Treasury Borrowing Advisory Committee
Hugh Hendry Capitulates: "Can't Look At Himself In The Mirror" As He Throws In The Towel, Turns BullishSubmitted by Tyler Durden on 11/22/2013 13:55 -0400
"I cannot look at myself in the mirror; everything I have believed in I have had to reject. This environment only makes sense through the prism of trends."
- Hugh Hendry
Here we go again, creating another asset bubble for the third time in a decade and a half, is how Monument Securities' Paul Mylchreest begins his latest must-read Thunder Road report. As Eckhard Tolle once wrote, “the primary cause of unhappiness is never the situation but your thoughts about it," and that seems apt right now. After Lehman, policy makers went “all-in” on bailouts/ZIRP/QE etc. This avoided an “all-out” collapse and bought time in which a self-sustaining recovery could materialize. The Fed’s tapering threat showed that, five years on from Lehman, the recovery was still not self-sustaining. Mylchreest's study of long-wave (Kondratieff) cycles, however, leaves us concerned as to whether it ever will be. More commentators are having doubts; and the problem looming into view is that we might need a new "plan." The (rhetorical) question then is "Have we really got to the point where it's just about more and more QE, corralling more and more flow into the equity market until it becomes (unsustainably) 'top-heavy'?"
"We see upside surprise risks on gold and silver in the years ahead," is how UBS commodity strategy team begins a deep dive into a multi-factor valuation perspective of the precious metals. The key to their expectation, intriguingly, that new regulation will put substantial pressure on banks to deleverage – raising the onus on the Fed to reflate much harder in 2014 than markets are pricing in. In this view UBS commodity team is also more cautious on US macro...
As it turns out, a lot... and also very little.
Back in 2010, when few still dared to question that the entire move in the market is predicated on the Fed's daily POMO (then still on QE2), we laid out, in a way so easy even a caveman could grasp it, how every tiny move in the stock market is nothing but a function of the Fed's daily POMO on those days in which Bernanke would be directly injecting liquidity into the capital markets using his Primary Dealer frontmen. Since then nearly three years have passed, and thousands of POMO days. All of which brings us to this quarter's Treasury refunding presentation, and specifically the section "Effects of policy and market structure" from the Presentation to the Treasury Borrowing Advisory Committee, in which we learn that we had in fact been right all along, and that perhaps for the first time ever, the Treasury admitted that not only "no one dares fight the Fed" but that, as expected, it is "all POMO."
Perhaps the best source of real, actionable financial information, at least as sourced by Wall Street itself, comes in the form of the appendix to the quarterly Treasury Borrowing Advisory Committee (TBAC, aka the Goldman-JPM chaired supercommittee that really runs the world) presentation published as part of the Treasury's refunding data dump. These have informed us in the past about Goldman's view on floaters, as well as Credit Suisse's view on the massive and deteriorating shortage across "high quality collateral." This quarter was no different, only this time the indirect author of the TBAC's section on fixed-income market liquidity was none other than Citi's Matt King, whose style is well known to all who frequent these pages simply because we cover his reports consistently. The topic: liquidity. Or rather the absolute lack thereof, despite what the HFT lobby would like.
Excessive monetary stimulus and low interest rates create financial bubbles. This is the biggest debt bubble in history. It is a potent deflationary force and central banks are forced into deploying increasingly aggressive (offsetting) inflationary forces. The avoidance of a typical deflationary resolution to this economic long (Kondratieff) wave is pushing the existing monetary system beyond the point of no return. The purchasing power of the developed world’s currencies will have to bear the brunt of the “adjustment”. Preparations for this by the BRICS nations, led by China, are advancing rapidly. The end game is an inflationary/currency crisis, dislocation across credit and derivative markets, and the transition to a new monetary system. A new “basket” currency is likely to replace the dollar as the world’s reserve currency. The “Inflationary Deflation” paradox refers to the coming rise in the price of almost everything in conventional money and simultaneous fall in terms of gold.
How bad is the situation? Quite bad. As as of last night, courtesy of SMRA, we know that the amount of ten-year equivalents held by the Fed increased to $1.608 trillion from $1.606 trillion in the prior week, which reduces the amount available to the private sector to $3.603 trillion from $3.636 trillion in the prior week. There were $5.211 trillion ten-year equivalents outstanding, down from $5.242 trillion in the prior week. After the Treasury issuance, maturing securities, rising interest rates, and Fed operations during the week, the Fed owned about 30.86% of the total outstanding ten year equivalents. This is above the 30.63% from the prior week, and the percentage of ten-year equivalents available to the private sector decreased to 69.14% from 69.37% in the prior week.
“There can be no doubt that besides the regular types of the circulating medium, such as coin, notes and bank deposits, which are generally recognised to be money or currency, and the quantity of which is regulated by some central authority or can at least be imagined to be so regulated, there exist still other forms of media of exchange which occasionally or permanently do the service of money. Now while for certain practical purposes we are accustomed to distinguish these forms of media of exchange from money proper as being mere substitutes for money, it is clear that, other things equal, any increase or decrease of these money substitutes will have exactly the same effects as an increase or decrease of the quantity of money proper, and should therefore, for the purposes of theoretical analysis, be counted as money.”
Over a year ago, we first explained what one of the key terminal problems affecting the modern financial system is: namely the increasing scarcity and disappearance of money-good assets ("safe" or otherwise) which due to the way "modern" finance is structured, where a set universe of assets forms what is known as "high-quality collateral" backstopping trillions of rehypothecated shadow liabilities all of which have negligible margin requirements (and thus provide virtually unlimited leverage) until times turn rough and there is a scramble for collateral, has become perhaps the most critical, and missing, lynchpin of financial stability. Not surprisingly, recent attempts to replenish assets (read collateral) backing shadow money, most recently via attempted Basel III regulations, failed miserably as it became clear it would be impossible to procure the just $1-$2.5 trillion in collateral needed according to regulatory requirements. The reason why this is a big problem is that as the Matt Zames-headed Treasury Borrowing Advisory Committee (TBAC) showed today as part of the appendix to the quarterly refunding presentation, total demand for "High Qualty Collateral" (HQC) would and could be as high as $11.2 trillion under stressed market conditions.
With the Fed now openly warning that there may actually come a time when the 'flow' stops; the most recent Treasury Borrowing Advisory Committee (TBAC) report has some concerning statistics for those change-ridden hopers who see a smooth Fed exit, deficit-reduction, and blue skies ahead. While they are careful not shout 'sell' in a crowded bond market; hidden deep in the 126 page presentation are two charts that bear significant attention. The first shows what TBAC expects (given the market's expectations) to happen to interest rates in the US as the Fed 'exits' its QE program (taper, unwind, hold) - the result, the weighted-average cost of financing for the US government will almost triple from around 1.6% to around 4.3% over the next ten years. But more problematic is that even with CBO's rather conservative estimates of the growth in US debt over the next decade the USD cost of financing will explode from around $205bn (based on TBAC data) to over $855bn. Still convinced the Fed can exit smoothly?
The man who is the chief advisor to the US Treasury on its debt funding and issuance strategy was just promoted to the rank of second most important person at the biggest commercial bank in the US by assets (of which it was $2.5 trillion), and second biggest commercial bank in the world. And soon, Jamie willing, Matt is set for his final promotion, whereby he will run two very different enterprises: JPMorgan Chase and, by indirect implication, United States, Inc.
And that, ladies and gentlemen, is how you take over the world.
It has been well known for years that PIMCO's Dr. Jekyll and Mr. Gross, the original bond king in charge of Allianz' $1+ trillion bond portfolio, has been a vocal critic of QE even in the face of his daily tweet barrage, which often recommends positions in complete contradiction to what said king opined on in his expansive monthly essays. What will come a great surprise, however, is that the "other" fund, which is just as big, is run by Wall Street's shadow king Larry Fink, and which has been advocating to go all in stocks for over a year (preferably using ETFs) interim drawdowns be damned (after all everyone by now should have an infinite balance sheet) - BlackRock - just went all out against QE. As the FT reports, BlackRock's fixed income guru, formerly at Lehman Brothers, Rick Reider, "has called on the Federal Reserve to rein in its programme of quantitative easing, saying its bond-buying tactics are a “large and dull hammer” that have distorted markets and risk stoking inflation." Why, it is almost as if we wrote that... Oh wait, we did. Back in 2009.
It was only two weeks ago that Fed governor Jerremy Stein delivered a speech titled "Overheating in Credit Markets" in which he observed the obvious and warned that a new credit bubble was forming (not to mention housing, tech, student loan, GM channel stuffing and much more). And it was only yesterday that we learned that Bernanke, after a 6 year hiatus, just had his latest "everything is contained" moment. And just as when Maria Bartiromo asked him in July 2005 "what is the worst case scenario if prices come down substantially", so now his response, as then, is "I guess I don't buy your premise, it's a pretty unlikely possibility. We have never had a decline of house prices on nationwide basis." Of course, three years later the Fed had to do everything it legally could, and also much more, to prevent the modern financial system from terminally imploding.
One of the recurring memes of the now nearly 4 years old "bull market" (assuming the recession ended in June 2009 as the NBER has opined), is that corporate profits are soaring, and that despite recent weakness in Q4 earnings (profiled most recently here), have now surpassed 2007 highs on an "actual" basis. For purely optical, sell-side research purposes that is fine: after all one has to sell the myth that the US private sector has never been healthier which is why it has to immediately respond to demands that it not only repatriate the $1+ trillion in cash held overseas, but to hand it over to shareholders post-haste (see recent "sideshow" between David Einhorn and Apple). However, a problem emerges when trying to back this number into the inverse: or how much money the US government is receiving as a result of taxes levied on these supposedly record profits. The problem is that while back in the summer 2007, or when the last secular peak in corporate profitability hit, corporate taxes peaked at well over $30 billion per month based, the most recent such number shows corporate taxes barely scraping $20 billion per month!