US Credit Rating at Risk of Fitch Cut on Debt-Limit Impasse (Even Japanese Yen Is Whipsawwing)

What happened to Biden? He used to be a “reasonable” Senator (reasonable for a racist Democrat, that is), willing to negotiate with the opposition on budgetary issues and the debt ceiling. Now we have “Progressive Joe” who is acting like crazy Progressive Congresswoman Pramila Jayapal from Seattle. {Aka, Seattle’s Worst!} But his newly found Progressive identiy is leading down a terrible path. Rating agencies are putting the US of credit watch because of Biden’s newly found Progressive back bone. (Progressive means progressing towards full blown Communism).

Ratings company warns on worsening political partisanship
US AAA ratings on review with negative implications at DBRS

The tension around the US debt-limit negotiations ratcheted up after Fitch Ratings warned the nation’s AAA rating was under threat from a political standoff that’s preventing a deal.

Fitch may downgrade its assessment to reflect the increased partisanship that is hindering a resolution despite the fast-approaching so-called X date, it said, referring to the point at which Washington runs out of cash. It moved the US to “rating watch negative” under its classification. Meantime, DBRS Morningstar placed the US ratings of AAA under review “with negative implications.”

Markets have been showing increasing nervousness over the standoff, with Treasury-bill yields slated to mature early next month surging past 7%, while the S&P 500 Index has declined for two days. Economists project a US default could trigger a recession, with widespread job losses and a surge in borrowing costs.

Fitch’s warning “underscores the need for swift bipartisan action by Congress to raise or suspend the debt limit and avoid a manufactured crisis for our economy,” said Lily Adams, a spokesperson from Treasury.

Biden’s childish refusal to reduce his insanely huge budget (crammed with pork for large donors and Progressives) is causing ripples to be felt overseas. Look look at the Japanese Yen.

Pramila Jayapal, Joe Biden’s intellectual soulmate.

All Quiet On The Default Front As Biden Dithers The Night Away And Regional Bank Stocks Decline On Fed Tightening

Like the famous novel “All Quiet on the Western Front,” its “All Quiet on the Default Front” as China Joe and Speaker McCarthy are set to meet again. In short, Biden wants to raise taxs on middle class and McCarthy wants to return Federal spending to pre-Covid levels. Sure, Biden throws around the Bernie Sanders’s tax on millionaires and billionaires line, but they know that M&Bs have professional accounts and lawyers to protect them while the middle class has Turbo Tax and H&R Block.

In any case, markets are calm (the calm before the storm?) although I think Biden WANTS to default and blame Republicans ahead of Biden’s reelection. The media will mindlessly repeat DNC talking points. So Biden is covered. After all, he says it isn’t his fault (although it is 100% Biden’s fault if America defaults because of his reckless budget and insane ramblings).

Let’s look at regional banks and the US Treasury SHORT curve: 2Y-3M. Notice that regional bank stocks have gotten demolished as The Fed tightens.

US Treasury cash balance remains dangerously low as Biden and Yellen dither the night away.

Bankrupt Biden. The US, not the Biden pay-to-play family.

I wish we could seize all the Biden family assets if Old Joe defaults. Or at least make Hunter Biden take care of his child Navy and let the poor child get rich off the Biden name.

Crisis? US Loan Demand Weakens By Most Since 2009 Financial Crisis (Bidenflation + Fed Rate Hikes = Collapsing Loan Demand)

Inflatiion Joe Biden (or Unaffordable Joe). Bidenflation has led to The Federal Reserve tightening interest rates. As I said on Stuart Varney’s show years ago, “When The Fed starts raising rates, KABOOM!”

Now we are seeing US Loan Demand weakening by the most since the 2009 financial crisis.

Then we have large/medium sized banks reporting a crash in stronger demand for C&I loans.

Call Biden “The Recession Hessian.”

Biden Country! No Rent Being Paid On 20% Of US Office Space As Office Property Values Fall (Office Vacancy Hit An All-time High As Fed Shrinks Balance Sheet)

Living in Biden Country! Where big American cities are becoming like Lori Lightfoot’s Chicago.

And the sad headline of the day (other than pure chaos on the Mexican border) is that NO RENT IS BEING PAID ON 20% OF ALL US OFFICE SPACE! And small banks hold 70% of commercial real estate loans!

Things are so bad, in fact, that 26 Empire State Buildings could fit into New York City’s empty office space, as occupancy in the city is hovering around 50% of prepandemic levels,

As The Fed momentarily pauses rate hikes, office vacancy rate just hit an all-time high. Another Biden first!! And the NCREIF office property index falling as The Fed tightens.

Yellen Says Only Good Outcome Is Congress Raising Debt Ceiling (US CDS Remains Elevated As Child-like Biden Refuses To Negotiate The Debt Ceiling)

Treasury Secretary Janet “The Evil Hobbit” Yellen is a Statist. She can only think of an all powerful central government calling the shots since the private sector and individual liberties are something to be eliminated.

So, it is not surprising that Yellen is pushing for Congress to raise the debt ceiling without conditions. Even Democrat Senator Joe Manchin is saying that Biden is ‘Hypocritical’ On Debt-Limit Demands’.

Yellen has mostly declined to spell out what her department would do if Congress fails to raise or suspend the debt limit before the Treasury finds itself unable to cover all the government’s obligations.

Back in Mordor on The Potomac, President Joe Biden and House Speaker Kevin McCarthy postponed a meeting on the debt ceiling set for Friday. People familiar with the talks said the postponement was a sign that staff-level talks were yielding progress.

Biden and congressional Republicans have been locked in disagreement for weeks over raising the US federal government’s $31.4 trillion borrowing limit. GOP leaders have demanded promises of future spending cuts before they approve a higher ceiling. Biden has jinsisted on a “clean” increase, with budget talks kept separate.

Now what no one in our lame pro-government media or Congress or Administration has said is the a US debt default does NOT necessarily mean that the US walks away from its debt. Very likely, China and Japan, our two biggest foreign debt holders, will insist on debt restructuring so that the US pays some fraction of debt owed, like 80%.

But foreign debt holders are a relatively small percentage of US debt holders. The Federal Reserve is the largest single borrower, thanks in part to Yellen who has formally Federal Reserve Chair,

Of course, financial entities like Vanguard, Blackrock and Fidelity are the largest holders of US debt. Since pensions invest heavily with these enetitites, the Federal government would restructure the debt rather than outright default.

US CDS 1Y continues to remain high as Biden/Yellen/Schumer play chicken with the lives of the American middle class while the political donor class is clamoring for endless spending and wealth transfers.

Remember, Biden, Yellen and Schumer all Statists and believe that their job is growing Federal government to wear it is all powerful and their donors get billions in subsidies and wealth transfers. You don’t think green energy subsidies make any common sense, do you? Wind turbines (aka, whale and eagle killing machines) are ineffective. We need nuclear power but Progressives fear nuclear power as much as they have Donald Trump.

Jamie Dimon Warns US Banking Crisis Will Be Felt for Years, Regulators Didn’t Stress Test Rate Hikes! (This One’s Gonna Hurt Us)

JPMorgan Chase’s Jaime Dimon is channeling country crooners Marty Stuart and Travis Tritt by warbling “This One’s Gonna Hurt You (For A Long, Long Time).”

Silicon Valley Bank’s blunders were encouraged by US regulation, went untested by the Federal Reserve and were “hiding in plain sight” until Wall Street and depositors grew alarmed.

That’s JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon’s assessment of the US banking crisis that sent markets careening last month, an episode he predicts is “not yet over” and will be felt for years. He said US authorities shouldn’t “overreact” with more rules.

In his wide-ranging annual letter to shareholders on Tuesday, Dimon described his firm’s aspirations for using artificial intelligence and ChatGPT, weighed in on geopolitics, and provided updates on JPMorgan’s activities in Ohio. This time, many of his sharpest remarks ripped at regulation, including capital rules that pushed banks to binge on low-interest assets that lost value as interest rates shot up.

“Ironically, banks were incented to own very safe government securities because they were considered highly liquid by regulators and carried very low capital requirements,” Dimon said. “Even worse,” he added, the Federal Reserve didn’t stress-test banks on what would happen as rates jumped.

When Silicon Valley Bank’s uninsured depositors realized it was losing money selling securities to keep up with withdrawal requests, they raced to pull their cash. Regulators then intervened and seized it.

Yes. Banking regulators were so focused on credit-exposure of banks (remember the subprime crisis of 2008?) that they really screwed up by having banks load-up on low credit-risk assets that usually have interest rate risk associated with them like Treasuries and mortgage-backed securities (MBS). What could go wrong?

What went wrong was that interest rates rose and unrealized losses on Treasuries and Agency MBS exploded.

Here is a chart of urealized losses on investment securities that banks have accumulated.

Apparently, The Fed and FDIC (and the myriad of Federal and State regulators) sit high on a mountain top and ignore interest rate risk.

The face of regulatory stupidity.

Gov’t Gone Wild! US Treasury 2-year Yields Down -32 Basis Points As Gold Soars 3.8% On Banking Nerves And Sloppy Joe’s Budget Proposal

Its Gov’t Gone Wild! Insane spending budget by “Sloppy Joe” Biden, Yellen asking Warren Buffet for banking advice (seriously??), a war in Ukraine that America doesn’t seem to actually want to win, etc. But its the banking system where banks are getting crushed by rising inflation and interest rates (but failed to hedge). Sigh.

As I always told my investments and fixe-income students at University of Chicago, Ohio State University and George Mason University, a 10 basis point change in the 2-year and 10-year US Treasury yield is a big deal. This morning, the US Treasury 2-year yield fell -32 basis points while the 10-year Treasury yield fell -14.8 basis points.

At the same time, gold 3.8% and silver rose 4.7% on banking fears.

While it shouldn’t pass the House vote (but you never know in Mordor on The Potomac), Sloppy Joe’s budget proposal is a joke.

Debt would hit a new record by 2027, rising from 98 percent of GDP at the end of 2023 to 106 percent by 2027 and 110 percent by 2033. Nominal debt would grow by $19 trillion, from $24.6 trillion today to $43.6 trillion by 2033.
Deficits would total $17.1 trillion (5.2 percent of GDP) between FY 2024 and 2033, rising to $2.0 trillion, or 5.1 percent of GDP, by 2033.
Spending and revenue would average 24.8 and 19.7 percent of GDP, respectively, over the next decade, with spending reaching 25.2 percent of GDP and revenue totaling 20.1 percent by 2033. The 50-year historical average is 21.0 percent of GDP for spending and 17.4 percent of GDP for revenue.
Proposals in the budget would reduce projected deficits by $3 trillion through 2033, including $400 billion through 2025 when it could help fight inflation. The budget proposes $2.8 trillion of new spending and tax breaks, $5.5 trillion of revenue and savings, and saves $330 billion from interest.
The budget relies on somewhat optimistic economic assumptions, including stronger long-term growth, lower unemployment, and lower long-term interest rates than the Congressional Budget Office (CBO). The budget assumes 0.4 percent growth this year, 2.1 percent growth next year, and 2.2 percent by the end of the decade – compared to CBO’s 0.1 percent, 2.5 percent, and 1.7 percent, respectively. The budget also assumes ten-year interest rates fall to 3.5 percent by 2033, compared to CBO’s 3.8 percent.

And then we have Sloppy Joe and Statist Janet Yellen meeting with mega donor Warren Buffet for advice on dealing with the banking crisis … made by Biden’s energy policy and insane Covid spending by the Administration. And, of course, The Fed’s “too low for too long” monetary policy. What is 92-year old Warren Buffet going to say?

Meanwhile, Fed Funds Futures are pointing to one more rate hike then a series of rate cuts down to 3.737 by January 2024.

Gold and silver are where its at!

This should be Joe Biden’s campaign slogan if he actually decides to run for reelection in 2024.

The NEW Banking Crisis In One Chart (Hint: Inflation = Fed Rate Hikes = Treasury/MBS Duration Increases = Bond Losses = Bank Runs) Bond Volatility Highest Since 2008

So, the Biden Administration made a horrible error by guaranteeing deposits at Silicon Valley Bank for deposits over $250,000. Essentially, Biden bailed out big tech that kept their deposits at SVB.

But what triggered the run on SVB and other banks? Simple. Biden and Congress spent like drunken sailors with Covid and The Federal Reserve went nuts printing money. Viola! We got inflation. But with inflation came The Fed’s attempt to get inflation back to its 2% target (difficult since Biden/Congress refuse to return spending to pre-Covid levels). But as interest rates rise, duration (weighted average life of MBS) rose dramatically meaning that risk increased. But banks like SVP ignored the risk, or didn’t hedge, or were spending time worrying about non-bank related issues.

So, what happened? Banks are holding Treasuries and MBS (orange line) that are getting clobbered with rate hikes (yellow line).

Talk about volatility. Today, the 2-year Treasury yield is up over 20 basis points as bond volatility hits levels last seen in 2008, just prior to the subprime credit crisis.

So, Biden’s bailout of SVP depositors stopped the deposit run for the moment. But if The Fed keeps hiking rates, banks are going to be hurting worse and worse. They could rebalance their portfolios and/or hedge. But with Uncle Spam (Biden) at the helm, bailouts are always on the table.

US Financial Conditions Collapse On Fed Failures (Bank Stocks Continue To Fall Despite Biden’s Assurances)

The Fed (Bernanke, Yellen, Powell) kept rates too low for too long (their new moto?), and hell is now being paid.

US financial conditions index collapsed on the 3 bank failures … so far.

Despite what Resident Biden said about banks, bank stocks fell again today.

Dazed And Confused! Treasury Flows Show Bullish $2.5 Billion Shift to ST Sovereigns Versus S&P 500 (Credit ETFs Hammered by Record Outflows of Almost $12 Billion As Fed Worries About Inflation)

The Federal Reserve is dazed and confused about inflation.

As The Federal Reserve reaffirms their draining of the monetary punch bowl, we are seeing investors flock towards the bond market. Particularly the iShares Short Treasury ETF. $2.5 BILLION to be exact.