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!

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US Core Inflation Rises In April To 4.7% Despite M2 Money Growth Crashing To -4.6% YoY, More Rate Hikes Forecast (Damn It, Janet [Yellen])

Damn it, Janet (Yellen)!

So much for Treasury Secretary Janet Yellen’s proclamtion that inflation is transitory and would subside to under 2%. April’s core inflation (PCE Deflator) rose to 4.7% YoY. Despite M2 Money growth crashing to -4.6% YoY.

Today’s Fed Funds Futures data is pointing to another rate hike or two.

With Core PCE at 4.7%, the Taylor Rule suggested Fed Funds Target rate is now 10.57%. So, The Fed is only about half way there.

Damn it, Janet, people are suffering from the ravages of inflation and you laugh.

Biden’s Broken Economy! April’s US Existing Home Sales Plunge -22.6% Since Last Year For 17th Straight Month Of Negative Growth (23 Straight Months Of Negative REAL Wage Growth)

Biden has a line on you! And it isn’t good. More like we are fish being caught and eaten by Washington DC bureaucrats.

Another example of Biden’s dismal economy. US pending home sales plunged -22.6% YoY in April. Even worse, REAL weekly wage growth has been negative for 23 straight months!

What I like about the Biden/Yellen economy? Nothing!!

Biden’s Peggy Lee Economy: Is That All There Is? GDP QoQ Prints At Anemic 1.3%, Core Inflation Prints Hotter At 5.0% QoQ Despite Trillions In Federal Spending

Peggy Lee sang it best about the US economy under Biden: Is that all there is?

According to the Bureau of Economic Analysis (BEA), US GDP QoQ rose slightly to an anemic 1.3%. Actually, this is a terrible print given the trillions in Federal spending after Covid.

Even worse, Core Inflation (PCE core prices) rose to 5%. So, unlike what Treasury Secretary Janet “Transitory” Yellen said, core inflation remains high despite M2 Money growth crashing.

Here is the rest of the story.

Before conservatives have a meltdown over the comments that will be forthcoming from Biden’s Press Secretary Karine Jean=Pierre, bear in mind that she was senior advisor and national spokesman for hard-left progressive advocacy group MoveOn.org.

She will feel obligated to howl and scream about the debt ceiling and budget with idiocy like “the economy will crash and burn if you cut Biden’s proposed budget.” Gee, for the trillions that Biden has spent, we only got 1.3% GDP growth. So her logic will be “President Biden spent trillions and we got only 1.3% GDP growth! Imagine if we spend less????”

Babbling Biden! The US Budget Deficit Remains Higher Than Before Covid (Biden Lying … Again) Lagarde Trusts in US Common Sense to Avert Catastrophic Default

Joe Biden is the worst public speaker of any President in history. Here is “Babbling Biden” lying about the great reduction in Federal budget deficit.

First, Biden didn’t “balance the budget” liked he claimed at Hiroshima. In fact, the Federal budget deficit, while improving, is still worse than it was before the 2020 Covid economic shutdown.

Biden, Schumer and Yellen are ignoring the $187 TRILLION in UNFUNDED entitlements promised America, even though Biden keeps threatening to halt Social Security payments if Biden and Yellen default on the debt. No discussion of the runaway train of entitlemennts.

I love this Bloomberg headline: “(ECB’s) Lagarde Trusts in US Common Sense to Avert Catastrophic Default.” Has Lagarde actually talked to Biden, Harris or Yellen? America’s REAL 3 Stooges??

Here is a video of Joe Biden tackling the debt ceiling.

Gov’t Gone Wild! Biden Refuses To Cut Bloated Budget, Cory Bush’s $14 TRILLION Reparations Demand (US Dollar DOWN -21% Since Sept 2022 While Bitcoin UP 41%, Gold UP 21%, Silver UP 28%)

This is truly the new version of “Girls Gone Wild!” except this time it is elderly politicians in Washington DC acting like demented children. Biden will not budge on spending cuts with the debt limit soooo close to the point of no return. But Biden may not budge since he has the corporate media spewing hate against Republicans nonstop.

And on top of Biden’s outrageous budget, largely payoffs to progressive groups, Missouri Representative Cori Bush (D-of course) is demanding $14 TRILLION in slave reparations. Or what?? More BLM riots? Even California Governor Gavin “Gruesome” Newsom isn’t stupid enough to approve budgetary disaster like reparations.

But that is where we are in the US. A President who acts like a spoiled 12 year old bully, members of Congress like Cori Bush and AOC who think The Fed can just print trillions MORE and give it to preferred groups. Senator Diane Feinstein (soon to be replaced by a horrible human being in the person of Adam Schiff). John Fetterman, the next Bernie Sanders?? C’mon DC. A true ship of fools. And dangerous ones at that.

So since September 26, 2022, we have seen a fundametal shift in markets. The US Dollar is down -21% since September 26, 2022 while Bitcoin is up 41%, Gold is up 21% and Silver is up 28%.

Biden is sitting pretty, If McCarthy chickens out and agrees to Biden’s outrageous budget, Biden looks like a hero. If Biden defaults, the MSM media will blame McCarthy and Republicans, so Biden wins. No wonder Biden said he isn’t worried about the debt ceiling negotations. He wins no matter what, And we the 99% get screwed.

Going Down! CMBX Declines Below 70% As Fed Hikes Rates (Trouble In Commercial Real Estate?)

Freddie King said it best. We’re going down. At least the commercial real estate market.

As The Fed raises rates to combat inflation, we are witnessing a serious decline in Markit’s CMBX BBB S15 index.

We’re going down, at least the commercial real estate market.

Here is a photo of Treasury Secretary Janet Yellen ready to address problems in the commercial real estate market.

St Louis Fed Financial Stress Index Soars To Highest Level Since Covid Outbreak As Bond Volatility Soars With Fed Rate Hikes And Bank Failures As US Treasury 10Y Yield Rises 12 Basis Points (Flight To Safety)

The US economy got beaten to a pulp by the Chinese Wuhan Covid virus outbreak in early 2020. The Fed intervened with massive money printing along with massive spending by Congress and the Administration. Result? 40-year highs in inflation and a Fed counterattack in terms of rate hikes.

The result of Fed rate hikes? Failing regional banks trying to cope with duration extention and scared depositors. And then we have the St Louis Fed Financial Stress index reaching its highest level since the Covid outbreak of early 2020. And with that, bond volatility is higher than that found during the Covid crisis.

With the expectation of MORE rate hikes, the 10-year Treasury yield jumped 12 basis points.

The architect of The Fed’s “too long for too long” is also the US Treasury Secretary, Janet Yellen.

Yellen: “It wasn’t my fault!”

The Fed’s “Doomsday Machine”! Catching Up From Bernanke/Yellen’s “Too Low For Too Long” Policies (US Treasury 2-Year Yields UP 16.1 Basis Points)

I feel like I am watching the Star Trek original series episode “The Doomsday Machine” as former Fed Chair and current US Treasury Secretary effectively just guaranteed ALL US bank deposits. Aka, a massive bank bailout. The episode was about a robot space vehicle that destroy planets … and anything in its path. And if it changed course to destroy something, it gradually returned to its original destructive path. Like The Federal Reseve.

But after a few days of declining Treasury yields because of the mess created by Bernanke/Yellen’s too low for too long policies, and the Biden/Congress insane spending, the US Treasury 2-year yield is up 16.1 basis points.

Whether it was politcally motivated to protect Obama/Biden or Obama/Biden’s economic recovery was terrible, The Fed only raised their target rate once before Trump’s election. And then Yellen raised rates like crazy. Only to hand her mess off to Powell who had to drop rates like a rock and massively expand the balance sheet … again … to fight Covid.

The Federal Reserve from a car on Constitution Avenue in Washington DC.

Undun! Fed’s $8.6 Trillion Balance Sheet in Focus as Banks Seek Cash (25 BPS Increase At Next Meeting Then DOWN To 3.820% By Jan 2024)

Undun. The Fed’s balance sheet, that is.

For all the focus on whether the Federal Reserve is about to pause its interest-rate hikes, there’s another critical policy decision sure to draw plenty of attention come Wednesday: What the central bank does with its massive pile of bond holdings.

The banking-sector turmoil that has only appeared to deepen, combined with a previous increase in funding pressures, has left financial markets keenly attuned to what the Fed will say about its $8.6 trillion balance sheet.

Until this month the stash had been shrinking as part of the Fed’s efforts to return it back to pre-pandemic levels. But now it has started to expand again as the Fed acts to bolster the banking system through a slate of emergency lending programs. Its latest step came Sunday, when it moved with other central banks to boost US dollar liquidity.

Some say financial-stability concern may spur policymakers to dial back the runoff of its bond portfolio, a process known as quantitative tightening that’s designed to drain reserves from the system. Still, others argue that even if the Fed does pause its rate increases, the central bank’s overarching goal of taming inflation means it’s unlikely it will signal any shift this week in efforts to shrink the holdings of Treasuries and mortgage-backed debt. The one exception, they note, would be if stress in the banking sector were to become much more severe.

The Fed’s move to backstop US banks “clearly expands the Fed’s balance sheet,” said Subadra Rajappa, head of US rates strategy at Societe Generale SA. If usage of the Fed’s liquidity facilities is “small and contained they probably continue QT, but if the take-up is large then they probably stop as it then starts to raise concerns over reserve scarcity.”

The fate of the Fed’s portfolio is a subject of debate after the collapse of several US lenders led the central bank to create a new emergency backstop, known as the Bank Term Funding Program, which it announced March 12. Banks borrowed $153 billion from the Fed’s discount window — lenders’ traditional liquidity backstop — in the week ended March 15, Fed data show, a record that eclipsed the previous all-time high set during the 2008 financial crisis. They also tapped the new program for $11.9 billion.

The central bank’s various liquidity programs added about $300 billion to the Fed’s balance sheet last week, reversing about half of the reduction the Fed has achieved since the runoff began last June. But some economists say the two programs can work in tandem, with the banking efforts targeting financial stability and QT remaining a steady part of the Fed’s plan to remove the support it provided during the pandemic.

It looks like a 25 basis point increase at the next meeting, then cuts in The Fed Funds Target Rate to 3.820% by January 2024.

The labor market is still tight. So tight, we get this!!