The Dog Is Still Not Barking

Debt bombBack on August 3rd, 2019, I posted a piece titled “The Dog that Did Not Bark” on the occasion of the U.S. congress enacting and the president signing a “budget deal” which suspended the statutory limit on the national debt until July 2021.  A few days before, the House defeated an amendment which would have renamed the bill “A bill to kick the can down the road and for other purposes”.  I remarked that neither any of the Democrat presidential hopefuls nor President Trump had mentioned the deficit or the debt in any of their “debates” or rallies.

The only Presidential candidate who was talking about these issues was South Carolina former governor and congressman Mark Sanford, who was attempting a primary challenge to Trump with the debt and deficit as central issues.  On Wednesday, November 12th, Sanford “suspended” his campaign, just 65 days after announcing.  Sanford’s statement said, “I am suspending my race for the Presidency because impeachment has made my goal of making the debt, deficit and spending issue a part of this presidential debate impossible right now. From day one, I was fully aware of how hard it would be to elevate these issues with a sitting president of my own party ignoring them. Impeachment noise has moved what was hard to herculean as nearly everything in Republican party politics is currently viewed through the prism of impeachment.”... [Read More]


Repo Creepo

Something funny is going on in the very short-term money market.  That’s funny as in “uh-oh” rather than “ha ha”.  A “repurchase agreement” or Repo is a widely-used instrument for managing cash needs in banks, corporate treasuries, government agencies, financial institutions, and the Federal Reserve.  In a Repo, a party with an immediate need for cash sells a security, often a government or agency debt instrument such as a Treasury bill or note, to a counterparty, who pays in cash, providing liquidity to the seller.  Under the Repo contract, the seller agrees to buy back (repurchase, hence the name) the security after a short term (often overnight) for slightly more than the funds received from the sale, compensating the buyer for the use of their funds.  (This can be looked at as a kind of interest on a very short-term loan.)

This is a huge market: between US$ 2 and 3 trillion in Repos are outstanding most of the time and much of this turns over on a daily basis.  Normally, the equivalent rate of interest on Repos closely tracks that of short-term money market interest rates such as the federal funds rate.  If the Repo rate rises substantially, it is an indication of a “cash crunch”, where borrowers who have an immediate need for cash have to pay more to lay their hands on it.  Usually the Repo market is stable and predictable, but in the last few days it’s been behaving distinctly oddly.  It started in the overnight market between September 16 and 17, when a vertical spike in rates went from 2.25% to 4.75%, something rarely seen except in unusual circumstances such as the end of a quarter when corporations need to raise cash to pay taxes, dividends, and coupons on bonds.... [Read More]


The Dog that Did Not Bark

Debt bombIn one of Heinlein’s stories (I forget which one, and the search engines haven’t helped on this odd query) a character awakes after having been in suspended animation for many years and catches up on what he’s missed by spending a few hours reading a history book, then remarks on how much time he would have wasted had he read a newspaper every day for all that time, reading about matters too ephemeral to make the history books.

If you do follow the news (I try to spend as little time as possible doing so), keep in mind that the most important thing may be what’s not in the daily news.  Many of the things that end up in the history books were complete surprises to those embedded in the “news cycle” and to the “experts” who feed it.  For example, check the newspapers for early October 1929, November 1941, October 1989, the latter half of 1990, or August 2001: you’ll find little or nothing about the imminent stock market crash, Pearl Harbor, fall of the Berlin Wall, collapse of the Soviet Union, or terrorist attacks in the U.S.  And yet, in retrospect, the circumstances which led to these “surprises” were in plain sight.  Thus, I’m always interested in the big story that none of the chattering classes are chattering about.  Which brings me to…... [Read More]


Inverted Yield Curve

U.S. Treasury Bond, 1977, US$ 1 millionThis is a fairly geeky financial technical analysis post.  I usually post such material as Gnome-o-Grams on my own Web log, but as an experiment, I’m posting this one here to see if there’s any interest among the membership or wish to see further posts of this kind.  If you’d like to see more like this here, please indicate by liking this post or commenting, including topics you’d like to see discussed (after reviewing those already published, linked above).  As always when anything discussing finance or investing, I don’t make recommendations; you’re entirely responsible for your own decisions and would be crazy to interpret anything I say as a course of action you should pursue without coming to your own independent decision.

The yield curve is a measure of the sentiment of investors, particularly conservative investors who own fixed-income securities (bonds and equivalents).  (Much of the financial press covers the equity [stock] markets and neglects the bond markets, but the bond markets dwarf the stock market in valuation.  Bonds aren’t [usually] exciting [and when they are things are generally unpleasant], so they don’t get much attention, but if you’re interested in the flow of funds [and you should be], that’s where you ought to be looking.)  The yield curve simply plots, for equivalent fixed-income (debt) securities (bonds), the relationship between the yield of the security and the time to its maturity (when the investor gets his or her money back).  For example, consider the most widely traded securities in the world: U.S. Treasury debt.  These instruments have various names: Treasury Bills, Treasury Notes, and Treasury Bonds, depending upon their time to maturity, but they all are obligations of the U.S. Treasury and bear the full faith and credit of the United States.  They are considered as close to risk-free as any paper investment in the world.... [Read More]