Sunday, November 20, 2022

The CPI Inflation Number Is A Lie, And That's A Fact

It is important to remember the CPI inflation number is a lie. This means even if the CPI falls dramatically in 2023, we may, or most likely will still have inflation. When economic growth is slow and unemployment rises, inflation takes on the moniker of stagflation. Currently, the website ShadowStats claims real inflation is closer to 17.15% rather than the 8.5% that the media, the Biden administration, and the Federal Reserve claim.

America’s inflation is now the highest since 1981. The number slightly above 17% is based on calculating inflation the same way economists and politicians did in the 1980s. Yes. inflation is a problem and indicators such as the inverted yield curve in the bond market are screaming that we should expect a recession. Considering what we are seeing and the fact Fed Chairman Jerome Powell has warned of pain ahead, there is good reason to think he is telling the truth. 

The crux of this issue is that there is a huge difference between these two views of inflation and accepting the wrong number as fact could greatly impact your future. This rapidly becomes apparent in retirement for those older Americans fortunate to have accumulated some savings. The problem is that unless their investments perform at least as well as inflation they face seeing their wealth vanish into the deep dark hole of inflation.

This Chart Indicates The CPI Inflation Number Is A Lie

Decades ago, politicians and those concocting this system created it as a way to reduce the cost of living adjustments for government payments to Social Security recipients, etc. By moving to a substitution-based index and weakening other constant-standard-of-living ties those reporting inflation have muddied the water lessening the impression of just how much our cost of living is being impacted by inflation. The general argument used to promote this change was that changing relative costs of goods results in consumers could easily substitute less-expensive goods for more expensive goods, the reality is that this assumption is often false.

Allowing for a substitution of goods within the formerly "fixed-basket" supposedly allows the consumer flexibility in obtaining a “constant level of satisfaction." This adjustment to the inflation measure was touted as more appropriate for the GDP concept in measuring shifting demand and weighting actual consumption. Other tricks were also used to give the illusion of less inflation. In cases where the quality of the product is deemed by the government to be "improved" prices in the CPI, calculations are now adjusted lower to offset the higher quality. Extending this idea the Baskin Commission Report, December 4, 1996, actually used steak and chicken as its substitution example. 
 
While substitution-related alterations to inflation methodologies were made beginning in the mid-1990s the introduction of major changes to concepts geared towards making us feel better about things began in the 1980s. The aggregate impact of the reporting changes since 1980 has been to reduce the reported level of annual CPI inflation by roughly seven percentage points meaning there is no question as to the understatement of inflation. If the methodological changes did not reduce CPI inflation reporting significantly, the politicians would not have pushed the changes through. Where the rubber meets the road is that without these changes, Social Security checks would be more than double what they are today.
Basing Decisions On A False Inflation Premise Is Problematic

Of course, if you concede the real rate of inflation is higher than the CPI indicates, charts such as the one above become invalid. Higher inflation than reported also feeds into the Fed being forced to raise the interest rate to destroy and slow demand. Expect a hard landing, wild rallies in the markets in my view are more a reflection of investors taking short positions using tight stops. This means those shorting this market often paint a target on their back and become sitting ducks for the algorithms generated by computer trading. These rallies are not a sign of a strengthening economy. All this translates into volatility and a somewhat unstable investment landscape. 

The ugly reality of inflation is apparent during a shopping trip to a grocery store or stores such as Walmart. Sadly, what we see is the type of inflation that directly impacts many of the consumers that can least afford it. Recently product manufacturers like Coca-Cola, Pepsi, and Procter & Gamble all started raising prices across the board, which means that "something has to give." Retailers can only absorb so much of these increases before being forced to pass them on to consumers. Walmart values low prices and it is a key part of its marketing strategy but higher wages, transportation costs, and e-commerce investments have all pressured Walmart to bump many prices higher.

Years ago when America was experiencing what the late economist Allen Meltzer described as "The Great Inflation" his take was that inflation generally was not considered a major problem until it rose into the double-digit area. Still, I maintain the view the manipulation of data to artificially lower the official rate of inflation is very harmful in that it feeds into the illusion of economic stability. This helps both politicians and central banks sell the idea that inflation is not and will not become an issue. 

The problem comes when these bogus CPI numbers are used by individuals to plan and make decisions concerning their investments and retirement needs. I further contend that inflation would be much greater if more money was flowing into tangible goods rather than paper investments and promises. For proof of the real rate of inflation just look at the surging replacement cost resulting from recent storms and natural disasters. 
 
Beware, taking the CPI numbers reported to heart may cost you dearly in the coming years. We are lied to about how invasive inflation has become and how our currency is being debased. The only way we can protect ourselves is to invest in places that give us a chance to move with inflation. This is not easy and the risk associated with doing so is often great. How to protect our wealth from the scourge of inflation has become the most crucial economic issue individuals face. Good luck with that.
 
 
 (Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)

Monday, November 14, 2022

Yes, 3D Printed Steaks Are A Thing

Believe it or not, 3d printed meat may soon be on its way to a store near you. Reuters recently reported that Israel's Redefine Meat has struck a partnership with importer Giraudi Meats to drive the distribution of its 'New Meat' steak cuts produced on 3D printers. At this time, they will be targeting the European market.

Redefine hopes to reach thousands of restaurants by the end of next year with its plant-based whole cuts of alternative meat. Their product, which mimics meat, or as they say, flank steak, is a mix of soy and pea protein, chickpeas, beetroot, nutritional yeasts, and coconut fat.

The Israeli company has been working with about 150 restaurants in Israel, they say the whole cuts they offer will broaden the appeal of alternative meat products. These, up until now, have mostly been limited to ground-beef dishes, including hamburgers and sausages.

Is This What We Want?
As the larger cuts of alternative meat which are more complicated to produce evolve, companies are gearing up to meet the demand which could reach $140 billion by 2029, according to Barclays. This would account for about 10% of the world's market for meat.

"We're scaling up the capacity. Every batch that we make is five times larger than the previous batch. So we're changing ... the machines, the flow and we're also changing the product attributes." Redefine Meat's CEO Eshchar Ben-Shitrit said.

To be clear, Redefine Meat, is not the only company moving in the direction of what some of us see as "fake meat." In fact, competition in this sector is growing, players include California's Beyond Meat (BYND.O) and Impossible Foods as well as Spain's Novameat, and Israel's Aleph Farms, which is developing a method to cultivate meat in the lab from cow cells.

Adding New Meaning To, Where's The Beef?
It is likely that if Europe does not reject this concoction, it will soon reach our shores. To many Americans and other people across the world, this will most likely be viewed as an abomination pushed upon us by climate change activists that see cattle as harming the environment. 

This move to produce food in ways foreign to nature can also be framed as proof that mankind is moving further from its roots and off into some strange bizarre future. The following link; https://www.youtube.com/watch?v=zQSCzHaMcTg takes you to a video about Redefine Meats and its products. This is certainly not something our ancestors would not have seen coming.

Tuesday, November 8, 2022

Inflation May Remain Around 5% For Years

The view that inflation will be around for some time is growing. Many people in the inflation camp see at least 5% inflation will stay with us for most of the next ten years. This is something we should consider and note because the ramifications would be huge. It is a prediction that is likely and lives in the area between runaway hyperinflation and deflation.

The whole inflation regime dictates how everything is valued. It is important to remember inflation affects everything but not equally. My premise is that wealth will flow out of paper promises and fiat currencies and into tangible assets. Such a shift in where money is invested is a game changer. If I'm correct, this will result in a fundamental change in the economy.

The recent CPI numbers have come in hotter than expected. Headline CPI month over month was double expectations with core numbers rising 6.6% year over year. These numbers are the highest since August 1982. Going forward it is likely we will see inflation in services and "fees" continue to rise as the prices of goods begin to slow. Adding to our pain as consumers is the fact the CPI routinely understates inflation by using a formula based on the concept of a “constant level of satisfaction.” This was concocted by politicians and their advisers to reduce the cost of living adjustments for government payments to Social Security recipients, etc.

Services Inflation Continues To Rise As Prices Of Goods Slow

Source: Bloomberg

The argument for deflation is very clear, we have too much debt and when defaults occur it will trap us in a deflationary vortex. Most deflationists think by the time you factor in demographics we will find ourselves trapped in a long and painful deflationary cycle. The general consensus is that as people age they buy less and spend less. This leads people to see an aging population, such as we have in America, will add to the forces favoring deflation. 

The flaw in their thinking may lay in the fact that a lot of money will be spent by the government to maintain both their health and support those retiring with little or no savings. Also, when people retire most no longer contribute to the supply side of the economy but move completely to the demand side. How can we say older people consume less when they generate huge medical bills and have other special needs? Even if the cost is shifted to the government it still shows up as consumption.

Some people are predicting inflation will soon drop based on the idea much of the data reflecting inflation flows from past numbers that reflect what is already behind us meaning we are looking in the rear-view mirror and retail prices are about to drop due to high inventories. Still, some problems refuse to fit into the narrative that inflation has peaked. How do you pull forward rent, health insurance, energy, etc? 

Sure some deflationary numbers may be coming out on the retail side of things due to heavy inventories but this may not be enough to offset prices rising on the things we need. The problem is, inflation does not always cure itself. You can't tamp down inflation by merely talking about how high prices destroy demand. Many things driving inflation, such as rent increases are not all behind us. As leases expire each month renters are brought up to the current pricing. The same thing can be said about utility bills and other needed services. Do not expect the cost of shelter to fall. Too many of the costs feeding into this sector are still moving higher.

Unfortunately, those seeing deflation ahead base it on a horrible economy, falling liquidity, and the destruction of demand rather than improving supplies. We have to recognize the difference between supply-side and demand-side inflation. With this in mind, you could say, a broken supply chain also feeds into the inflation picture and could make a case that the supply chain is the economy.   

Recent "hotter than expected"  PPI data indicates inflation will be with us for some time. It seems to have deeper roots and may prove stickier than originally thought. The idea we may see both a weak economy and stagflation dovetails with a recent piece put out by David Stockman. Of course, this debate is far from settled. There is a lot going on and few pundits or economists agree on where this is headed. 

Below is a sampling of a few financial headlines from last month that indicate economy watchers are all over the place as to where the economy is headed.


             Fed’s Williams sees steep decline in inflation ahead
             Oct. 3, 2022, at 3:27 p.m. ET by Greg Robb
 

           
The 4% retirement spending rule may be too high. Could you get by on 1.9%?
            Oct. 3, 2022 at 10:59 a.m. ET by Mark Hulbert
 

           Europe’s red-hot inflation numbers may be ready to cool off, says Morgan Stanley
           Oct. 3, 2022, at 10:40 a.m. ET by Barbara Kollmeyer        

 

The elephant in the room remains that restrictive monetary policy  means that liquidity is vanishing and the risk-reward for loaning money on a promise is breaking. When credit fails to grow the economy rapidly falls into a recession or depression. When credit is a problem, how do we move the economy forward? The big question is whether destroying the wealth effect in certain sectors of our economy will offset the redeployment of wealth in others enough to halt inflation.

The massive mindless "exchange-traded-funds" trade where all ETFs own the same ten stocks has supported this market over the years. Unfortunately, this sector seems greatly out of wack and hugely overvalued. If money starts to flow out of the ETFs and this sector breaks markets may go into a free fall. This would be an indication the markets may be underpricing the duration of high-interest rates. 


Footnote; The following AdvancingTime article details how the CPI understates inflation by using a formula based on the concept of a “constant level of satisfaction” that evolved during the first half of the 20th century in academia. Politicians touting the benefits of this system created it as a way to reduce the cost of living adjustments for government payments to Social Security recipients, etc.

https://brucewilds.blogspot.com/2019/08/the-cpi-understates-inflation-skewing.html

 

 (Republishing this article is permitted with reference to Bruce Wilds/AdvancingTime Blog)

Sunday, November 6, 2022

Lotto Madness Has Again Been Unleashed!

Again many Americans are being inflicted with "lotto madness." The US Powerball jackpot is now a world-record $1.9 billion after there was no winning ticket for Saturday's prize. The previous world-record jackpot was set in 2016, was $1.59bn, and split between three winners. 
 
For many people a Powerball ticket is a cheap trip down fantasy lane for the poor it is throwing away money they can't afford. The odds of winning the jackpot in Monday's draw stand at one in 292.2 million, according to Powerball. Tickets cost $2, and a winner can choose a lesser lump sum payment or choose to receive the full amount in an annuity paid over 29 years, most winners opt for the upfront cash option. A ticket must match all six numbers drawn to win the jackpot and if more than one winner has the same combination of numbers they share the jackpot.
 
The failure of anyone to win America's premier and largest lottery ever has caused the Powerball jackpot to soar creating a phenomenon that could be called "Lotto Madness." The fact this has spread like a fire and swept across America reveals something very significant about our culture. While this might not reach the level of needing a post-event "debriefing" a closer look at how these large lotteries affect our culture may be important and meaningful. 
 
How people react to the idea of winning a large sum of money exposes more than a few flaws and insight into our values and the way we think. It seems that society has reached the place where it thinks the road to riches is not through the valley of hard work and savings and that wealth can be achieved without sacrifice.

Family Guy Wins The Lottery!
When we have a large jackpot, lotto madness has a way of extending into the media and even influencing television shows like the animated comedy "Family Guy." During one of the big payouts years ago, an episode had the Griffin family living on a strict budget until a local news story on the lottery influences Peter to buy a ticket in hopes that he will win and set the family on a better financial platform. Peter reveals to his family that he has not bought just one, but several thousand lottery tickets, admitting that he has taken out a second mortgage on the house in order to buy them. After watching the results of the lottery that night, they discover that they have indeed won, they have obtained the American dream.

Articles occasionally appear that reveal and compare incomes and salaries across the nation. Such articles show, an athlete making $15,900,000 a year, next to a government employee making $130,000, a CEO at $120,000,000 a year, and a business owner earning $24,000. This should give us pause. No wonder we as a society are screwed up as to how we value and relate to money. It reflects on not only our values but the fairness and income inequality. I feel it is hard to measure the discontent generated by such fluff pieces and irresponsible articles like these that are often inaccurate or fail to tell the full story.

It is clear that many people feel the trade-offs we face by living in a free market-consumer-based society and it wears away at them. The fact is economic growth is accompanied by  “wheel spinning”, inefficiencies and waste.  While the benefits of our system often outweigh the negatives we find society is paying a toll through increased rates of addiction, depression, and economic inequality.  On the emotional side, many people are not achieving the degree of happiness or contentment they had hoped for, instead, they are left feeling insecure and unfulfilled. This all contributes to the phenomena of people going  completely bonkers and off the deep end at the prospect of winning a great deal of money even if the odds are massively against them doing so.

Government-sanctioned gambling and especially lotteries send a message to the populace that conflicts with many important cultural values and can have far-reaching effects. These messages promote a "let it roll" mentality.  Simply allowing such activities and promoting them are two different issues.  The government has climbed into bed with the devil to gain revenue from taxing these activities.  Gaming does not benefit the average man.  Truth is the laws of nature and the odds are against you, that’s why they call it gambling and not winning. It might be interesting to place more focus on how many people suffer post-lotto depression when they are unlucky enough not to win.

Huge sums of money from lotteries are unmanageable by the average man and often cause adjustment difficulties, resulting in pain and not happiness. Large jackpots also result in a disconnect between true and associated values causing unrealistic expectations.  Thoughts that jackpots above one hundred million dollars can be ours create a false impression of reality that is harmful in cultivating positive work ethics and makes a mockery of those who toil to produce a better life. In the past, some winners have used the line "be careful what you wish for" after having their life turned upside-down and disrupted by good fortune. The infamous Jack Whitaker is often quoted as saying he wished he had torn up his ticket after he was afflicted numerous times by the "lottery curse."
Robert Ringer, wrote a book titled "Looking Out For #1." In it, he wrote, "I've never met a billionaire, but I have had the opportunity to know many people in the $5 million to $100 million range, and there's one thing that stands out in my mind about all of them; not only do they refrain from tossing money around loosely, they're even careful about the way they speak of it. There's even respect in their voices at the mention of even $10."
 
You must adjust for inflation but successful hard-working people have a respect for money that many people have failed to acquire. A tenant who sometimes fails to pay his rent on time, but has had to borrow a few dollars on occasion recently told me he is working on a couple of things and is going to be a "billionaire", to my surprise he totally skipped over the millionaire stage of the process. Prediction! The pawnshops will be crazy busy going into the next drawing because a slew of losers produced last week are all tapped out. If they can get any money at all many of these people will double down.

Our modern consumer-based society has made us slaves to material objects and producers of waste.  Many economists urge us to consume, even when we must borrow to do so, saying it creates ever more jobs. We follow Governments and leaders that we often neither like nor trust.  Today’s youth grow up besieged by marketers and are then vilified for being materialistic, marred by too little perspective, it is little wonder so many find themselves angry and disappointed. During times of massive well-publicized jackpots, people use money that was intended to pay rent and even the food stamp money given to them by taxpayers to buy tickets. Bottom-line this is indeed madness.

Saturday, October 29, 2022

Holly Molly! New Japanese Woman Robot Better Than Real

Holly Molly! Japanese Woman Robot Better than Real. The following commentary is partly written tongue-in-cheek, partly in horror, and partly as a social commentary. The idiom tongue-in-cheek, of course, refers to a humorous, high-spirited, or sarcastic statement expressed in a mocking manner. The thoughts focus on the integration of more and more robots into society a subject I have explored on several occasions.

The whole subject of robots extends past what they are and their capabilities and into what they represent to us or rather into what we want them to be. With this in mind, the news that Japan has just released fully performing female robots intersects with several possible emotions. Your personal reaction is most likely linked to how you feel about artificial intelligence. 

Most rational people concede AI carries with it the seed for the destruction of mankind or could make humans redundant. This is the dark side of AI which includes killer drones and a slew of other non-emotional killing machines. Pushing aside the view that AI is a poisonous pill, it also holds the potential to make our lives better. Robots guided by AI could complement the human race by acting as servants and making our lives more pleasurable. 

The first thing to acknowledge is that Japan is technologically advanced and makes great use of robots. It employs a lot of robots in almost every aspect of its industry. Japan has unveiled many crazy robots over the years and continues this tradition by now announcing they have developed the first fully performing female robots.

This claim brings forth many questions such as, what are these robots? What are they supposed to do? How do they even function? Many of those questions are answered in the following video; https://www.youtube.com/watch?v=i7W4ZOUfWWU Spoiler alert, this video claims these woman robots are warm to the touch, smart, flexible, and more.

This dovetails with an article that appeared on AdvancingTime on October 20th of 2015 titled "Sex-bots Could Make Your Spouse Obsolete." The article in a sarcastic and spirited manner suggested both men and women alike, might consider replacing their significant other with an obedient robot. It focused on the benefits of living with an agreeable companion dedicated to simply putting our happiness and well-being before anything else.

Of course, the reactions to such personal companion robots often drift down the path of sexual possibilities. While many people consider such thoughts as "perverted" many others take what they consider a more "enlightened" attitude. Below are a few of my favorite comments tied to the announcement and promotion of Japan's fully performing female robot.

  •  You had me at ‘these robots are extremely flexible…
  •  Wow, I've seen people stretch their content before but this was like a master class.
  •  Finally, a woman that comes with instructions and a remote!
  • This is a good thing. This will help weed out those who are not interested in putting in the work and effort required for a real and meaningful relationship. It’s a win-win for everyone. 
  •  I'm not sure if this is the coolest thing ever or the saddest.
  • As brilliant as the work is, the ultimate question is "why, once evolved enough, would robots not simply replace humans?". How evolved are the ones they don't show us, the military ones? This whole science is giving dynamite and a hammer to a gorilla. Something is bound to go wrong. 
  •  I would buy these if it is globally launched 
  • Japan never fails to alarm me.
Is This Better Than Real?
It was not difficult to predict we would try to turn machines into the "perfect companion." We should all try to be grownups and face the fact that robots can be used for things other than moving items around the factory floor. Today, robots are being looked at to fulfill a variety of needs, some of these uses are less distasteful than the killing machines the military seeks, and some are destined to become rather controversial. Many articles have been written about how robots are being groomed to help and assist in the care of the elderly, but it is clear that they have the potential to fulfill many of our other needs as well. The integration of robots into our culture will bring about massive changes in society.

For as long as I can remember people have tried to infuse human qualities onto inanimate objects. Everything from pet rocks to automobiles have been referred to by their owners as "she's a beauty." This could be considered proof that many people have a desire for objects to reflect something beyond what the world originally granted these objects the ability to muster. Most of us harbor the desire to be liked, loved, cherished, and exist in an environment free of criticism. Physical closeness or contact often is a part of this. My experience leads me to believe a good percentage of humans are a bit strange, weird, or off and becoming more so every day, in many cases, we might be surprised how many people could shift their feelings of companionship to a well-designed robot. 
 
Humans do not live on bread alone, but again, even a good home-cooked meal is something a "love-reflecting" robot could provide, and in many cases, their cooking might be far better than that of the spouse many of us might choose, or get stuck with. This article was written to inform readers of the progress being made in robotics rather than defend or change how they think about them. It is impossible to deny there is a great deal of money to be made in robotics. This almost guarantees, that if not halted by some type of regulations, the production of robots is destined to grow into a massive part of the economy. 
 
All in all, it will be very interesting to see how society embraces robots to fulfill different roles in our lives as technology moves forward. A few final thoughts about what a future might look like if mankind gracefully integrates robots into our lives and culture. The economics of such a companion or mate also is already at an acceptable level for many people. One thing is certain, and that is the rich will have access to the best and most advanced units. With a good warranty and little maintenance, such a robot purchased on payments might render the purchaser large savings when compared to a high-maintenance spouse. 
 
Please consider this piece a social commentary on what we have become, or where we might be heading. If nothing else it should help bring into focus the fact that in our fast-changing world we have a slew of decisions to make concerning the boundaries we place on society. In a future post I may explore what might happen if a sex-bot becomes dysfunctional or in human terms "goes mad." even worse that it decides it "deserves" and then demands respect. Of course, that is for another time, for now, I will let you ponder what you have just read.
 
(Republishing this article is permitted with reference to Bruce Wilds/AdvancingTime Blog)

Saturday, October 22, 2022

Investing Is Difficult And Speculating Is Dangerous

Many of us are under the impression something in the economy or the financial system is about to break. If so, things will get much more volatile and unsettled before things play out. This has forced me to explore different scenarios and listen to various so-called experts I disagree with in an attempt to avoid reinforcing poor or biased conclusions. Individuals that look only at views they agree with tend to strengthen their convictions and reassure themselves. The problem is that this can take us down the often more dangerous path of speculation rather than investing. During unsettled times the risk of putting your money and wealth "out there" can hold far more risk than is offered in return.

Speculating is akin to gambling and not a prudent way to go about procuring a solid future. Jason Zweig, a leading financial journalist who writes the widely read "The Intelligent Investor" column for The Wall Street Journal recently shared his analysis of the current market climate. He also doled out some advice for investors. At the 18-minute mark of this video, ( https://www.youtube.com/watch?v=3vKYy4DvfDY ) he hit his stride. Zweig makes it clear that it takes more than gathering information to make a good investor.

During my search for different ideas on where the financial system and economy are headed, this is the first time I have stumbled upon the name of  Benjamin Graham. This revelation of my ignorance is merely a confirmation of the fact we all have blind spots in our education. Benjamin Graham was a British-born American economist, professor, and investor who died in 1976. Graham is widely known as the "father of value investing." 

Graham wrote two of the founding texts in neoclassical investing. His investment philosophy emphasized such things as investor psychology, having minimal debt, buying and holding assets, fundamental analysis, diversifying, maintaining margins of safety, activist investing, and contrarian mindset. In short, Graham saw a clear distinction between investing and speculation.

This includes warning how when money is abundant a wide range of financial assets rise to record levels and enormous amounts of money tend to flow into stocks. Demand for residential real estate soars and innovative products such as digital currencies can appreciate at breathtaking speed. For financial historians and serious market observers, these are the signs of a market bubble. Another sign is that speculation soars. 

At Times Risk Out Numbers Reward
My opinion as to where markets are headed in most cases is far lower than most market watchers are willing to acknowledge. When asset prices collapse, a great deal of money is lost or simply vanishes into a black hole. During such an event, those looking at our corrupt government and institutions to be their salvation will most likely be disappointed. Inflation is far worse than the CPI indicates and highly indebted developed economies face an uphill battle in eradicating the damage it heaps upon the average person.

With this in mind, another interesting investment strategy is to invest in what Dylan Grice refers to as a "cockroach portfolio." Grice points out the resilience of cockroaches and that this portfolio is based on simply surviving and preserving your wealth. For those investors who have difficulty getting into the niche alternative markets that Dylan's fund invests in, he recommends the dead-simple "cockroach" portfolio: 25% stocks 25% bonds 25% cash 25% gold. 

The effects of the last few recessions have been significantly buffered by the Fed but at some point, there is no place to hide. Credit spreads have not yet moved to where they reflect the risk and magnitude of what is occurring across the world. Making things worse, we find ourselves in a place where no country or sector of the economy is strong enough to carry us forward. We are a train with no locomotive. 

 

 (Republishing this article is permitted with reference to Bruce Wilds/AdvancingTime Blog)

Sunday, October 16, 2022

Major Problem, US Treasury Market Is Becoming Illiquid

If the U.S. Treasury market dries up, it may signal a Hindenburg moment that spills over into derivatives and the financial system. Reuters reports that Bank of America has warned rising illiquidity in the $14.8 trillion U.S. Treasuries market is an issue for concern. This comes as government bonds  experienced their worst week in years as the Fed's interest rate hiking cycle continues.

 Analysts at Bank of America are worried about the state of the U.S. Treasury market. “In our view, declining liquidity and resiliency of the Treasury market arguably poses one of the greatest threats to global financial stability today, potentially worse than the housing bubble of 2004-2007.” They noted that if the Treasury market really hits the wall, the effects could cause even greater disruptions to the U.S. economy than those seen in the financial crisis over a decade ago....  

While few Americans are aware of this, the US Treasury market is generally viewed as the deepest and most liquid securities market in the world and it plays a critical role in the global economy. It is linked to the Federal Reserve's implementation of monetary policy. Despite its importance, the official sector has historically had limited access to information on cash market transactions. This makes it difficult to fully measure the market's structure and size. 

So, is this a big deal? Yes, it kinda is. Those in the know say declining liquidity in the US Treasuries market represents the biggest systemic risk to financial markets since the 2007 housing bubble, if not bigger. The 10-year bond is often used as a proxy for many other important financial matters, such as mortgage rates. It also tends to signal investor confidence in the economy. The fact that many derivatives are tied to this market creates a situation that screams contagion. With this in mind, consider this "an alarm bell" signaling problems ahead.

Treasury securities are loans to the federal government their yields are tracked by investors for many reasons. Treasury Bills are loans to the federal government that mature from a few days to 52 weeks. A Treasury Note matures in two to 10 years, while a Treasury Bond matures in 20 or 30 years.23. The 10-year Treasury yield is closely watched as an indicator of broader investor confidence. Treasury bills, notes, and bonds carry the full backing of the U.S. government and are viewed as one of the safest investments available. 

The US Treasury sells bonds via auction and yields are set through a bidding process.  When confidence is high, bonds become more valuable even as yields fall. As perceived risk increases, as in our current market, investors demand a higher yield in return for accepting greater risk. This confidence factor reverberates across the world financial system and carries with it huge geopolitical consequences. In short confidence in the US Treasury market is essential for the stability of the global financial system.

The Group of 30, or the G-30, a private, nonprofit international body composed of academic economists, company chiefs, and representatives of national, regional, and central banks said in a July 2021 report, "The US Treasury market is the single most important financial market in the world, as Treasury rates are a fundamental benchmark for pricing virtually all other financial assets."  This means, that confidence in the US Treasury market is essential for the stability of the global financial system.

Rather than going into a deep explanation of this market, the crux of this post is to let you know this is happening and of its potential to disrupt "the force," if I may use a Stars Wars term. This is a big deal because it is directly connected to true price discovery which has been absent from many markets for a long time. Here are three very important words, interest rates matter. Two other words we should remember are liquidity matters. Without liquidity, markets cease to function.

 

 Republishing this article is permitted with reference to Bruce Wilds/AdvancingTime Blog