Republican Surrender And A Trillion-Dollar Treasury Vacuum Is Coming for Wall Street Rally (Impact On Cryptos)

Well, Kevin McCarthy (RINO-CA) and Patrick McHenry (RINO-NC) along with Jim Jordan (RINO-OH) and Marjorie Taylor Greene (RINO-GA) sold out America to Green Joe Biden (the Jolly Green Giant?) and pretty much guaranteed a Biden reelection as President and Democrats winning the House majority at the next election. Way to go McCarthy, McHenry, Jordan an Greene! You sold out America to the Progressive, destructive Left.

With a debt ceiling deal freshly inked, the US Treasury is about to unleash a tsunami of new bonds to quickly refill its coffers. This will be yet another drain on dwindling liquidity as bank deposits are raided to pay for it — and Wall Street is warning that markets aren’t ready.

The negative impact could easily dwarf the after-effects of previous standoffs over the debt limit. The Federal Reserve’s program of quantitative tightening has already eroded bank reserves, while money managers have been hoarding cash in anticipation of a recession. 

JPMorgan Chase & Co. strategist Nikolaos Panigirtzoglou estimates a flood of Treasuries will compound the effect of QT on stocks and bonds, knocking almost 5% off their combined performance this year. Citigroup Inc. macro strategists offer a similar calculus, showing a median drop of 5.4% in the S&P 500 over two months could follow a liquidity drawdown of such magnitude, and a 37 basis-point jolt for high-yield credit spreads. 

The sales, set to begin Monday, will rumble through every asset class as they claim an already shrinking supply of money: JPMorgan estimates a broad measure of liquidity will fall $1.1 trillion from about $25 trillion at the start of 2023.

“This is a very big liquidity drain,” says Panigirtzoglou. “We have rarely seen something like that. It’s only in severe crashes like the Lehman crisis where you see something like that contraction.”

It’s a trend that, together with Fed tightening, will push the measure of liquidity down at an annual rate of 6%, in contrast to annualized growth for most of the last decade, JPMorgan estimates.

The US has been relying on extraordinary measures to help fund itself in recent months as leaders bickered in Washington. With default narrowly averted, the Treasury will kick off a borrowing spree that by some Wall Street estimates could top $1 trillion by the end of the third quarter, starting with several Treasury-bill auctions on Monday that total over $170 billion.

What happens as the billions wind their way through the financial system isn’t easy to predict. There are various buyers for short-term Treasury bills: banks, money-market funds and a wide swathe of buyers loosely classified as “non-banks.” These include households, pension funds and corporate treasuries.

Banks have limited appetite for Treasury bills right now; that’s because the yields on offer are unlikely to be able to compete with what they can get on their own reserves. 

But even if banks sit out the Treasury auctions, a shift out of deposits and into Treasuries by their clients could wreak havoc. Citigroup modeled historical episodes where bank reserves fell by $500 billion in the span of 12 weeks to approximate what will happen over the following months.

“Any decline in bank reserves is typically a headwind,” says Dirk Willer, Citigroup Global Markets Inc.’s head of global macro strategy. 

Bitcoin Faces Downside Risks After Debt Deal Moves Forward

Just when markets appear to be moving past the months-long drama around the US debt ceiling, holders of risky assets such as cryptocurrencies are likely facing a fresh challenge while the Treasury looks to rebuild its depleted cash balance with an estimated $1 trillion Treasury-bill deluge.

“The impending reserve drawdown, due to the [Treasury General Account] rebuild, may prove to be a headwind,” Citi Research strategists including Alex Saunders wrote in a note.

Citi analyzed the performance of risky assets during drawdowns and found that they were vulnerable to higher volatility and weaker returns. As such, the near-term outlook doesn’t seem too rosy for Bitcoin and Ether. “Both coins average negative returns in these scenarios, and BTC has significantly underperformed in the median case,” the strategists wrote Thursday.

The TGA, which keeps money for the Treasury, ballooned during the pandemic. It expanded again last year and is now about as low as it has ever been. Treasury, as a result, will need to replenish its dwindling cash buffer to maintain its ability to pay its obligations through bill sales, estimated at well over $1 trillion by the end of the third quarter. This supply burst may drain liquidity from the banking sector and raise short-term funding rates against an economy many say is likely to fall into recession.

This doesn’t bode well for digital-asset investors, who were just recovering from fears of a no-deal scenario for the US debt ceiling. While Bitcoin edged higher on Friday, it’s still hovering around the $27,000-mark that it has failed to break away from for several weeks. 

“Crypto markets were not immune to fears of the US defaulting on its debt, selling off on negative developments and rallying on headlines suggesting progress,” the strategists said. They added that crypto has typically “fared well” amid issues concerning traditional financial institutions, citing the banking turmoil in March, a period in which Bitcoin outperformed. But perhaps risks of an institution such as the US government defaulting “doesn’t paint a favorable outlook for decentralized digital assets.”

To illustrate, the strategists used the Cboe Volatility Index, or VIX, as an indicator of the market’s fear to gauge whether a resolution would be passed before hitting the ceiling. And whenever equity market concerns were eased, that’s when Bitcoin outperformed.

“While in theory the potential default of an institution as impactful as the US government would bode well for decentralized technologies and systems, this may not currently be the case given that the crypto industry is still in its infancy and regulation has yet to be well-defined,” they wrote. “Another theory is that not raising the debt ceiling would lead to reduced US government debt and a lower fiscal deficit, and provide more credibility to fiat, particularly the dollar.”

On Friday, the Senate passed legislation to suspend the US debt ceiling and impose restraints on government spending through the 2024 election. The measure now goes to President Joe Biden, who forged the deal with House Speaker Kevin McCarthy and plans to sign it just days ahead of a looming US default. 

Year-to-date, Bitcoin has rebounded some 60% after starting the year at around $16,500. Such optimism comes after 2022’s 64% drop, its second-worst year in its history. It rose about 1% to $27,178 as of 3:32 p.m. in New York, and is marginally higher from last Friday.

Bitcoin’s support hovers around $26,500, said Fiona Cincotta, senior market analyst at City Index, adding that a break below $25,000 could mean a deeper sell-off. 

“The problem is the macro backdrop, which is relatively uncertain going forward with recessionary fears,” she said. “I think what will be looking for to make Bitcoin shine is a nice dovish pivot from the Federal Reserve. That might be the tide where we will see another decent leg higher.”

Range-bound trading has been Bitcoin’s defining characteristic of late, with its 30-day volatility reigning low at 1.8%, firmly staying firm within its two-month-long trading range. Despite growing short-term volatility, options implied volatility trended lower over the past week, according to K33’s Bendik Schei and Vetle Lunde. Even so, Bitcoin exchange-traded products continued to see steady outflows while Bitcoin volumes — spot and futures — are trending lower. 

McCarthy, McHenry, Jordan and Greene, honorary Frenchmen!

Fear The Talking Fed! Fed Likely To Pause Tightening Despite Being Only Half Way Home (3.7% Unemployment Implies Target Rate Of 10.12% Versus 5.25% Rate, Fed Balance Sheet Still At > $8 TRILLION)

Don’t kid yourself. The talking heads at The Federal Reserve (more like Feral Reserve) are only about halfway there in terms of rate hikes. There is still over $8 trillion in monetary stimulus sloshing around the economy.

The Taylor Rule implies a target rate of 10.12% while the current target rate is just over half that rate at 5.25%. A little over halfway there and The Fed is likely to pause rate hikes.

Of course, Yellen and Powell think The Taylor Rule is a pork roll product from Trenton, New Jersey.

Fear the talking Fed!

May Jobs Report Adds 339k Jobs, But Unemployment Rate Rises To 3.7% (Avg Hourly Earnings Cool To 4.3% YoY, Too Bad Core Inflation Still Sizzling At 5.5%)

The May jobs report is out and, under normal circumstances, would led The Fed to raise rates. But these are not normal times, my friends.

The US economy (allegedly) added 339k jobs in May. That is the good news.

The not-so-good news? A large diverengence between the Establishment survey and Household survey. +339k versus -310k. What’s it going to be?

The bad news? While US average hourly earnings YoY cooled to 4.3%, inflation is still roaring at 4.9% (headline) and 5.5% (core). So Americans are still losing ground to inflation.

The unemployment rate rose to 3.7% in May while the underemployment rate rose to 6.7%.

With unemployment rising to 3.7%, the Taylor Rule implies a Fed Funds Target rate of 10.12%. We are currently at 5.25%. Or just a little over halfway there. But The Fed is talking a pause in rate hikes.

Even Powell is getting a headache.

Biden’s Economy! ISM Manufacturing In May Falls To 46.9, 7th Straight Month Of Contraction (McCarthy Surrenders To Biden And Allows 2 Years Of Uncontrolled Spending And Debt)

Another day under Biden/Yellen.

Last night, “Republicans” joined Democrats to allow unlimited Federal spending and debt for the next two years. Way to go “Benedict McCarthy”!

But today, we saw that ISM Manufacturing printed at 46.9 for May, the 7th consecutive month of contraction.

Meanwhile, the Biden family twists the night away while Americans are ravished by inflation caused by bad energy policies and runaway Federal spending.

The new flag of the National Republican Party!

Biden’s Economy: Challenger Job Cuts Soar 286.7% YoY In May As M2 Money Growth Collapses

So much for Biden’s “miracle economy.” Challenger jobs cuts report is out for May and job cuts soared 286.7% year-over-year (YoY). As M2 Money growth crashes.

Another Day In Bidenville! Mortgage Indicators Ring Alarms as Spreads at Post-Subprime High

A Biden Saturday Night!

Worsening conditions in the US mortgage-backed securities market are doing little to ease fears over financial contagion as a recession looms.

MBS current-coupon yield spreads over Treasuries are near the highest level since 2008 subprime crisis, as economic and political concerns weigh on performance, Erica Adelberg, a Bloomberg Intelligence strategist, wrote in a BI Chart Book. Mortgage-related exchange traded funds are seeing outflows, even as bond funds as a whole enjoy inflows. Applications for loans are near 25-year lows as the housing market languishes.

Use the GP tool for charting and run BI to search for research, data and chart books. 

The top panel shows nominal current-coupon yield spreads are back near decade highs, surpassing those seen in the fourth quarter and reaching peak levels from the pandemic panic in March 2020. The bottom panel shows option-adjusted spreads are also wide, trading near two standard deviations of the average level, though slightly more in line than nominals, Adelberg wrote.

Primary mortgage rates are approaching historic highs versus Treasuries too.

Both the secondary mortgage spread to Treasuries (white) and the primary mortgage spread to secondaries (blue) have blown wider. That has increased the total spread between 30-year-fixed consumer mortgage rates and 10-year Treasuries (pink) to near financial-crisis levels. 

Elevated spreads could make it harder for borrowers to find rate relief, even if Treasuries rally and secondary mortgage spreads tighten, Adelberg wrote.

Mortgage ETFs saw marginal outflows while bond funds as a whole continued to see inflows. To monitor ETF flows:

Flows into US aggregate bond ETFs are mostly positive this year, as investor demand has improved on higher yields. Agency MBS-specific ETF flows, however, are more muted, Adelberg wrote.

Loan applications remain near all-time lows, showing no signs of life yet.

Loan applications for refinancings and purchases are near 25-year lows as housing-market activity is still depressed, and most refinancings are uneconomical at current rates, Adelberg wrote. The 30-year fixed mortgage contract rate hovers around 6.7%.

Activity in the existing-home market continues to wane.

Single-family existing-home sales in April fell 3.5% month-over-month and are down more than 20% from a year ago. Existing-home median prices continued to decline as well, seeing their largest year-over-year drop since early 2012, though this may partly reflect the mix of homes purchased. Low existing homes for sale, with many homeowners locked into low-rate mortgages, are depressing resale activity.

MBS spreads may remain under pressure until the economic and inflation outlooks become more optimistic, Adelberg wrote on May 31.

Land Of Confusion! US Mortgage Demand Drops 3.7% From Previous Week, Under Biden: Mortgage Purchase Demand Down -44%, Refi Demand Down -87%, Mortgage Rates UP 106%

Under Biden, the US economy is a land of confusion. Under Biden’s Reign of Error, Mortgage Purchase Demand is down -44%, Refi Demand is down -87%, and Mortgage Rates are UP 106%.

Mortgage applications (demand) decreased 3.7 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending May 26, 2023.

The Market Composite Index, a measure of mortgage loan application volume, decreased 3.7 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 5 percent compared with the previous week. The Refinance Index decreased 7 percent from the previous week and was 45 percent lower than the same week one year ago. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier. The unadjusted Purchase Index decreased 4 percent compared with the previous week and was 31 percent lower than the same week one year ago.

Here is the rest of the story.

1% down payment mortgages when home prices are falling? Truly, a land of economic confusion under Country Joe.

The Amazing COVID Wealth Theft! The Top 1% Fared Far Better Than The Bottom 50% With Fed COVID Money Printing (Since COVID, Top 1% Share Of Net Worth Rose 7.4%, Bottom 50% Share Fell -5%)

It is not a surprise that the ill-advised COVID economic shutdowns would harm small businesses that large corporations.

Yes, The Fed’s M2 Money printing press went wild with COVID emergency refief. And so did the discrepancy between the top 1% and the bottom 50% in terms of “Share of Total Net Worth Held.” The top 1% is in blue and the bottom 50% is in red. M2 Money is in green.

Compared to pre-COVID, the top 1% increased their share of total net worth from 29.7% to 31.9%, an increase of 7.4% since January 2020. The bottom 50% fell from 30% to 28.5%, a -5% decline. An elitist wonderland!

And The Biden family keeps raking in the money far about Joe’s salary.

And I assume Fed Chair Jerome Powell and Treasury Secretary Janet Yellen also made fortunes from COVID relief.

Foul owls on the prowl!

Gross Domestic Income GDI Suggests the US Is In Recession Right Now (While Uniparty Agrees In Principle To Avoid Debt Default)

Well, Biden and McCarthy have agreed in principle to a budget revision, raise the debt ceiling and avoid a US debt default. The Uniparty strikes again! No restraint of reckless Federal spending t speak of . The big donor class wins and middle class Americans lose.

Mike Shedlock (aka, Mish) makes a good point: the US is already in recession if we look at GDI (gross domestic income) rather than GDP (gross domestic product). The US has already declined two consecutive quarters in terms of negative GDI growth.

Mish’s chart:

The Uniparty heads.

Biden/Yellen Dare McCarthy To Step Over The Line! Treasury Cash Balance Goes Low, Large Company Bankrupties Highest Since 2010 As Biden Goes On Vacation (Vacation Joe!)

US Treasury Secretary Janet Yellen changed the drop dead date on a US default from June 1 to June 5, daring Speaker McCarthy to step over the line. The debt ceiting is so urgent that Biden went on vacation to Delware for Memorial Day weekend. In fact, Biden and Yellen expect McCarthy to dance.

White House and Republican negotiators tentatively narrowed differences but were still clashing Friday on key issues as the Treasury Department signaled extra time was available before a potential US default. 

Treasury Secretary Janet Yellen announced the department expects to be able to make payments on US debts up until June 5 if lawmakers fail to act on the US debt ceiling. That set a more pointed date for a potential default but is also four days later than her previous comments eyeing trouble as soon as June 1.

The new so-called X-date buys negotiators for House Speaker Kevin McCarthy and President Joe Biden more time to strike a deal. The negotiating teams haven’t met in person since Wednesday but spoke late into the night Thursday and were in regular communication throughout the day Friday. 

Yes, there isn’t really a crisis folks. Treasury collects tax dollars continuously so Treasury can prioritze debt payments and other disbursements. The only crisis is in the minds of the media.

Deputy Treasury Secretary Wally Adeyemo warned Friday that payments to Social Security beneficiaries, veterans and others would be delayed if there’s a default. But he said he’s gaining some confidence an agreement will be reached.

We’re making progress and our goal is to make sure that we get a deal because default is unacceptable,” Adeyemo said in an interview on CNN. “The president has committed to making sure that we have good-faith negotiations with the Republicans to reach a deal because the alternative is catastrophic for all Americans.”

The accord would also include a measure to upgrade the nation’s electric grid to accommodate sham renewable energy, a key climate goal, while speeding permits for pipelines and other fossil fuel projects that the GOP favors, people familiar with the deal said.

The deal would cut $10 billion from an $80 billion budget increase for the Internal Revenue Service that Biden won as part of his Inflation Reduction Act (big whoop). Republicans have warned of a wave of agents and audits while Democrats said the increase would pay for itself through less tax cheating.

What is taking shape would be far more limited than the opening offer from Republicans, who called for raising the debt ceiling through next March in exchange for 10 years of spending caps. House conservatives were already balking Thursday at the notion of a small deal, with the House Freedom Caucus sending a letter to McCarthy demanding he hold firm. 

Treasury’s cash balance is at a low point and The Administration threatens Social Security recipients and veterans of delayed payments … while Biden goes on vacation for Memorial Day weekend to honor veterans??

Of course, Yellen know that all The Fed has to do to increase M2 Money growth again.

Meanwhile, bankrupties among large companies are highest since 2010.

In the mortgage market, current coupon nominal spreads 9Agency MBS 30Y coupon over Treasuries) are soaring.

Meanwhile, to honor US veterans, Biden goes on Memorial Day weekend and threaten veterans with delays in veteran benefits. Sigh.

Is Joe Biden REALLY Reverend Kane from Poltergeist II??