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Wednesday, March 25, 2015

BRICS Blink (or More Correctly Wink) and BLICS Wink Back, Takeover US Treasury Buying

The following is an attempt to explain the mechanics of what appears to be a Ponzi supporting the US asset bubble (stocks, bonds, real estate, etc.) and very likely the dollar.  However, if you like your Ponzi, stop reading here, no hard feelings...If you are still reading, then you are going down the rabbit hole.

In my previous post,, I tried to show the impact if the Domestic Public were to become the primary buyer of Treasury debt.  However, this is a pretty unlikely scenario and was shown primarily to demonstrate just that.  This article is a view of what is already well under way and is likely to only accelerate..."foreigner holders" of Treasury debt are likely to take over.  But who these foreigners are and what their motivation is to buy something that domestic pensions, insurers, banks, etc. are unwilling to buy seems a pretty fair question.

Treasury Details -
As you can see below, almost 90% of the growth in US Treasury debt since Jan ‘08 has come in the form of Public debt (+$8 trillion) while trust fund surplus’ used to purchase Intra-governmental holdings account for only 10% of the growth in debt (+$1 trillion).
Source; Treasury (TIC), Federal Reserve

As a reminder, Treasury buyers are classified into two sources:

1) Intra-governmental holdings
  1. These are primarily trust fund surplus' used to purchase non-marketable Government Accounting Securities.  Intra-gov holdings will continue to slow and likely turn to a deficit sometime over the next 5 years on declining trust fund receipts and growing redemptions. 

2) Public Holdings

  1. The Federal Reserve, given the Fed "tapered" Quantitative Easing to zero and the Fed intends to begin raising rates and “normalizing” (aka, shrinking) its balance sheet over the coming 5 year period.  The Fed holds mid and long term debt (notes and bonds) but at present, the Fed isn't a likely buyer.
  2. Domestic Public (US institutions, i.e., insurance, pensions, banks, plus US based retail buyers).  The sources hold primarily short duration debt (bills and short term notes).
  3. “Foreign Holdings” (all treasury's purchased in overseas accounts).  Foreigners hold a mixture of debt across the duration spectrum.
I’ll focus on the public treasury holdings.  As you can see below, of the three sources of public purchasing, the Fed is the smallest of the buyers and the “foreign holders” the greatest.  Two noteworthy points, one, that as interest rates fell, the Fed and “foreign holdings” were undeterred while US domestic buyers were less interested in the perpetually lower yielding debt.  And, two, the Fed and "foreign holders" together bought nearly all the mid and longer duration debt (the riskier debt) leaving the domestic public to primarily purchase the shortest duration bills and notes.
Source; Treasury (TIC), Federal Reserve
The chart below shows, as a percentage of issuance during each period, who bought all the public debt.  The BRICS, OPEC, and “all other foreigners” (x-Japan and x-BLICS...BLICS = Belgium, Luxembourg, Ireland, Cayman Islands, Switzerland) bought 40% of all the debt from ’08 to June ’11.  The buyers of 40% of all US public Treasury issuance turned on a dime and reduced their purchasing to 10% of all net issuance over the June ’11 to January ’15 period…and strangely the US 10yr yield fell 50% over the same period?!?  The rush to buy lower yielding US debt was driven by the Federal Reserve, BLICS, and Japan.
Source; Treasury (TIC), Federal Reserve
As you can see below, the US Domestic Public halved its buying over the later period due to low yields.  More interestingly, BRICS (running record net $ trade surplus’) turn from heavy buyers to net sellers while OPEC nations (likewise running massive dollar inflows on record oil prices), reduce their pace of Treasury purchasing.
Source; Treasury (TIC), Federal Reserve
The chart below shows the sources of the increased buying…in particular the BLICS.  BLICS unlike BRICS have no natural trade or dollar surplus, thus the purchasing there is the result of purchases made for 3rd party buyers utilizing these financial centers.

 Source; Treasury (TIC), Federal Reserve
Alright, clear enough who bought and who sold what over the past 7 years.  Now, let’s turn the gaze into the future.  Below are some possible scenarios regarding the US debt, debts growth, debts buyers, and the Federal Reserve’s potential actions.

Scenario #1: Fed hikes rates and shortly thereafter begins a path to normalize its $4.45 trillion balance sheet to $1.5 trillion over 6 years ($1 trillion MBS, $500 billion Treasury’s…a $3 trillion reduction but still double the ’08 balance sheet).
On this move, “foreign holders” do not sell (or at least sellers are offset by continued stronger net purchases from BLICS) and continue their buying.  Despite this, the bulk of the new debt falls on the Domestic Public, hiking domestic commitment from $225 to $625 billion annually.  Noteworthy would be the decrease to US GDP, a minimum of 2.5% annually, to an already very sluggish growth rate (this would likely trip the US into recession).
Source; Treasury (TIC), Federal Reserve
Scenario #2: The Fed hikes rates but determines to maintain its current balance sheet and “normalize” in its next lifetime (aka, never).  The purchasing load is lessened on the Domestic public and “foreign holders” (likely ongoing rotation from BRICS to BLICS) but both still take losses on their bond holdings, the impact to US GDP is still negative but lessened.
Source; Treasury (TIC), Federal Reserve
Scenario #3:  The Federal Reserve does not significantly raise rates and instead either continues QE directly or more likely an indirect QE scheme via a central bank driven pass-through in the BLICS and Japan.  This is positive for US GDP as there is no rate shock to the interest rate sensitive system and this frees more domestic money to engage in the economy.  This also results in no losses for “foreign holders” of US Treasury debt as prices continue rising / yields falling (and likely a strong rotation of BRICS holdings to BLICS ).  The scheme utilizes untraceable off-shore monies...the origination of the dollars or ultimate Treasury owners is not publicly available data according to the Treasury's TIC reporting.Source; Treasury (TIC), Federal Reserve
And a breakdown below of what this 3rd scenario would look like from the “foreign holders” viewpoint…actually, it would look a lot like the last 5 years!
Source; Treasury (TIC), Federal Reserve - Dashed line extensions are authors estimates.
The only downside is this is a fraudulent Ponzi scheme likely to blow up terribly.  After decades of Federal Reserve mismanagement, the Federal Reserve is aware of the  imbalances it has created and supported.  The Fed is fully aware that the fa├žade of a "market" is entirely dependent on the Fed's props and crutches to remain upright.  Were a free market allowed to set prices in the bond market, stock market, real estate...the result would be the reset so many simultaneously fear and/or desire.

I’m wide open to other rational, logical, reasonable explanations but to this point…when something looks like a Ponzi, acts like a Ponzi, then I have to believe it probably is a Ponzi.

1 comment:

  1. The Fed "Balance Sheet" holdings of $4.45 Trillion figure is about as reliable as the "5.8% US unemployment" figure. Both figures conceal more than they disclose.

    Any idea why Yellen has gone ballistic whenever Congress considers an "Audit the Fed" motion? At least partly, her reaction is because the Fed "Balance Sheet"? is more cover-up than disclosure. Supposedly, Fed QE has ended, and interest rates will "be normalized" sometime, but the Fed window for corporate and Wall Street borrowing at 0.25% remains open. The Plunge Protection Team reveals itself at each market close, magically hiking stock prices. Where does anyone think the Team gets its money? As for interest rates "normalizing", the Fed keeps putting off the start date, bluffing with terms like "patient" while traders divine the entrails of the Fed minutes for any clue that the Fed will stop signalling the markets well in advance of any change in Buy The Effing Dip ("BTFD") being a sure way to profit.

    As for the Fed Balance Sheet actually disclosing the Fed's total money issuance, consider that Congress discovered some years ago that the Fed had issued $16 Trillion that was not recorded on the balance sheet. Again a few years ago, Max Keiser and a guest discussed the $70 Trillion issued since 2008 by the Fed to Europe's banks to ensure that those banks had sufficient US Dollars to meet their payment needs after their $US - denominated leveraged bets in Emerging Market countries went south.

    The purchases of US Treasurys "by Belgium" in amounts that were effective to sop up concurrent sales by China and Japan, after QE allegedly ended, are far too coincidental to have occurred by chance. The suspicion is that the Fed made the purchases in Belgium - who says the Fed cannot operate through foreign banking centers?

    The Fed's "Balance Sheet" figures are only the tip of the money issuance iceberg, IMHO.


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