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The Treasury Storm of the Century Is Coming
David Haggith

That is what passage of the debt-ceiling bill actually presages.

Passage of the debt ceiling bill presages a treasury storm the likes of which none of us have ever seen. It will deluge bonds, pound stocks, raise interest on everything, and sweep away the corporate debt binge that fueled stock buybacks, drowning zombie corporations in its flood.

After publishing my own article, “A Storm is Gathering,” last night about all of this, numerous stories this morning are already lining up to confirm the claims made in that article, particularly the main theme, which was that a sudden flood of new Treasury issuances is about to come pouring in, assuming the debt ceiling increase, which passed the House late last night, now passes the Senate (as I am certain it will and was certain it would earlier with the House and the House Finance Committee). That will be the storm of the century for bonds and stocks and many other things, unlike any raising of the debt ceiling we’ve ever experienced.

Another point my own article brought up was that the stock market’s only lift in May came from AI stocks, which carried the NASDAQ up, but did nothing for the Dow and merely kept the S&P from falling. This “frenzy” as I called it is being called a “frenzy” by others in today’s news as well, and one of those stories agrees that it is likely to deteriorate exactly as internet stocks did in the dot-com bust, even though AI will transform industry and commerce as much as the internet began to do two decades ago and as personal computers did two decades prior to that. Internet stocks all went down during the 2000 bust, but those that survived, such as Amazon, became the major transformative players in the market and in the economy for the next two decades.

Stocks, this morning, are showing the same kind of lull I wrote about in the article, giving some signs of rising on fading interest in AI stocks and from a boost from the House passage of the debt bill, but not really having any oomph behind them so far (in fact, even less enthusiasm than the quickly-passing spurt I thought they might get).

The guts of my own story about the Treasury surge that is coming showed up in a news story about how the corporate debt binge is likely to get stormed over by the onslaught of Treasury supply raising interest on all bonds that have to compete against “risk-free” Treasuries (never mind they certainly did not prove risk-free to banks a couple of months ago, thanks entirely to the Fed’s own raising of interest rates and roll-off of Treasuries, which will continue even as the government starts trying to fund all kinds of new bonds). The debt binge was largely used to do stock buybacks that long pumped up the stock market with artificial demand created by companies for their own stocks; so, the article points out one more way (not mentioned in my article) that the Treasury deluge will pound stock prices back down: The cheap debt for those buybacks will now end.

As also mentioned in my article, as longtime mantra of mine, the job market is not rolling over like many think the Fed would like. It shows only the faintest signs of starting to budge, but no bigger signs than in showed in past months, which went nowhere. Payrolls actually rose, which many say the Fed doesn’t want, pressing the Fed to stay hard at its inflation-fighting task, which was what I pointed to as an absolutely driving force that will keep the Fed from rescuing Treasuries when the Treasury opens back up for business following Senate approval of the debt-ceiling deal. Unemployment did nudge upward, as many say the Fed wants in order to fight inflation, but not enough to matter in terms of Fed rate hikes.

Finally, Ronald Reagan’s budget director, David Stockman, points out that McCarthy’s cause célèbre is really just proof of how he wimped out because he could have proven once and for all, as I’ve been pounding, that the debt default was never anything but canard. There never would be debt default, as Stockman points out, because the government could and would simply reduce spending on those expenses it has control over (that aren’t established by contract or funded as debts). 

Stockman also says McCarthy should have gotten assurance from Biden, at the start of deal negotiations, that payment of debt obligations, Social Security benefits, Veterans benefits, etc., would be assured as top priorities, with or without a deal. As I pointed out, without such an assurance, US credit would have been seriously downgraded the second a deal failed because just like in 2011, credit agencies would not wait for actual default to move, and they would stop trusting government to make the right moves. That prospect should have been cleared off the table as a threat right away, which makes me think McCarthy loved the threat for the sake of his MIC underwriters as much as anyone. A downgrade would be far more critical during the coming Treasury monsoon than it was back in 2011, especially with the vast mountains of government debt our weaponized politicians have accrued since then.

Without such an assurance up front, I doubt agencies would trust the government to live within the constitution any more than S&P trusted it in 2011. That trust is even less assured now, though it would be easy to assure, if we had smart politicians, even without lifting the debt ceiling, but who can think we have politicians smart enough to foresee the need to do do that? There was certainly never talk of making it clear that failure to lift the ceiling would be handled by prioritizing all debt payments, which even after paying all Social Security benefits and Veteran’s benefits, etc, would still leave enough cash flow just from ax revenues to cover all other government expenses at 50%. And that, of course, was government’s true fear. It would be forces to tighten its belt … a lot. Instead, everyone chose to brandish the fake threat of default, which is the last thing you want to be shouting about in front of all you creditors. But shout they did!




Seeing the Great Recession Before it Hit

My path to writing this blog began as a personal journey. Prior to the start of this so-called “Great Recession,” my ex-wife had a family home that was an inheritance from her mother. I worked as a property manger at the time, and near the end of 2007, I could tell from rumblings in the industry that the U.S. housing market was on the verge of catastrophic collapse. I urged her to press her brothers to sell the family home before prices dropped. The house went on the market and sold right away — and just three months before Bear-Stearns and others crashed, taking the U.S. housing market down for the tumble. Her family sold at the peak of the market.

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