Good morning, and welcome back to Bygone Relics. I’m C Thomas Printer and I am flying solo this morning. The CPTC has lost Austerity Jones back to the business world on a full-time basis. I will miss her and I will try to have her stop in from time to time to say hello. I thank her for making this cooperative better and I wish her well in her next endeavor. She will be missed, just like the bond traders missed the fact that the back end of the curve might go higher! That’s right, we have the front end flat and the back end of the curve steeping. The bear steepener. The 2/10 US treasury spread narrowed by almost 30 points this week. The bond market, the deepest and most liquid markets in the world, were trading like meme stocks up 14 basis points down 15 basis points. You want action, head to the bond market. That has seldom been said since Madonna was exactly like a virgin.
So what gives people? There are numerous winds a blowin’. Let’s start in Japan. They are trying to ease yield curve controls as their 10 year bond pierced through the 50 basis point limit after the Bank of Japan allowed the rate to ease past .50%. That’s right, like an old man into a warm bath the Bank of Japan is easing into a higher inflation world. Izuru Kato from Totan Research writes, “Keeping the 10-year yield at 0.5% would cause the yen to weaken, so the BOJ’s decision shows the central bank is probably conscious of the yen’s weakness.” This has the chance to cause liquidity issues in the US and Europe. If the Japanese can get a higher rate and avoid any foreign currency weakness, then why not? Furthermore, the dollar/yen breached 143 this week a level not seen since last fall. That was the official/unofficial start of the BOJ having to deal with a currency that had lost 25% of its value in months. The problem is reappearing again as remember Japan must import its energy. Energy prices have been strong the last couple of months.
Another key breeze that is blowin’ is the buying of the Biden’s. The debt ceiling scare went away with nary a whimper but it was also left unchecked, meaning that it was basically unlimited until after the next election. Janet Yellen is needing to raise money for the government to spend all of this Inflation Reduction Act stimulus. Christopher Campbell former assistant Treasury secretary for financial institutions said, “The potential hit to the economy once the Treasury goes to market selling that much debt could be extraordinary. It’s difficult to imagine Treasury going out and selling what could be $1 trillion of bonds and not have an impact on borrowing costs.” Who is going to buy the bonds and at what price? Janet Yellen just got back from China after a business trip where I am sure she wasn’t there sample the Peking duck. No, she was trying to find a buyer for some bonds. Remember, and no one seems to be mentioning this, the Fed was the buyer of last resort just a couple years ago buyer well over a third of all the bonds being offered. That buyer is gone and letting its own balance sheet run off. Loose fiscal policy mans the treasury needs to sell bonds to raise money. Where are these buyers going to come from? Japan might be buying their own and selling US treasuries because of their own rising bond yields. Hedge funds? Probably not, in fact Bill Ackman from Pershing Square, came out and said he is shorting bonds as a hedge against equities dropping. It could be the reason equities drop. The cost of a mortgage just broached 7.3%. What is the real estate market going to look like with a 10% mortgage rate? We will have to wait and see, but the answer is … historically normal.
Ratings agency Fitch came out and downgraded the United States long-term foreign currency issuer default rating from AAA to AA+. The market and the pundits met the downgrade with a yawn, I say at your peril. This is how it starts…All the talking heads were out saying this is odd, this doesn’t matter, this is political. They cited “a steady deterioration in standards of governance over the last 20 years.” I couldn’t have said it better myself. We talked about how capital is flighty when you don’t have a peaceful transition of power in our Argentina series last summer. Say what you will about Trump being innocent of charges, including new ones this week, or not. The transition of power was anything but peaceful on Jan 6. These things matter, how we present ourselves to the world matters, and how we present ourselves as creditors matter. When you have money and don’t need a loan you can act however you want, but if you need someone to buy your debt, you better put on your Sunday dress and do your hair up real nice. Instead we looked like Snooki trying to walk across the beach in heels. That’s right a Jersey Shore reference, we look that trashy right now on the global stage and we deserved the downgrade. Having a printing press is not, I repeat is not, a solution. The full faith and credit just became the almost full faith and credit of the US government. Proceed accordingly. This is one thing that bothers me. The risk free rate isn’t so risk free now…
People believe that there is no chance of America becoming a credit risk. Have they not seen what has happened in the past 20 years? Exploding debt as a percentage of GDP, declining productivity for 5 straight quarters. How is that trend of work from home treating you America? Even Joe Biden is telling HHS workers to bring employees back because of declining HHS productivity. Fortune reports that the American worker is the least productive they have been since 1948. Right now we are trying to re-shore or bring back manufacturing from overseas to America, from the productive and cheaper workers to the US, the home of the less productive and more expensive. Now regardless of how you feel about jobs, that means rising prices. Labor is one of the biggest, if not the biggest, input costs for many industries.
Speaking of input costs, the price of WTI crude oil as rallied from 67 to over 82 $/barrel in a little over a month. Fuel prices are at nearly 52 week highs, and grain prices are rising after Russia pulled out of the Black Sea grain agreements last week. Remember how we talked about the year over year comps for inflation peaked in June when inflation reached a high of 9.1%? This means that the inflation rate might not come down as fast as everyone thought and I think that is yet another reason why the bond market is finally starting to believe Jerome Powell when he says higher for longer. He can’t lower interest rates if inflation is going back up.
“Never spend your money before you have earned it.” Said Thomas Jefferson. We have spent $32 Trillion and counting… Later this month in South Africa the Brics nations are meeting to discuss their coming gold settled trading currency. It seems that Fitch and a large percentage of the earth’s population are coming to the conclusion that the risk-free United States isn’t quite risk-free. There are consequences for bad policies and bad politicians. The US isn’t looking but they are about to get a glimpse.
Sincerely Yours,
C Thomas Printer
On this date in history… 78 years ago to be exact, the US dropped the second atomic bomb on the city of Nagasaki.
This week’s thought experiment… If you could buy a one-year bond that offered 3.25% interest and inflation was 10.8%, would you buy it? Last year at this time, the 1 year bond was at 3.25%, and inflation was 8.3%… Please stop believing the government CPI stats, I’m attaching a link to the John William’s shadow stats website again… If you still want to rely on government issued numbers, the inflation rate was the lowest it has been in a year, 2.97%.
Also born on this date…hall of fame boxing trainer Eddie Futch.
CNBC-Fitch downgrades the US credit
Beckershospitalreview Workforce productivity falls to a 75 year low