by Chris Hamilton
I’m dazed & confused…economists and the consensus all acknowledge 2001 and 2007 were low interest rate, debt driven financial and economic bubbles. However, somehow today’s even lower interest rate environment resulting in an additional $9.5 trillion in equity valuation from the last bubble peak…this one is legit and isn’t a bubble???
What I’m even more confused about is who, exactly, is buying all the Treasury debt while simultaneously buying all the equity’s (and real estate, and and and)? The chart below shows average monthly Treasury issuance over different periods and how much was purchased by the US domestic public (pensions, insurers, banks, institutional buyers, and private citizens). I’m astounded that somehow the domestic public is able to push equity prices up by over $16 trillion from there ’09 lows while simultaneously buying record quantities of Treasury debt. The TIC data (Treasury International Capital system) combined with Fed data and further Treasury data show the public is presently purchasing nearly $70 billion a month (average) of still near record low yielding debt?!? The only previous period that the domestic public bought even 2/3rds the present amount, asset valuations were in free fall from 2008 to 2010 as money rotated from risk to perceived safety.
From 2009 through 2014, during Quantitative Easing, the Federal Reserve was buying up to $45 billion in Treasury debt on a monthly basis. During the 2014 QE taper, the Fed was reducing their monthly purchases until they ceased altogether at years end. The end of Fed buying via QE was the trigger for foreigners to do likewise and cease buying and begin net selling US Treasury debt.
So, the Federal Reserve and foreigners have ceased buying and Intra-Governmental surplus have been muted by demographic and population shifts…that means nearly $70 billion a month domestically being spent on low yielding Treasury bonds instead of stocks, instead of corporate bonds, instead of RE or CRE. This should represent anti-QE or fiscal tightening. However, in the face of what essentially amounts to billions in monthly tightening of the money supply, assets (excluding commodities, the foundation of all economic activity) are ramping upward?!? Clearly, something else is happening.
A little background…
The chart below shows total US Treasury debt issued per period (white boxes) and what sources did the purchasing during each period. The red dashed circle draws your attention to the period since expansionary QE ended (yes, Fed still buys to maintain their balance sheet, but on a net base has ceased accumulating). (1), the Federal Reserve has ceased buying, (2) foreigners have not only stopped buying but are net selling, having decreased total Treasury holdings by $215 billion since the end of 2014. (3), all the buying since 2014 has been the US Public (primarily institutional buyers like pensions, insurers, banks, etc) and the IntraGovernmental “surplus”.
If we focus on the growth in US Treasury debt, what should be obvious from looking at the chart below is that the vast majority of growth in US debt since 2008 has been marketable. The accelerating demographic and population shifts mean the surplus’ that were mandated to soak up nearly half of all federal debt until 2008, will turn from total net buyers to net sellers within a few years. The rapid growth in marketable debt since ’08 will only accelerate further.
Focusing on Marketable debt, from ’01 through ’14, the collective Federal Reserve and foreigners net purchased from 70% to 90% of all new US Treasury debt (freeing up $8 trillion to be spent domestically & levered up at ever lower rates on equities, bonds, etc.). China and the BRICS were huge buyers from ’01 through ’11, but China’s holdings peaked in July of ’11 and have been falling since…but the financier BLICS nations (Belgium, Luxembourg, Ireland, Cayman Island, Switzerland) took over and maintained the foreign bid until the Federal Reserve ceased QE. But since QE ended, the domestic public is buying all net new marketable debt plus that which foreigners are not rolling over.
To Recap…I’m dazed and confused!
Since the Fed ended QE and the sources of 70% to 90% of Treasury buying have ceased buying and turned to net sellers, yields essentially haven’t risen (Jan 1, 2014 at 3%, Jan 1 2015 at 2.2% vs. todays 2.45%) nor has there been any asset declines because of a massive increase of dollars moving into low yielding Treasury debt. In fact, asset prices are sky rocketing despite the trillions of dollars (supposedly?) no longer available to move into these asset classes? In the only other period with domestic Treasury buying anything approaching the present quantity, financial assets collapsed as institutions and investors looked for shelter from the ’09 storm.
I have tried to make it pretty clear why all this is taking place, HERE, why the recovery hasn’t been about growing jobs or wages HERE, and in part why the stock market has soared, HERE. But, unfortunately, I have no answer as to what is currently taking place with Treasury buying and why there is seemingly no impact of trillions being siphoned off from “markets” (plenty of opinions, but no clear evidence to back them). And because I don’t understand it, I can’t comment on it’s durability or longevity. I hope it makes more sense to you and allows you to invest accordingly.