Wednesday, March 14, 2012
US Fed Reserve Is The Chief Debt Enabler
As we mentioned earlier Portugal is headed in the same direction as Greece. No growth and no change of any kind. Italy and Spain will have to be bailed out like the others. Then there is the dark dirty secret that is France that follows close behind. These problems are going to go on and on and on.
Last week the Dow fell 0.4%, S&P was little changed, the Russell 2000 roe 1.8% and the Nasdaq 100 was up 0.2%. Cyclicals fell 1%; transports were unchanged; consumers were unchanged; utilities rose 0.5%; banks rose 0.3%; broker/dealers rose 0.5%; high tech rose 0.2%; semis rose 0.6%; Internets rose 0.3% and biotechs 0.5%. Gold bullion was little changed. The HUI fell 2.6% and the USDX gained 0.8% to 80.04.
Two-year T-bills rose 4 bps to 0.32%. The 10-year notes rose 5 bps to 2.03% and the German 10-year bunds fell 1 bps to 1.79%.
Freddie Mac 30-year fixed mortgage rates fell 2 bps to 3.88%. The 15’s fell 4 bps to 4.67%,, one-year ARMs rose 1 bps to 2.73% and the 30-year fixed rate jumbos rose 4 bps to 4.67%.
Fed credit declined $43.3 billion; it is up 12.5% yoy. Fed foreign holdings of Treasury and Agency debt rose $1.7 billion for a 5-week gain of $51 billion. Custody holdings for foreign central banks rose $65 billion yoy, or 6.2%.
M2, narrow, money supply fell $3.7 billion expanding ytd 9% and 9.7% yoy.
Total money fund assets fell $7 billion to $2.645 trillion. Total commercial paper fell $1.6 billion to $926 billion.
Commodity inflation & economic ebbing are worse than most realize.
The main US Treasury buyers are now sellers. This renders the Fed as Treasury buyer of last resort.
Please note that the 12-month ROC for China Treasury Holdings coincides exactly with Treasury peaks in 2003 (May/June) and 2005 (May/June)…Now the ROCs are at their lowest readings since 2000 & 2001.
Weeks ago we noted that QE 1.0 was agency and MBS monetization. At that time, China was dumping MBS and agencies and buying Treasuries. QE 2.0 was Treasury monetization. QE 2.5 (Twist II) had the Fed buy Treasuries and sell Bills or short-term notes. China was dumping Treasuries during both.
The shortfall was $31.5 billion, the customs bureau said yesterday. Imports [commodity inflation] rose 39.6 percent from a year earlier, after a 15.3 percent slump in January, while exports increased 18.4 percent, the bureau said. Data in the first two months are distorted by the timing of the Lunar New Year holiday, which fell in January this year and February in 2011
Robert Gordon, a Northwestern University professor who tracks productivity closely, says he sees “clear signs everywhere” that a productivity slowdown is happening. Last year, productivity measured as the output of workers for every hour they work grew just 0.4% and has grown at a 0.9% annual rate over the past seven quarters. Productivity did spurt higher in 2009 during this stretch of fear-induced firing but over a longer stretch it shows additional signs of slowing. Worker productivity has grown at an annual rate of 1.7% since 2004, down from 2.6% growth in the decade before that.
Mr. Gordon agrees with Ms. Romer’s overfiring story. But he says the longer-run threat to productivity shouldn’t be overlooked. “The productivity numbers have been dismal,” he says. That is an explanation this fragile economy can do without and that policy makers shouldn’t ignore.
The US labour market is still a shambles by Joseph Stiglitz [Nobel Prize winning economist]
In Friday’s US employment report, the proportion of working-age American adults in a job moved up only 0.1 percentage points, to a miserable 58.6 per cent – numbers not seen since the downturn of the early 1980s. There are still 23m Americans who would like a full-time job but who cannot get one. The jobs deficit, the number of extra jobs that would have been required to keep up with new entrants to the labour market, is 15m. Employment has yet to return to its level of December 2008. Male employment is still below what it was in February 2007 – meanwhile, the working-age population has grown considerably
Stiglitz’s solution is the standard Keynesian bromide: more government.
First, a couple facts: the U.S. Treasury currently has $10.7 trillion in outstanding publicly-held debt, and more than $8 trillion of it must be repaid within the next seven years. More than $5 trillion falls due within the next 36 months.
This relatively short-term debt sheet is no accident. Like a subprime borrower opting for a low teaser rate, the government has structured its debt to keep current interest payments low. This is a political temptation for every Administration because it means lower budget deficits on its watch.
The Obama Administration has added close to $5 trillion to the U.S. debt. So it much prefers to finance all of this at a rate, say, of 0.3% in two-year notes than at 2% in 10-year notes. The nearby charts show how federal debt has soared during the Obama years, yet net federal interest payments are lower than they were in 2007 and lower than they were in nominal dollars even in 1997 when public debt was a mere $3.8 trillion. This year the debt is expected to reach $11.58 trillion.
The problem is that this disguises the magnitude of the debt threat and stores up trouble for future Presidents and taxpayers. And maybe not far in the future… [The Fed is the chief US debt enabler.]
As they have before in the aftermath of financial crises or wars, governments and central banks are increasingly resorting to a form of “taxation” that helps liquidate the huge overhang of public and private debt and eases the burden of servicing that debt.
Such policies, known as financial repression, usually involve a strong connection between the government, the central bank and the financial sector. In the U.S., as in Europe, at present, this means consistent negative real interest rates (yielding less than the rate of inflation) that are equivalent to a tax on bondholders and, more generally, savers.
The US budget deficit for February is $231.7B; $229B was expected. It’s the lower tax receipts, fans! Another day, the lowest volume of 2012 and another GDP forecast cut (JPM to 1.5% from 2%).
Receipts were $103.4 billion in February, the Treasury said, about $7 billion lower than receipts in February 2011… [The jobs data is bogus; and even Ben knows it. Fictitious jobs don’t pay taxes.]
Private payrolls increased 233k; manufacturing is +31k; construction fell 13k and private serviceproducing employment is +209k. Business services increased 86k, which included 45k temps; 286k people hold multiple jobs; education and healthcare increased 82k. 6k government jobs were cut.
The participation rate increased to 63.9% from 63.7%; the work/population ratio increased 0.1 to 58.6%.
December NFP was revised up from +203,000 to +223,000; January was revised up from +243,000 to +284,000. The average workweek was unchanged at 34.5 hours. Average hourly earnings increased 0.1 and are +1/9% y/y…Taxes do not support the [fictitious] job gains.
851k NFP jobs were created NSA; 811k were created NSA last February. The reality is 1.838 million jobs have been lost in 2012, NSA (not seasonally adjusted).
Stocks shrugged at the ‘good’ February Employment Report because critical thinkers understand that the heavily over-hyped report is mostly temps, part-timers and low paying gigs, which impair real income and real economic growth. But the ‘good’ headline number will keep the Fed from implementing QE3.0.
Despite the media cheerleading, people vote their pocketbooks, not government statistics.
[Due to $56.6B trade deficit in January]
Just hours after another strong employment report, rain is hitting the parade. The latest U.S. trade data, released alongside the jobs numbers, are triggering a raft of downgrades to first-quarter growth estimates. That could be a sign of trouble ahead later in the year.
Economists at Goldman Sachs and Macroeconomic Advisers lowered their tracking estimates for firstquarter GDP growth to 1.8% from 2%, partly due to expectations for lower net exports during the period (due to a jump in imports). J.P. Morgan Chase economists lowered their overall projection for firstquarter GDP to 1.5% from 2%.
U.S. banks bought more government and related debt in the first two months of 2012 than they did in all of last year, an endorsement of Federal Reserve Chairman Ben S. Bernanke’s assessment of the economy that’s boosting demand for bonds even with yields near the lowest on record.
Commercial lenders purchased $78.2 billion of Treasuries and securities of agencies in January and February, compared with $62.6 billion in all of 2011, bringing their holdings to $1.78 trillion, Fed data show. Deposits exceeded loans by a record $1.63 trillion last month, up from $1.17 trillion in January 2011, providing scope to buy more bonds.
While the economy has expanded for eight straight quarters, unemployment at 8.3 percent, the scheduled end of the Bush-era tax cuts, a mandatory $1 trillion in federal budget cuts over 10 years and the presidential election campaign have made banks hesitant to accelerate lending. Instead of providing credit, they are exploiting the gap between the Fed’s target interest rate for overnight loans and Treasury yields to make profits.
“Bank managers are still very cautious, and that’s appropriate,” Jeffrey Caughron, a partner at Baker Group LP inOklahoma City who advises community banks on investments of more than $30 billion, said in a March 6 telephone interview. “We don’t expect negative growth or a recession, but we expect sluggish growth. There’s not the kind of loan demand that banks are used to having, so banks have excess liquidity and the place to go is the bond market.”
Caughron advises clients to invest in government and municipal bonds.
The U.S. government ran a $231.7 billion budget deficit in February, the Treasury Department reported Monday. This is up substantially from the deficit of $222.5 billion in the same month one year ago. Receipts were $103.4 billion in February, the Treasury said, about $7 billion lower than receipts in February 2011. Outlays were $335.1 billion. This is $2 billion higher compared with a year earlier. The Congressional Budget Office projects that the federal deficit will narrow slightly to $1.08 trillion from last year’s $1.29 trillion, but remain above $1 trillion for the fourth straight year. For the first five months of the fiscal year, the government incurred a budget deficit of $580.8 billion, $60 billion less than the deficit recorded during the same period last year.
Federal Reserve officials are considering a new type of bond-buying program designed to subdue worries about future inflation if they decide to take new steps to boost the economy in the months ahead. Under the new approach, the Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates. The aim of such an approach would be to relieve anxieties that money printing could fuel inflati later, a fear widely expressed by critics of the Fed’s previous efforts to aid the recovery.
For all the concern that the $10 trillion market for Treasuries is dependent on Federal Reserve purchases to absorb a continually expanding supply of debt, the amount held by investors outside the U.S. has grown even more. Foreigners increased their holdings of U.S. government debt by $1.84 trillion to a record $5 trillion since the Fed began the first round of Treasury purchases in May 2009, taking their stake to 60.5% of the securities not held by the central bank… The Fed added $1.18 trillion during that period, to $1.65 trillion, or 16.8% of the total, from 7.6%.