. You do it by having higher yields on the 30 yr bond and lower yields on short durations. This leads to a steepened yield curve. It is an anti- YCC tool.


Bear Steepener might be the Fed/Treasury’s best hope of engineering a “Controlled Demolition” of asset prices WITHOUT engineering a CREDIT CRISIS.






In 2000, bubblicious tech valuations resulted in high EQUITY VOLATILITY and crashed asset prices. The GFC of 2008 was very different in that the heart of the maelstrom revolved around CREDIT VOLATILITY which threatened to take down the banking system.







The Fed’s best hope at curbing demand through pricking asset bubbles WITHOUT also causing a CREDIT CRISIS lies in BEAR STEEPENING of the yield curve vs. just hiking FFR (Fed Funds Rate) until something breaks.














QT now has to combat BOTH QE AND MMT. Given upcoming midterms and the prospect of divided government, I don’t see a FISCAL antidote to MMT, so it all rests upon the Fed’s shoulder to use the very BLUNT tool of QT to fight inflation. Stan Druckenmiller in a recent interview said 2 things. First, Stan noted that the traditional signal content from Bonds (i.e. a flat/inverted yield curve always precedes recession) is no longer a valid one.

Because the yield curve has been MANIPULATED FOR 15+ YEARS THROUGH QE it no longer operates a fire alarm. Incidentally, it was the same manipulated quality of the CNY at 6.3 in June 2022 that led me to disregard its “strength” as a spurious Fx signal.
Druckenmiller in the same interview also cited a statistic stating that “inflation > 5% could NOT be stopped without FFR > CPI." Problem: I don’t see the FFR going >8% much less >4% without creating a major CREDIT/FUNDING CRISIS.

Based on recent FRED data, I estimate that ~$2.7-$3T of TOTAL corporate debt (encompassing bonds and loans) of $12.2T as of Q1’22 to be FLOATING-RATE.

In addition, I estimate that ~17-20% of $15.8T of total US mortgages is in the form of ARM. I have no idea how much is currently floating, but even a small % of a giant absolute number would be significant.

Even if we assume a low % of floating mortgages, spiking rates on $3T of floating rate corp loans alone (typically at the top of the capital stack) will have a CASCADING EFFECT DOWN THE ENTIRE CAP STACK OF $12.2T CORPORATE DEBT AND COULD RESULT IN MASS BANKRUPTCIES.

Even worse, just hiking the short-end absent active Bear Steepening is that A FLAT/INVERTED YIELD CURVE WILL EVISCERATE BANK NET-INTEREST MARGINS AT THE SAME TIME CORPORATE DEFAULTS SURGE.
What happens when you cut off a bank’s NIM lifeblood and saddle it with loan losses at the same time? CREDIT CONTRACTION ACROSS ALL LENDING ACTIVITIES AND POSSIBLY EVEN BANK BANKRUPTCIES.
I believe the Fed is ok with a 2000-style correction but NO ONE wants a 2008-style CREDIT CRISIS that threatens the entire fabric of the financial system.

Remember that RISKY DISCOUNT RATES are comprised of 2 components: RISK-FREE RATES + CREDIT SPREADS (aka RISK PREMIUMS):
The market has already led the Fed in pricing a Bear Steepener of RISKY RATES. The underperformance of HIGH DURATION ASSETS (both in Equities & $BTC/Crypto) suggests that LT EQUITY RISK PREMIUMS have already blown out. They bottomed 6 months ago. Financial Assets act as QT Levers

When the Nasdaq goes from leader to laggard, it’s a tell that you need to start thinking about stocks as bonds, i.e. DURATION of Cash Flow’s matter a lot. It is part of the reason I think coal stocks are now the best replacement asset for the long bond.
the present value of a financial asset = the summation of cash flows discounted by i + the discounted value of the terminal value



It should be fairly intuitive that as you move the fulcrum to the right towards the source of “Load” you gain a “mechanical advantage” and can apply less “Effort” to lift the same “Load.” The converse is also true: shifting the fulcrum to the left loses the mechanical advantage.
Applying this model to financial valuation, think of interest rates (really discount rates) as the “Effort” that can impact the valuation “Load” and think of the fulcrum point as the relative mix of “Cash Flow” term vs. “Terminal Value” term of the DCF equation. KEY IDEA: A financial asset whose valuation derives principally from the Terminal Value is like a 1st class lever whose fulcrum point is close to the Load. In other words, it takes very little movement in the interest rate “Effort” to move the valuation “Load” A LOT.


In this lever analogy, long-dated zero-coupon bonds & tech stocks whose valuations derive from terminal values far in the future resemble 1st class levers with large mechanical advantages, where even a small shift in the interest rate “Effort” can move the valuation “Load” A LOT. What is exceptionally worrisome about today’s markets is that so many asset classes fall into this bucket. As bad as overvalued tech stocks are, at least one can argue that there is still an underlying valuation framework that’s applicable.
Applied to the lever analogy, DURATION is akin to the MECHANICAL ADVANTAGE of the lever which scales with the length of lever arm between “Effort” and “Fulcrum.”






The longer the lever arm between source of “Effort” and fulcrum the greater the mechanical advantage for lifting the “Load.”



Similarly, the longer the DURATION of the asset, the more sensitive the valuation “Load” is to the interest rate “Effort.”

This is immediately obvious with BONDS but conceptually it is applicable to ANY asset. Remember I said that the fulcrum position represents the mix between the left “Cash Flow term” and the right “Terminal Value” term?






The more an asset’s valuation derives from the “Terminal Value” term, the greater the DURATION, the more sensitive to interest rates.










For STOCKS, the concept of GROWTH vs. VALUE comes to mind. One can argue that GROWTH stocks are more heavily weighted to the “Terminal Value,” while VALUE stocks are more grounded in the “Cash Flow” term.





I think the preferred method of SHAREHOLDER RETURN going forward will be DIVIDEND stocks, which have a DURATION-SHORTENING EFFECT in a rising rate environment = coal/energy stocks


Here is also Bear Steepening in CREDIT RISK PREMIUMS, easily visibly in mortgage rates. With avg 30-year fixed rates blowing out to 5.875% and 15-year fixed to 5.375%, the implied CREDIT SPREADS over equivalent tenor Risk-Free Rates are now 2.5% at 30-yr vs. 2.2% at 15-yr.
In other words, the RISKY YIELD CURVE is already leading the Fed in Bear Steepening, and I expect this trend to continue, with higher duration assets underperforming. For the Fed/Treasury, Bear Steepening is potentially a "Heads-I-Win/Tails-I-Win" strategy.
Heads: curve steepens and HIGHER LONG RISKY RATES continue to discount High Duration Assets including HOUSING/RE -- the BIGGEST bubble which is just beginning to pop now.
Tails: if the curve doesn’t steepen, and the ducks at the long-end are clamoring to fund our govt at 3.35% for 30 years, then FEED THE DUCKS AND TERM OUT OUR MATURITIES!














If I were Powell, I'd be working with Treasury to issue debt at the long-end and maybe even come out with a 50-yr bond. If the ducks are quacking at high yields, let's feed them. Heads you win: achieve tightening without causing floating-rate funding stresses and runaway USD Wrecking Ball. KEY POINT: BEAR STEEPENING WOULD LESSEN PRESSURE ON THE FED TO TAKE FFR TO A POINT THAT CAUSES FUNDING STRESS AND STILL IMPOSE TIGHTENING ON RISK ASSETS.

The notion that Stocks and Bonds are always inversely correlated is PART of the moral hazard created by decades of Liquidity Lottery enabled ONLY by the absence of Inflation.


Bear Steepening = Create a curve you can live with given the above math


Imagine a scenario where the long end of the yield curve is at 6% and the front end is at 3%. Restrictive for targeting wealth effects? Check. Front end low enough to manage debt svc? Likely. NIMs positive to prevent banking crisis? Check. Front end high enough for retirees on FI? Check.

 

that's some heavy stuff to wrap my head around........

 

That is what this thread is about. Now we have another inflationary pulse coming.......CCP will be selling UST in a big way soon to combat the tech lock down we just put on China. The effects are going to be massive

 

Bond, equity and real estate investing in fiat now is like licking chocolate from the razors edge.

 

The 1970s is a bad analog for today's world because US govt debt & deficits were very low in the 1970s. Today, we have 1970s inflation with a 1920’s Europe debt load. European sovereign debt collapsed 75-100% v. gold from 1920-31; Germany, Austria, & Russia hyperinflated.