Household Debt Growth YoY Now Equals Federal Public Debt Growth (Thanks To Debt Ceiling On Feds)

Yes, the US public debt is temporarily frozen at the statutory debt limit (with the exception of fiscal shenanigan with public debt held by investors versus intragovernmental lending).  You can see the rapid expansion of household debt between 2000 and 2007 compared with after 2007.

But it was the Federal government that greatly expanded debt after 2007, not households.

The Year-over-year increase in Public debt can be seen spiking in 2009 then slowing while consumer debt bottomed out in 2009 but has been growing ever since such the the YoY growth rate in Public debt and consumer debt are about the same (3% YoY for Public debt and 3.44% YoY for household debt).


Despite the staggering monetary stimulus from The Federal Reserve (created in 1913 by The Federal Reserve Act and signed into law by President Woodrow Wilson), household debt has bee relatively slow to grow compared to previous decades while Public debt has benefitted by The Fed’s monetary rate repression.

And the monetary effect seems to have stalled for commercial and industrial lending (2.6% YoY) and real estate lending (4.64% YoY).

Janet Yellen looks like a Keynesian Krusader in this photo.


US Treasury Secretary Mnuchin Still Interested In Ultralong (High Duration) Sovereign Debt As Argentina Sees strong demand for surprise 100-year bond

US Treasury Secretary Steve “The Munchkin” Mnuchin said on Bloomberg News today that Treasury is still considering issuing ultra-long sovereign debt. This comes on the news that Argentina is issuing a 100 year sovereign bond that is in hot demand.

Reuters — Argentina sold $2.75 billion of a hotly demanded 100-year bond in U.S. dollars on Monday, just over a year after emerging from its latest default, according to the government.

The South American country received $9.75 billion in orders for the bond, as investors eyed a yield of 7.9 percent in an otherwise low yielding fixed income market where pension funds need to lock in long-term returns.

Thanks to a stronger-than-expected peso currency, the government has increased its overall 2017 foreign currency bond issuance target to $12.75 billion from its previous plan of issuing $10 billion in international bonds, Finance Minister Luis Caputo told reporters in Buenos Aires.

Argentina is going to the international capital markets to help finance a fiscal deficit of 4.2 percent of gross domestic product this year. Caputo said Argentina has $2.6 billion in bonds left to be issued this year. The new paper could be denominated in euros, yen or Swiss francs.

The new bond had a coupon of 7.125 percent, the finance ministry said in a statement that hailed success of the sale as evidence that Argentina had regained “credibility and confidence.”

Still, the move came as a surprise given Argentina only last year ended a decade-long dispute with creditors over its 2002 default and residents tend to frown upon accumulating debt in dollars.

Mnuchin is considering joining the “High duration” crowd of nations issuing sovereign debt with maturities longer than 30 years. Once Argentina’s 100 year bond starts to trade, their sovereign yield curve will be the longest after Austria’s 70 year sovereign bond.

Argentina is now a member of “The High Duration” Club. Based on preliminary estimates, the modified duration (as measure of interest rate risk) is 14.

Here is Fed Reserve Chair Janet Yellen discussing ultra long bond issuance with members of Mnuchin’s Treasury team.


US Treasury 30Y-5Y Slope Falls To Under 100 (Lowest Since Dec 2007)

The US Treasury yield curve (30Y-5Y) slope has flattened to the lowest level since December 2007, before The Great Recession.

The US Treasury 10Y-2Y curve slope (orange line) is near the lowest level since December 2007.

It looks like The Fed’s massive stimulus has finally worn off for the Treasury curve.

Fed Vice Chair Stanley Fischer spoke this morning.

(Cape) Fear! Shiller CAPE Ratio At 1929 Black Tuesday Levels (Probability Of Further Rate Cuts Low)

Robert Shiller, the Nobel Laureate in economics from Yale University, has a cyclically-adjusted price-earnings ratio termed the CAPE ratio. And it just rose to the same level as Black Tuesday of 1929, the famous stock market crash.

The Federal Reserve, after months of lowering their target rate, waited until after the November 2008 election of Obama to cut the rate a final time and did not raise their target rate again until December 2015. But since the November 2016 election of Trump, The Fed has raised its benchmark rate 3 times.

With such staggering monetary stimulus, it is not surprising that the S&P500 index has experienced such a fantastic run despite poor wage growth.

Nothing has been the same for Gold since QE3.

Let’s see if The Fed raises their benchmark rate again. But the implied probability of a rate hike before March 21, 2018 is less than 50% (with zero probability of a rate hike at the July 26th meeting, growing to 40% for the December FOMC meeting).

Here is a picture of The Good Ship Follypop.

Yes, Shiller’s CAPE (Fear) index is at 1929 Black Tuesday levels.

Cry For Argentina! Issuing 100 Year Sovereign Debt As Fiscal Deficits Grow To Worst Since 2000

Cry for Argentina. 

Argentina, which has defaulted on its debt seven times, is now faced with the worst fiscal gap since 2000.

(Bloomberg) Argentina is planning to sell its first 100-year bond a year after returning to global capital markets, as it grapples with a soaring budget deficit.

The bond, which will be used to shore up its budget and refinance debt, may be priced as soon as Monday and yield about 8.25 percent, according to a person with knowledge of the matter, who asked not to be named because the deal is private. Citigroup Inc. and HSBC Holdings Plc are managing the sale. The debt-issuance plan was announced on Twitter by the Argentine Finance Ministry, which hasn’t provided further details.

Argentina will join Mexico, Ireland and the U.K. in selling debt that matures over a century. While Argentina last year sold what was at the time the largest emerging-market bond on record, the move will test investor resolve on Argentina. As well as seeking to close its fiscal deficit, the south American country has defaulted seven times in 200 years.

Argentina currently has the second highest sovereign 10 year yield at 13.52% when denominated in their home currency the Argentian Peso. Their US dollar denominated 10 year yield is 5.99%. Venezuela, of course, has the worst 10 year sovereign yield in the Americas at 25.41% (and that is in US Dollar denomination!)

Here are the current Peso-denominated and US Dollar-denominated sovereign curves for Argentina. Since the Peso-denominated curve only goes out to 10 years and their US Dollar denominated curve extends out to 30 years, I assume that the new 8.25% 100-year sovereign bond will be US Dollar denominated.

Argentina is trying to get its act together under President Mauricio Macri.

Here is the Argentinian Peso spot rate relative to the US Dollar.

Hopefully the days of Juan and Eva Peron and their failed economic policies are long gone.

NY Fed’s Dudley: “Remain Calm!! All Is Well! Flattening Yield Curve Is NOT A Bad Sign For The Economy!!”

The New York Fed’s President and CEO William (Bill) Dudley just uttered one of the silliest statements of all time at a business forum in Plattsburgh, New York.

(Bloomberg) — Federal Reserve Bank of New York President William Dudley sounded a positive note on the U.S. economy, saying the central bank wanted to tighten monetary policy “very judiciously” to avoid derailing the expansion that began in mid-2009.

“I’m actually very confident that even though the expansion is relatively long in the tooth, we still have quite a long way to go,” Dudley said Monday in Plattsburgh, New York.

Yields on U.S. Treasuries rose and the dollar advanced after Dudley’s comments. 

Dudley also said that a flattening (Treasury) yield curve is not a bad sign for the economy.

Well, that was a silly thing to say because since the 1970s, the US Treasury curve has always flattened before a recession.

True, we live in a global economy where numerous nations continue to struggle with low growth. And global Central Banks continue to keep their benchmark rates near zero.

Or is Dudley doing his equivalent of “Remain calm! All is well!” from Animal House?

Illinois: The Puerto Rico of the Plains (State Finances in “Crisis Mode” as PowerBall and MegaMillions Pull Out)

Ah, Illinois. Once known as “The Land of Lincoln,” it is now known as  “The Puerto Rico of the Plains.”

Illinois has the distinction of having the lowest municipal bond rating of any state. Only Puerto Rico, which is NOT a state, has a lower municipal bond rating (S&P rates them as ‘D’ since Puerto Rico has defaulted on the debt). S&P has downgraded Illinois to BBB-.

The yield on 10-year Illinois General Obligation bonds BBB-rated is almost 5% while the AAA-rate GO bond yields in Illinois is at 2.28%. BBB-rated Illinois GO bonds are yielding over 2x the AAA-rated yield. And remember, the Illinois GO bonds are tax-exempt. For comparison, the fully-taxed US Treasury yield is 2.15% at the 10-year maturity. So, tax-exempt Illinois bonds (both AAA and BBB-rated) have a higher yield that the fully taxed US Treasury 10 year note. 

In addition to credit ratings, another similarity between Illinois and Puerto Rico is that both have declining populations. But Illlinois has four times the population of Puerto Rico.

The Illinois state legislature has not passed a state budget in three years in what basically boils down to Chicago versus the rest of the state.

Rick Moran at PJMedia has cobbled together a few of the consequences of not having a state budget.

  • If there is no state budget by June 30, 2017, the Illinois Department of Transportation announced that they would be forced to halt all state projects that could cost 30,000 jobs.
  • The Illinois Lottery faces threats of removal from the Powerball and Mega Millions if there is no budget by June 30, 2017.
  • Illinois owes school districts more than $1.1 billion in categorical payments for special education, transportation, bilingual and early childhood services.
  • Illinois’ backlog of unpaid bills stood at record $14.5 billion as of May 31, according to Comptroller Susana Mendoza.
  • The state’s Medicaid managed care organizations are owed $2 billion.
  • Centerstone, a non-profit behavioral health organization that helps 16,000 clients in southern Illinois and the metro-east region, has shuttered offices and cut services amid the budget impasse, affecting 700 clients and 39 staff members throughout the state.
  • The Wells Center, a drug treatment facility in downstate Jacksonville that has been operating for 50 years, was forced to shut down operations because of the budget impasse.
  • Illinois’ unpaid bill backlog could hit $25 billion by FY 2019 if the state continues without a budget.
  • Students and parents are looking to out-of-state colleges due to the unstable climate within Illinois’ higher education system.
  • More than 1,500 employees have been laid off at public universities and community colleges throughout the state.
  • The two multi-state lotteries — Powerball and Mega Millions — announced that if there was no budget agreement by June 30, 2017, they would drop Illinois from the games.
  • Additionally, the state currently has $130 billion in unfunded pension obligations, annual payments of which could be cut if a deal isn’t struck; a scenario that Moody’s warned would be a negative credit event for bondholders.

Of course, unlike California where Governor Jerry “Moonbeam” Brown has a super-majority in the state legislature, Illinois is divided politically. The pressure of passing a budget (even a stopgap budget) is enormous, but which side will blink first?

It reminds me of “The Chicken Run” from the James Dean film “Rebel Without a Cause.”