Dissident Thoughts

Who is Buying All of Those Treasuries? Some fascinating research out of the Fed last week that looks into answering one of the most important questions of our time (not an exaggeration) - one that we ourselves have asked: "who's gonna buy all that debt if the Fed isn't?" In this paper, the Fed did a regression analysis unpacking who are the marginal buyers of Treasuries during QT when the Fed is letting assets run off and marginal buyers need to step in to make up that gap in demand. The takeaways were the following: ➞ During the previous phase of QT between 2017-19, the buyers were primarily households (which includes domestic hedge funds) and dealers. Both were domestic. ➞ This current era of QT from 2022-present is different because domestic hedge funds have actually reduced their exposure to Treasuries, even as the Fed is offloading them to the private sector via QT. This time, the marginal buyers are foreign hedge funds, insurance companies, and households (actual individuals, not hedge funds). The study concedes that "...some of the increase in foreign hedge fund holdings may end up in the household sector. We conclude that domestic hedge funds cannot explain the increase in household Treasury security holdings, but the increase may instead be partially attributable to foreign hedge funds." https://www.federalreserve.gov/econres/notes/feds-notes/who-buys-treasuries-when-the-fed-reduces-its-holdings-20240614.html

China is Not Selling Dollars Citing a paper from Goldman, Bloomberg reports that "most regions haven’t actively been selling Treasuries... Holdings have declined mainly because of the selloff in US rates (bonds are less valuable when their rates go up), and in some temporary cases, probable foreign exchange intervention (Japan)." The valuation-adjusted holdings of Treasuries can be seen in the first image on the left, showing that the world still clearly craves dollars. Investors often focus on mainland China as a major source of de-dollarization via net sales of Treasuries. Looking at mainland China’s Treasury holdings in US custody (at NY Fed, State Street, Bank of New York, and JP Morgan) alone would suggest that is true (dark blue in the second image above). But recall that Treasuries held by non-US custodians won't register as “China” in the data. The two biggest custodians are Euroclear, based in Belgium, and Clearstream in Luxembourg: "Looking at China’s Treasury holdings, the Goldman analysts found evidence that Belgium and Luxembourg may be large custodians of China’s FX reserves. That would mean those Chinese holdings of Treasuries would be recorded against the location of the custodian." "To account for that 'custodial bias' the analysts considered China, Belgium and Luxembourg as one entity in their report, finding that China’s Treasury holdings have likely been “roughly stable.” Treasury’s monthly report on international capital flows showed China increased its Treasury holdings in April." As long as the US runs large deficits, the world is acquiring US assets (which in this case is US debt). And as long as China is running the world's largest surpluses, it is hard to work out how it would also be a net seller of US assets. Someone else would have to acquiring massive amounts of US debt, and would be doing so under-the-radar. https://archive.is/uqSe4 🔗 Goldman

Biden's State Dept Official Admits Great Replacement is Real; ‘They Want to Change the Demographics of the United States’ “Traditional, standard Americans are not leftists. Latin Americans are all leftists. This is just to try and change the demographics [of the United States]." - U.S. Consular Officer “I wish people knew we were letting in criminals [to the United States] daily.” 🔗 Project Veritas

How Biden celebrates Juneteenth

"Norinchukin ("Nochu") is Japan's "farmer" bank: it holds around $600 billion in deposits from Japan’s agricultural and fishing collectives. Most of the pensions of Japan's lowest-income workers are stored here. Until recently, Nochu was best known as the CLO whale: it had invested over $40BN billions in various US CLOs (as least it was in the less risky tranches) making it one of the world's largest CLO buyers. In 2022, the bank stopped its purchases of CLOs after the near-collapse of the UK bond market, the subsequent credit market shock and BOE bailout. And now, the bank which Japan's farmers had entrusted their savings to, has finally admitted to billions in unrealized losses on its foreign bonds - as a result of surging rates and plunging bond prices - on its massive bond portfolio, which is forcing it to liquidate a huge chunk of its fixed income holdings: it is expected to sell 10 trillion yen of its 31 trillion in bonds to plug the hole from unrealized losses. Unless Nochu can find an investor to throw more good money after bad, the bank's liabilities - farmer pensions - will be impaired (big haircuts). This would be the first and most notable example of Japanese pensioners suffering major losses due to monetary policy error; this in a nation where pensions have historically been sacrosanct and only invested in the safest of securities (40 years of ZIRP meant few had expectations for capital gains). How many other banks will be impaired if and when a selling cascade emerges to front run Nochu's $60BN+ liquidation? How many more pensioners will see their life savings slashed or wiped out in the coming months/years because they entrusted their life's work to a failing system?" https://x.com/zerohedge/status/1803503734791741597

CBO is projecting that interest expense will account for the bulk of the fiscal deficit going forward. Is it more likely that Congress makes some hard choices like entitlement reform, or that they just bully the Fed onto a lower than appropriate rate path? Imo the latter is obviously more likely. 🔗 CBO Economic Outlook 📝 One point of confusion I regularly see is "money going towards interest expense is a 'dead weight' that does not stimulate the economy, as opposed to the primary deficit (every other expense issued by Congress) which IS stimulative because that money flows through the banking system via fiscal spending." Interest expense is paid to the private sector (i.e. the lender that buys the Treasuries) who can use those funds to buy good and services or financial assets etc. Treasury holder has more purchasing power as it gains more interest – it’s account balance grows. My sense is that money usually gets reinvested into financial assets, like stocks.

How The 2024 Election Will Rock Markets, According To @Citrini7 My interview with Jack Farley: Timestamps: 00:00 Introduction 00:20 How Citrini Is Thinking About Markets Right Now 07:21 Just How Narrow Is The AI Bull Market? 20:04 VanEck Ad 20:44 Election 2024: Investment Implications & Preparations 26:18 Fannie Mae and Glass Producers 28:34 Onshoring vs. Nearshoring Stocks 29:48 Trump Election Would Cause Epic 2s10s Steepeners 33:41 Deficits Under Biden, Deficits Under Trump 37:07 Trump's Aggressive Tax Policy (TCJA Tax Cuts To Expire In 2025) 40:13 China 46:32 Trump on Crypto 48:15 Would The S&P 500 Perform Better Under Biden or Trump, and Why? 54:12 Tarriff Basket 56:05 Tarriffs on Chinese Electric Vehicles (EVs) 58:31 Citrini on Tesla as an AI Company And As A Robotaxi Company 01:01:40 The Hottest New Coding Language Is English 01:06:21 Why Software and Saas Stocks Have Underperformed 01:09:32 Margin Of Safety Has Been Extraordinarily Diminished 01:12:43 What Are The Odds That The Top Is In For AI Stocks? 01:19:03 China's AI Stocks 01:34:54 Hedging For A Recession Is Pretty Straightforward Right Now 01:37:18 Hedging Via The VIX 01:42:34 Citrini: "I Think I'm Underweight Nvidia Relative to the S&P 500" To listen to my interview on Telegram, see here. Here to watch my interview on YouTube.

*CBO BOOSTS 2024 US BUDGET DEFICIT ESTIMATE TO $1.9T FROM $1.5T "The CBO sees the deficit reaching $1.92 trillion in 2024, up from $1.69 trillion in 2023, according to updated projections released in Washington Tuesday. The new estimate is more than $400 billion larger than what the CBO anticipated in February — in part reflecting additional spending, including aid for Ukraine, enacted since then..." "As a share of GDP, the US deficit is now seen widening, not shrinking, for the 2024 fiscal year, which runs through September. The ratio is estimated at 6.7%, compared with the February forecast of 5.3% and the 6.3% logged for 2023." ~ Calls for a recession in 2024 just got BTFO. As expected, at the first sign of a growth slowdown they simply issued more Treasuries (which increases the purchasing power of the private sector). This will keep inflation persistent, financial conditions loose, and help nominal GDP growth recover somewhat. In this context, rate cuts will be unnecessary. How did the bond market respond? With stellar demand and lower yields. This wouldn't happen in a country like the UK or France, both who saw their sovereign bond yields rise substantially after higher deficits (read: bond issuance) were projected. The appetite for dollars and American debt is still plentiful, and this time it's apparently coming from foreign hedge funds. https://archive.is/GakEM

No Real Stress Nothing in the data suggests meaningful stress, but increasing political turmoil could eventually morph into greater concern. The increasing credit risk in French assets could lead the banks themselves to retrench, or reduce the willingness of other counterparties to trade with them. The experience from the GFC is that some dealers asked for higher repo haircuts when lending to counterparties perceived to be riskier. Reduced arbitrage activity would ultimately lead to higher financing costs across a range of dollar assets, potentially pushing a range of investors to deleverage. The risk of catastrophe is very small with the Fed standing by to both actively lend in the FX swap market as well as the repo market. But there could still be bumps. 4/4

Political Change The surprising political developments in France have slightly but discretely increased the riskiness of French assets. After his party lost significant seats in the European parliament, President Macron surprised the world by calling for new national legislature elections. This created significant uncertainty in the political landscape, as polls suggest Macron’s centrist party is trailing far behind parties that either more strongly lean right or left. Both rising political forces are populist movements that strongly support increased fiscal spending even as France is already at a historically high 5.5% fiscal deficit. The political turmoil has led to a discrete widening in the credit default swaps (increased risk of default) of France and French banks. Note the level of spreads remains low when compared to the thousand basis point spreads seen in some European countries during the European debt crisis. The slight widening in CDS spreads also coincided with a slight rise in rates in key dollar funding markets, which usually reflect higher arbitrage costs. The dollar euro FX swap basis widened slightly, implying a slightly higher interest rate for dollar borrowers who put up euros as collateral. Treasury swap spreads also tightened slightly, which suggests that Treasury yields increased relative to the expected path of policy. The level of both spreads are in part determined by the availability of financing to market participants, as the trades themselves have little risk. Borrowing dollars and lending euros, or buying Treasuries and paying fixed rate swaps are low risk trades. However, the small spreads mean that the trades require significant amounts of leverage to be profitable. The changes in spreads suggest a decrease in the availability financing, probably related to developments in France. 2/4