Liquidity in Bond Markets Crimped As Treasury Auctions Crowd Out Corporates

Treasury Secretary Steve Mnuchin’s impromptu calls to bank CEOs on Christmas Eve aiming to assuage investors by inadvertently causing panic, may have missed the mark. The real liquidity crunch appears to be not in banks, but in the corporate bond market, funding for which is being crowded out by immense Treasury sales as the deficit continues to skyrocket. The problem, as described in MarketWatch, is that primary dealers in Treasuries who get special privileges in dealing directly with the treasury and therefore get the lowest prices, are expected to – in a wink-wink mutual back-scratching maneuver – buy US Treasuries in return for the privilege of being a primary dealer. So they are bound to bid in the government bond market, leaving less liquidity for bidding in the corporate bond market, making it illiquid. (NASDAQ:VCSH)

Japan Follows S&P 500 Into Bear Market

Japanese stocks bounced a bit higher today, about 0.9%, after slipping into a bear market officially yesterday when it crashed over 5%. The bounce was not enough to take the Nikkei 225 out of bear market territory, though technically it has been in a bear market since 1989 and never gotten remotely close to reaching new highs. All subsectors of the Japanese stock market were down, following cues from Wall Street though Japan’s economy, at least superficially looks to be functioning normally. That may not be the case if losses continue to mount, and Japan’s debt problem is more than twice as extreme as the United States by debt to GDP ratios. Japanese government bonds, or JGBs, have been skipping around a 0% yield since 2016. (NYSEARCA:EWJ)

Gold Is Loving the Turmoil

One investment class that hasn’t been phased by the panic selling has been gold, which has had a higher real yield at zero than Japanese government bonds, for example, for years. Gold (NYSEARCA:GLD) has shot past $1,270 an ounce, blowing past its 200 day moving average and now bumping up against the 50DMA. If it pushes through the 50DMA without much resistance, as it seems to be doing this morning, the next resistance level is at $1,300, and then $1,360. The gallop higher in gold prices could be signaling that the current rate hiking cycle initiated by the Federal Reserve in December 2015, is just about over, or already over. Gold bottomed at almost exactly the same time as the Fed began hiking rates after keeping them at zero for 7 years. Real rates are still at zero or very close to it, as the yield on the overnight money market rate set by the Fed is still only 2.25%, about the same rate as inflation measured by the CPI, meaning Treasuries still have around the same yield as gold, which doesn’t yield anything, assuming one is not Rumplestiltskin.

Goldman Sachs in Hot Water Over Stock Collapse, Malaysian Scandal

Pushing paper is very lucrative. Goldman Sachs (NYSE:GS) is getting some heat for allegedly helping embezzle $6.5B in bond sales for a Malaysian sovereign wealth fund, half of which went to buying jewelry and fine art, which is what the Malaysian people really want and need, maybe. Goldman’s former head of Southeast Asia pleaded guilty to being involved in the scheme, and Goldman still got away with its $600M in fees at about 10% of the offering total. Defending the deal, Goldman CEO David Solomon said, “The 1MDB bond offerings were generally meant to raise money for an entity intended to acquire and develop power assets to support the Malaysian economy. Instead, a huge portion of these funds was diverted. We are and have always been committed to assisting government agencies in bringing to justice the people responsible for these crimes.” Investors aren’t buying it, literally. Goldman has had its sharpest decline in terms of market cap per unit of time, since July-November 2008.

Trump Wants YOU – To Buy Stocks

President Trump is trying to pull an Obama by calling the exact bottom in a bear market, though he may be a little early, or maybe even a lot early. Obama called the bottom to the day when he urged Americans, on March 6, 2009, to buy stocks. Trump is doing this now, saying that America has companies, the “greatest in the world” with “record kinds of numbers” leading to a – you can’t have a Trumpism without the word “tremendous” in it – “tremendous opportunity to buy”. To paraphrase Smokey the Bear (Market), “Only YOU…can prevent bear markets.” We wonder what he’ll tweet if he turns out to be wrong, but he’ll probably just blame it on the Fed.