The Hill/Justin Haskins/01-14-17
The current economic picture looks eerily similar to the one in 2008: Economic growth is sluggish, personal debt is extremely high, the government is running massive annual deficits, and riskier investments are being encouraged by the current market conditions, although this time it’s being caused by excess cash in the monetary supply.
President-elect Trump enters the White House at a crucial moment in U.S. history. If the economy does not grow rapidly in the coming years, allowing market distortions to correct and the Fed to safely increase interest rates to bring the monetary supply back to its historical norm, there could be another large-scale economic collapse in the not-so-distant future.
Will the national debt hit $20T before Dow hits 20k?
Since every penny of that new debt was presumably spent, it should come as no surprise that the latest batch of headline growth numbers have been impressive. Which is the basic problem with debt-driven growth: The good stuff happens right away while the bad stuff evolves over time – in the form of higher interest costs that depress future growth – making it hard to figure out what caused what.
That’s bad for regular people who have to live through the resulting slow-down or crisis.
PG View: It looks once again like we may be pulling economic growth forward from the future via increased debt. While that may give the economy a short-term boost, the longer term prospects becoming increasing dire as the debt load mounts.
“The fiat money quantity has now breached the $15 trillion level, standing at $15,108bn on November 1st 2016, the last calculable date. This is now $6.3 trillion above the pre-Lehman crisis trend-line, exceeding it by 72%. Instead of the Lehman rescue being a temporary fix, the increase in the quantity of fiat money has continued to grow over eight years later.”
PG View: The proliferation of paper — paper in the form of debt and paper in the form of fiat currency — is one of the primary driving forces behind gold price appreciation over time. I concur with Mr. MacLeod when he says, “gold must be regarded as significantly undervalued relative to fiat dollars.”
The Wall Street Journal/Nick Timiraos/01-04-17
The debt limit as it exists now came into being between the first and second world wars. Before 1917, Congress authorized every new debt issuance. By 1939, it had delegated nearly full authority to the Treasury to issue debt by setting an overall cap. But over time, the debt limit has morphed from a tool for simplifying the borrowing process into a weapon that individual lawmakers “can wield against our economic well-being,” Mr. Lew said.
PG View: I might argue that unrestrained debt accumulation is a weapon of mass economic destruction. Do we really trust our policymakers to wrack up the national debt at the escalating pace that has developed over the last decade-plus? Seems like there should be some checks and balances; and if not a debt ceiling, then what?
Financial Times/Eric Platt/12-27-16
“Companies accounted for more than half of the $6.62tn of debt issued, underlining the extent to which negative interest-rate policies adopted by the European Central Bank and the Bank of Japan, as well as a cautious Federal Reserve, encouraged the corporate world to increase its leverage.
Corporate bond sales climbed 8 per cent year on year to $3.6tn, led by blockbuster $10bn-plus deals to finance large mergers and acquisitions.”
PG View: Corporations are leveraged to the hilt; at levels not seen since right before the financial crisis.
“China’s capital outflows are accelerating and the central bank is selling larger amounts of foreign exchange, Goldman Sachs Group Inc warned as the yuan headed for its biggest annual decline in more than 20 years.”
PG View: As the yuan is driven lower, it is exacerbating the problems arising from recent dollar strength. This is only going to escalate president-elect Trump’s contentions that China is a currency manipulator, strengthening the case for his threat to impose import duties. That in turn could start a trade war. China has already been selling Treasuries and dollars in an alleged effort to shore up the yuan, to the point where China is no longer the top holder of U.S. government debt. That honor goes to Japan, which hasn’t held that dubious title for any sustained period since the financial crisis.
01-Dec (WSJ) — The bond market rout is deepening.
The yield on the U.S. benchmark 10-year Treasury note rose to a 17-month high Thursday, following the biggest monthly increase in November since 2009. The yield recently was 2.477%, according to Tradeweb, compared with 2.365% Wednesday. Yields rise as bond prices fall.
Selling Thursday was driven by higher oil prices, which have extended Wednesday’s rally after the Organization of the Petroleum Exporting Countries reached a deal to curb the continuing oil supply glut. Higher oil prices tend to boost inflation expectations, which chip away at bonds’ fixed returns over time and is a big threat to long-term government bonds.
PG View: As we approach $20 trillion in debt — and the prospect of higher deficits under a Trump administration — we can ill afford “a big threat to long-term government bonds.”
06-Nov (Bloomberg) — Barack Obama will go down in history as having sold more Treasuries and at lower interest rates than any U.S. president. He’s also leaving a debt burden that threatens to hamstring his successor.
Obama’s administration benefited from some unprecedented advantages that helped it grapple with the longest recession since the 1930s. The Federal Reserve kept rates at historically low levels, partly by becoming the single biggest holder of Treasuries. The U.S. could also rely on insatiable demand from international investors, led by China deploying its hoard of reserves. Global buyers added $3 trillion of Treasuries, doubling ownership to a record.
Now those tailwinds are turning around. The Fed is telegraphing more hikes at a time when interest costs on the nation’s bonds are already the highest in five years. The government’s marketable debt has more than doubled under Obama’s stewardship, to a record of almost $14 trillion. And the deficit is expanding again, after narrowing for four straight years, just as overseas holdings of Treasuries are shrinking at the fastest pace since 2013.
“We’ve really got ourselves into a pickle here,” said Edward Yardeni, president of Yardeni Research Inc. in New York, who’s been following the bond market since the 1970s. “All these years we’ve been kicking the can down the road, and suddenly we’re seeing a brick wall.”
PG View: With the national debt fast approaching $20 trillion, it becomes pretty clear that gold should remain underpinned whomever succeeds President Obama.
PG View: It almost doesn’t seem that bad when compared to the massive $152 trillion debt reported this week by the IMF.
05-Oct (Bloomberg) — Eight years after the financial crisis, the world is suffering from a debt hangover of unprecedented proportions.
Gross debt in the non-financial sector has more than doubled in nominal terms since the turn of the century, reaching $152 trillion last year, and it’s still rising, the International Monetary Fund said. The figure includes debt held by governments, non-financial firms and households.
Current debt levels now sit at a record 225 percent of world gross domestic product, the IMF said Wednesday in its semi-annual Fiscal Monitor, noting that about two-thirds of the liabilities reside in the private sector. The rest of it is public debt, which has increased to 85 percent of GDP last year from below 70 percent.
05-Oct (Bloomberg) — Warning: The world is suffering from a debt hangover of unprecedented proportions. Eight years after the financial crisis, gross debt in the non-financial sector has more than doubled in nominal terms since the turn of the century, reaching $152 trillion last year, according to the International Monetary Fund. That’s equivalent to 225 percent — a record — of world gross domestic product.
PG View: Some would argue that because interest rates are so low, the size of the debt just doesn’t matter, but any rational person knows this is just not sustainable.
28-Sep (ProjectSyndicate) – “What a government spends the public pays for. There is no such thing as an uncovered deficit.” So said John Maynard Keynes in A Tract on Monetary Reform.
But Robert Skidelsky, the author of a magisterial three-volume biography of Keynes, disagrees. In a recent commentary entitled “The Scarecrow of National Debt,” Skidelsky offered a rather patronizing narrative, in a tone usually reserved for young children and pets, about his aged, old-fashioned, and financially illiterate friend’s baseless anxiety about the burden placed on future generations by the rising level of government debt.
If Skidelsky’s point had been that some economies, including the United States, would benefit from higher infrastructure spending, even at the cost of more debt, I would agree wholeheartedly. Compelling reasons for boosting US public investment include deteriorating infrastructure, tepid growth, low interest rates, and limited scope for further monetary stimulus. For the US, such an impetus might be especially welcome as the Federal Reserve raises interest rates (albeit gradually) while other countries ease further or hold rates steady and the dollar likely strengthens.
But that was not the route Skidelsky took. Instead, in his critique of a commentary by Kenneth Rogoff, he argued that it is silly and passé for a country that can issue debt in its own currency to fret over medium-term debt levels. Call me old-fashioned, but that argument smacks of complacency and is not supported by evidence. On this score, Skidelsky confuses two different papers on debt and growth, a 2012 paper of mine, in which there were some alleged data concerns, with one that I co-authored with Rogoff and Vincent Reinhart, in which there were none.
25-Sep (Bloomberg) — They’ve long been one of the most reliable sources of demand for U.S. government debt.
But these days, foreign central banks have become yet another worry for investors in the world’s most important bond market.
Holders like China and Japan have culled their stakes in Treasuries for three consecutive quarters, the most sustained pullback on record, based on the Federal Reserve’s official custodial holdings. The decline has accelerated in the past three months, coinciding with the recent backup in U.S. bond yields.
…The amount of U.S. government debt held in custody at the Fed has decreased by $78 billion this quarter, following a decline of almost $100 billion over the first six months of the year. The drop is the biggest on a year-to-date basis since at least 2002 and quadruple the amount of any full year on record, Fed data show.
PG View: “Homegrown demand has helped pick up the slack,” but what if that stops being the case? That could change the “gradual” rate hike dynamic significantly.
13-Sep (MarketWatch) — The federal government ran a budget deficit of $107 billion in August, the Treasury Department said Tuesday, $43 billion more than in August 2015.
The government spent $338 billion last month, up 23% from the same month a year ago. Spending rose notably for veterans’ programs and Medicare, Treasury said. For the first 11 months of the fiscal year, spending is up 3%.
Total receipts for August were up 10% to $231 billion. Individual income and payroll tax receipts rose by 9%. Corporate receipts were flat at $5 billion.
Receipts are up 1% for the fiscal year to date.
PG View: That was outside expectations of -$100 bln.
12-Sep (Bloomberg) — For the past two years, all yield curve news has been bad news — for the Federal Reserve.
In a reversal of the defining trend of the past year, the spread between two and 10-year U.S. Treasuries — known as the yield curve — has widened to more than 90 basis points on Monday morning, its highest level since the Brexit vote, amid the worldwide tumult in bond markets.
While such a widening would normally be interpreted as a positive sign for the U.S. economy, the shape of the yield curve could nevertheless cause concern for a U.S. central bank seeking to balance the needs of the economy without upsetting global markets.
That’s because the widening has been driven by a larger increase in 10-year yields than two-years, known as a steepening of the yield curve.
Such yield curves map out the rate paid to holders of government debt at various maturities, and generally slope upwards — a testament to the riskiness of lending money for a longer time period, as well as a partial reflection that central bank rates and inflation would generally be expected to rise.
So on the surface, this shift in the yield curve might be presumed to be a positive signal for the U.S. economy. The opposite dynamic — the prolonged period in which the curve flattened — was certainly taken to be a sign of economic malaise, or even malady.
01-Sep (WSJ) — Politicians playing by their own rules is an old story. But it should count as news that politicians have lately been rewriting a rule in place since 3,000 B.C.
This rule of history is that savers deserve to be compensated when they loan money. Not anymore. In much of the developed world lenders are the ones paying for the privilege of letting governments borrow their cash. Through the magic of modern central banking, countries in Europe and elsewhere have managed to drive their borrowing rates not just to historic lows but all the way into negative territory. As of Monday almost $16 trillion of government bonds world-wide were offering yields below zero.
Amazingly, governments have managed this feat even as they have become more indebted and even as slow economic growth undermines their ability to repay. Such conditions normally suggest a less creditworthy borrower and therefore a higher interest rate to compensate investors for the risk. But sovereign debt has become more expensive. Governments have succeeded in making their bonds more expensive in part by printing money and buying the bonds themselves via their central banks. Commercial banks are all but required to buy them too.
In the new political economy—or alchemy—the more unsustainable a government’s finances, the less it pays to borrow. Japan’s government debt amounts to more than 200% of its economy. The yield on Japan’s 10-year bonds recently clocked in at negative 0.06%.
…Put another way, government bonds have never been so expensive. Paul Singer, founder of hedge fund Elliott Management, isn’t expecting a happy ending. He believes that because of massive entitlement promises plus huge debt, “the entire developed world is insolvent.” He says that a negative rate on a government bond is “crazier than zero, and zero was crazy enough.”
31-Aug (Bloomberg) — Billionaire money manager Bill Gross said negative interest rates are turning assets into a liability stifling the capitalist system.
In his monthly investment outlook posted Wednesday, Gross, 72, reiterated his long-running criticism of central bankers, including Federal Reserve Chair Janet Yellen, for slashing interest rates to zero or below to help raise asset prices in the hope they will trickle down into the economy. It’s a plan, Gross argued, that will fail to produce sustainable economic growth.
“Capitalism, almost commonsensically, cannot function well at the zero bound or with a minus sign as a yield,” wrote Gross, who manages the Janus Global Unconstrained Bond Fund. “$11 trillion of negative yielding bonds are not assets — they are liabilities. Factor that, Ms. Yellen, into your asset price objective.”
15-Aug (FT) — The latest sign of the bond rally’s eye-watering extremes: Bonds that have doubled in price.
The Bank of England’s recent stimulus splurge, including a move to buy corporate paper, has driven the market prices for several sterling corporate bonds up to more than two times their initial face value, even for those unlikely to qualify for the central bank’s shopping list, writes Joel Lewin.
The price of US industrial conglomerate General Electric’s 2039 sterling bond, for example, has rocketed to a record high of 215.5 pence on the pound. That’s up from 165p at the start of the year and 100p when it was issued in 2009.
The yield has plunged from more than 10 per cent in 2009 to a low of 1.805 per cent.
Coupons aside, paying £215.50 today to be repaid £100 in 2039 amounts to a capital loss of 5 per cent every year for the next 23 years. Tasty.
“It’s another sign of how far central banks have pushed things,” says Luke Hickmore, a senior investment manager at Aberdeen Asset Management.
10-Aug (FT) — Britain’s revived programme of mass bond-buying accelerated a fall in global bond yields yesterday in the latest sign of how central bank policy has intensified a worldwide collapse in borrowing costs this year.
The Bank of England this month announced a new £70bn asset purchase programme designed to address fears of an economic slowdown after Britain voted to leave the EU, joining the European Central Bank and Bank of Japan to become the third major central bank engaged in quantitative easing.
The speed and extent of market reaction to the BoE’s monetary easing programme indicated a change among investors who previously doubted the ability of central banks to further suppress bond yields, said Steven Major, head of fixed income research at HSBC.
“The Bank has made it clear that the next move is lower rates and possibly more QE — if they can find the bonds to buy — which is why this new round of easing is having an influence on everything in markets. It has shifted expectations towards further easing in Europe and away from a rate rise in the US.”
03-Aug (Bloomberg) — Municipal money market funds are hemorrhaging cash in advance of rules aimed at reducing the risk of runs on the pools.
Assets have plunged $64 billion since the beginning of the year to the lowest levels since 1999 as investors pulled money from tax-exempt funds in 25 of the last 30 weeks and shifted into ones that buy only government debt. These government-only funds are exempt from Securities and Exchange Commission rules effective in October that require floating net-asset values and impose liquidity fees and redemption suspensions under certain conditions.
The new regulations are adding more pain to funds that have been plagued by seven years of the Federal Reserve’s zero interest-rate policy.
“They’re in danger of going extinct, especially if you don’t get a rate hike anytime in the next couple of years,” said Peter Crane, president of Westborough, Massachusetts-based Crane Data LLC. “Municipal money market funds lobbied hard to get an exemption from the SEC’s rules, but the SEC threw them under the bus.”
…The Fed’s zero-interest rate policy hasn’t helped.
…“Tax exemptions don’t help you if there’s no income to tax,” said Crane.
PG View: Prudent investors should consider taking a portion of their wealth out of the traditional banking and financial services realm. Physical gold is the ideal vehicle to accomplish this goal.
03-Aug (Bloomberg, via Financial Post) — Money manager Bill Gross says investors should favour gold and real estate while avoiding most stocks and bonds trading at inflated prices.
“I don’t like bonds; I don’t like most stocks; I don’t like private equity,” Gross, who runs the US$1.5 billion Janus Global Unconstrained Bond Fund, wrote in his monthly investment outlook Wednesday. “Real assets such as land, gold and tangible plant and equipment at a discount are favoured asset categories.”
The views echo concerns expressed by managers including TCW Group’s Tad Rivelle and Oaktree Capital Group LLC’s Howard Marks as stocks reached record highs and bond yields plunged to historic lows amid sluggish economic growth. “Sell everything,” DoubleLine Capital’s Jeffrey Gundlach told Reuters last week. “Nothing looks good here.”
PG View: When a bond guru eschews bonds in favor of gold…perhaps it’s time to listen.
06-Jul (MoneyWeek) — The bond bubble is going from mad to worse.
The average yield across Germany’s bond market – known in one of those wonderful German words as the Umlaufrendite – has fallen below 0% for the first time in history.
Meanwhile, more than $10.4trn of government debt globally now trades on negative yields, according to ratings agency Fitch.
Either the bond market is pricing in a very extreme negative economic outcome, or it’s incredibly overvalued.
One way or another, someone’s going to get a nasty surprise…
05-Jul (WSJ) — The yield on the benchmark U.S. 10-year Treasury note closed Tuesday below 1.4% for the first time on record, the latest milestone of the record-setting declines in global government bond yields following the U.K.’s vote in late June to quit the European Union.
Benchmark 10-year government debt yields from the U.S., Germany, Switzerland, France, Denmark and Sweden all fell to fresh historic lows on Tuesday as persistent uncertainty surrounding the economic and political fallout from the U.K.’s vote to quit the European Union continues to boost demand for haven assets.
The U.S. 10-year Treasury yield settled at a record low of 1.367%, compared with 1.446% Friday. The U.S. bond market was shut Monday for the Independence Day holiday. The previous closing low was 1.404% in July 2012.
Compounding markets’ anxiety on Tuesday is concerns over the health of the banking system in Italy. Shares of Italian banks have been hard hit lately as investors fret about their bad loans.
The buying sent the yield on the benchmark U.S. Treasury note to as low as 1.370% earlier Tuesday, surpassing the previous historical low of 1.385% set on Friday, according to Tradeweb. The 10-year government bond yields in Germany and Switzerland fell further below zero and the 10-year yield in Denmark fell to near zero. Yields fall as bond prices rise.
01-Jul (FT) — Global government bond markets began the second half of the year extending their record-setting run, led by the UK and Japan, while the US Treasury benchmark yield also approached a fresh all-time low.
The prospect of global central banks keeping interest rates lower for an extended period, led by a likely easing from the Bank of England this month, has spurred strong buying of top-tier sovereign debt by investors.
Against a backdrop of UK political turmoil and with economists expecting a recession in the coming months, the 10-year gilt yield fell a further 6 basis points early on Friday to a record low of 0.81 per cent. That came after BoE governor Mark Carney spoke of “some monetary policy easing” in the next few months on Thursday.
The rally in Gilts was accompanied by firmer US Treasury prices, with investors concerned that Brexit will slow global growth prospects and spark bouts of financial market volatility over the summer.
The 10-year Treasury yield fell 12bp to 1.382 per cent, just above July 2012’s record low of 1.381 per cent, according to Reuters. Bond investors have ruled out the prospect of an interest rate rise this year by the Federal Reserve in the wake of Brexit.
“We believe this is one of those key moments in global fixed income,” said Luis Costa, a strategist at Citi. “It looks to us we are at the tipping point, very close to another large leg down in US Treasury yields.”
29-Jun (FT) — Global government debt with negative yields has increased by more than a trillion dollars since the end of May after the UK’s Brexit vote sent investors scrambling for safe haven assets.
The amount of sovereign debt with negative yields, meaning if investors hold the bonds to maturity they will get back less they put in, was $11.7tn on Monday, a rise of $1.3tn since the end of May, according to data from Fitch Ratings.
Frenzied demand for high-rated government debt in the wake of Great Britain’s vote to part ways with the EU have sent sent yields a swath of haven bonds plumbing new lows.
“Worries over the global growth outlook, further fueled by Brexit, have continued to support demand for higher-quality sovereign paper in June,” Fitch said.
Strikingly, debt of increasingly long maturities has fallen into negative-yielding territory, with the level of bonds with maturities of seven years or more swelling to $2.6tn from $1.4tn at the end of April.
27-Jun (FT) — Standard & Poor’s on Monday cut the UK’s rating by two notches, becoming the last of the three major credit rating agencies to strip the country of its top-notch status.
S&P reduced the rating from “AAA” to “AA”, and warned that more cuts could be on the horizon. The New York-based group said that the country’s surprise vote to exit the EU was a “seminal event, and will lead to a less predictable, stable, and effective policy framework in the UK”.
PG View: As a further reminder of how the world has turned upside down, 10-year Gilts fell 10 bps to an all-time low of 0.93%.
There was a time — not so long ago — when this would have made absolutely no sense at all.
The debt market is neither healthy nor logical. Those seeking a haven in sovereign debt should reconsider and buy gold.
PG Note: The Epsilon Theory newsletter, written by W. Ben Hunt, Ph.D., Chief Risk Officer at Salient Partners is one of my favorite reads. The most recent installment is a must read for all investors. There are a lot of arguments in his writing that should excite the gold owner. In his summation of the Epsilon Theory of investment strategy Hunt warns that “We’re in a policy-driven market” and that “A policy-controlled market is next”. His suggestion is that you “look to real assets”.
Here are several key snippets:
…when governments undertake emergency actions and extraordinary policies, they obliterate the focal points that make our cooperative games of investing and market making possible.
Specifically, extraordinary monetary policy has obliterated the focal points of price discovery.
I’m often asked if I think that negative rates will ever come to the U.S. My answer: they’re already here by proxy (U.S. Treasury rates are so low today because German Bunds are negative out to 10 years duration), and negative rates will hit the U.S. in earnest and in practice early next year.
…just wait until your money market fund starts charging you interest for the privilege of investing your cash in short-term government obligations. Just wait until Nestle floats a negative interest rate bond. Just wait until borrowing money, not lending money, becomes a profit center. Just wait until the entire notion of compounding — without exaggeration the most important force in human economic history — is turned on its head and becomes a wealth destroyer.
You know, I’ve written a lot of Epsilon Theory notes over the past three years. As I figure it, about three novels’ worth and just over the halfway mark of War and Peace. But in all that time and across all those notes I’ve never felt so … resigned … to the fact we are ALL well and truly stuck. The Fed is stuck. The ECB and the BOJ are stuck. The banks are stuck. Corporations are stuck. Asset managers are stuck. Financial advisors are stuck. Investors are stuck. Republicans are stuck. Democrats are stuck. We are all stuck in a very powerful political equilibrium where the costs of changing our current bleak course of ineffective monetary policy and counter-productive regulatory policy are so astronomical that The Powers That Be have no alternative but to continue with what they know full well isn’t working.
My god, you think I’m a downer? This is the President of the St. Louis Fed, saying that everything the FOMC has been doing for the past four years is just a bad joke!
So, Bullard says, let’s stop this charade of dot plots and just admit the truth: rates are not going up, maybe not EVER, until something beyond the Fed’s control shocks the world into some other macroeconomic regime.
Read the entire piece here.
14-Jun (WSJ) — The yield on the benchmark U.S. government note fell to near a record low on Tuesday as the yield on Germany’s 10-year debt fell below zero for the first time on record.
Tuesday’s move extends the record declines in high-grade global government bond yields, reflecting investors’ consistent concerns over sluggish global economic growth and the limit major central banks are facing in boosting growth via their unconventional monetary stimulus.
The yield on the benchmark 10-year Treasury note was recently at 1.587%, according to Tradeweb. It already traded below 1.616% on Monday, which was the lowest close level since December 2012.
The yield’s record closing low was 1.404% set in July 2012. Some analysts and money managers say they expect the yield to breach that level in the months ahead.
“It’s amazing. I never thought I’d see the day where 10y German rates would go negative,” said Anthony Cronin, a Treasury bond trader at Société Générale SA . “It is difficult to say what is next but it seems safe to expect money to continue to flow into U.S. Treasurys.”
PG View: Investors paying for the “privilege” of financing the German government . . . that’s pretty messed up . . .