Last Week's TIC Report

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Lemonyellowschwin's picture
Lemonyellowschwin
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Last Week's TIC Report

I don't think it's getting enough attention. Here's some commentary:

http://financialsense.com/Market/wrapup.htm

To me, everything ends in a vortex and at the center of the vortex is the dollar. If we don't have enough money coming in to support our debt, we have to print dollars, and if we have to print new dollars then we get less coming in, and then we have to print more and then . . . . well, we get the picture.

SkylightMT's picture
SkylightMT
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Re: Last Week's TIC Report

Here's another article along the same lines: http://seekingalpha.com/article/131680-be-bop-sudden-stop-of-capital-flows-into-the-u-s

"This situation actually started to develop back in 2007, as foreign demand for Agency Debt started on its present downward path. Brad Setser, in a November 2007 post, even used the term Sudden Stop to capture the totality of the falling net inward flows to US assets. As we know, the bulk of the Federal Reserve’s monetization was focused through mid-March of 2009 on Agency debt. But, with the March FED meeting, the FED added its first 300 billion of planned purchases of actual Treasuries, to its gargantuan purchases of Agencies. The reason is simple. When we take the current rate of private savings in the US combined with inward flows of demand, for Treasuries, and we compare this to the acceleration in US Treasury supply–the result is a shortfall. I currently peg this at about 300 billion. And I agree with a number of analysts who are forecasting a tripling of this shortfall this year."

Lemonyellowschwin's picture
Lemonyellowschwin
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Re: Last Week's TIC Report

That's a cool little article Skylight, thanks for posting it.  Has anyone else seen commentary on the TIC report?  I've not seen much.

Actually, I am totally floored that the issue of debt monetization and future expected debt monetization is not getting more play.  To me, it seems 100x more significant than how much the Dow gains or loses in a particular day.

I mean, if we just monetized 300 billion how much will we have to monetize next time?  $600 billion?  And the time after that?  And the time after that? 

memorrison's picture
memorrison
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Re: Last Week's TIC Report

Lemony.....

 

I could not agree with you more!!!  It is absolutely crazy that this is not front page news.  It seems a little surreal - much like all the talk when the mortgages were starting to blow up.  Or, the comments when Bear Sterns went under..... seems like if we are not talking about it now, when it gets much worse, it will be to late to talk about it with any time to do anything about it.

I did read this blog on it - not sure how I ended up on this blog as I have never been to the site before - but I get links all the time from various emails I receive.

http://economicedge.blogspot.com/2009/04/february-monthly-tic-flows-negative.html

He does a good job of quoting an article from Bloomberg and stating that the article is downplaying the bad news.

I looked into when the Government is "purchasing"  debt securities and I could not find out a schedule. The friend who is a bond trader said he was not aware of any "schedule".  But, I would say he was a little taken back by my question.  He is more of an acquaintance than a friend. 

This journey we are all on is sometimes frustrating, as it is hard to put the puzzle pieces together.  I feel this is a pretty big puzzle piece.

SkylightMT's picture
SkylightMT
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Posts: 125
Re: Last Week's TIC Report

It sounds like it could be the beginning of economic warfare. I read somewhere that China stated they would not buy US bonds unless/until the govt would bailout all their bad US private debt (the toxic assets owned by China sold to them by our bad banks).

If we are required to bail out the world, we're in trouble. And anyway, we can't.

Worse, if we escalate this, maybe by refusing to import China's cheap plastic stuff or putting a heavy tariff on their goods until they agree to buy our bonds, we all go down together. Of course, I think we're probably all going to go down together anyway.

Lemonyellowschwin's picture
Lemonyellowschwin
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Posts: 548
Re: Last Week's TIC Report

Me too Morrison.  I think that if the dollar eventually goes under people will look back 50 years from now and see some points on the timeline.  Among those points will be last month's Fed decision and this period of time when money is clearly flowing out of the US when it absolutely has to be flowing in.

I keep playing this out in my mind and I get to a point where the Fed ends up basically monetizing the entire debt.

Here is a copy of an e-mail I sent to some friends of mine last night.  I had had a few glasses of wine and was typing strong.  The figures are probably not as precise as they should be, but I don't know that I can get any better information:

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

To me, there is one economic issue that dwarfs all others:  what is the future of the dollar?  Everything else is noise.  Some of it is important noise, but it all ends in a sort of vortex and at the center of the vortex is the dollar.
 
I don't know why this doesn't get more attention in the mainstream.  There are a lot of people who know a lot more about this than me, but here is how I sort of simplify it in my mind:
 
The US is running ginormous deficits and there is a ginormous debt.  For the moment, let's forget what our future unfunded liabilities are; let's forget what the debt already is; let's just look at one single year:  2009.
 
In 2009 our deficit is already in the range of $1 trillion.  Most credible sources think our total deficit will exceed $2 million for the year.  Some credible folks even say close to $3 trillion. 
 
It is bad to have to borrow ALL OF THAT MONEY!  It is terrible.  But there is something far worse, and that is when there is not enough money to borrow.  In effect, it is bad to have to max out the credit cards.  But it is worse, if you're the government, when the credit lines dry up altogether.
 
There is some evidence to suggest that this is happening right now. 
 
Because the savings rate in the US has been so pathetic, there is not nearly enough domestic money to loan to the federal government.  Much (most?) of that debt is financed from foreign sources including foreign central banks, but also including other foreign entities.  In other words, the amount of money coming into the US from foreigners must at least equal the shortfall between the deficiit and the amount of the deficiit that can be financed from domestic sources.  Let's suppose the deficit is $2 trillion.  If only $500 billion can be borrowed from domestic sources, then we need $1.5 trillion from foreign sources to make up the difference.  In that case, at least $1.5 trillion must flow into the US from foreign shores.
 
The Treasury actually publishes a report every month called the Treasury International Capital report.  The TIC report basically tells us how much money is flowing into the US.  Here is the report for April 15, 2009 (measuring data for February, 2009):
 
http://www.treas.gov/press/releases/tg89.htm
 
Don't bother trying to figure this out directly unless you're a glutton for punishment.  The long and the short of it seems to be that if we run a $2 trillion deficit for 2009, we need to borrow a minimum of something like $1.6 trillion from foreigners since we can only soak up something like $400 billion domestically.  I don't have better information than this; I think it is roughly correct.
 
The problem is, that if you look at this TIC report (for me this just means paying attention to people who can understand it), money is not flowing into the US.  In fact, it is actually flowing OUT of the US at a rate in excess of $100 billion per month.  That means that there is a huge shortfall on the order of $200 billion per month minimum.  To put this in perspective, this is a shortfall in our ability to borrow, on the order of 1/2 the entire year's defense budget every single month.  Again, this is not what we must borrow -- it is what we want to borrow, but cannot.
 
The only possible way for the US to get the money it needs is to allow yields on these bonds to rise.  In effect, it has to offer higher yields to attact more money in.  But that is a gigantic problem because interest rates are tied to yields, and if yields rise interest rates rise.  Thus far, the only thing that is supposedly keeping the economy from completely imploding is the fact that interest rates are artificially being kept as low as humanely possible.  If rates were to rise to any significant degree, it would shut down all hope of "recovery" and the depression people talk about then becomes a foregone conclusion.
 
This leaves one alternative:  Print.  The Fed must print money and use the money to buy Treasuries, and that is where the money will come from to finance the government.  That is really incredible when you think about it, because this kind of printing is supposed to be reserved for third world countries.  Normal countries are not supposed to work that way.  Only disfunctional countries are.
 
On March 20th, the Fed announced that it was going to buy $300 billion in Treasuries with printed money.  That came as a big shocker to a lot of people, and it really was an historic event because it was an admission that the government is going to be fueled by vast sums of printed money.  If the dollar ever does crash big time, March 20th will be one of the points on the timeline that people look at 50 years from now.
 
But what people might not realize is that (1) the Fed had no other choice, and (2) it is probably not going to be nearly enough. 
 
Here is what I think is going to happen:
 
The Fed will have to increase its degree of printing fairly dramatically.  Look for future Fed announcements to make it plain that they are going to keep on doing it in greater and greater amounts.  $300 billion over six months is not enough.  It probably has to be at least $1 trillion a year and probably more.
 
The more the Fed monetizes, the more smart money will get out of the Treasury-buying business, particuarly at these low yields.
 
The more smart money leaves, the greater the shortfall.
 
The greater the shortfall, the more the Fed monetizes.
 
Now you have a vicious cycle.
 
Here are two links to articles that might be of interest:
 
http://seekingalpha.com/article/131680-be-bop-sudden-stop-of-capital-flows-into-the-u-s
 
http://financialsense.com/Market/wrapup.htm
 
I think this should get way more attention than it's getting.  In the big macroeconomic picture, in my mind at least, this is where the end game is.  It's so much more important than what the Dow does on any particular day or which company bought which company or anything else.
 

memorrison's picture
memorrison
Status: Bronze Member (Offline)
Joined: Apr 16 2008
Posts: 90
Re: Last Week's TIC Report

Lemony-

 

What response did you get from your friends?  Are they up to speed on what you are talking about...... The latest TIC report, coupled with the horrible Jan report shows a very alarming trend.  If it does not change and reverse soon, we are in big trouble.  I did go to the link ...seekingalpha....  I would say that the current domestic demand is from  treasury money market funds. They by charter have to invest in Treasury securities regardless of the current yield.  With the financial crisis that came about due to Lehman Bros. going bankrupt, a lot of money has gone into treasury money market funds.  You may not be aware, but a lot of people lost money in a money market fund last fall - meaning the fund "broke the buck" and the investors will get less than they put in the fund. 

One analogy I use when talking to my friends is - The TIC report shows the world is playing Old Maid with the US dollar... it appears they are trying to "slough" off the maid before the hand is done being played as no one wants to be the last one holding it! 

Thanks for putting another Blog up as I think we should all be thinking outside the box and trying to figure how this piece of the puzzle fits in to the bigger picture!

 

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