The Social Security Trust Fund released some data today. There are some
data points worth noting, they might lead to a conclusion. But first,
for the history buffs, I want to show you a “Tipping Point”. I
think the exact date was March 3rd or 4th. For sure it was sometime in
March that the SSTF went negative since Greenspan fixed things in 1983.
In March the CBO came up with a forecast for the fiscal year of a $29B deficit. I look at things on a calendar year basis. My number for the year 2010 is -$50 billion in cash flow (excludes interest). The components:
Payroll Tax: $640b
Tax on Income: $24b
Total in: $664b
R.R. Ex.: $5b
Total out: $714b
Net Decrease in Cash: $50 billion
The significance of this is that the US Treasury will have to fund this shortfall. They will have to sell an additional $50b of debt into the public market. This $50b has nothing to do with what we call the deficit. This is money we have to borrow in addition to the deficit.
In prior years the SSTF has generated big cash surpluses. This cash was invested in Treasury securities that had an average life of 8 years and maturities ranging out to fifteen years. The TF was a great place to sell bonds. Their big appetite for long duration securities helped fund our deficits and extend the average life of our debt profile. But not any longer. That ‘tipping point’ is the first step on the way to a very steep staircase.
The following chart shows the actual cash surpluses of the TF over the last decade. The red is my 2010 estimate. I am not far off. Note that there is a big swing from the average from 2000-2008 (+$70b) and 2010 (-$50b). That difference comes to $120b. So at this nexus point a traditional “size buyer” is morphed into a “size seller”. This is not going to change. The net negative number will likely improve a bit in 2011 and 2012, after that the cash outflow will rise every year.
There is a very big debate on the future of interest rates. David Rosenberg sees deflation and a future credit market that looks like Japan’s for the past 20 years. Call that “Long Term Zirp” or “LTZ”. On the other extreme would be Jim Grant. His thinking is, “Sell Bonds Now” or “SBN”. Goldman Sachs is more in the camp of LTZ while Morgan Stanley has put its neck out with SBN.
There are dozens of very smart thinkers who are lining up on either side of this big fence. Therefore someone is going to be wrong and there is some big money to be made if you choose the right door. I can’t decide. The arguments on both sides are compelling.
The critical variable may come down to good old supply and demand. Just who is it that is going to be buying all this stuff that is coming down the pike. It will not be the SSTF. They are size sellers for a long time to come. It is my belief that there will be a cash flow shortfall for all of the other categories that make up the Intergovernmental Account “IG”. This means that the current holders of one third of all our debts will not only be on a buyers strike, but the IG Account may be cashing in $100b of chips a year.
I don’t see China, Russia, Hong Kong, UK, EU or OPEC increasing their holdings to accommodate the supply. There is not enough domestic demand either. The only scenario that I see that could work is if we have perpetual financial chaos outside our border that sucks money in because of the lack of alternative, and there is no increase in demand for credit in the real economy. Let’s just hope that is not the outcome.
One wild card would be for the US banks to become the "reverse lender of last resort". They would buy and hold the $4-5 Trillion of excess supply that is coming. Their balance sheets would explode. I am not aware of any economy that has worked (for long) where the private sector banks used their ability to multiply money by lending it to the provider of the credit (Treasury borrows from banks/Federal Reserve lends to banks through Repo window). Again, let’s hope that will not happen. That is Argentina.
When you are trying to sell a deal on Wall Street you go to a list of names and get “circles”. When you get enough circles you have a deal and drink champagne. If you don’t get enough you either revise the deal or just let it die. I would like to see those ‘circles’ for $5 Trillion of US paper over the next five years. All the names are there; we will not invent any new ones. What is the Pro-Forma ownership in 2015? I, for one, do not see a plausible result. Absent those circles I have to be in the SBN crowd.