US FEDERAL RESERVE HALF BLINKS
The US Federal Reserve half blinked last week. For those readers who don’t know, “the Fed” is the central bank of the United States. They raised their key interest rate by 0.25% while simultaneously saying that they would not be as aggressive next year as previously intended. Next year, they now plan to raise rates only twice instead of three times. They have raised the key interest rate four times in the last 12 months so a drop to two hikes in 2019 is being called a “dovish stance” (less aggressive). That did not please many people who wanted to see an interest rate drop immediately.
In their commentary, they stated that the labor market had continued to strengthen. BOOM cannot understand how this conclusion can be reached by the central bank of America when jobs growth in the US last month was only 155,000. Every month in the US, approximately 250,000 enter retirement and 250,000 apply for disability acceptance. BOOM likes to view the world rationally so the mathematics reveal that 500,000 jobs were lost and 155,000 were created, leaving a Net Jobs Created figure of Negative – 345,000. Of course, such a calculation runs counter to the official narrative of the “strong US recovery” so it simply cannot be made. The Fed clearly can’t allow themselves to make it and neither can the mainstream financial media. Back in the mid 1990’s the US economy would routinely create 400,000 new jobs per month. Those days are long gone.
The recovery is so “strong”, in fact , that the Federal Treasury is now annually spending $ 1.3 Trillion more than it receives in taxation revenue. No problem — just sell Treasury Bonds each month worth $ 100 Billion (or more). They are on track towards a doubling of the budget deficit since Trump took office. The “ocean of bond issuance” that BOOM said would happen is now happening.
During the Obama years, the US Treasury was in deficit training, slowly turning Japanese as they increased the Federal “Debt” (Bond Issuance) from $ 9 Trillion to $ 19 Trillion in just 8 short years. But now they have gone the full Konnichia Wa — to those who don’t know, that means Hello in Japanese.
The Japanese Treasury are the world champions of bond issuance. This is clearly disturbing to the Americans in the Treasury Department. After all, they have been told that America must be “great again’, that the American people are “exceptional” and that they rule the planet as “Number One” so they have clearly decided to out do Japan in the Bond Issuance race.
If a national government spends money from bond issuance in an accelerated fashion to well targeted destinations, they can create economic growth as measured by the GDP numbers. Greece did this leading up to 2008 and generated a fabulous GDP Growth record. We all know what happened after 2008. The “sugar” high was followed by a disastrous collapse. The Greek economy is still moribund.
But the US economy is a different kettle of fish. Their currency is the dominant global reserve currency and they have a very receptive market for Bonds issued by their Treasury. Why? Because they are seen as the lowest risk investment globally. Many even regard it as “risk free” because they cannot imagine the US currency or the US Bond market ever collapsing. So there are plenty of buyers out there for fresh new US Treasury Bills and Bonds.
WHO IS BUYING ALL THESE FRESH NEW US T BILLS & BONDS?
THE US ISSUES THEM, THE US BUYS THEM
THE MAGIC OF BOND ISSUANCE
The US gross national debt has increased by $1.33 Trillion over the past 12 months to almost $22 Trillion. A Trillion is a Million Million or a Thousand Billion. In just the last six months, the debt has surged by $740 Billion. The Federal Government has been increasing its debt at a rate of $123 billion a month during that period. At this rate, the total annual deficit will soon exceed $ 1.5 Trillion. Then the Treasury will be heading towards achieving an annual deficit of $ 2 Trillion. That will be truly exceptional as they will have doubled the Obama rate of increase. GO USA (!)
So who is buying the US Treasury Bills and Bonds?
Is it being bought by the Chinese or the Japanese? No — they are certainly the biggest foreign holders of US government debt but they are steadily reducing their holdings. Mainland China and Japan now hold less than $ 2.2 Trillion of the $ 22 Trillion total — so they own less than 10% and are reducing that.
In fact, if you look at all the foreign nations who own US Treasury Bills and Bonds, you will find that they own only $ 6.2 Trillion. That is 28% of the total. And over the last 12 months, they have reduced their holdings from $ 6.3 Trillion to $ 6.2 Trillion.
The recent buyers of all these fresh new Treasury Bonds are all from inside the US. Interestingly, US government pension funds and social security funds are increasing their holdings of Government Treasury securities. So the government is selling bonds to the government here (go figure) and that now amounts to a total of $ 5.9 Trillion — more than 25 % of the grand total of Treasuries of $ 22 Trillion. This could be called “borrowing from yourself”. Only governments can do such a thing.
American financial institutions, banks and private investors own about $ 7.4 Trillion of the total. This could be called “borrowing from the people”.
The US Federal Reserve (the central bank) currently owns $ 2.3 Trillion of the total (about 10.5%). You could (maybe) call this “borrowing from your own bank”. The Fed is reducing its holdings steadily but there are plenty of other buyers to soak up their reduction.
Let’s tally up those numbers — as at 31st October 2018
Foreign Investors = $ 6.2 Trillion (reducing over time)
US Government Entities = $ 5.9 Trillion (increasing over time)
US Private Investors = $ 7.4 Trillion (increasing over time)
US Federal Reserve = $ 2.3 Trillion (reducing over time)
Total US Federal Govt Debt = $ 21.7 Trillion (it is over $ 22 Trillion now)
Can this continue? Yes, of course. If you are essentially borrowing from yourself, you can continue to borrow from yourself always promising to pay back the total at some later date (but never doing so). Bonds and Bills at maturity can be rolled over or replaced by an equal amount of fresh new Bonds and Bills.
Is there any danger in doing this? Yes the danger lies in regard to the risk of CPI inflation and loss of faith in the currency. If the risk of runaway CPI inflation is well controlled and if the risk of loss of faith in the currency is well controlled then this can actually go on forever. Steady growth in the economy and low grade CPI inflation will support it.
So what else can go wrong? The economy can become hopelessly unproductive because all the usual signals that fuel incentives can become obscured. Why bother working when money just flows freely through the economy? When this happens, the whole house of cards is weakened (almost like a slow drip of moisture on cardboard) and eventually it comes crashing down. This happened in the USSR in 1989 when that empire collapsed.
That day will probably come to the United States too. We can only watch and wait and observe. The timing is the only real unknown. This has happened frequently in history to many nations and empires. The Empire of the US Dollar however is intact right now so there is not much point worrying about its demise until the signs unmistakably appear.
BIG NEWS IN CRYPTO
There is some big news in the Crypto world. Facebook is reportedly looking at creating a Stablecoin which will allow WattsApp users to transfer money. If this happens, India is probably going to be the first target market. WattsApp is owned by Facebook and there are apparently 200 million users in India.
Stablecoins are the potential key link between the world of Fiat currencies and the Crypto world. They are, in essence, tokens that represent national currencies. The key is to keep them in a tight band of valuation against a single currency. That is why they are called “Stablecoins”. You could therefore think of them in one sense as the opposite of Bitcoin (which is far from stable when compared to fiat currencies).
In economics, things work until they don’t. Until next week ………… Make your own conclusions, do your own research. BOOM does not offer investment advice.
Return to the BOOM Main Website – BOOM Finance and Economics at http://boomfinanceandeconomics.com/
EMAIL: gerry [@]
PRICE PULSE DOMINANCE CHANGES DURING LAST WEEK Ended 22nd December 2018:
1. JAPAN STOCKS — Changed to DOWN Arrow Dominant
2. WEST TEXAS OIL PRICE — Changed to DOWN Arrow Dominant
3. US LONG BOND PRICE (TLT) —Changed to UP Arrow Dominant
4. US DOW STOCK INDEX — Changed to DOWN Arrow Dominant
5. US BIOTECHNOLOGY INDEX — Changed to DOWN Arrow Dominant
6. GOLD PRICE (in Aus Dollars) — Changed to UP Arrow Dominant
7. AGGREGATE US BOND PRICES (BND) — Changed to UP Arrow Dominant
8. SWISS STOCKS — Changed to DOWN Arrow Dominant
NOTE — RED ARROWS INDICATE BOOM PRICE PULSE DOMINANCE in the present moment (as indicated by the date of the chart and taking into account the 3 year time frame shown). The charts are now arranged in PRICE PULSE RED ARROW DOMINANCE. NOTE: All Charts are WEEKLY Charts over the last 3 YEARS time frame. Arrows indicate PAST price action (not future). No predictions are implied from past action.
Comments refer to past PRICE PULSE (Red Arrow DOMINANCE) over the last 3 years, the week ended 22nd December 2018. You can RIGHT CLICK a chart and OPEN in a New Tab. Make your own conclusions, do your own research. BOOM does not offer investment advice.
PLEASE NOTE — Many charts are ETF’s from NY Market (not the base commodity or currency etc). The NY Stock Code is in the Top Left Hand Corner of each chart.
Charts are produced from http://www.stockcharts.com
Return to the BOOM Main Website – BOOM Finance and Economics at http://boomfinanceandeconomics.com/
PRICE PULSE RISING — (RED ARROW UP DOMINANCE)
# US LONG BOND PRICE (TLT) — UP Arrow Dominant
# AGGREGATE US BOND PRICES (BND) — UP Arrow Dominant
# GOLD PRICE (in Aus Dollars) — UP Arrow Dominant
# INDIAN STOCKS — UP Arrow Dominant
# NATURAL GAS (SPOT PRICE) — UP Arrow Dominant
# BRAZIL STOCK INDEX — UP Arrow Dominant
# PALLADIUM PRICE — UP Arrow Dominant
# ARGENTINA STOCKS — UP Arrow Dominant
# US INFLATION PROTECTED BOND PRICES — UP Arrow Dominant
# US UTILITIES STOCKS — UP Arrow Dominant
# RWR (US Real Estate REIT Fund) — UP Arrow DominanT
# VALE STOCK (Iron Ore) — UP Arrow Dominant
# US 3 MTH T BILL YIELD — UP Arrow Dominant
# LIBOR — UP Arrow Dominant
PRICE PULSE FALLING — (RED ARROW DOWN DOMINANCE)
# SWISS STOCKS — DOWN Arrow Dominant
# US DOW STOCK INDEX — DOWN Arrow Dominant
# US BIOTECHNOLOGY INDEX — DOWN Arrow Dominant
# JAPAN STOCKS — DOWN Arrow Dominant
# WEST TEXAS OIL PRICE — DOWN Arrow Dominant
# US TRANSPORT INDEX — DOWN Arrow Dominant
# US INSIDER SENTIMENT (KNOW) — DOWN Arrow Dominant
# SOIL (POTASH ETF) — DOWN Arrow Dominant
# QUAL (Quality ETF) — DOWN Arrow Dominant
# MTUM (Momentum ETF) — DOWN Arrow Dominant
# RUSSELL 2000 INDEX — DOWN Arrow Dominant
# TRIM TABS US FLOAT (TTAC) — DOWN Arrow Dominant
# US HIGH GRADE CORP BONDS (LQD) — DOWN Arrow Dominant
# EMERGING MARKETS ETF (EEM) — DOWN Arrow Dominant
# FINANCIAL SECTOR ETF (XLF) — DOWN Arrow Dominant
# US KBW BANK INDEX — DOWN Arrow Dominant
# NASDAQ COMP INDEX — DOWN Arrow Dominant
# US JUNK BOND PRICES — DOWN Arrow Dominant
# COMMODITIES INDEX (USCI) — DOWN Arrow Dominant
# SWISS FRANC (AGAINST $US) — DOWN Arrow Dominant
# FRANCE STOCKS — DOWN Arrow Dominant
# AUSSIE ALL ORDS INDEX — DOWN Arrow Dominant
# THAI SETI INDEX — DOWN Arrow Dominant
# GERMAN DAX — DOWN Arrow Dominant
# TAIWAN STOCKS — DOWN Arrow Dominant
# FVL — VALUE LINE — DOWN Arrow Dominant
# YEN (AGAINST $US) — DOWN Arrow Dominant
# DENMARK STOCKS — DOWN Arrow Dominant
# COAL ETF (KOL) — DOWN Arrow Dominant
# TED SPREAD — DOWN Arrow Dominant
# COPPER PRICE — DOWN Arrow Dominant
# INDUSTRIAL METALS ETF (DBB) — DOWN Arrow Dominant
# YUAN (AGAINST USD) ETF — DOWN Arrow Dominant
# HANG SENG — DOWN Arrow Dominant
# SOUTH KOREA STOCKS — DOWN Arrow Dominant
# SINGAPORE STOCKS — DOWN Arrow Dominant
# AUSSIE DOLLAR AGAINST US DOLLAR — DOWN Arrow Dominant
# CANADIAN DOLLAR AGAINST USD — DOWN Arrow Dominant
# BRITISH POUND AGAINST USD — DOWN Arrow Dominant
# EURO (AGAINST $US) — DOWN Arrow Dominant
# NOMURA HOLDINGS — DOWN Arrow Dominant
# PLATINUM PRICE — DOWN Arrow Dominant
# SHANGHAI STOCKS — DOWN Arrow Dominant
# BITCOIN INDEX $NYXBT — DOWN Arrow Dominant
# DEUTSCHE BANK SHARES — DOWN Arrow Dominant
# FOOD INPUT PRICES (DBA) — DOWN Arrow Dominant
# EURODOLLAR INDEX ($XED) — DOWN Arrow Dominant
PRICE PULSE UNCERTAIN — NON-DOMINANCE OF RED ARROW –
# GOLD PRICE in USD —NO Arrow Dominant
# RUSSIAN RTSI STOCK INDEX — NO Arrow Dominant
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