In light of its deteriorating balance sheet and explosive borrowing, I am lowering my credit rating of the US government by one notch. The US Treasury announced this week it intends to borrow over one trillion dollars this fiscal quarter. Much of these borrowings will be used to repay prior borrowings, and there appears to be no effort to restrain uncontrolled debt growth.
This does not imply Treasury will fail to pay principal and interest due its lenders. But the likelihood of the dollars paid having the same purchasing power as the dollars lent is low. The markets are demanding higher yields to compensate.
This follows yesterday’s action by Fitch announcing a ratings downgrade. The response of the Treasury Secretary was to fault the messenger and blame the prior administration. A more constructive response would be to find ways to curb debt growth.
So much (of everything) is USG controlled or “guided” right now that you really have to wonder (not really) about the timing of the Fitch downgrade. Just a few days ago, we were discussing “The amazing thing is even the Fed itself seems mystified as to why its hikes aren’t getting more traction”. If they still have to solidify bank balance sheets with interest payments on reserves, this would certainly help with that traction. Problem solved, right on time.
You may have blown you sell call – by about 5 days.
Good point Chris. The timing of the Fitch action does raise questions. Most of it was already justified well before this … my guess is that the timing catalyst was Treasury’s announcement of over a trillion in sales this quarter. It was a big number already, but crossing the T threshold is kind of an eye opener.
Also not beyond the pale … the Fed has clearly been trying to shift some of the upward rate pressure out the curve … that would be consistent with all the talk about holding rates higher for longer.
The Fitch action per se is more theater than substance. The sheer mass of supply though does appear to be pressuring prices. I’ve shifted my UST exposure towards a shorter duration by trimming GOVT in favor of SHV. Less stocks and bonds, more cash and gold.
I followed up on the trade in that thread:
https://financology.net/2023/07/25/i-sold-all-my-stocks-today/#comment-3119
> Just a few days ago, we were discussing “The amazing thing is even the Fed itself seems mystified as to why its hikes aren’t getting more traction”.
“For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum. Bond price movements may be a short-term aberration, but it will be some time before we are able to better judge the forces underlying recent experience.”
😀
We still have loose monetary policy (the trillions of unnecessary extra money the Fed put into the economy is being paid over 5% in interest). The Fed is going to have to remove many trillions of dollars of money from the economy by selling Treasuries and mortgage-backed securities to stamp out inflation. Otherwise, the run-off of assets is largely cancelled by the interest being paid out.
For sure Milton, despite the storied rate increases, the stock market and the labor market both say money has been easy. Too much money chasing too few stocks; too much money chasing too few workers. At what point does QT catch up enough to turn the tide?
We also have fiscal policy fighting the Fed. Rate hikes “work” by making borrowing more expensive and disincentivizing it. But so far this cycle government has been a price-insensitive borrower. That was brought front and center by Treasury’s announcement that it plans to borrow a cool trillion bucks this quarter. Fitch’s announcement really just put a little more focus on it.
The net of it is that for any given unit of progress on inflation, the Fed has to be just that much tighter. The entire burden will fall on the private sector.
The Fed will likely wind up monetizing at least some of the excess. But depending on monetization alone without any fiscal restraint would destroy the dollar and banana republic the US.
i may be foolish but for now i’m holding on to my commodity stocks [mostly energy, mostly offshore services]. taking a bit of a beating on my silver miners but sticking with my pm positions as well. i think the fed has more hiking ahead and we’re fairly likely to see that 6% ffr i half-jokingly predicted. interesting times.
Yeah I think of your 6% prediction every FOMC announcement. FWIW I’m hanging on to my commodity positions as well. They will suffer in a deflationary squall, but the policy response could send them higher than ever. So far so good … after selling off for months TPL is off to the races again … up 7% just today in a down market. I don’t touch that position though because it’s in a taxable account @ 99% cap gains and paying dividends. My platinum stock (Impala) has been a dog though, underperforming the metal apparently on African infrastructure problems. Did add to positions in copper, silver & platinum metals in recent weeks. Timing is a bitch but the longer term wind is at their backs.