Backdrop

Let us use “Mihir Sharma’s Isolating Saudi Arabia Will Be Harder Than It Looks” poem as our backdrop.

1. At the same time, however, it’s risky to keep cutting bits out of the global financial system and expecting it to survive. Russian sanctions strained it. Iranian sanctions might break the SWIFT system unless Europe and America can agree on a path forward. Any attempt to isolate Saudi Arabia could be the last straw. Already there are mutters in the Gulf about “alternate” ways to ensure the flow of finance, especially if the Magnitsky Act is invoked.
2. Integrating global finance has been a real achievement of the past century. The question now is whether the world is willing to take the risk of balkanizing it.

T-Bills Holding

Graphs

Statistica Portal

Government Finances – Who’s Holding U.S. Government Debt

Link

Who is selling?

1. Russia
   • 2018-March Thru May
     • Between March and May, Russia’s holdings of US Treasury bonds plummeted by $81 billion, representing 84% of its total US debt holdings.
2. Turkey
   • 2018-1st Half
     • Turkish Central Bank sells off half of US government bonds in 6 months ( Link )
       • Turkey’s holdings of U.S. bonds, bills and notes have fallen 45.24 percent in the first half of this year, dropping to $28.8 billion in June with a selloff worth $23.8 billion, according to a U.S. Treasury Department report released Wednesday.
       • The U.S. Treasury has a floor of $30 billion to be classified as a major holder.
       • At the end of December 2017, Turkey was reported to hold U.S. Treasury bonds worth $52.6 billion.
3. Japan
   • Schiff Gold
     • Who Is Buying US Treasuries ( Link )
       • The Japanese rank as the second-largest holder of US Treasuries, but they’ve been systematically selling. Over the past six months, the Japanese have shed $63 billion in US debt. Since July 2016, they have reduced Treasury holdings by $123 billion.

Graphs

Russia

US Treasury Holdings By Russia

Who is buying

1. Ireland
   • It’s no surprise that economic juggernauts China and Japan keep swapping places at the top of the list of biggest U.S. creditors. What might strike observers as odd, however, is that tiny Ireland has been lurking at No. 3 for more than a year.
   • The country holds more than $310 billion in U.S. government paper, according to the Treasury International Capital, or TIC, report released on Monday.
   • But Ireland’s ranking is puzzling given that economic heavyweights with deeper financial markets, including the United Kingdom and Germany, keep less Treasurys on their books than an arguably peripheral member of the eurozone. Ireland does not have Japan’s massive pension fund and life insurance companies that need to buy long-dated government debt to match their lengthy liabilities. Nor does it have China’s exporters, whose rapid growth has enabled the country to accumulate its hoard of foreign-exchange reserves.
   • Investors and analysts suspect Ireland appears as one of the U.S.’s largest creditors on paper because Google parent Alphabet and other American corporations like to hold their overseas profits in highly liquid Treasurys. These cash-rich firms want to avoid the 35% repatriation tax, but they don’t want to let the foreign-earned cash sit idly by.
   • “There might be some correlation because U.S. corporations with European subsidiaries tend to hold most of their offshore corporate cash in Ireland and Luxembourg. Those are the two main places where they have their offshore cash,” said Lance Pan, director of investment research at Capital Advisors Group, which manages money for American firms.
   • As a country that offers a combination of low corporate taxes and an English-speaking workforce, it’s little surprise Ireland is now the country of choice for many U.S. companies looking for a launching pad for European operations. It currently hosts the European headquarters of Google, Facebook, Apple, and Microsoft
   • The four firms including Amazon which has located its main office in Luxembourg, hold more than $200 billion worth of government paper, according to their corporate filings.
   • Microsoft and Apple alone added more than $80 billion of U.S. government paper in the past five years, doubling the previous amount. At the same time, Ireland’s holdings have grown at a similar pace, rising $200 billion since 2012.
   • Most of the sovereign paper in the country is placed in so-called custodial accounts. But the Treasury Department does not differentiate the composition and identity of the actual owners, and simply categorizes by nationality—in other words, central banks are lumped with private money managers.
2. American institutional and individual investors
   • Who Is Buying US Treasuries
     • According to Wolf Street, “Mostly American institutional and individual investors, directly and indirectly, through bond funds, pension funds, and other ways.”
     • The question is how much of the load can these investors absorb? And how high will interest rates have to climb in order to keep them buying? Keep in mind, rising interest rates don’t just impact bond yields. On the flip-side, debtors are paying more to service their debts. That means leveraged companies and consumers with massive credit card balances. That’s not good news in a world drowning in debt.

US Federal Reserve

1. Schiff Gold
   • Who Is Buying US Treasuries ( Link )
     • The Federal Reserve is another big player in the US Treasury market. The central bank holds about $2.39 trillion on federal debt, much of it purchased over the last decade through its QE programs.
     • But the Fed isn’t buying right now either. Its Treasury holdings fell by $70 billion from the beginning of its QE unwind last fall through April.

World Drowning In Debt

1. Zero Hedge
   • Tyler Dunden
     • IMF Sounds The Alarm On Global Debt, Warns “United States Stands Out” ( Link )
       • What we again find odd is how quiet everyone was for the past ten years when central banks, by keeping interest rates at record low levels, enabled the world’s biggest debt issuance spree, for both public and private debt, and now that debt is at a level that even Goldman recently said is no longer sustainable, suddenly everyone – from central banks, to bank CEOs, to NGOs – is screaming from the rooftops how dangerous debt really is …
       • Reading the IMF report between the lines, it is nothing more than advance scapegoating for the inevitable global debt crisis that is coming, and which not even the IMF is hiding any more. What is most comical – if completely expected – is that the IMF is now blaming it all on Trump: not on generations of economists who steered the world to the point where there is more than $3 of debt for every $1 of GDP, and not on central bankers who flooded the world with debt so that the richest 0.01% can be richer than their wildest dream. Nope: it’s all Trump’s fault.
       • Somehow we doubt this advance damage control will work after the next, and likely final, crash.
       • “We urge policymakers to avoid pro-cyclical policy actions that provide unnecessary stimulus when economic activity is already pacing up,” Gaspar said; what he really meant was “Trump, stop what you are doing before you lead to a debt funding crisis, that finally bursts the global debt bubble. “
       • There is another threat: rising rates. The IMF said that the interest burden has doubled in the past ten years to close to 20% of taxes, an escalating cost which “reflects in part the increasing reliance on nonconcessional debt, as countries have gained access to international financial markets and expanded domestic debt issuance to nonresidents.”
       • Echoing its warning from April 2017, The IMF again noted it is was concerned that private sector debts make the global economy more vulnerable to a new financial crisis started by “an abrupt deleveraging process” where borrowers all tighten their belts simultaneously, sending the economy into a nosedive.
       • “In the event of a financial crisis, a weak fiscal position increases the depth and duration of the ensuing recession, as the ability to conduct countercyclical fiscal policy is significantly curtailed.”
       • So what should policymakers – having gotten used to flooding the world in debt – do? Why the opposite, of course: as the FT summarizes, with the global economy growing strongly, the IMF recommended countries stop using lower taxes or higher public spending to stimulate growth and instead try to reduce the burden of public sector debts so that countries have more leeway to act in the next recession.
       • Translation: no tax cuts, no increases to deficit spending, i.e. another dig at everything that Trump is doing.
       • In fact, the IMF singled out the Trump administration’s tax cuts for criticism, since they left the US with a deficit of 5% of national income into the medium term and a persistently rising level of debt in GDP. It also explains why the IMF forecasts the US is the only nation whose debt load will rise in the next 5 years.
         

         “In the United States fiscal policy should be recalibrated to ensure that the government debt-to-GDP ratio declines over the medium term. This should be achieved by mobilising higher revenues and gradually curbing public spending dynamics, while shifting its composition toward much-needed infrastructure investment.”

Iran

New Payment System

• Al Jazeera
  • EU and Iran agree on new payment system to skirt US sanctions
    • In a major snub to the United States, the European Union has decided to set up a new mechanism to enable legal trade with Iran without encountering US sanctions.
    • The EU will create new payment channels to preserve oil and other business deals with Iran, Federica Mogherini, the bloc’s foreign policy chief said late on Monday, in a bid to evade US punitive measures.
    • Mogherini’s announcement came after a meeting with foreign ministers from Britain, France, Germany, Russia, China, and Iran on the sidelines of the United Nations General Assembly in New York.
    • “In practical terms this will mean that EU member states will set up a legal entity to facilitate legitimate financial transactions with Iran and this will allow European companies to continue to trade with Iran in accordance with European Union law and could be open to other partners in the world,” she told reporters after the closed-door meeting.
    • The EU, along with Russia and China, said in a joint statement that the so-called “Special Purpose Vehicle” will “assist and reassure economic operators pursuing legitimate business with Iran”.
    • The statement added that the six countries signatory to the 2015 nuclear agreement “reconfirmed their commitment to its full and effective implementation in good faith and in a constructive atmosphere”.

SWIFT

1. Wkipedia
   • As mentioned above SWIFT had disconnected all Iranian banks from its international network as a sanction against Iran. However, as of 2016 Iranian banks which are no longer on international sanctions lists, were reconnected to SWIFT. Even though in theory this enables movement of money from and to these Iranian banks, foreign banks remain wary of doing business with the country. Due to primary sanctions, transactions of U.S. banks with Iran, or transactions in U.S. dollars with Iran, remain prohibited.
   • Similarly, in August 2014 the UK planned to press the EU to block Russian use of SWIFT as a sanction due to Russian military intervention in Ukraine.However, SWIFT refused to do so. In their official statement they said, “SWIFT regrets the pressure, as well as the surrounding media speculation, both of which risk undermining the systemic character of the services that SWIFT provides its customers around the world”.  SPFS, a Russia-based SWIFT equivalent, was created by the Central Bank of Russia as a backup measure.
   • In September 2018 the European Union foreign policy head, Federica Mogherini, proposed the development of a new “special purpose financial vehicle” intended to bypass the U.S. controlled Society for Worldwide Interbank Financial Telecommunication payments system – commonly known as SWIFT. The seven founding members of this new system are to be Iran, the European Commission, Germany, France, the U.K., Russia and China – but not the United States.
   • The United States, having withdrawn from the JCPOA – better known as “the Iran Nuclear Deal” – has decreed severe sanctions against any nation trading with Iran. The new payments system is designed to remove certain banking transactions with Iran from the purview of U.S. authorities, and as such, to escape U.S. sanctions against nations trading with Iran. The goal is to encourage Iran to continue to adhere to the terms of the JCPOA, which forbids the testing, development and manufacture of nuclear weapons.
   • In time, it could be used more generally to evade other U.S. sanctions, such as those against the German-Russian pipeline project known as Nordstream 2.
   • SWIFT has also rejected calls to boycott Israeli banks from its network.

Quotes

1. David Kotok, chairman of Cumberland Advisors
   • money.cnn.com [ Link ]
     • The bigger risk is that China or another country weans itself off US debt by slowing its purchases and waiting for existing Treasuries to mature.
     • “Gradualism could have a long-term impact on the United States. But that would be a patient policy that would not reveal itself easily,” said David Kotok, chairman of Cumberland Advisors.

Technical Summary

As it relates to Treasury Bills:

1. Sold Off
   • Russia and Turkey have sold off
2. Holding at Current Levels
   • Japan & China
3. Buying
   • US Multi-Nationals ( Amazon, Microsoft, Google, Facebook ) are accumulating as part of off-shore business income
   • Resistant to bring on-shore due to exposure to Tax

International Money Transfer

1. SWIFT
   • Pressured to exert itself as embargoes are launched against countries
   • It appears that Western Europe, Russia, and China might not go along

Closing

In closing, “How do you deal toughly with your banker?” – Hilary Clinton