Sive Morten
Special Consultant to the FPA
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Fundamentals
Gold market has surprised us a bit this week, starts moving with assets, such as FX market and EUR in particular. If, we could expect upside performance from EUR, due rising ECB interest rate, gold, as non-interest bearing asset should have behaved easier. But, it seems, because of different market view on interest rates perspective, it also has shown solid bounce. As we've discussed yesterday, Fed is loosing confidence among investors, and markets now are living by its own mind, do not rely too much on what Fed is telling. Suggesting that interest rate easing and possibly QE should come earlier.
As was widely expected, the Federal Reserve Open Market Committee (FOMC) put rate hikes on pause at the June meeting, although it indicated we should expect additional hikes before the end of the year. The question is how long will the pause last and will the next Fed move actually be a rate cut? That likely depends on whether or not something breaks in the economy before the July meeting.
With the annual CPI increase coming in at the lowest level in over two years in May, the Fed had the cover it needed to put rate hikes on pause. But falling energy prices papered over sticky price inflation. If you look at the core CPI data, it’s clear the Fed hasn’t won the inflation fight. How the central bank proceeds from here will depend on what happens over the next month.
Yesterday we've discussed recent Fed comments in details, so, I do not repeat 'em here. Here we just tell that by Fed's words, they now are data depended, and intends to keep watching for statistics to make the next step. July rate change is not a decided thing yet. At the same time, Fed has expressed commitment once again to reach 2% inflation goal.
The problem is it’s a long way from achieving that goal. Even with the headline CPI number cooling significantly to 4% in May, it remains more than double that elusive target. And when you consider core inflation, the situation appears even worse.
The FOMC continues to claim that “the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans.”
The problem with this statement is that it hasn’t come anywhere near reducing its balance sheet according to the plan it announced a year ago. In fact, it has never reduced its holdings of mortgage-backed securities by its $35 billion per month target. Even if the central bank met its balance sheet reduction target, it would take more than seven years for it to unwind all of the quantitative easing that it did during the pandemic. As we've said yesterday, QT once again stumbles, and balance have increased:
While the FOMC statement didn’t yield much new information, the FOMC also released a new “dot plot” projecting two more rate hikes before the end of the year. That was the thing that grabbed everybody’s attention and sent stocks plunging, along with gold and silver.
Four committee members projected one more rate hike in 2023. Nine members indicated they expect two. Two members projected a third hike, and the most hawkish member forecast four more rate increases this cycle. Two dovish members signaled that they don’t see any more hikes this year. During the post-meeting press conference, Powell doubled down on the hawkishness, saying he doesn’t see rate cuts in the near future, and perhaps not for years.
The Fed is clearly trying to project a hawkish tone, but talk is cheap. And with price inflation still hot (despite mainstream reporting to the contrary) the Fed can’t plausibly declare victory.
But if the Fed was really that hawkish, why skip a rate hike?
The Fed is between a rock and a hard place, and they know it. They realize the economy can’t function much longer in this high interest rate environment. But they also feel obligated to keep fighting against price inflation. They can’t plausibly pivot now with CPI still running hot. So how do the central bankers justify this pause?
They’re claiming that they need to pause and let the previous rate cuts take full effect. Powell said, “We’ve covered a lot of ground and the full effects of our tightening have yet to be felt.”
That’s probably true. It was months after the last hike before the financial crisis in 2008. So, we are going to eventually feel the impact of these rate hikes. But it’s not likely going to be in the form of lower price inflation. It’s going to come in as another financial crisis or major economic crash.
Interest rates are already at the highest levels since June 2006. The Fed held them there until Bernanke cut rates in September 2007 when home sales started to collapse. In other words, rates are at levels that set off the 2008 financial crisis and Great Recession. The difference is today we have even more debt and malinvestments in the economy. One has to wonder why anybody thinks things will turn out differently this time.
It must be wishful thinking.
The Federal Reserve has screwed up everything that is a function of interest rates. Rate hikes have already precipitated a financial crisis. Despite Fed’s insistence that “the US banking system is sound and resilient,” we’ve already witnessed three major bank failures. The Fed’s bank bailout papered over those problems and plugged that hole in the dam, but it’s only a matter of time before something else breaks. (Commercial real estate is a good candidate.)
That's why reaction was so different, I would say even opposed to Fed sentiment. Because market is sure - cuts are coming, no matter how tough Powell talks today, or what the rest of his crew put on a dot plot.
Ultimately, the Fed is going to reverse course and cut rates in order to keep banks from failing, stop the auto industry from imploding, save the housing market, prop up the government, bail out over-levered corporations, or try to re-inflate whatever pops next in this bubble economy. If things hold together until July, maybe we will see another rate hike. But the longer this plays out, the closer we get to rate cuts instead of rate hikes.
And that means even more price inflation is in your future.
No matter what Powell says, it’s only a matter of time before the Fed has to abandon the pretense of an inflation fight, pivot, and start cutting rates. Even if this tightening cycle brings down CPI in the next few months, it will only be temporary. The moment it is forced to reckon with the damage done by decades of easy money, it will return to easy money like a pig to mud — no matter what the central bankers are telling you today.
Our in-depth analysis of recent CPI numbers tells that price inflation isn’t dead. It has certainly moderated from its peak a year ago if you only consider the headline numbers. But if you factor in the core, price inflation hasn’t moderated at all. It’s rising at almost the exact same pace it was one year ago.
And there is nothing in any of this data to indicate that the increase in CPI will fall to 2% in the near future. They can do that now because they can plausibly argue the economy appears to still be humming along. The real question is what will the Fed do when the recession hits and something else big breaks in the economy or the financial system? If the Fed holds true to form, it will pivot and start cutting rates to prop up the sagging economy. Moderating CPI data gives them the cover to make that pivot. But that will mean even more inflation coming down the pike.
The signal for the markets is very negative, because the Fed admits to a lack of understanding of what is happening and begins to tight the bolts. The inflation forecast for 2023 has been raised from 3.6 to 3.9% (!), despite all efforts to put it down. While the rate forecast has been raised from 5.1 to 5.6%.
ANOTHER SIDE OF US LIQUIDITY
Previously we already have said, that US Treasury has to borrow a lot of money until the end of 2023 to finance government spending. As we've estimated recently, it seems the major source will be reverse repurchase agreement balance, where banks hold around 2 Trln US Treasury bonds. Last week, it was unwound for ~ 177 Bln. At the same time, we could suggest that situation with liquidity remains difficult, because Fed stops QT and even has increased the balance slightly, while US Treasury is lagging behind its announced pace of borrowings. They told about ~ 460 Bln while for now they have borrowed around 135 Bln and next week intends to get just ~115 Bln. We could suggest that investors not very easy spend their money on new debt issues and J. Yellen has to offer them some premium to market yields. Otherwise, the borrowing process should go faster.
So, they’re back to borrowing, as evidenced by the big jump in the national debt. We can also see it in an increase in outstanding Treasuries. Marketable Treasury securities (bonds that can be traded in the bond market) spiked by $330 billion on June 5. And that’s just the beginning.
According to analysis by Goldman Sachs, the US Treasury will have to sell as much as $700 billion in T-bills within six to eight weeks just to replenish cash reserves spent down while the government was up against the borrowing limit. On a net basis, the Treasury will likely have to sell more than $1.1 trillion in Treasuries this year. By our view it is going to be around $1.3-1.5 Trln.
Toward this end, the question is now about how much the US Treasury is willing to “liquify” (refill) a very thirsty Treasury General Account (TGA), which has been the invisible source of funding to offset the Fed’s mid-2022 policy of so-called balance sheet “tightening”? Whenever Powell grabs headlines for “tightening” liquidity, the TGA quietly provides more of the same behind a TGA curtain of complexity. But now that TGA needs a re-fill of USDs to continue this charade of musical-dollar-chairs.
The first question is who is going to buy all of these bonds? And the second question is how will it impact the financial markets?
The market will almost certainly be able to absorb all of that paper, but it will likely cause interest rates to rise as the supply of Treasuries spikes. And that will have a ripple effect though the broader market.In effect, as the Treasury floods the market with new debt, bond prices will likely fall in order to create enough demand for all of those Treasuries. Bond yields are inversely correlated with bond prices, and as prices fall, interest rates rise. Indeed, now we already could see the divergence of US Treasury yields performance and Dollar index. While market widely anticipates easing, pushing dollar lower - we do not see corresponding drop in the yields. If markets are aimed on easing, logically, they have to increase demand for bonds in anticipation of yields' drop (price increasing). But we do not see this:
A Bank of America note projects that the anticipated post-debt ceiling bond sale would have an impact equivalent to another 25 basis point Federal Reserve rate hike.
As WolfStreet noted, this will have a spillover effect.
A liquidity drain coupled with rising interest rates is bad news for anybody in debt. And there are a lot of people in debt, from consumers, to corporations, to the federal government. Exactly how this will impact the economy in the long term remains to be seen, but it’s pretty obvious this is an unsustainable trajectory. It will put even more strain on the financial system. Rising interest rates have already kicked off a financial crisis. It’s only a matter of time before something else breaks.
Another problem has come from where nobody expected. China’s Central Bank Moves to Shore Up Recovery, so Unexpected trim in key lending rate likely augurs further steps to stimulate Chinese economy. Something in China, even against the backdrop of record exports and trade balance, did not work out with the economic recovery.
It is everything fine with the export. Apparently brings domestic demand. Chinese data continues to disappoint: retail slowed down more than expected:
as well as industrial production:
And investments in fixed assets have set an anti-record for 27 years of observations (not counting the failure of 2020), youth unemployment reaches ~20%. In general, the answer to the question we posed a few weeks ago was received: a rather serious crisis is beginning in China.
As we will show you below, AUKUS strategy slowly but stubbornly is spinning up. And in new reality, when West is trying to cut China off the international markets, they could start selling their US Dollar reserves, and US Treasuries in particular. US Treasury Department already has called for preparing for the sale of treasuries by China is noteworthy for the following reasons:
Looking further down the road, at some point, this unlimited borrowing is going to force the Federal Reserve to monetize some of this debt. That means a return to quantitative easing. Even if it doesn’t happen immediately, QE is in the future. There is no other way for the market to absorb all of the debt the Treasury will have to issue to support spending that will mostly go onto a credit card with no limits.
In order to prop up the bond market and keep prices higher than they otherwise would be (and interest rates lower), the Fed will ultimately have to buy bonds to boost demand. It will buy those Treasuries with money created out of thin air. That’s inflation.
But, before trap will be closed, we should see big redistribution of the assets. In 2008 and 2020, the Fed provided liquidity to the overnight market when banks stopped lending to each other. This delayed the crisis. Only when the Fed took liquidity out - the system collapsed. This gives the Fed complete control over when the crash occurs.
Fed interventions to bail out the banking sector now exceed 2020 right before the crisis hit. The Fed's recently created Other Lending Facility and Bank Term Financing program totaling $278 billion is over $255 in 2020 and $133 in 2008. The spread adjusted for high yield options looks the same
When the Fed is ready to crash the markets, we will see a -20% to -50% reduction in the two credit lines created in March 2023 under the Fed's Term Financing Facility (BTFP) and Other Credit Extensions (OCE). liquidity, which is usually a REPO, that is already start decreasing. BTFP should keep working until March 11, 2024, but Fed still have other tools to dry out liquidity fast.
AUKUS in PROGRESS
US switches to preparing Taiwan, Japan and Australia (!!!) for war with China. Last Friday's approval by the US Senate Foreign Relations Committee of the Taiwan Protection and National Resilience Act marked a watershed that made a military resolution of the Taiwan issue appear to be inevitable. The bill will now be sent to the full Senate, and a similar proposal must also be passed by the House of Representatives in order for this bill to be finally sent to the US President for signature.
Most international observers, while agreeing that a conflict is inevitable, disagree on the timing. At the same time, the bill itself allows the United States to wage war not directly, but, like in Ukraine, with the help of allies.
Apparently, the United States expected that the conflict would begin no earlier than 2026-2027, that is, when Australia and Japan would have significantly more military capabilities than now and the United States would have the opportunity to directly intervene when China would be pretty battered in the war with allies.
Now it is assumed that China has finally understood the plans of the United States and will strike earlier, not counting on the victory in the elections of the American president in 2024, Kennedy Jr. or Trump.
And although most Western analysts believe that China will wait for the results of the presidential elections in Taiwan, which are scheduled for January 2024, and the first steps of the new leader of Taiwan, the chances that China will begin the operation to regain control of the island before the end of summer have increased dramatically. They grew largely due to the unpreparedness of Taiwan and its allies for serious resistance in the near future (before the end of the year). For this reason, the evacuation of American citizens from Taiwan has been announced.
At the same time, analysts in the United States continue to rely on China's indecision, and believe that the PRC will not only wait for the execution of the 15,000 Shahid-136 drones ordered from Iran with various engines for use in a potential war with Taiwan, Japan and Australia, as the commander of the IRGC said " , but also the completion of the presidential elections on the island.
China still has time - Australia's nuclear submarine fleet is only at the beginning of construction and modernization, Japan, despite the sharp increase in the military budget, is also only on its way to strengthening its defense capability, and the free stocks of weapons of Western countries have almost completely gone to Ukraine. In addition, the production capacities in China's defense industry are now undoubtedly the largest in the world, and in the next year and a half, China will definitely have everything for the production of weapons and military equipment faster than most of its opponents combined.
Already by 2027, a lot of things for China can change not only for the better.”
At the expense of military equipment, everything is fine, but it will be problematic to quickly and decisively wage war with tanks and MLRS at sea. Without control of the territory, this is impossible. Here, one cannot do without multimillion-strong (in Japan, more than 100 million people live) landings. In general, it is not clear how all this will look like.
Thus, the belt around China is narrowing - West is trying to isolate China from world ocean by the line of Japan - Philippine - Australia- S. Korea and block it from access to South China sea and major trading sea ways. China vitally needs foreign markets because of lack of domestic demand...
Gold market has surprised us a bit this week, starts moving with assets, such as FX market and EUR in particular. If, we could expect upside performance from EUR, due rising ECB interest rate, gold, as non-interest bearing asset should have behaved easier. But, it seems, because of different market view on interest rates perspective, it also has shown solid bounce. As we've discussed yesterday, Fed is loosing confidence among investors, and markets now are living by its own mind, do not rely too much on what Fed is telling. Suggesting that interest rate easing and possibly QE should come earlier.
As was widely expected, the Federal Reserve Open Market Committee (FOMC) put rate hikes on pause at the June meeting, although it indicated we should expect additional hikes before the end of the year. The question is how long will the pause last and will the next Fed move actually be a rate cut? That likely depends on whether or not something breaks in the economy before the July meeting.
With the annual CPI increase coming in at the lowest level in over two years in May, the Fed had the cover it needed to put rate hikes on pause. But falling energy prices papered over sticky price inflation. If you look at the core CPI data, it’s clear the Fed hasn’t won the inflation fight. How the central bank proceeds from here will depend on what happens over the next month.
Yesterday we've discussed recent Fed comments in details, so, I do not repeat 'em here. Here we just tell that by Fed's words, they now are data depended, and intends to keep watching for statistics to make the next step. July rate change is not a decided thing yet. At the same time, Fed has expressed commitment once again to reach 2% inflation goal.
The problem is it’s a long way from achieving that goal. Even with the headline CPI number cooling significantly to 4% in May, it remains more than double that elusive target. And when you consider core inflation, the situation appears even worse.
The FOMC continues to claim that “the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans.”
The problem with this statement is that it hasn’t come anywhere near reducing its balance sheet according to the plan it announced a year ago. In fact, it has never reduced its holdings of mortgage-backed securities by its $35 billion per month target. Even if the central bank met its balance sheet reduction target, it would take more than seven years for it to unwind all of the quantitative easing that it did during the pandemic. As we've said yesterday, QT once again stumbles, and balance have increased:
While the FOMC statement didn’t yield much new information, the FOMC also released a new “dot plot” projecting two more rate hikes before the end of the year. That was the thing that grabbed everybody’s attention and sent stocks plunging, along with gold and silver.
Four committee members projected one more rate hike in 2023. Nine members indicated they expect two. Two members projected a third hike, and the most hawkish member forecast four more rate increases this cycle. Two dovish members signaled that they don’t see any more hikes this year. During the post-meeting press conference, Powell doubled down on the hawkishness, saying he doesn’t see rate cuts in the near future, and perhaps not for years.
The Fed is clearly trying to project a hawkish tone, but talk is cheap. And with price inflation still hot (despite mainstream reporting to the contrary) the Fed can’t plausibly declare victory.
But if the Fed was really that hawkish, why skip a rate hike?
The Fed is between a rock and a hard place, and they know it. They realize the economy can’t function much longer in this high interest rate environment. But they also feel obligated to keep fighting against price inflation. They can’t plausibly pivot now with CPI still running hot. So how do the central bankers justify this pause?
They’re claiming that they need to pause and let the previous rate cuts take full effect. Powell said, “We’ve covered a lot of ground and the full effects of our tightening have yet to be felt.”
That’s probably true. It was months after the last hike before the financial crisis in 2008. So, we are going to eventually feel the impact of these rate hikes. But it’s not likely going to be in the form of lower price inflation. It’s going to come in as another financial crisis or major economic crash.
Interest rates are already at the highest levels since June 2006. The Fed held them there until Bernanke cut rates in September 2007 when home sales started to collapse. In other words, rates are at levels that set off the 2008 financial crisis and Great Recession. The difference is today we have even more debt and malinvestments in the economy. One has to wonder why anybody thinks things will turn out differently this time.
It must be wishful thinking.
The Federal Reserve has screwed up everything that is a function of interest rates. Rate hikes have already precipitated a financial crisis. Despite Fed’s insistence that “the US banking system is sound and resilient,” we’ve already witnessed three major bank failures. The Fed’s bank bailout papered over those problems and plugged that hole in the dam, but it’s only a matter of time before something else breaks. (Commercial real estate is a good candidate.)
That's why reaction was so different, I would say even opposed to Fed sentiment. Because market is sure - cuts are coming, no matter how tough Powell talks today, or what the rest of his crew put on a dot plot.
Ultimately, the Fed is going to reverse course and cut rates in order to keep banks from failing, stop the auto industry from imploding, save the housing market, prop up the government, bail out over-levered corporations, or try to re-inflate whatever pops next in this bubble economy. If things hold together until July, maybe we will see another rate hike. But the longer this plays out, the closer we get to rate cuts instead of rate hikes.
And that means even more price inflation is in your future.
No matter what Powell says, it’s only a matter of time before the Fed has to abandon the pretense of an inflation fight, pivot, and start cutting rates. Even if this tightening cycle brings down CPI in the next few months, it will only be temporary. The moment it is forced to reckon with the damage done by decades of easy money, it will return to easy money like a pig to mud — no matter what the central bankers are telling you today.
Our in-depth analysis of recent CPI numbers tells that price inflation isn’t dead. It has certainly moderated from its peak a year ago if you only consider the headline numbers. But if you factor in the core, price inflation hasn’t moderated at all. It’s rising at almost the exact same pace it was one year ago.
And there is nothing in any of this data to indicate that the increase in CPI will fall to 2% in the near future. They can do that now because they can plausibly argue the economy appears to still be humming along. The real question is what will the Fed do when the recession hits and something else big breaks in the economy or the financial system? If the Fed holds true to form, it will pivot and start cutting rates to prop up the sagging economy. Moderating CPI data gives them the cover to make that pivot. But that will mean even more inflation coming down the pike.
The signal for the markets is very negative, because the Fed admits to a lack of understanding of what is happening and begins to tight the bolts. The inflation forecast for 2023 has been raised from 3.6 to 3.9% (!), despite all efforts to put it down. While the rate forecast has been raised from 5.1 to 5.6%.
ANOTHER SIDE OF US LIQUIDITY
Previously we already have said, that US Treasury has to borrow a lot of money until the end of 2023 to finance government spending. As we've estimated recently, it seems the major source will be reverse repurchase agreement balance, where banks hold around 2 Trln US Treasury bonds. Last week, it was unwound for ~ 177 Bln. At the same time, we could suggest that situation with liquidity remains difficult, because Fed stops QT and even has increased the balance slightly, while US Treasury is lagging behind its announced pace of borrowings. They told about ~ 460 Bln while for now they have borrowed around 135 Bln and next week intends to get just ~115 Bln. We could suggest that investors not very easy spend their money on new debt issues and J. Yellen has to offer them some premium to market yields. Otherwise, the borrowing process should go faster.
So, they’re back to borrowing, as evidenced by the big jump in the national debt. We can also see it in an increase in outstanding Treasuries. Marketable Treasury securities (bonds that can be traded in the bond market) spiked by $330 billion on June 5. And that’s just the beginning.
According to analysis by Goldman Sachs, the US Treasury will have to sell as much as $700 billion in T-bills within six to eight weeks just to replenish cash reserves spent down while the government was up against the borrowing limit. On a net basis, the Treasury will likely have to sell more than $1.1 trillion in Treasuries this year. By our view it is going to be around $1.3-1.5 Trln.
Toward this end, the question is now about how much the US Treasury is willing to “liquify” (refill) a very thirsty Treasury General Account (TGA), which has been the invisible source of funding to offset the Fed’s mid-2022 policy of so-called balance sheet “tightening”? Whenever Powell grabs headlines for “tightening” liquidity, the TGA quietly provides more of the same behind a TGA curtain of complexity. But now that TGA needs a re-fill of USDs to continue this charade of musical-dollar-chairs.
The first question is who is going to buy all of these bonds? And the second question is how will it impact the financial markets?
The market will almost certainly be able to absorb all of that paper, but it will likely cause interest rates to rise as the supply of Treasuries spikes. And that will have a ripple effect though the broader market.In effect, as the Treasury floods the market with new debt, bond prices will likely fall in order to create enough demand for all of those Treasuries. Bond yields are inversely correlated with bond prices, and as prices fall, interest rates rise. Indeed, now we already could see the divergence of US Treasury yields performance and Dollar index. While market widely anticipates easing, pushing dollar lower - we do not see corresponding drop in the yields. If markets are aimed on easing, logically, they have to increase demand for bonds in anticipation of yields' drop (price increasing). But we do not see this:
A Bank of America note projects that the anticipated post-debt ceiling bond sale would have an impact equivalent to another 25 basis point Federal Reserve rate hike.
As WolfStreet noted, this will have a spillover effect.
A liquidity drain coupled with rising interest rates is bad news for anybody in debt. And there are a lot of people in debt, from consumers, to corporations, to the federal government. Exactly how this will impact the economy in the long term remains to be seen, but it’s pretty obvious this is an unsustainable trajectory. It will put even more strain on the financial system. Rising interest rates have already kicked off a financial crisis. It’s only a matter of time before something else breaks.
Another problem has come from where nobody expected. China’s Central Bank Moves to Shore Up Recovery, so Unexpected trim in key lending rate likely augurs further steps to stimulate Chinese economy. Something in China, even against the backdrop of record exports and trade balance, did not work out with the economic recovery.
It is everything fine with the export. Apparently brings domestic demand. Chinese data continues to disappoint: retail slowed down more than expected:
as well as industrial production:
And investments in fixed assets have set an anti-record for 27 years of observations (not counting the failure of 2020), youth unemployment reaches ~20%. In general, the answer to the question we posed a few weeks ago was received: a rather serious crisis is beginning in China.
As we will show you below, AUKUS strategy slowly but stubbornly is spinning up. And in new reality, when West is trying to cut China off the international markets, they could start selling their US Dollar reserves, and US Treasuries in particular. US Treasury Department already has called for preparing for the sale of treasuries by China is noteworthy for the following reasons:
- If this happens, then both the currency and credit markets will storm, get ready, don't get ready. It is impossible to painlessly pour into a glass at the same time a US Treasuries of even 5-10 billion, not to mention 50 or 100. And here are 800 + and other papers that the Chinese hold (three times more). Moreover, if now the Chinese are trying to sell noc on the sly every day, then with the understanding that they simply will not be released, they can start pouring on anyone, thus rocking the system: prices for treasuries are falling, pledges are beginning to pour all over the world, and banks inside the United States, of course, and already large and medium-sized. I believe that there will be Chinese sales of 200-300 billion. there will be practically nothing left of the global financial market.
- By and large, only the Fed can prepare here - keeping
the powderprinting press dry, but it seems that it is more or less ready anyway. Another thing is that outside the United States, in any case, it will not be possible to do it quickly (in 1-2 days), which means they will still have time to disperse the panic. - By the way, the dollar index has been growing since mid-May (not much - from 101 to 104 at the peak, now 102.7), which indicates the desire of investors to find shelter. Although in this situation, where the real shelter is not clear. Most likely in gold, but gold is still in the side
Looking further down the road, at some point, this unlimited borrowing is going to force the Federal Reserve to monetize some of this debt. That means a return to quantitative easing. Even if it doesn’t happen immediately, QE is in the future. There is no other way for the market to absorb all of the debt the Treasury will have to issue to support spending that will mostly go onto a credit card with no limits.
In order to prop up the bond market and keep prices higher than they otherwise would be (and interest rates lower), the Fed will ultimately have to buy bonds to boost demand. It will buy those Treasuries with money created out of thin air. That’s inflation.
But, before trap will be closed, we should see big redistribution of the assets. In 2008 and 2020, the Fed provided liquidity to the overnight market when banks stopped lending to each other. This delayed the crisis. Only when the Fed took liquidity out - the system collapsed. This gives the Fed complete control over when the crash occurs.
Fed interventions to bail out the banking sector now exceed 2020 right before the crisis hit. The Fed's recently created Other Lending Facility and Bank Term Financing program totaling $278 billion is over $255 in 2020 and $133 in 2008. The spread adjusted for high yield options looks the same
When the Fed is ready to crash the markets, we will see a -20% to -50% reduction in the two credit lines created in March 2023 under the Fed's Term Financing Facility (BTFP) and Other Credit Extensions (OCE). liquidity, which is usually a REPO, that is already start decreasing. BTFP should keep working until March 11, 2024, but Fed still have other tools to dry out liquidity fast.
AUKUS in PROGRESS
US switches to preparing Taiwan, Japan and Australia (!!!) for war with China. Last Friday's approval by the US Senate Foreign Relations Committee of the Taiwan Protection and National Resilience Act marked a watershed that made a military resolution of the Taiwan issue appear to be inevitable. The bill will now be sent to the full Senate, and a similar proposal must also be passed by the House of Representatives in order for this bill to be finally sent to the US President for signature.
Most international observers, while agreeing that a conflict is inevitable, disagree on the timing. At the same time, the bill itself allows the United States to wage war not directly, but, like in Ukraine, with the help of allies.
Apparently, the United States expected that the conflict would begin no earlier than 2026-2027, that is, when Australia and Japan would have significantly more military capabilities than now and the United States would have the opportunity to directly intervene when China would be pretty battered in the war with allies.
Now it is assumed that China has finally understood the plans of the United States and will strike earlier, not counting on the victory in the elections of the American president in 2024, Kennedy Jr. or Trump.
And although most Western analysts believe that China will wait for the results of the presidential elections in Taiwan, which are scheduled for January 2024, and the first steps of the new leader of Taiwan, the chances that China will begin the operation to regain control of the island before the end of summer have increased dramatically. They grew largely due to the unpreparedness of Taiwan and its allies for serious resistance in the near future (before the end of the year). For this reason, the evacuation of American citizens from Taiwan has been announced.
At the same time, analysts in the United States continue to rely on China's indecision, and believe that the PRC will not only wait for the execution of the 15,000 Shahid-136 drones ordered from Iran with various engines for use in a potential war with Taiwan, Japan and Australia, as the commander of the IRGC said " , but also the completion of the presidential elections on the island.
China still has time - Australia's nuclear submarine fleet is only at the beginning of construction and modernization, Japan, despite the sharp increase in the military budget, is also only on its way to strengthening its defense capability, and the free stocks of weapons of Western countries have almost completely gone to Ukraine. In addition, the production capacities in China's defense industry are now undoubtedly the largest in the world, and in the next year and a half, China will definitely have everything for the production of weapons and military equipment faster than most of its opponents combined.
Already by 2027, a lot of things for China can change not only for the better.”
At the expense of military equipment, everything is fine, but it will be problematic to quickly and decisively wage war with tanks and MLRS at sea. Without control of the territory, this is impossible. Here, one cannot do without multimillion-strong (in Japan, more than 100 million people live) landings. In general, it is not clear how all this will look like.
Thus, the belt around China is narrowing - West is trying to isolate China from world ocean by the line of Japan - Philippine - Australia- S. Korea and block it from access to South China sea and major trading sea ways. China vitally needs foreign markets because of lack of domestic demand...
