Ticking Time Bomb: US Govt Spends Nearly Half A Trillion Dollars This August Alone

The government has just spent nearly 40% more this August than last. Here are the details of a budget deficit that is starting to blow-up…

from Zero Hedge

Two days ago we previewed the the US budget deficit for the first 11 months of fiscal 2018, which according to CBO data, hit $895 billion, up $222 billion or 39% from the same period last year. Additionally, we noted that according to CBO calculations, the US would hit a $1 trillion deficit in calendar 2019, one year sooner than the previous forecast of 2020.

Today, the US Treasury released the detailed budget deficit breakdown for the month of September and the first 11 months of the year, and the numbers are scary.

According to the latest Monthly Treasury Statement, in August, the US collected only $219BN in tax receipts – consisting of $106BN in individual income tax, $93BN in social security and payroll tax, a negative $3BN in corporate tax and $24BN in other taxes and duties- a drop of 3.2% from the $226BN collected last August…

… but more concerning was that in August, the 12 month trailing receipt total was barely higher compared to a year ago, up just 0.3% Y/Y after rising as much as 3.1% at the end of 2017, and on the verge of turning negative year over year.

The real highlight of the August budget report was that government outlays, or total spending, soared to $433.3 billion, not only 30% higher than a year ago, but the highest government monthly outlay of any month on record.

This is where the money was spent: social security ($108BN), defense ($65BN), Medicare ($83BN), Interest on Debt ($32BN), and Other ($146BN).

This resulted in a August budget deficit of $214 billion, which was not only one of the highest one-month deficits on record, but also the highest August deficit on record.

The August deficit brought the cumulative 2018F budget deficit to over $898BN during the first 11 month of the fiscal year, up a whopping 40% over the past year.

This was the highest 12 month cumulative deficit since February 2013; as a reminder the deficit is expect to increase further amid the tax and spending measures, and rise above $1 trillion as soon as next year.

And while the August numbers had a few calendar quirks, until recently Most Wall Street firms forecast a deficit for fiscal 2018 – which closes on September 30 – of about $850 billion, a number which has already been surpassed by $50 billion, at which point things get… much worse. As we showed In a recent report, CBO has also significantly raised its deficit projection over the 2018-2028 period.

But while out of control government spending is clearly a concern, an even bigger problem is what happens to not only the US debt, which recently hit $21.3 trillion, but to the interest on that debt, in a time of rising interest rates.

As the following chart shows, US government Interest Payments are already rising rapidly, and just hit an all time high of $538 billion in Q2 2018.

Interest costs are increasing due to three factors: an increase in the amount of outstanding debt, higher interest rates and higher inflation. Needless to say, all three are increasing; furthermore, a rise in the inflation rate boosts the upward adjustment to the principal of TIPS, increasing the amount of debt on which the Treasury pays interest, turbocharging the amount of interest expense.

The bigger question is with short-term rates still just around 2%, what happens when they reach the mid-3% as the Fed’s dot plot suggests it will?

Deutsche: Is The US Headed For An Imminent Debt Crisis? Here Are The Signs

The thesis is simple and familiar: the United States is running a fiscal deficit and a current account deficit (i.e. "twin deficits") and relies on domestic and foreign investors to buy US Treasuries.

The  bigger the fiscal deficit is the more Treasuries investors - including the Federal Reserve - need to buy. At the same time, the more Treasuries that have to be sold, the highest the interest rate all else equal... until something snaps (or unless an stock market crisis forces the Fed and investors to monetize/park cash in Treasurys).

This was, in a nutshell the grim message from the IMF's latest Fiscal Monitor Report, which warned that the US would be the only country with growing debt levels over the next 5 years.

What the IMF did not elaborate on, however, is that in many countries, such twin deficits have resulted in a debt crisis.

As shown in Figures 10 and 11 below, the model-implied odds of a crisis are set to tick higher over the next several years as government debt levels increase and the current account deficit grows.

Deutsche bank's conclusion is troubling: "the model-implied odds of a US debt crisis in the coming years are set to surge to the highest ever non-recessionary level." And, it goes without saying, they may well hit an all time high once the next recession (or depression) hit, some time in the next 12-24 months.

To be sure there are several mitigating factors when it comes to a US debt crisis, chief among which is that the US is the world's reserve currency (for now).

As DB needlessly reminds us, "the US exclusively borrows in its own currency, while the model includes countries that have been exposed by borrowing abroad;  the US has scope to raise additional revenues (its overall tax rate of 26% of GDP in 2016 is below the OECD average of 34%); and the US dollar is the de facto global reserve currency."

This last point is significant. Figure 12 shows that almost two thirds of global official reserve assets are held in US dollars. One out of every four dollars lent to the US Treasury comes from the foreign official sector. These institutions need a safe, deep, and liquid place to park their reserves. The appeal of Treasuries is further boosted by the US’s military strength, the nation’s cultural appeal, and strong domestic institutions. There are few alternative to US Treasuries in the size and scope of a safe asset demanded by global investors.

True, but this brings up an interesting, and critical, point, one which Bank of America first raised last week, when it suggested that "The 10Y Treasury Is No Longer A "Safe Asset."

Deutsche Bank echoes this warning, and writes that whereas Treasuries tend to rally in episodes of market stress, even when US economic growth slowed sharply in 2008 or when China devalued its currency and signaled potential selling of its Treasury holdings in 2015, "this is not happening today, which is why investors need to pay attention to whether an EM-style debt crisis is about to play out."

* * *

Which brings us to Deutsche Bank's key point: is the US headed for a debt crisis and where should investors look for early signs of a debt crisis?

As DB macro strategist Quinn Brody writes, crises are usually characterized by a “sudden stop” in financing. And whereas both fiscal and current account deficits require capital inflows, declining foreign demand for Treasury securities might signal imminent pressures. Fortunately, the strategist adds, "no major signs of such stress are currently evident, but investors should continue to monitor Treasury auctions for any signs of declining external demand. This will be particularly important in 2018, since Treasury supply is set to increase sharply and several pillars of demand are likely to soften, see Figures 13 and 14."

As deficits continue to grow further in 2019, auction supply will continue to rise, surpassing $1 trillion this year, and growing substantially in coming years.

So far in 2018 the US Treasury has substantially increased the supply of T-bills - which many have speculated caused the blowout in Libor and LOIS - but later this year the supply of longer-dated government bonds will also increase.

As auctions sizes grow, two key pillars of traditional demand support are fading:

• the Fed is shrinking its balance sheet
• foreign purchases are falling particularly as the ECB ends QE.

These trends are evident in lower bid-to-cover ratios, which have recently reached their lowest levels since the financial crisis, as shown in Figure 16. The same trend is evident across auction tenors.

Meanwhile, the Fed will continue paring back its balance sheet reinvestments this year. At 10-year auctions over the last two years, the Fed has absorbed 7% of bond supply, on average. Steadily declining reinvestments will force Treasury to borrow more from the private sector, increasing auction sizes. Simultaneously, Deutsche Bank finds that the scale of foreigners’ debt purchases at Treasury auctions has dipped to its lowest level since the 2013 taper tantrum (chart below).

This is especially relevant for the US, since foreign purchases of Treasuries are a key avenue of current account deficit financing. Other countries, e.g. Japan, have been able to build up very large stocks of sovereign debt, but they are often financed by domestic savings.

Why is foreign demand for US paper softening? According to the biggest German bank (which itself will need some serious investor demand for its stock in the coming months), it reflects several factors.

• Firstly, the dollar has been weakening substantially over the last 15 months. US policymakers, in a departure from tradition, have used their rhetoric to “talk down” the dollar. To some extent, this reinforces market expectations for further depreciation and makes purchasing unhedged dollar-denominated assets less attractive.
• Secondly, US asset valuations are potentially stretched already. While Deutsche Bank equity strategists, ironically, still anticipate around 13% upside for US equities this year, the bank's credit team and global strategists acknowledge that this is just for window dressing purposes, and admit that "there will be less incremental demand from overseas investors considering valuations are more attractive in Europe and EM."
• Thirdly, as the Fed has continued to hike rates and diverge from other major central banks, hedging costs have become more expensive for foreign investors. As shown in Figure 18, 10-year Treasuries no longer offer a yield pickup for European-based investors on a currency-hedged basis. The same dynamic is true for Japanese-based investors.

In its summary assessment, Deutsche Bank writes that more than anything, the world needs safe, liquid assets. Historically, this need has been filled by Treasuries- and it still is. Demand has thus far been inelastic despite the increase in supply.

In a testament to the towering "safety" of Treasuries, they have rallied for 30 years regardless of events in the equity world, while rates continue to slide lower as the stock of debt continues to expand. But Deutsche's ominous conclusion, one which increasingly more commentators, including Goldman Sachs...

... and the IMF, have been voicing is that "eventually this will become unsustainable."

Ok, when?

We cannot say exactly what level of debt (85% of GDP? 100%? 125%?) will prove to be the tipping point, but we do believe that the latest fiscal developments have increased the odds of a crisis.

And so, while the collapse the reserve currency empire remains open-ended, the bank's recommendation is clear: "Investors should continue to monitor Treasury auction developments and will remain alert to any indications of softening demand."

Of course, when this "tipping point" does arrive, it will be too late to make the proverbial "hedging trades." Which might explain not only the recent strength in gold prices, but why after crashing in the start of 2018, the crypto sector is once again soaring, and bitcoin is fast approaching $10,000 once again...

Fonte: qui

China’s Five Options in the Trade War with the U.S. “Rare Earths” Are China’s Most Potent Weapon In A Trade War

After Trump ordered the USTR to consider an additional $100BN in tariffs, something we said on Wednesday would happen if the market was dumb enough to allow Trump to think he had a trade war victory by closing green…

…China has suddenly found itself in a quandary: as we showed first thing this morning, if Beijing were to continue responding to the US in a “tit-for-tat”, it would be unable to retaliate to the latest Trump salvo of a total $150 billion in tariffs for the simple reason that the US does not export $150 billion in products to China.

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Which doesn’t mean that China is out of options; quite the contrary. The problem is that virtually everything and anything else that Beijing can do, would be a significant escalation. In fact, the five most frequently cited options are all considered “nuclear” and would promptly lead to an even more aggressive response from Washington.

Here are the five “nuclear” options that China is currently contemplating:

1. A Currency Depreciation. A sharp, one-time yuan devaluation, like the one Beijing unexpectedly carried out in August 2015, could be used to offset some of the effect of tariffs.
2. Sales of US Treasurys. Chinese authorities could sell some of its large official-sector holdings of US Treasuries, which would lead to a tightening of US financial conditions.
3. Block US services. Chinese authorities could limit access for US companies to the Chinese domestic market, particularly in the services sector, where the US exports $56 billion in services annually and runs a $38 billion surplus
4. Curb US oil shipments. According to Petromatrix, China is one of the biggest importers of U.S. crude oil at 400kb/d, so any counter-tariffs on crude could become very heavy for the U.S. supply and demand picture. Such a move would weigh on U.S. prices and spill over to global oil pricing. As Petromatrix adds, the market would need to start balancing downward price risk of trade-war escalations with upside risk of Iran sanctions as oil flows could be about the same.

All of the above are mostly self-explanatory. The fifth option is one we first previewed back last August, in “Rare Earths Are China’s Most Potent Weapon In A Trade War.” Here is a quick reminder:

In October 1973, the world shuddered when the Arab members of the Organization of Petroleum Exporting Countries imposed an oil embargo on the United States and other nations that provided military aid to Israel in the Yom Kippur war. At the same time, they ramped up prices. The United States realized it was dependent on imported oil — and much of that came from the Middle East, with Saudi Arabia the big swing producer. It shook the nation. How had a few foreign powers put a noose around the neck of the world’s largest economy?

Well, it could happen again and very soon. The commodity that could bring us to our knees isn’t oil, but rather a group of elements known as rare earths, falling between 21 and 71 on the periodic table.

This time, just one country is holding the noose: China.

China controls the world’s production and distribution of rare earths. It produces more than 92 percent of them and holds the world in its hand when it comes to the future of almost anything in high technology.

Rare earths are great multipliers and the heaviest are the most valuable. They make the things we take for granted, from the small motors in automobiles to the wind turbines that are revolutionizing the production of electricity, many times more efficient. For example, rare earths increase a conventional magnet’s power by at least fivefold. They are the new oil.

Rare earths are also at work in cell phones and computers. Fighter jets and smart weapons, like cruise missiles, rely on them. In national defense, there is no substitute and no other supply source available.

Today, The Week‘s Jeff Spross picks up on this topic, and in an article “How China can win a trade war in 1 move” writes that “if things do spiral into all-out trade war, it’s worth noting China has a nuclear option. I’m referring to rare earth metals.”

These are elements like dysprosium, neodymium, gadolinium, and ytterbium. They aren’t actually rare, but they do play crucial roles in everything from smart phones to electric car motors, hard drives, wind turbines, military radar, smart bombs, laser guidance, and more. They’re also quite difficult to mine and process.

Some more details, and the reason why none of this is new to those who have been following the rare earth space and China’s brief trade war with Japan back in 2010/2011:

Basically, if China really wanted to mess with America, it could just clamp down on these exports. That would throw a massive wrench into America’s supply chain for high-tech consumer products, not to mention much of our military’s advanced weapons systems.

In fact, China isn’t just America’s major supplier of rare earth metals; it’s the rest of the globe’s major supplier as well. And in 2009, China began significantly clamping down on its rare metal exports. Once, China briefly cut Japan off entirely after an international incident involving a collision between two ships. This all eventually led to a 2014 World Trade Organization spat, with America, Japan, and other countries on one side, and China on the other.

How did we get to this position where China has a near monopoly on rare earths:

Much of the story centers around Magnequench, an American company that emerged out of General Motors in the 1980s. It specialized in the magnets that account for most of the final components created from rare earth metals. But in 1995 Magnequench was bought out by a consortium that included two Chinese firms who took a controlling 62 percent majority share in the company. They also bought a big rare earth magnet plant in Indiana. Eventually, Magneuquench’s manufacturing capacities were moved to China, and the Indiana plant was shut down.

Executive branch regulators do wield power over foreign investment in and buyouts of American companies, particularly through the Committee on Foreign Investment in the U.S. (CFIUS). But this was the post-Cold War 1990s, when optimistic enthusiasm for globalized free market trade was at a peak. CFIUS approved the initial takeover of Magnequench in 1995 under the Clinton administration, as well as the later shutdown of the Indiana plant in 2003 under the Bush administration.

Lawmakers and the Government Accountability Office criticized the agency and both administrations for their lackadaisical approach to the issue. Hillary Clinton even struck a rather Trump-ian note in 2008, trying to turn Magequench’s sale to China into a campaign issue. But it was a tricky topic, given how her husband’s administration got the ball rolling. So rare earth metals have occasionally turned into a political hot potato, but usually for only brief periods.

Which then takes us back to our August preview of precisely where we are today:

At present, the rare earths threat from China is serious but not critical. If President Donald Trump — apparently encouraged by his trade adviser Peter Navarro, and his policy adviser Steve Bannon — is contemplating a trade war with China, rare earths are China’s most potent weapon.

A trade war moves the rare earths threat from existential to immediate.

In a strange regulatory twist the United States, and most of the world, won’t be able to open rare earths mines without legislation and an international treaty modification. Rare earths are often found in conjunction with thorium, a mildly radioactive metal, which occurs in nature and doesn’t represent any kind of threat.

However, it’s a large regulatory problem. The Nuclear Regulatory Commission and the International Atomic Energy Agency have defined thorium as a nuclear “source material” that requires special disposition. Until these classifications, thorium was disposed of along with other mine tailings. Now it has to be separated and collected. Essentially until a new regime for thorium is found, including thorium-powered reactors, the mining of rare earths will be uneconomic in the United States and other nuclear non-proliferation treaty countries.

Congress needs to look into this urgently, ideally before Trump’s trade war gets going, according to several sources familiar with the crisis. A thorium reactor was developed in the 1960s at the Oak Ridge National Laboratory in Tennessee. While it’s regarded by many nuclear scientists as a superior technology, only Canada and China are pursuing it at present.

Meanwhile, future disruptions from China won’t necessarily be in the markets. It could be in the obscure but vital commodities known as rare earths: China’s not quite secret weapon.

Of course, there is no way of knowing if China will proceed with a rare earth export ban as its response, or whether it will pick any of these options. However, for those who are growing concerned – or convinced – that it’s only going to get worse from here, there is good news: the VanEck Rare Earth ETF REMX makes it easy to make a substantial profit from the first nuclear trade war, should China clamp down on rare earth metals, sending their price to where they traded when China waged a brief trade war with Japan in 2011, when the ETF hit an all time high of $114. Needless to say, should China lock out the US, the price of rare earths would soar orders of magnitude higher.

The original source of this article is Zero Hedge

The Absurd U.S. Economic Model: $300 Billion In New Debt Just This Week

“The entire US national debt was around $300 billion when John F. Kennedy was President…” Here’s why it matters…

by Simon Black of Sovereign Man

I’m doing my best to take a few days off this week, and have the pleasure of spending time with some friends here in a fairly remote corner of Vietnam’s magnificent coastline.

This is one of the most pristine places I’ve ever been– a high-end resort nestled at the top of a mountain in the middle of nowhere overlooking Vietnam’s postcard-perfect Vinh Hy Bay.

I’ve traveled extensively through Vietnam over the years, from Hanoi in the north, to Saigon in the south, and all along the coast. And the country has always impressed me with its raw beauty.

But what’s always been even more impressive to me is how productive and industrious Vietnam has become.

Remember, this place is supposed to be Communist. And like all Communist experiments, this one nearly ended in economic catastrophe. Vietnam was among the poorest countries in the world just 30 years ago.

But in 1986, on the brink of economic meltdown, the government launched a series of sweeping economic reforms they called ‘doi moi’.

Suddenly it became possible for private individuals to start their own businesses, invest capital, and keep what they earned.

The economy started to boom practically overnight, and it’s been growing consistently at 6% to 8% annually for more than three decades.

The primary driver of the Vietnamese economy, of course, is production. Manufacturing. Exports. Etc.

In fact Vietnam is now a dominant manufacturer across dozens of industries and stands to gain if there’s a protracted trade war between the United States and China.

What’s also interesting about Vietnam is that the savings rate is one of the highest in the world– Vietnamese save an overwhelming percentage of their incomes to invest in the future.

So in other words, Vietnam’s economic model is based on saving and production.

This stands in stark contrast to the Western economic model which is based on debt and consumption.

In the United States (and much of Europe), for example, consumer spending comprises roughly 70% of all economic activity.

So consumption, not production, is the single largest component of GDP.

No one ever talks about American producers or entrepreneurs driving economic growth. It’s all about the consumer.

And savings rates in the West are appallingly low… sometimes even negative.

People go into debt to spend money they don’t have to buy things they don’t need to impress people they don’t like.

It’s totally absurd. Yet this is the primary economic growth model for most Western nations.

Consumption, of course, extends far beyond individuals.

Just look at government spending as an example.

The US government’s total debt level now exceeds $21 trillion. And just this week alone, the US government is issuing $300 BILLION in new debt.

To put that number in perspective, the entire US national debt was around $300 billion when John F. Kennedy was President of the United States.

Now they’re issuing that much debt in a single week.

Where does it all go?

The government spends trillions of dollars each year… and a lot of it gets wasted on some of the most comical misuses imaginable.

The National Institutes of Health, for example, spent $1,552,145 of your money to develop a video game that teaches parents how to feed their kids vegetables.

Then there was the $544,338 that the Justice Department spent to spruce up its LinkedIn profile.

And those are just two very tiny examples.

There are also really big, egregious examples, like that $2 billion Obamacare website fiasco.

Or the $1 billion that the Defense Department spent to destroy $16 billion of perfectly good ammunition.

This is all useless, wanton consumption. And it doesn’t take a rocket scientist to figure out the long-term consequences.

Countries whose economic models are based on savings and production will prosper.

Countries whose economic models are based on debt and consumption will suffer.

28 03 2018