via Zerohedge

One of the most challenging questions traders have faced over the past 11 years, ever since the Fed’s first QE, has been what is the fair value of stocks without the Fed’s chronic intervention in capital markets via trillions in spontaneously appearing liquidity used to prop up risk assets.

Today, in an attempt to answer this $64 trillion question, SocGen strategists Sophie Huynh and Charles de Boissezon calculate that nearly half of the U.S. benchmark’s current level is due to quantitative easing, while claiming that the impact of QE on the Nasdaq was even higher at 57%, with small cap less affected.

First, some background.

As part of their analysis, the socgen strategists find that the acceleration of the secular trend for bond yields since 2009 has triggered a shift in the causality between equity and bonds.

Specifically, before QE, US equities were more often the driver of US bonds, as investors would add either more or fewer bonds to their portfolios in response to the risk-on/off signals provided by the equity complex. However, this causality has totally changed since QE: US equities have been increasingly driven by US bond yields.

With that in mind, we move on the core of the analysis, namely what is the impact of QE on different equity indices.

SocGen find that for all US equity indices – from large, mid and small caps to the more tech-focused Nasdaq 100 – the US bond yield has played an increasing role in equity returns. Since 2009 until today, bonds have driven the S&P 500 32% of the time (on daily data), S&P 400 Midcaps 38% of the time, the Russell 2000 36% of the time and the Nasdaq 100 25% of the time. “All in all, the causality relationship of bonds driving equities was approximately two times more frequent than in the pre-2009 period”, according to SocGen.

While frequency is one aspect which gives perspective on how the low interest rate environment pushed investors into the equity complex by default, given the more attractive combined yield – dividend and buyback yield – to US government bonds ever-declining coupons, what about the scale of the impact? SocGen tries to quantify the impact of QE on the different US equity indices through the discount rate.

To do that, the bank uses its proprietary Equity Risk Premium framework, applying a dividend discount model to the equity market, and considering the whole market as a company paying a dividend each year. Therefore, the present value of the equity market (as reflected by the index price) is equal to the discounted value of future dividend flows. The first step would be to quantify the impact of QE on the UST 10y bond yield – which we use as the risk-free rate in our framework.

1. Quantifying the impact of QE on UST 10y bond yield

SocGen uses a simple regression to estimate the impact of QE. Since 2009, the cumulative impact of the different waves of QE on UST 10y bond yield was approximately 180bp. In other words, without QE, 10Y Yields would have been around 2.8%, a number which many would claim is unthinkable in the current environment.

2. Quantifying the impact of QE on the different US equity indices

Using the bank’s equity risk premium framework and work on the impact of QE on UST 10y allows it to understand how the different US equity indices have been impacted since 2009: there is a huge dispersion among the equity indices under review: the Nasdaq 100 has been the most impacted – and even more so this year – versus the S&P 600 Small Caps, which has been the least impacted. As of Oct-2020, the Nasdaq 100 price level was 57% explained by QE.

Here are the stunning findings: without QE the Nasdaq 100 should be closer to 5,000 than 11,000, while the S&P 500 should be closer to 1,800 rather than 3,300.

Clearly, large caps have benefited the most from the ever-lower interest rate environment resulting from QE. The sensitivity to bond yield can also be explained by the low payout and higher price-to-book ratios of Nasdaq 100 companies versus peers. Growth companies are overall less focused on dividends, but rather more on share buybacks as a way of neutralizing the impact of restricted share units. Small and mid caps, on a relative basis, given their higher payout and lower price-to-book value ratios, are less sensitive to swings in bond yields.

* * *

Having quantified the past, SocGen next looks at the future, and says that it expects 10-year Treasury yield to reach 1% by year-end and 1.2% by mid-2021 on less Fed intervention, increasing the need for earnings to deliver to justify valuations. For S&P 500 to “weather” a 10-year yield of 1%, expected EPS growth in 2021 would need to be at least 38% vs current expectation of 24%; more ominously, for the Nasdaq 100, a doubling of the 2021 EPS growth would not be sufficient to absorb a UST 10y yield of 1%. In the case of mid and small caps, it would be considerably less. Needless to say, this suggests that if yields do indeed rise even modestly, there will be lots of pain for growth/tech/momentum names.

In conclusion, SocGen warns that the focus on the feedback loop between equities and bonds has already started in the US:

With the UST 10y breaching the 50-80bp range in October and with the US election newsflow, the underperformance of Nasdaq 100 has been quite noticeable.

Meanwhile, the rotation into cyclical sectors, which have lagged the more defensive and growth sectors since the start of the bear market rally combined with a preference for value versus growth, were a reflection of the bond sell-off. The undecided outcome of the US election has triggered an unwinding of these positions for now.

Going forward, SocGen believes that currently causality order will hold and US Treasuries should continue to drive US equities, which is bad news for those who believe a continued rise in yields will not impact stocks: according to SocGen the impact will be very pronounced unless companies succeed in boosting their EPS well beyond current consensus estimates.

This is why, as SocGen ominously warns, “there will be a breaking point where a bond sell-off will impact the highly leveraged corporates which typically benefit from a higher yield environment as being of a shorter duration.” All in all, the bank’s suggestion is to go long S&P 400 MidCaps versus the Nasdaq 100 “as this could offer good leverage on the higher US yield environment, while taking into account the leverage dimension.”

Finally, and aside from SocGen’s analysis which may be off by a few percentage points but is directionally accurate, the fact that Fed, through, QE now holds trillions in equity value hostage is also who Powell and his successors will never again dare to tighten financial conditions as the resulting asset price crash would have catastrophic consequences for both capital markets and US household net worth, which is roughly 70% in the form of stocks, bonds, financial assets, and other non-tangibles.

Little foreign taste for the inflato-dollar. The Fed had to buy nearly half of it outright

by Wolf Richter

Remember the ridiculous and quaint charade around the “Debt Ceiling” in Congress and the White House? Me neither. But those were the Good Times. So what we now have is the Pandemic Economy with the Incredibly Spiking US Gross National Debt, which spiked incredibly by $4.45 trillion over the past 12 months, to $26.5 trillion. WHOOSH go the trillions, flying by.

But here is the thing: These are all Treasury Securities – and someone had to buy them, every single one of them. But who?

With today’s release by the Treasury Department’s Treasury International Capital (TIC) data through June 30, and with other data released by the Federal Reserve, we can piece together the puzzle who bought those $4.45 trillion in Treasury Securities over the past 12 months.

Foreign investors: nibbling on it.

Foreign central banks, governments, companies, commercial banks, bond funds, other funds, and individuals, all combined added $90 billion to their holdings in June compared to May. Over the 12-month period through June, they added $413 billion. They now hold a total of $7.04 trillion, a huge record pile.

But given the incredibly spiking US Treasury debt ($26.45 trillion on June 30), their share of this debt plunged to just 26.6% — the lowest since 2008. The quarterly chart shows foreign holdings in billion dollars (blue line, left scale); and the percentage of total US debt (red line, right scale):

Japan and China, the two largest foreign creditors of the US, combined held 8.8% of the US debt, the lowest share going back many years. Back at the end of 2015, their combined holdings were still 12.8% of the total US debt.

Japan maintained its holdings in June for the third month in a row at $1.26 trillion, but over the 12-month period increased its holdings by $138 billion.

China cut its holdings in June by $9 billion, to $1.07 trillion, and over the 12-month period by $38 billion, which follows the trend since 2015, with exception of the V-shaped plunge during peak-capital flight, and the recovery afterwards:

The next 10 largest foreign holders include many tax havens and financial centers, such as the UK (City of London financial center), Belgium (home to Euroclear), Ireland, the fertile breeding ground of mailbox-entities of many US corporations established there to dodge US taxes. The Treasuries that US corporations hold in those mail-box accounts established in Ireland count as Irish holdings. In parenthesis are Treasury holdings as of June 2019:

1. UK (“City of London” financial center): $446 billion ($341 billion)
2. Ireland: $330 billion ($261 billion)
3. Luxembourg: $268 billion ($230 billion)
4. Hong Kong: $266 billion ($217 billion)
5. Brazil: $264 billion ($312 billion)
6. Switzerland: $247 billion ($232 billion)
7. Cayman Islands: $222 billion ($225 billion)
8. Belgium: $219 billion ($200 billion)
9. Taiwan: $205 billion ($175 billion)
10. India: $183 billion ($163 billion)

Despite the mega-trade deficits that the US has with Mexico and Germany, their holdings of US Treasury securities are relatively small: Germany held $80 billion and Mexico $47 billion.

US government funds

The Social Security Trust Fund, pension funds for federal civilian employees, pension funds for the US military, and other government funds added $50 billion in June and $112 billion over the 12-month period to their holdings, which reached $5.95 trillion, or about 22.5% of total US debt.

These Treasury securities, often called “debt held internally,” represent assets that belong to the beneficiaries of those funds. They’re a true debt of the US, and they don’t go away – “it doesn’t count because we owe this to ourselves,” the silly line goes – just because American beneficiaries are indirectly the holders of these assets.

The Federal Reserve loads up.

In June, the Fed added just $95 billion to its pile of Treasuries, having already cut back its purchases, after having added $1.6 trillion from March 11 through the end of May, bringing its total holdings at the end of June to $4.2 trillion. It holds about 15.9% of the US debt.

Over the 12-month period, the Fed added $2.1 trillion in Treasuries to its holdings, about doubling its pile over the period (weekly chart through August 12, here’s my analysis of the Fed’s latest asset purchases):

US Commercial Banks load up too.

Just over the month of June, US commercial banksadded $121 billion in Treasury securities, to a total of $1.07 trillion, according to the Federal Reserve’s data release on bank balance sheets. This brought the 12-month increase to $220 billion. They hold about 4.0% of the total US debt.

Other US entities & individuals

That’s everything that is not included in the above: US institutional investors, US bond funds, pension funds, insurers, individuals directly or indirectly, cash-rich US corporations, private equity firms, and highly leveraged hedge funds engaging in complex trades – such as long cash Treasuries and short Treasury futures, which blew up in March and which were bailed out by the Fed, as was confirmed in an editorial by William Dudley, former president of the New York Fed.

They all piled on Treasury securities, possibly in panic,possibly hoping to be able to sell them at even lower yields and even higher prices to the Primary Dealers to sell to the Fed.

By the end of June, over the course of the tumultuous second quarter, these US entities added $1.6 trillion, after having been big sellers of Treasuries in prior quarters. This brought their total holdings to a mega-record of $8.13 trillion – about 31% of the total US debt.

The chart shows Treasury holdings by holder. US banks and other US entities are combined into the yellow field, which, along with the Fed, bought the majority of the Incredibly Spiking US Debt in Q2:

Source: Wolf Street

“$187 billion increase in consumer debt in 2019 amounted to nearly a quarter of the $849 billion increase in nominal GDP over the same period.”

I would argue that the $187B may have created all of the GDP growth. When someone borrows to spend, for example, dining out, that money gets spent again by the restaurant. They pay the employees, the food distributers, the list goes on. The employees spend their money, the food distributors pay their employees, etc. The dollars keep getting recycled. And I don’t think anyone really knows how GDP is calculated.

Now, if we add the Federal Government ~$1.1Trillion in deficit spending, how did GDP increase by a lower amount?

Well the GDP calculation is flawed. Like the story where two friends, exchange 1 dollar between each other, both of them has the same amount of money. However, they exchanged 100 times. Then GDP is $100.

GDP is more a measure of “activity” than it is a measure of increased wealth.

Any counterproductive policy or gvt spending will be counted as an increase in GDP – regardless if it is likely to result in a multiplied decline in GDP in the future.

DC could pay the unemployed to burn down every structure in the US…and GDP would increase by that amount – and be doubled when the structures are rebuilt.

Keynes knew this (and preferred it to “stasis”/”suboptimal” “growth”) – he used the example of digging and filling in holes.

But in doing so he really just put an intellectual veneer on the fiscal (and other) totalitarian instincts of the kind of people attracted to “government”.

The economy might be strong in the U.S., but, as Statista’s Maria Vultaggio details below, nearly 70 percent of Americans have less than $1,000 stashed away, according to GOBankingRates’ 2019 savings survey. The poll, released December 16, revealed 45 percent have nothing saved. The survey questioned 846 respondents November 25 to 26.

You will find more infographics at Statista

The discovery baffled Bruce McClary, the spokesman for the National Foundation for Credit Counseling.

“It’s puzzling to me that if the economy is doing so well and that we’re so close to full employment, that consumer confidence is up … that we haven’t seen the numbers move much in people’s ability to save,” McClary told Yahoo Finance.

“I find it very troubling that people can’t come up with $1,000 in a savings account to cover expenses without borrowing money.”

As he faces impeachment, President Donald Trump has lauded the strong U.S. economy, saying the American people care more about the economy than the impeachment inquiry.

“The Stock Market hit another Record High yesterday, number 133 in less than three years as your all time favorite President, and the Radical Left, Do Nothing Democrats, want to impeach me. Don’t worry, I have done nothing wrong. Actually, they have!” he tweeted December 17.

“The new USA Today Poll, just out, has me leading all of the Democrat contenders. That’s hard to believe since the Fake News & 3 year Scams and Witch Hunts, as phony as they are, just never seem to end. The American people are smart. They see the great economy, & everything else!”

POSTED BY SRSROCCO

The U.S. Corn Ethanol Industry, the largest in the world, is now losing a serious amount of money producing unprofitable biofuel. While the situation for the ethanol producers was bad in 2018, due to losses stemming from falling margins, it’s even worse this year. This has prompted one of the country’s largest ethanol producers, ADM – Archer Daniels Midland, to sell some of its ethanol assets with the possibility of spinning off its entire ethanol business operation.

While higher corn prices and falling revenues have negatively impacted the U.S. Ethanol Industry recently, that is only a small part of a much bigger problem. You see, the EROI (Energy Returned On Investment) for corn-based ethanol, is so low, there’s virtually little if any, net energy produced from the 16 billion gallons of the biofuel supplied by the U.S. industry last year… or any year prior.

IMPORTANT NOTE: Please understand my analysis of the U.S. ethanol industry is focused at the macro-economic level and is not directed at the individuals or companies who are doing the best to their abilities. The main problem as I see it is that the leadership today is not providing the market with wise advice on our energy situation. Instead, we are ignorantly heading over the energy cliff without a care in the world. Unfortunately, this will end badly

That being said, according to the Alternative Fuels Data Center, U.S. ethanol production has more than doubled from 6.5 billion gallons in 2007 to 15.8 billion gallons in 2017:

As we can see in the chart, the United States is by far the largest ethanol producer (Blue bars), followed by Brazil (Orange bars) at a little more than 7 billion gallons per year. The United States and Brazil account for 85% of global ethanol production.

Now, how much corn does the U.S. Ethanol Industry consume to produce nearly 16 billion gallons of its biofuel per year? Well, according to the information from the USDA (U.S. Department of Agriculture) and WorldofCorn.com, the Ethanol Industry consumed nearly 40% of the entire U.S. corn crop last year:

Of the total 14.4 billion bushels of the U.S. corn crop in 2018, the domestic ethanol industry devoured 5.5 billion bushels or 38% of the entire supply. So, how much land is needed for U.S. ethanol production?? The USDA states that the farming industry harvested 81.7 million acres in 2018 to supply that 14.4 billion bushels of corn. Thus, the U.S. Ethanol Industry needed 31 million acres of corn just to produce its biofuel last year.

How much land is 31 million acres?? That’s nearly 48,500 square miles. Thus, the Ethanol Industry needed the crop acreage of the following states total area to produce its fuel:

1. Rhode Island
2. Delaware
3. Connecticut
4. New Jersey
5. Massachusetts
6. New Hampshire
7. Vermont
8. Maryland (90%)

Actually, I was quite surprised how much corn the Ethanol Industry consumed to make its fuel. I knew it was a lot, but I had no idea. By the way, here is an interesting data point. The largest food component of the corn industry is not food or cereals; it’s High-Fructose Corn Syrup. Check out how much corn the Ethanol Industry consumes versus the Food and High-Fructose Corn Syrup Industries:

U.S. Corn Consumption 2018 (million bushels)

Ethanol Fuel = 5,515 million bushels

High-Fructose Corn Syrup = 455 million bushels

Food & Cereal = 209 million bushels

The U.S. Ethanol Industry consumed 12 times more corn than the High-Fructose Corn Syrup Industry and 26 times more than the Food & Cereal Industry. This data came from WorldofCorn.com. Pretty amazing… huh? And even more surprising, the number one consumer of corn in the United States is the Ethanol Industry (38%) followed by the Animal Feed Industry (34%). So, all you folks who thought the miles and miles of corn in the midwest were mostly grown for food, think again.

Now, it’s one thing for so much valuable farmland to be used for the production of fuel ethanol, but it’s even worse when the industry can’t turn a profit. As I mentioned at the beginning of the article, while 2018 was rough for the Ethanol Industry, 2019 is turning out to be a REAL BUMMER.

I am not going to get into too many details plaguing the U.S. Ethanol Industry, but one of the more recent factors is the rising corn prices due to the record rains and flooding in the midwest negatively impacting the corn crop. And along with falling Ethanol fuel prices, it has put a real KIBOSH on profits.

If we look at the data provided by the Iowa State University on their estimated “Net Returns” for the ethanol producer, we have the following spreadsheet:

It’s hard to read this chart, so I made a larger table from the insert above:

The highlighted area of the table provides an “estimated net return” per gallon for the typical ethanol producer in the United States. By including “ALL COSTS,” the folks at Iowa State, (Iowa is the largest corn ethanol producer in the country), they calculated that the typical ethanol producer lost 27 cents per gallon in May 2019. That 27 cent loss per gallon includes paying debt.

Now, if we look at some of the financials by the Ethanol producing companies, we see evidence of mounting losses. For example, Green Plains Inc, the fourth largest ethanol producer in the U.S., reported a $42 million loss in Q1 2019. Furthermore, Pacific Ethanol, a smaller producer, recorded a $13 million loss during the same quarter. And, if we look at Pacific Ethanol’s stock trend over the past few years, it seems as if INVESTORS are quite unhappy with the company’s performance:

As we can see, Pacific Ethanol was trading near a high of $24 in 2014, but now is a penny stock at a mere 60 cents a share. While Pacific Ethanol might be a smaller producer, it’s $1.5 billion in total revenues last year wasn’t chump change.

Also, as I mentioned, ADM, the second-largest producer in the country, is also struggling. From the article, ADM Separates Ethanol Business:

The Archer Daniels Midland Company (ADM) is breaking news of breaking off their ethanol unit…and a tumbling 40% decline in profit.

…. According to Reuters, “Last week, U.S. ethanol production hit 1.05 million barrels per day, highest in at least five years seasonally, according to U.S. Energy Information Administration data. Inventories climbed to 22.75 million barrels, not far from the record of 24.45 million hit in March. Producers such as Green Plains (GPRE) and Pacific Ethanol (PEIX) have laid off workers and idled or sold plants to stay afloat during the sustained downturn. Ethanol prices are down 42 percent in the last five years, while Green Plains and Pacific Ethanol have seen their shares fall 33 percent and 92 percent, respectively, in that time.”

So, while we see real trouble for the U.S. Ethanol Industry as companies lay off workers, sell or idle plants to remain afloat, it’s only going to get worse. Why? Because the Ethanol Industry has one of the lowest energy EROI’s (Energy Returned On Investment) in the United States:

Corn-based ethanol fuel actually has a lower EROI than either Canadian Oil Sands or U.S. Shale Oil. If we look at the chart above, corn ethanol and biodiesel EROIs are tied for last place. Thus, by using higher quality EROI energy from oil, natural gas, and coal to grow, harvest, and produce the low-quality EROI corn-based ethanol fuel, the industry is basically turning GOLD into LEAD.

And, if that wasn’t bad enough, the huge increase in U.S. fuel ethanol production came on the back of rising shale oil production. Corn ethanol production in the United States remained relatively flat from 1990 to until the early 2000s. However, when U.S. shale oil started to ramp up in 2007, we see the same for ethanol production. Ethanol production jumped from 150 million barrels per year in 2007 to over 350 million barrels in 2016.

In an ironic twist of fate, the United States is trying to become energy independent by ramping up production of two of the lowest EROI fuels in the world. According to some studies, U.S. Shale oil has an EROI of 5/1 while corn ethanol is 1.2-1.5/1. Gone are the days in the 1930s when the U.S. oil industry was producing oil at an amazing EROI of 100/1.

Unfortunately, I see real trouble ahead for the U.S. Ethanol Industry… an industry that produces more than a million barrels of extremely low EROI ethanol fuel a year. When U.S. shale oil production peaks and declines, it makes perfect sense that domestic fuel ethanol production will also do the same.

Lastly, Zerohedge posted this article; This Is What Americans Spent The Most Money On In The Second Quarter, stating that Americans spent the most of their income in Q2 2019 on Recreational Goods and Vehicles… over $22 billion. This makes perfect sense. Americans are totally clueless about the coming economic calamity and are preparing by going further into debt by purchasing recreational vehicles so they can GET AWAY from the RAT RACE.

Years from now, we are going to look back at the Great U.S. Ethanol Boondoggle and why we wasted so much energy and capital producing one of the lowest EROI fuels in the world.

Comment:

I hear that shale and ethanol are intertwined in a way you didn’t touch on. The ethanol is needed as an octane booster to turn shale heavy blends into good enough gasoline.

The biggest problem with ethanol, in my opinion, is these people ruining the topsoil. Took a few million years go build up, hey let’s just destroy this precious resource it in less than a century for tiny profits.

Until 1987 – when Greenspan unleashed the Fed Put – the stock average traded at around 18x the Industrial Production index.

It now trades at 230x!! Intervention has consequences it seems.

SRSrocco Report

Few analysts realize that for the past decade, the global economy has been propped up by the U.S. Shale Oil Ponzi Scheme. Without the huge increase in U.S. shale oil production, the global economy would have peaked and collapsed into a severe depression. And according to the new data put out in the 2019 BP Statistical Review, of the total global oil production increase in 2018 over 2017, the United States accounted for a stunning 84% of that growth.

I first wrote about this subject in my article, Global Economic Growth In Serious Trouble When U.S. Shale Oil Peaks & Declines. However, since that article, the new 2019 BP Statistical Review was published on June 11th. I took the data and updated my charts to show that the United States and Canada accounted for 90% of global oil production growth since 2008:

As total world oil production increased by 11.6 million barrels per day (mbd) since 2008, the United States accounted for 8.5 mbd, Canada 2.0 mbd, and the rest of the world 1.1 mbd. If we look at the net increase of global oil production versus the U.S. and Canada during the same period, this is the result:

Now compare this updated chart to the data for 2017:

Total U.S. oil production in 2018 increased by 2.2 mbd while Canada added 0.4 mbd, and the rest of the world lost 0.6 mbd. And if we look at the change in Global oil production minus the U.S. and Canada since 1997, it seems as if the rest of the world is dealing with the ramifications of PEAK OIL.

From 1997 to 2007, global oil production growth minus the United States and Canada was 11.4 mbd. However, since 2008, the rest of the world has only added a net 1.1 mbd of new oil production growth vs. 10.5 mbd from the United States and Canada. Thus, North American oil production growth, especially from the U.S., has been the leading factor for Global GDP Growth.

For those who don’t believe that oil production (consumption) has anything to do with Global GDP growth, you need to look at the following chart by Gail Tverberg at OurFiniteWorld.com:

Here we can see that oil consumption rates correspond with the change in Real GDP growth. So, if we consider that the United States accounted for nearly 75% of total world oil production growth since 2008 (check figures below), then it also attributed to approximately 75% of Global GDP growth during the same period.

Breakdown in the oil production growth from the United States, Canada, and rest of world:

Net change 2008 to 2018 Oil Production Growth:

U.S. oil production growth = 8.5 mbd (73%)

Canadian oil production growth = 2.0 mbd (17%)

Rest of world oil production growth = 1.1 mbd (10%)

While the U.S. has added a lot of oil production since 2008, that wasn’t the case in the previous decade:

From 1997 to 2007, U.S. oil production fell by 17%, but surged 125% during the recent decade. Even though the BP Statistical Review posts 15.3 mbd of oil production for the United States, that also includes Natural Gas Plant Liquids (NGLS). According to the EIA, U.S. Energy Information Agency, total U.S. NGLs production for 2018 was 4.3 mbd, or 28% of total oil production:

Due to the rapid increase in U.S. shale oil and gas production, a great deal more NGLs are produced. Unfortunately, a barrel of NGLs only contains two-thirds the energy content compared to a barrel of oil and receives a market price that is 60% less than oil. Thus, the 15.3 mbd of total U.S. oil production quoted in the 2019 BP Statistical Review, is actually 11.0 mbd of crude and condensate plus 4.3 mbd of NGLs.

Regardless, the U.S. Shale Oil Ponzi Scheme has allowed the Global Economy to continue growing this past decade, despite the massive amount of debt added to the system. However, U.S. shale oil production will likely peak much sooner than energy analysts are forecasting, especially during the next economic downturn and recession (depression).

Lastly, I will be posting a new article showing that U.S. shale oil production has DECLINED during the first few months of 2019. With oil prices now in the low $50’s, shale oil companies are struggling to continue producing oil at a loss. If oil prices don’t recover back to the high $ 60’s or $ 70’s, watch for growth forecasts in U.S. shale oil to be cut back considerably this year.

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

In, The Lowest Common Denominator, we quantified the extent to which growth of consumer, corporate, and government debt has greatly outstripped economic growth and our collective income. This dynamic has made the servicing of the debt and the ultimate pay back increasingly more reliant on more debt issuance.

Fortunately, taking on more debt for spending/consumption and to service older debt has not been a problem. Over the past twenty years there have been willing lenders (savers) to fund this scheme, even as their reward, measured in yield, steadily declined.

Unfortunately, two of the largest buyers/holders of U.S. Treasury debt (China and the Federal Reserve) are no longer pulling their weight. More concerning, this is occurring as the amount of Treasury debt required to fund government spending is growing rapidly. The consequences of this drastic change in the supply and demand picture for U.S. Treasury debt are largely being ignored.

Foreign Bond Holders

In our article, Triffin Warned Us, we provided a bit of history on the Bretton Woods Agreement. This pact from 1944 essentially deemed the U.S. dollar the world’s reserve currency. As a result of the agreement, foreign nations rely heavily on U.S. dollars for all types of international trade. For instance, if Uruguay sells widgets to Australia, Australia will most likely pay Uruguay in U.S. dollars. Because of the reliance on dollars for trade, Uruguay, Australia and almost every other nation holds reserves of dollars.

Foreign entities with dollar reserves maximize the interest they earn on reserve accounts with the objective of taking as little risk as feasible. Think of reserve accounts as savings accounts. As such, foreign reserves are most often invested in “safe” U.S. Treasuries. As world trade has grown over the years, the need for dollar savings has grown in step and has resulted in more lending to the U.S. Treasury by foreign governments.

Recently the incremental appetite from foreign buyers, both private investors and governments, has declined. Prior to the last two years, the last instance with flat to negative growth over a two-year period was 1999-2000. During that period, the amount of U.S. Treasury debt outstanding was shrinking, and despite a decline in foreign ownership, foreign ownership as a percentage of bonds outstanding rose.

The graph below charts the amount and percentage of foreign holdings of public U.S. Treasury debt outstanding (excluding intra-governmental holdings such as social security administration investments), and total public debt outstanding. As highlighted, the divergence occurring over the past few years is without comparison in the last forty years. As a point of reference, the last time foreign entities meaningfully reduced their holdings (1979-1983) the ratio of U.S. Treasury debt to GDP was less than 40% (currently 105%). Needless to say, the implications of a buyers strike today are quite different.

Data Courtesy St. Louis Federal Reserve

Federal Reserve QE

During the financial crisis and its aftermath, government spending and debt issuance increased sharply. From 2008 through 2012, Treasury debt outstanding increased by over $8 trillion. This was three times as much as the $2.6 trillion increase during the five years preceding the crisis.

Faced with restoring economic growth and stabilizing financial markets during the crisis, the Federal Reserve took the unprecedented step of lowering the target for the Fed Funds rate to a range of 0-0.25%. When this proved insufficient to meet their objectives, they introduced Quantitative Easing (QE). The implementation of QE had the Fed purchase U.S. Treasury securities and mortgage-backed securities (MBS) in open market operations. By reducing the amount of bonds held publicly they reduced Treasury and MBS yields which had the knock-on effect of lowered yields across a wide spectrum fixed-income securities. After three rounds of QE, the Fed had purchased over $1.9 trillion Treasuries and over $1.7 trillion MBS. At its peak, the Fed owned 19% of all publicly traded U.S. Treasury securities.

In October 2017, the Fed began balance sheet normalization, the process by which they reduce their holdings of U.S. Treasuries and MBS, in what is colloquially known as Quantitative Tightening (QT). Since then, they have reduced their Treasury holdings by over $200 billion. Although they have been shedding $50 billion a month between U.S. Treasuries and MBS, they intend to reduce and halt all reductions by the end of September. The following graph shows the size of the Fed’s balance sheet as well as its expected decline.

Data Courtesy St. Louis Federal Reserve

The Fed and Foreigners are MIA

As discussed, the Fed is reducing their U.S. Treasury holdings and foreign entities are not adding to their Treasury holdings. This reduced demand is occurring as the U.S. Treasury is ramping up issuance to fund a staggering $1 trillion+ annual deficit. The CBO forecasts the pace of heavy Treasury debt supply will continue for at least four more years.

Because foreign entities and the Fed are not buying, domestic investors are left to fill the gap. The graph below charts the change in U.S. Treasury debt issuance along with the net amount of domestic investor purchases (Total debt issuance less net purchases of foreign entities and the Fed.)

Data Courtesy St. Louis Federal Reserve

As highlighted in the yellow box, domestic purchases have indeed taken up the slack. The graph below shows investor breakout of net purchases from 2000 to 2015.

Data Courtesy St. Louis Federal Reserve

Note that domestic investor demand accounted for roughly a quarter of the Treasury’s issuance. Now consider the period from 2016 to current as shown below.

Data Courtesy St. Louis Federal Reserve

Quite a stark difference! Domestic investors have bought over 100% of Treasury issuance.

This leads to two important consequences worth considering.

1. Given the amount of debt that is expected to be issued, will interest rates need to rise further to attract domestic buyers?
2. If domestic investors are forced to buy 100% net Treasury issuance plus that which is sold by the Fed and foreigners where will the money will come from?

Now, before answering those questions here is the punch line. According the Office of Management and Budget (OMB), Treasury debt is expected to increase by $1.086 trillion in 2019. As the Fed modifies their balance sheet reduction but does not resume buying, and foreign entities remain neutral, domestic savers will still be on the hook to purchase at least the entire $1.086 trillion in U.S. Treasury securities in 2019 alone. Looking beyond 2019, net debt issuance over the next ten years is expected to average $1.2 trillion per year, and that forecast by the CBO, OMB and primary dealers does not include a recession which could easily double the annual estimate for a few years.

It is probable that, barring deflation or a notable stock market decline, higher interest rates will be required to attract marginal domestic investors to purchase U.S. Treasuries. It is also fair to say that the onus of buying more U.S. Treasuries that is falling on domestic investors will likely result in a higher savings rate which negatively effects consumption.

The bottom line is that investors will need to consume less and shift from other assets into U.S. Treasuries to match the growing supply. This presents a big problem for equity investors that are buying assets at record high valuations and are unaware of, or unconcerned with, this situation.

Summary

Just because something has gone on for what seems to be “forever” does not mean it will continue.

Deficits do indeed matter. The post Bretton Woods agreement formalizing a fiat currency global system had the support of all major developed world nations. Against better judgement and a lack of understanding about the implications, monetary policy was fashioned towards ever larger debt burdens. The story plays a bit like an old Monty Python skit:

Cleese: “The amount of debt we owe is creating a problem, sir.”

Palin: “Don’t be ridiculous! That’s pure horse hockey! It’s just a bloody flesh wound.”

Cleese: “But the amount of debt outstanding can no longer be described using numbers and we have no way of paying the interest.”

Gilliam: “Are you an idiot, man? We’ll issue more debt to pay the current debt we owe, of course!”

Cleese: “But we’ve been doing that and the problem keeps getting worse and you say the same thing!”

Chapman: “Is that a penguin on the telly?”

Now that we actually have to fund our debt, the reality is hitting home and diverting attention to “penguins on the telly” will do us no good. If foreign investors remain uninterested and the Fed avoids restarting QE, this situation will become much more obvious. Regardless, history is chock full of warnings about countries that continuously spent more than they had. Simply, it is completely unsustainable and the investment implications across all assets are meaningful.

by Tyler Durden

Now, people claim that in order to be “rich”, they need to be worth and average of $2.3 million, or “more than 20 times the actual median net worth of U.S. households,” according to Bloomberg. The number is down from $2.4 million the previous two times the survey was issued. The survey notes that the older someone gets, the higher their bar goes for what they consider as “wealthy”. Baby boomers say you need to have $2.6 million to be “wealthy”, which is 35% higher than what millennials think.

For someone to be considered “financially comfortable” the threshold falls significantly. The average amount needed to be “comfortable” was $1.1 million, and only Gen Z believed that under a million ($909,600) was acceptable.

The survey sampled 1,000 Americans between the ages of 21 and 75. It also revealed that the majority of Americans “crave” real estate. More than 50% of those surveyed said that if they got a $1 million windfall, they’d spend it on real estate. This sentiment held truest particularly among millennials (roughly age 22 to 37).

More than 75% of millennials surveyed also said their personal definition of wealth was “really about the way they live their lives, rather than a discrete dollar amount.” Call us old fashioned, but we still prefer the money for our definition.

Even richer (pun intended) is the fact that 60% of these same millennials believe they will be wealthy “within 1 to 10 years”. And just wait until they find out that becoming wealthy may hinge on ignoring their friends social media posts. The survey also found that overspending on things found on social media was the largest “bad” influence on how millennials managed their money.

And the trend of social media influencing negative spending looks like it will only continue. For instance, Instagram said in March that it’s testing a shopping feature, which we noted in this totally serious and 100% not sarcastic article about millennials becoming friends with houseplants.

Despite their visions of grandeur, the economic “growth”, and low unemployment, 59% of those surveyed said they still live paycheck to paycheck. Meanwhile, despite the supposedly great economic data, the largest U.S. banks are seeing losses on credit cards outpace those of auto and home loans at a rate not seen in at least 10 years even as credit card interest rates are the highest in history.

Native Americans killed in service for the United States and killed defending their Indian country are listed below in rough estimated numbers. A likely total of 100,000 – 500,000 Native Americans in the U.S. have died since 1776. The high end would be around a million.

Native Americans are the have the highest mortality rate of any U.S. minority because of U.S. actions and policies.

Indians Conflicts & Removals 1776-1973 (1973)

– Wounded Knee II – 2 (1890) Wounded Knee – 178 (1864)

– Sand Creek Massacre – 200 (1862)

– Dakota War of 1862 – 38 prisoners executed (1876)

– Battle of Little Big Horn – 136 (high estimate) (1838)

– Cherokee Removal – 4,000 (1817-58)

– Seminole Wars I,II, & III – 1475 (likely as high as 10,000) (1831)

– Choctaw Removal – 2,500 (1812)

– Red Stick War of the Muscogee or Creek –3,000 (1791)

– Battle of the Wabash – 21 (1830)

– Indian Removal Act [Original data truncated; no useful data]

Estimates: Two studies have been conducted that attempt to count the natives killed by the United States.

1. The first of these was sponsored by the United States Government, and while official, it does not stand up to scrutiny and is therefore discounted (generally); this estimate shows between 1 million to 4 million killed.

2. The second study was not sponsored by the US Government but was conducted by independent researchers. This study estimated populations and population reductions using later census data. Two figures are given, both low and high: between 10 million and 114 million Indians, as a direct result of US actions.

Please note that Nazi Holocaust estimates are between 6 and 11 million; that would make the Nazi Holocaust the 2nd largest mass murder of a class of people in history. REF: <i>American Holocaust</i>: D. Stannard (Oxford Press, 1992) – “over 100 million killed” “[Christopher] Columbus personally murdered half a million Natives” <i>God, Greed and Genocide: The Holocaust Through the Centuries</i>: Grenke (New Academia Publishing 2006). <i>Holocaust: Critical Concepts in Historical Studies</i>: Cesarani, (Routledge 2004)

Thousands more, like me, being half native – they mostly killed us because they owed us land and didn’t want to give it to us, so they gave us beer … even though they owed us millions in land. My great grand parents had to hide out from the government; they had to move from place to place. They never got an education and they were on war footing because the government abused them.

Thanks to the Indian Removal Act of 1830, it was illegal for Indians to live in Georgia. They could only travel through Georgia, with proper papers. This law was not repealed until March 1980.

Officially not ‘many’ died in the Indian Wars, but murdering Red Indians was daily practice for white colonists. And this genocide was happily tolerated by the American Government and the US Army. Almost 20 million Red Indians died, say 10 per day, which should be general American knowledge.

By far the biggest killers though were smallpox, measles, influenza, whooping cough, diphtheria, typhus, bubonic plague, cholera, and scarlet fever. All imported by the Europeans.