Who’s Going To Buy All Those Treasuries?

January 30, 2018

* Currencies go on a Roller Coaster ride!

* Fed’s FOMC begins two day meeting today


Good Day… And a Tom Terrific Tuesday to you! I’m feeling much better, although I don’t look like it… The tumor in my jaw continues to grow, and now I’ve had allergic reaction to something and the left side of my face is all swollen and red… UGH! What I sight to see, eh? I had dinner last night, my first real meal since last Wednesday, with our building friends, Jack & Lorraine, and hosts, Gus and Vivi… Vivi and Gus are both from Greece, and she is an excellent cook, OMG! Robin Trower greets me this morning with his band’s song: Bridge of Sighs…     

Well, things didn’t exactly go the way I thought they would yesterday, as the dollar got a boost from the dollar bugs, who saw that the writing was about to go up on the wall for a huge dollar decline. It sure wasn’t the data that did the trick for the dollar yesterday, and Personal Income and Spending both increased 0.4%, and Core Inflation only gained 0.2% putting the YTD increase at 1.5%…   I’ve got something for you in the FWIW section today about Consumer Spending, that I think you’ll want to read, so stay with me here…   

The good news this morning is that all the dollar buying yesterday didn’t change things much except for 1 day, as the currencies have fought back in the overnight sessions to trade this morning about in the same place they were yesterday morning… So, a roller coaster ride for sure, but we’re back at the launching pad, and ready to get off this ride…  

And Gold lost $9.40 yesterday, but has gained back nearly $4 of that loss in the early morning trading today.  The price of Oil slipped below $66 in the past 24 hours, and hasn’t seen any reversal of any kind. Apparently, according to Bloomberg, that is, the large reserve withdrawals have ended, and that should be the end of Oil’s rise in price. That may be the case, but I would have to think that if the dollar is headed for an extended stay in the woodshed like I think it will do, then the price of Oil will rally, just on the dollar weakness. 

Well…  last week I highlighted my good friend, the Retirementor, Dennis Miller’s newsletter that was an interview with me… I also invited you to visit his website, and sign up for his free newsletter.  But, I digress here… What I wanted to point out is that in the interview I talked about Treasuries, let’s listen in to what I actually said…   

What could cause a Minsky Moment in bonds? Well, think about this for a minute. The U.S. Fed has been a very large bond buyer since the first round of Quantitative Easing began in 2009. They bought boatloads of both U.S. Treasury bonds and Mortgage-backed bonds. Look at their balance sheet, it increased five-fold to over $4.6 Trillion in 2017. 

The Fed announced a “tapering” in 2015, but they kept buying Treasuries to replace bonds that matured. Late last year they announced that they were going to stop buying bonds altogether. No replacement bonds, no auction window buying.

The question was… “Who is going to take the Fed’s place”? Well, there has been no one, to date, and the 10-year Treasury yield has risen from 2.05% on Sept. 8, 2017, to 2.65% on Jan. 18, 2018. That’s just the beginning, in my opinion!

The Fed may not be the only “no show” at the auction window. China is considering slowing down their Treasury purchases or halting them altogether! Guess who else has been slowing down their Treasury purchases? Saudi Arabia, and Russia… Oh-no! Say it ain’t so, Joe!
This is the Minsky Moment for bonds…no big Central Bank buying, will drive yields much higher. It could easily be followed with another Minsky Moment for stocks. – Chuck Butler, www.milleronthemoney.com   

And then this morning I saw this head of interest rate strategy at Wells Fargo saying the same thing I said last week! Let’s listen in to what he had to say… “Michael Schumacher’s chief concern right now: Who’s going to buy all those extra Treasury notes?

“They [people] are worried about Treasury issuance going up, up, up. You could see an increase in 2018 of 50 percent – maybe more versus last year. That’s got a lot of people very concerned, myself included,” he said recently on CNBC’s “Futures Now.”

He anticipates the Treasury Department will likely announce within days a “pretty significant change” in the way it issues bonds. It comes just as the Fed is shrinking its balance sheet. With less demand coming from the Fed, a fire sale of sorts would increase supply and emerge as the major catalyst causing yields to jump.”   You can find this person’s viewpoint on interest rates further, by going here: https://www.cnbc.com/2018/01/26/treasury-market-fire-sale-could-hurt-bonds-wells-fargo-warns.html      

OK, enough on Treasuries, and I think you got the point here…  

The Fed’s FOMC begin a two-day meeting tomorrow. Time to get out the board games and playing cards… HA!  They will wrap it all up around 1 pm on Wednesday with no rate change… Two days wasted… Or, maybe they’ll discuss the fact that 4th QTR GDP came in at 2.6% instead of the preliminary 3.2% that everyone was gushing about, except me, who knew it would be revised downward…  And the great economist David Rosenberg had this to say about GDP… “The savings rate fell from 3.3% to 2.6%. If it had stayed the same, real PCE would have been 0.8% (annualized) instead of 3.8% and GDP would have been 0.6% instead of 2.6%.”   

WOW! But to me 0.6% sounds more reasonable than 3.2%!  I’m just saying…  

Earlier this morning the Eurozone printed some data, leading off with their 4th QTR GDP figure, which was 2.6%, the same as the 3rd QTR. And a slew of Confidence reports for January, either saw a small slippage or a flat print from the December. So, nothing really to be concerned about here, and I keep my contention that the Eurozone has outperformed the U.S. with regards to GDP the last couple of years. Because if the GDP here in the U.S. was calculated correctly without “adjustments” it would be much lower…   

Speaking of outperforming the U.S. economy… Longtime reader, Bob, sent me this: from the RT.com: Russian economy under Putin: quality of life tripled, and foreign debt fell by 75%!   That’s pretty impressive, and no I’m not a cheerleader for Russia! It’s just that when you see an economy, especially one under the strains of economic sanctions, overcome those obstacles I believe it should be pointed out…  

The problem the Russian ruble has right now, is that most of the world isn’t a fan… The conflict with Ukraine continues, and as long as that’s the case, the ruble will have to look to the price of Oil for its support.  

The U.S. Data Cupboard today will have the Case/Shiller Home Price Index for November, and we’ll see the color of the stupid Consumer Confidence Index for this month….  Tomorrow’s Cupboard is stocked to the top row with data, but that’s tomorrow, and we need to just let tomorrow be… 

To Recap…. The dollar got bought by the bushel full yesterday, but then got sold by the same amount in the overnight sessions, and the currencies are trading in about the same places they were yesterday morning.  Chuck spends an inordinate amount of time on Treasuries this morning. The Fed meets this week, and Gold and Oil both saw slippage yesterday.   

For What It’s Worth… Well, I built this one up, so I hope it doesn’t disappoint… But recall when I kept saying that the U.S. consumer was tapped out? But then along came credit cards… You can find this article here: https://www.zerohedge.com/news/2018-01-29/us-savings-rate-hits-crisis-lows-amid-soaring-credit-card-debt    

Or, here’s your snippet: “Amid soaring credit card use, the tumble in Americans’ savings rate continued in December with a modestly better than expected 0.4% MoM rise in incomes and as expected 0.4% rise in spending (but upward revisions in spending).

For the inflation waters, the Fed’s favorite price indicator, the Core PCE, saw a one-tenth gain to 0.2%, matching consensus, and was up 1.5% Y/Y. Income is growing at 4.1% YoY – the most since Nov 2015 – but spending continues to outpace that growth.

What is odd is that despite the rise in incomes, Americans continue to spend more than they make, which means that the U.S. savings rate continues to slide, and is now not only the lowest since the crisis, but is the lowest since September 2005.

Recall the striking Gluskin Sheff chart we presented a month ago, which showed that 13-week annualized credit card balances in the U.S. had gone “completely vertical” in the last few months of 2017. We now know why: American consumer are officially tapped out.”  

Chuck Again…  It’s nice to see a great firm like Gluskin Sheff come around to my way of thinking!   

Currencies today 1/30/18… American Style: A$ .8094, kiwi .7334, C$ .8115, euro 1.2420, sterling 1.4091, Swiss $1.0715, … European Style: rand 11.8923, krone 7.7060, SEK 7.8732, forint 249.48, zloty 3.3386, koruna 20.3786, RUB 56.29, yen 108.58, sing 1.3103, HKD 7.8187, INR 63.62, China 6.3289, peso 18.62, BRL 3.1569, Dollar Index 89.12, Oil $65.10, 10yr 2.68%, Silver $17.23, Platinum $1,001.95, Palladium $1,086.24, and Gold… $1,348.80  

That’s it for today…  Day 3 of being all by myself was non-eventful, I did finally turn some lights on, and go outside…  Progress… But this allergic reaction on the left side of my face is very ugly, and my left eye is swollen shut, but I don’t see out of that eye so no biggie as far as seeing is concerned. I’m just thankful that it’s not on the right side of my face! I do believe that I totally missed Happy Birthday notes to two of my former colleagues… Our Little Christine, and Chris Gaffney. I apologize for letting those days get past me…  My TV lost its volume, and went silent yesterday, I was watching Robin Meade, and listening to her speak one minute, and the next minute there was nothing! So, I’ve got to figure that one out today! Alrighty then.. The Buckinghams take us to the finish line today with their song: Mercy, Mercy, Mercy…  I hope you have a Tom Terrific Tuesday, and Be Good To Yourself!   

Chuck Butler