Friday, August 30, 2019

For Second Week In A Row, Fed Buys Treasuries (AKA, QE4!?!)

Summary
After 250 weeks without a purchase of Treasuries (since Oct. 2014), for the second week in a row, the Federal Reserve bought Treasuries.
The $14 billion in purchasing is in stark contrast to the zero purchases and selling during Quantitative Tightening.
When the Fed sells Treasuries, asset prices struggle, but when the Fed buys Treasuries, asset prices have surged.
Chart below shows the Fed's total Treasury holdings (red line) versus the weekly change in Treasuries (black columns) since 2014.  The QE taper is visible with the first dashed yellow line, the Quantitative Tightening and then the QT taper.  The Fed has begun a new period of Treasury purchasing...but for how long, who knows.
To put things in perspective, the chart below shows the Fed holdings of Treasuries (red line) and weekly change in Treasury buying (black columns) since 2003.  Clearly visible is the activist role the Fed has taken since the GFC...QE1, QE2, Operation Twist, QE3, Quantitative Tightening...and now???
Since March 2019, when the Fed rolled out its latest plan (HERE)...The Fed has ended its Treasury runoff sooner than communicated, cut rates as they said they would not, and is buying mid and long duration bonds while aggressively rolling off / selling off notes and bills...again, opposite to what they previously communicated or insinuated. From a duration perspective, the significant increases have come in the Fed's 7 to 10 year bond holdings (+$43 billion since May) and essentially zero roll-off / sell-off of long bonds going all the way back to 2016 (as detailed last week, HERE).
To highlight the changing nature of the Fed's balance sheet since the start of 2019, the chart below shows the weekly change in MBS (blue line), and change in Treasury holdings (red line).  The Fed has suggested it will continue rolling off MBS in exchange for T's indefinitely...definitely worth watching.
And just to highlight the immediate and incredible impact of the Federal Reserve purchasing of Treasuries on equity prices, the chart below is weekly changes in Treasury purchases (yellow columns) versus the Wilshire 5000 (red line), representing all publicly traded US equities.
Extra Credit - Weekly change of Fed holdings of MBS, Treasury, and Federal Funds rate (left axis) from June 2009 versus the Wilshire 5000 (right axis).  Ongoing rate cuts and rising Treasury holdings should be a pretty safe bet from here on out.
And just getting silly, I'll add in gold.  Make of that what you will?!?
Finally, for those unsure of what is going on, or "why the Fed has ultimately only got a knife at a gun fight", this is what this is all about globally, HERE, and domestically, HERE.

Data via St. Louis FRED.

Friday, August 23, 2019

J-Hole Surprise...QE Is Back?!?

Summary
Federal Reserve holdings of Treasury's has risen for the first time since QE ended in 2014.
Quantitative Tightening is over, but is outright QE back???
Ongoing "direct monetization" continues, with un-matched declines in Excess Reserves versus Fed held Treasury's and MBS.
Interesting that this week, for the first time since QE ended way back in late 2014, Federal Reserve holdings of Treasury bonds rose (yellow columns, below).  The $8 billion increase is the first seen since QE ended almost 5 years ago and comes after QT (quantitative tightening) had been decelerating since mid 2019.  However, the outright increase in Treasury holdings is still a bit of shocker.  Can't say if this was a one off...but this deserves a bit more attention.
So what exactly was the Fed buying?  Seven to ten year Treasury's!  The chart below shows the Fed's mid duration holdings (red line) and the weekly change in those holdings (blue columns).  The purchasing this week was only bested by a single week in 2011...when the Fed was feverishly running its QE program?!?
After a long period of selling/rolling off mid duration Treasury's (red line below), late 2018 and early 2019 saw an end to the selling...and now a sudden burst of Federal Reserve purchasing coinciding with a sharp decline in the 10 year yield (shaded blue area).
As for the shorter durations, the two charts below show the Fed's holdings of Treasury's under 1 year, and the 1 to 5 year holdings.  No need to guess what the Fed is actively rolling off/selling.
And the unchanging (nearly zero roll-off since 2016) Fed holdings of over 10 year Treasury debt.
And the Feds long duration holdings versus the 30 year Treasury yield.  The current move down in the long yield is exactly what was seen, in anticipation prior to QE1, QE2, and QE3.  Hmmm.
Charted below are the Fed Treasury holdings, by duration, since 2003 and the impact on the 10 year minus 2 year spread (shaded grey area).  The real question isn't is QT ending, but is QE 4 actually already starting?  Purple line are Fed held T-bills, red line 1 to 5 year duration, yellow line mid duration, and blue line is everything over 10 year duration.  The fact the Fed has allowed nothing to roll off from the longest duration holdings sure is interesting.
Below, ongoing declines in bank excess reserves versus far smaller declines in Fed held Treasury's and Mortgage Backed Securities.  Some call this $700 billion and growing disparity "direct monetization", something the Fed said it would never do?!?  
And now that QT appears to be over, will bank excess reserves continue falling providing an unofficial QE (with banks leveraging up the direct monetizaton) alongside a potential restart of the Fed's QE?

Why is this happening?  In short, organic potential for growth has been decelerating for half a century but central banks and federal governments are unwilling (unable?) to accept what growth the economy can provide.  They are instead artificially and synthetically pushing up economic growth and financial asset valuations.  But every action has a reaction, and like Mother Nature, the more one messes with the economy, the greater the distortions become.  Detailing the decelerating potential for organic growth, globally HERE and domestically HERE.

Why this is the end of the positive interest rate cycle...HERE

And why China is facing an existential crisis and has no possible means to compromise on a trade deal...HERE.

EXTRA CREDIT - For those curious what the correlation of Federal Reserve Treasury buying to equity valuations has been...chart below is Fed Treasury holdings versus the Wilshire 5000 (representing all publicly traded US equities).  When the Fed buys, stocks go up...when the Fed holds or sells, stocks struggle (except for 2017, but that's another story).  Invest accordingly.

Sunday, August 18, 2019

Ever Fewer Wealthy, Ever More Poor, Projected To Equal Ever More Demand?!?

Summary
Wealthier half of the world population (with incomes of $4k+) consumes 90% of total energy and oil.
The under 65yr/old population of the wealthier nations begins declining (depopulating) in 2023, declining in excess of 10 million annually by 2035.
Despite the imminent decline in working age / consumer age populations of wealthier nations, total global energy and oil consumption are projected to continue rising on growth among the poor.
First chart is the 0 to 65 year old population of the worlds nations that have in excess of $4,000 annual gross national income per capita or average of $16k per capita (solid blue line) and their total energy consumption (dashed blue line).  This is versus the worlds nations with annual gross national income per capita below $4,000 or average of $1.6k per capita (solid red line) and their total energy consumption (dashed red line).  
Same variables as above but showing the annual change in the nations with $4k+ and annual change in population under $4k...again versus their total energy consumptions.  Population data includes anticipated ongoing immigration to the wealthier nations away from poorer nations at present rates...absent this, the wealthy nation depopulation begins sooner and is even more significant.
Global oil consumption with EIA projection through 2040 (black line), annual wealthier under 65 year old population growth (blue columns), annual poorer under 65 year old population growth (red columns), plus Federal Reserve set federal funds rate (yellow line).
Finally, just two variables - the change per five years of the 0 to 65 year old wealthier (blue columns) and poorer (red columns) nations populations versus change per five years of global oil consumption (black line).  As the population of nations that consumes 90% of oil globally begins declining and growth among the poorer nations decelerates, oil consumption is projected to continue increasing?!?
Despite population growth driving up to half of GDP growth and the poorer nations reliant on growth among wealthier nations for their own growth...despite present near zero, zero, and negative interest rates to accommodate massive debt loads...somehow depopulation amidst the heavily indebted nations that consumer of 90% of global energy (coupled with conservation and innovation) is projected to be offset and outweighed by demand growth among the consumers of 10% of global energy?!?.  Go figure.
Total energy and oil consumption data via EIA International Energy Outlook 2016 and population data via UN World Population Prospects 2019.

Sunday, August 11, 2019

Declining Quantity Of Consumers Vs. Increasing Energy Consumption?!?

Summary
I compare the UN World Population Prospects 2019 report (split by the World Bank Gross National Income data) vs. the EIA International Energy Outlook 2017 (showing total global energy consumption).
I show the observed data sets from 1980 through 2018 and projected data sets from 2019 through 2050.
Imminent declines in the wealthier nations consumer populations are sure to mean significantly larger decelerations in Energy Consumption than presently forecast.
The ongoing but decelerating Poorer Nations population growth will not make up the difference.
A large, and likely non-linear, deceleration in global energy consumption appears likely.
Food for thought.  Utilizing data sets, rather than anecdotal evidence, can be helpful when attempting to understand the present and future realities we should anticipate.
Today, I compare the 2019 UN Population Prospects report vs. the EIA (US Energy Information Administration) International Energy Outlook 2017. 
  1. I split the world's 0-65 year-olds into roughly even populations by those nations with $4k (thousand) and above per capita purchasing power (solid blue line below) vs. those nations with per capita purchasing power below $4k (solid red line below).
  2. I compare total energy consumption, split by the same wealthier nations (dashed blue line) versus poorer nations (dashed red line).
  • The "above $4k" nations have an average purchasing power of over $16k per capita income while those nations "below $4k" average $1.6k.  This is about a 10 fold discrepancy in purchasing and consuming power of the wealthier vs. the poorer citizens of the world for what are essentially globally consistently priced commodities and exports. 
  • The wealthier nations consume just over 88% of the worlds energy and the poor nations the remaining 12%.
  • The data from 1980 through 2018 are actual observations while the data from 2019 through 2050 are projections.
In order to see better understand what is taking place, the chart below shows population change of the two groups on an annual change basis.  As the chart details, population change of the wealthier nations 0-65yr/old population (blue columns) has decelerated from +38 million annually in 1988 to just +5 million annually in 2019, and is set to cease growing as of 2023.  By 2035, this wealthier population is projected to be declining by about -15 million annually (this is assuming ongoing high rates of immigration, absent this, the declines will be larger).  Meanwhile, 0-65 year-old population growth among the poorer nations gently accelerated from '88 through '18 (+47 million to +53 million annually) but growth is now projected to continue a consistent deceleration to +35 million by 2050.  Fascinatingly, these changes in annual population growth are not expected to have significant impact on the trend growth of energy consumption (wealthier nations energy consumption=blue dashed line vs. poorer nations energy consumption=red dashed line).
Finally, detailing annual change in population and annual change in energy consumption.  As above, the annual population change of wealthier nations, (blue columns) versus poorer nations (red columns) but detailing the annual change in energy consumption of wealthier nations (blue line) versus annual change in energy consumption of poorer nations (red line).
Given the high volatility of the changing energy consumption vs. the relatively smooth population changes in the chart above, the last two charts average out the differing wealthier and poorer nations annual change in population and like annual change in energy consumption from 1980 through 2018 and 2019 through 2050.
First, Wealthier Nations...
From 1980 through 2018, wealthier nations saw an average annual increase of 24 million 0-65 year-olds versus an annual energy consumption increase of 6.9 quadrillion BTU's.
From 2019 through 2050, wealthier nations are projected to see an average annual decline of -8 million 0-65 year-olds versus an annual increase in energy consumption by 4.8 quadrillion BTU.
And Poorer Nations...
From 1980 through 2018, poorer nations saw an average increase of 49 million 0-65 year-olds annually versus an annual energy consumption increase of 1.4 quadrillion BTU's.
From 2019 through 2050, poorer nations are projected to see an average annual increase of 46 million 0-65 year-olds versus an annual increase of energy consumption of 1.9 quadrillion BTU's.
From 2019 through 2050, the consumer of 88% of earths energy, the wealthier nations, are expected to increase their total energy consumption by 154 quadrillion BTU's (+29%) versus a 62 quadrillion BTU increase among the poor nations (+87%).  This is based on an assumption of a 39% wealthy energy consumption increase on a per capita basis...versus a 33% increase on a per capita basis among the poor nations of the world.
The 2019 through 2050 wealthy energy consumption is a very strange projection that wealthier nations will significantly increase their total energy consumption against shrinking workforces, decelerating need for more infrastructure, more factories, more supply chains, etc..  Further, this is strange given continued innovation and conservation efforts in the creation and utilization of energy from all sources.

Again, food for thought.  The chart below is the annual change in the wealthier 0-65 year-old population (blue columns), the annual change in their energy consumption (blue dashed line), annual change in the poorer nations energy consumption (red dashed line), and the federal funds rate (yellow line). Simply put, as population growth decelerated, the federal funds rate was systematically cut (in conjunction with large quantities of stimulus) and subsequent to each cut, energy consumption spiked (the only exception being the energy consumption decline associated with the break-up of the Soviet Union).

And pulling it all together from 1980 through 2050.  We are now in year 38 of secularly declining federal funds rate to incent greater leverage (debt) to offset the decelerating wealthier 0-65 year-old population growth.  The boom-bust impact on energy consumption of the wealthier nations is apparent as is the relative insignificance of the poorer nations upon the global energy consumption.  Perhaps one more boom-bust cycle is possible based on the imminent implementation of NIRP in conjunction with the latest-greatest stimulus/QE/WTF?!? programs, all in an effort to goose the engine one more time...but I don't think so.

My two cents...is the UN medium variant population data is overstating population growth (and understating population declines among the wealthy nations) and that the EIA International Energy Outlook is somewhere from mildly to wildly overstating energy consumption growth.  With a soon to be shrinking working age consumer base among the wealthier nations who do nearly 90% of the global consuming, the already existing oversupply of capacity will only grow larger.  This lack of demand growth will block the poorer nations from developing and producing further supply.  This lack of global demand will mean little to no export based growth among the poorer nations (no repeat of the "Asian tigers" or anticipated "S-curves" for India or Africa).  As these two data sets are trued up to reality (and one another), the implications for the present and future will be a very different world than is currently being projected.

Monday, August 5, 2019

Young Adults Vs. Elderly, Urban Vs. Rural. Simultaneous Housing Scarcity & Surplus

Summary
The Quantity of New Potential Homebuyers is Decelerating to a Trickle.
The Quantity of Potential Sellers is Surging.
This Mismatch Will Continue to Drive The Federal Reserve to Cut the Federal Funds Rate (& Resultant Mortgage Rates) to Record Lows.
The Net Result is a National Oversupply of Housing, Particularly in Rural Areas, While Select Urban Markets Continue to Face Housing Shortages.
Just a few charts today to make a simple point regarding the present and future of the housing market.

1960 through 2019

Potential Home Sellers
1- 65+ year-olds have the highest homeownership rate, presently 78% of these folks own their own home and they are over-represented in rural areas
2- 65+ year-olds now account for over 75% of the net annual population growth in America (red columns below)...with annual 65+ growth rising from +0.3 million in 1960 up to +1.6 million as of 2019
3- 65+ year-olds also account for 75% of annual deaths (grey negative columns below)...with elderly deaths accelerating from -1.1 million annually in 1960 to -2.1 million as of 2019 (to clarify, in 2019 this means +3.7 million enter the 65+ crowd but 2.1 million exit...leaving a net increase of +1.6 million)
4- When elderly die, there are a couple options for their property...
-A) will it to their heirs
-B) sell it to settle their affairs (as in the case of reverse mortgages) 
Generally their heirs either occupy the home themselves (and sell or rent their existing home) or sell or rent the deceased parties property.  The net result in all these scenarios is a net addition of housing to the market (either as a rental or property for sale).
Potential Home Buyers
5- 20 to 64 year-old annual population growth has decelerated from the 1998 peak of +2.4 million annually to just +0.5 million, as of 2019 (blue columns, below)...but they are over-represented in select urban areas
6- Those under 35 years-old (entering the 20-64 year-old population) have just a 36% homeownership rate, but the lack of 20-64 year-oid population growth coupled with record student loan debt, record rents as a percentage of income, minimal savings, record delayed marriages (average now over 30yrs/old) and record low birth / fertility rates all continues to undermine rising homeownership rate and total growth of potential buyers
Potential New Homes
7- The annual quantity of new homes (represented below by annual housing permits...black line) varied from 1 million to 2.2 million annually from 1960 through 2005...on the whole driven by the annual growth of potential buyers among the 20 to 65 year-old population with significant short term gyrations due to the impact of changes in the Federal Funds rate (yellow line), driving mortgage rates up/down.
Since 2005, new permits (like the 20-65 year-old annual population growth) collapsed but permits have partly recovered (thanks to a decade of ZIRP and the re-employment of the workforce following the GFC) while potential population growth among home buyers has continued to decelerate.

2019 through 2030

These trends only become more acute over the next decade (chart below, same as above but including projections from 2019 through 2030).  The imbalance of miniscule growth among potential buyers (blue columns) versus massive growth among potential sellers (65+ year-olds, red columns) and definite sellers (65+year-old deaths...grey columns).
Below, same chart as above but 1980 through 2030 and flipping the annual elderly deaths (grey columns) to put them into perspective against the potential annual change in potential buyers (blue columns), potential sellers (red columns), 30yr mortgage rate (yellow dashed line), and permits (black line).  These are the changing ingredients that make up the US housing market (and economy).  Just some food for thought.
The 2019 through 2030 chart below highlights the discrepancy of minimal potential buyers (blue columns), surging elderly (red columns), accelerating elderly deaths (grey columns), and likely implementation of NIRP (yellow dashed line) versus best guestimate for new housing creation (permits, black dashed line).
By 2023, the growth of potential home buyers will decline to just 0.2 million annually, deaths among elderly will accelerate to -2.4 million annually (bringing up to 1.9 million properties to the market, either as rentals or "for sale"), and population growth among the elderly will peak at +2.4 million annually.
The net-net of this is an absolute mess.  65+ year-olds (who already own homes) are not likely to buy another and are more likely to downsize &/or enter a nursing/memory care home.  The accelerating deaths among the property owning elderly will bring significantly more properties to market against a fast decelerating quantity of new buyers.  The Federal Reserve is almost sure to push the Federal Funds rate negative (implementing NIRP) to incent the largest segment of the US economy, homebuilding, to continue creating new product. The NIRP is also likely to push mortgage rates to record lows, (perhaps 2% for a 30yr fixed?) continuing to push leverage, speculation, and valuations higher?!?  Of course, the lack of working age population growth and the already existing state of full employment means that potential employment growth over the next decade will likewise be a trickle (at best)...again putting secular downward pressure on the potential for new home buyers.
On a fundamental national basis, this means the imbalance only gets more severe with significantly more potential sellers versus just a trickle of growth among potential buyers...and the Fed will do all it can to kick the can as long as possible.  Of course, the local realities are very unique and quite different.  Simultaneously, urban markets are exhibiting housing shortages (due to relatively positive demographics, population growth, and jobs growth) while rural markets face overwhelming housing surplus' (due to awful demographics, depopulation, and declining jobs).  I previously detailed the urban / rural discrepancies in demographics, population growth, employment, by region South, West, MidwestNortheast, and National Overview.
Population data via UN 2019 Population Prospects Report