Strange
Sept 15, 2024 – Weekly Comment
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How many lives are living strange? – Oasis
The US ran a $318 billion deficit. In August. Yuge. Gold settled at a new all-time high this week with GCZ4 2610.70 and spot 2577.50. In early 1979 gold was around 200. By September it got to a little over 400. Chopped around a bit but then, from December 1979 to January 1980 it doubled again like a champagne supernova, from 400 to 850. We’re now about 10x higher…in 2023 gold chopped around 2000. It’s crazy to think of $8500. Right? Maybe not. Strange things can happen. Who would’ve ever thought the Gallagher brothers would reunite in concert?
In late August the NFL approved a plan to allow private equity to buy stakes in teams. Owners distributing equity (risk) at the top. The US is considering a Sovereign Wealth Fund (as private equity owners are having problems meeting cash flow ‘promises’ to investors). Is this the same idea? Distribute (the losers) to the US Government at the top?
Stats below are clipped from Credit Bubble Bulletin’s analysis of the Fed’s Z.1 Q2 data:
https://creditbubblebulletin.blogspot.com/
For the quarter, Household Net Worth (assets minus liabilities) surged $2.760 TN to a record $163.797 TN, with four-quarter growth of $10.812 TN. Household Net Worth has inflated $46.586 TN, or 40%, since the end of 2019 (18 quarters). Net Worth ended June at 572% of GDP, up from 2019’s 535%, and the previous cycle peaks 488% (Q1 2007) and 444% (Q1 2000).
Household Real Estate holdings inflated $1.752 TN during the quarter to a record $52.319 TN (one-year growth $3.007 TN). Real Estate ended June at 183% of GDP, up from the end of 2019’s 153% – and now only moderately below the mortgage finance Bubble peak 190% (Q3 2006).
Household Financial Asset holdings inflated another $1.134 TN to a record $123.238 TN, with one-year growth of $8.180 TN. Financial holdings ended 2019 at $93.937 TN. Financial Holdings ended the quarter at 430% of GDP, versus previous cycle peaks of 373% (Q3 2007) and 354% (Q1 2000).
Total Household Equities holdings-to-GDP ended June at 161%, versus previous cycle peaks 105% (Q2 2007) and 115% (Q1 2000).
These data suggest a broader picture of the ‘Buffet Indicator’, the Wilshire 5000 market cap to GDP. According to longtermtrends.net that value is now at a record 192%. I would posit that much of this ‘wealth’ was driven by massive US deficit spending which will likely decelerate, no matter who controls the apparatus of government next year. “Wealth” to GDP is at insane levels. From last week’s Thoughtful Money interview with Neil Howe: “What worries me is the amount of reconstruction we have to do around public priorities. We have a very large public sector today which is overwhelming oriented toward redistributing income to old people. Half of the federal budget excluding interest payments, ten years from now, according to the CBO, will be going to Americans age 65 and older. …In a crisis, you have to look at the numbers.”
There are increasing mentions of credit stress, including a surge in bankruptcies and delinquencies. For example, WSJ ran this headline over the weekend: ‘Americans Are Falling Behind on Bills, Alarming Wall Street’ – Lenders are seeing a rise in late payments on credit cards and auto loans. Ally Financial (ALLY) is down 23% so far in Sept as the CFO says its borrowers are struggling.
This data is from end of Q2 2024 from the American Bankruptcy Institute:
“Bankruptcy filings including all chapters totaled 40,276, a 7% increase from the June 2023 total of 37,790.”
In my experience, financial stress sparks selling of assets, but since the GFC, the model seems to be to transfer private debts to the federal government’s balance sheet. The Feds then deftly manipulate manage these pools, with examples ranging from the SPR to the composition of debt issuance at the Quarterly Refundings. In Europe as well, Draghi is calling for a new “industrial strategy.”
Even with a 4% surge in SPX this week, net changes in rates were somewhat subdued in front of the FOMC. Largest mover was 2y from 3.65% to 3.574%. Several ‘news plants’ suggested the Fed should ease 50 rather than 25 bps (immediately after Wednesday’s CPI data shifted market sentiment to 25). The most influential piece was by Nick Timiraos of the WSJ: ‘The Fed’s Rate-Cut Dilemma: Start Big or Small?’ On Friday FFV4 settled 9504.5, the exact dividing line between 25 and 50. It had traded as low as 9495 after CPI. SFRU4 settled 9514.5. Both of these contracts are likely to be 11-12 bps different at Wednesday’s settle. What is less clear is how forward contracts will react.
On the SOFR strip, Z4, H5, M5 and U5 closed the week at new highs, 9596.5, 9662.5, 9697.5, 9712. The 2yr note is at a new low yield of 3.57%, a level last seen exactly two years ago in September 2022 as the hiking campaign was in full swing. (Ultimate high was 5.22%). Let’s consider SFRZ4 just over 4% and SFRM5 at just over 3%. If the Fed only eases 25 to a midpoint target of 5.125%, can Dec’24 hold near 4%? That would take certainty of 50 bp cuts in Nov and Dec. Another 100 by June? Not out of the question, but a lot will depend on guidance at the press conference. My assumption is a cut of 50 on Wednesday, as a risk management maneuver to support both the labor market and the Harris campaign. (I’ll take the Guiness bet payoff on Thursday, YZ and RD). I think the Chair will stress data-dependency going forward, which isn’t much of a stretch considering post-election uncertainties.
The chart below is something I just find interesting. The last hike of this cycle was July 26, 2023 to a midpoint FF of 5.375% At the time, the 30-yr bond yield was 3.97%. Since that time, the 30-yr yield has had a floor right around that 4% yield. On Friday, going into the first ease, the 30-yr yield is exactly where it was at the last hike. 3.975%. For the sake of comparison, changes on other treasuries from July 26, 2023 to Friday are:
2yr 4.85% to 3.57% (-128 bps)
5yr 4.12% to 3.42% (- 70 bps)
10y 3.87% to 3.65% (- 22 bps)
Clearly the 2-yr note reflects the same expectations of ‘front-loaded’ eases as are embedded in the SOFR curve. As another point of comparison, in 2006 the last hike was June 29 to 5.25%. At that time, the 30-yr yield was exactly the same, at 5.25%, near the high of the move. The first ease was Sept 17, 2007. At that time the yield was 4.75% (though it had exploded up to 5.40% in June 2017).
My thought is that the Fed could easily take back the last 175 to 200 bps of ease by Q1. SFRH5 is essentially priced that way: SFRM4 just went off the board at 9463.0 and SFRH5 is 200 higher at 9662.5. The natural play is to fade that certainty. Indeed there was a buyer of some 60k SFRZ4 9550p on Friday for 2.25 to 2.5.
| 9/6/2024 | 9/13/2024 | chg | ||
| UST 2Y | 365.2 | 357.4 | -7.8 | |
| UST 5Y | 349.0 | 342.3 | -6.7 | |
| UST 10Y | 370.8 | 364.6 | -6.2 | |
| UST 30Y | 401.8 | 397.5 | -4.3 | |
| GERM 2Y | 223.0 | 221.1 | -1.9 | |
| GERM 10Y | 217.2 | 214.8 | -2.4 | |
| JPN 20Y | 165.8 | 163.5 | -2.3 | |
| CHINA 10Y | 213.8 | 207.3 | -6.5 | |
| SOFR Z4/Z5 | -122.0 | -121.5 | 0.5 | |
| SOFR Z5/Z6 | 4.5 | 3.5 | -1.0 | |
| SOFR Z6/Z7 | 13.5 | 11.5 | -2.0 | |
| EUR | 110.86 | 110.76 | -0.10 | |
| CRUDE (CLV4) | 67.67 | 68.65 | 0.98 | |
| SPX | 5408.42 | 5626.02 | 217.60 | 4.0% |
| VIX | 22.38 | 16.56 | -5.82 | |
