Connecting The Dots Part 2
In this series, we will examine and connect the dots, on several topics, all of which are contributing to stagflation, low interest rates, negative economic growth, and the greatest asset bubbles of all time. Today, lets examine our third and fourth topics.
As Chelsea Global Advisors point out, asset shortages pump up valuations, so lets pump up the price while dropping the volume.
Free Float
Difference between Free float vs Full Market Capitalization
Full Market Cap = Market Price x # Outstanding Shares
Free Float = Market Price x (# Outstanding Shares - Locked Up Shares)
Flow adjusted float or the free float value of an asset is more representative than the outstanding supply (market capitalization) of an asset.
In 2009 T-bond holdings Fed $475 billion; foreigners $3.2 trillion.
Today Fed $2.4 trillion; foreigners $6 trillion ($3.3 trillion in Fed custody)
Total Fed SOMA $4.1 trillion = Agency MBS $1.7 trillion + T-bonds $2.4 trillion
Last year, T-bond purchases from July 1, 2013, through June 30, 2014 increased the US gross national debt +$864 billion. Who bought? Foreigners +$418 billion; the Fed +$446 billion.
So last FY, lets round up and say the Fed issued $1 Trillion in T-bonds and purchased 50%.
In a normal market $1 Trillion would be the float and the bond prices would be based upon a result of credit, currency and inflation risks.
However, in this market, the stock is $1 Trillion, the float is $500 billion. Therefore, the risk and liquidity profile on a 50% float is not what it would be if all 100% were in play. With the Fed holding 50% of the issuance...
they can greatly influence pricing levels, making the price signaling mechanism unreliable and honest price discovery quite difficult.
Global central bank assets are est. at $14 trillion, SOMA (system open market account) holdings are government, agency and MBS. IMF estimates another $7 trillion in foreign exchange reserves. New banking collateral and liquidity requirements another $4 trillion. This means that $24 trillion is locked up and out of play. i.e. not in the float.
The above leads to:
A. A large and growing difference between the issuance of debt instruments and their float (the real quantity in play in the market).
B. Real supply and liquidity of the market is effectively reduced.
C. Yield, price and their market mechanisms no longer reflect real world conditions, i.e. actual value, potential inflation.
D. Support for lower interest rates and flattening of yield curves.
E. Decreased supply of lower risk assets leads to yield chasing with higher risk assets.
F. Increased demand leads to artificial inflation of other cash flow generating assets.
G. Increased non financial corporate debt i.e. low interest buy back and dividend debt.
H. In the event of further economic adversity, lower rates increase risk for high debt to equity (high cap) companies.
Lets examine, as Scott Grannis AKA The Calafia Beach Pundit aptly points out, in a ZIRP environment, there is a penalty for savers parking in a conservative asset zone.
The $1 Trillion Tax
We are in a prolonged period of inflation adjusted negative short term interest rates. Holding currency, checking accounts, savings deposits and money market funds i.e. cash and equivalents effectively erodes your purchasing power by at least 7%.
Measures of Money Supply
M1 = cash and checking in circulation
M2 = M1 + savings
MZM = M2 + money market
MZM in billions 1959 - Present
M1, M2, M3, MZM since 1980.
Notice M3 was discontinued by the Fed in 2006. That's because M3 = M2 + large deposits + institutional. If continued to it's logical conclusion, the M3 line would probably peak around $21.5 Trillion....
(MZM ($13T) + Fed SOMA (system open market account) government; agency; MBS holdings ($4.5T) + ER (bank excess reserves) + ($2.9T) = $21.5 Trillion.)
Note that in 2008 the difference between MZM and M1 was 6.8 trillion, today it is 9.8 trillion. Round up to $10 Trillion for annual purchasing power erosion on cash equivalents @ 7% equals $700 billion annually.
However, cash equivalents pay less than 1.5%, including treasury securities with < 5 years maturity, which have averaged 1.5% since 2008, adding < 5yr maturity, institutional money market funds, commercial paper, and bank CDs would bring the erosion to well over $1 Trillion annually.
More to come in Part 3.
As Chelsea Global Advisors point out, asset shortages pump up valuations, so lets pump up the price while dropping the volume.
Free Float
Difference between Free float vs Full Market Capitalization
Full Market Cap = Market Price x # Outstanding Shares
Free Float = Market Price x (# Outstanding Shares - Locked Up Shares)
Flow adjusted float or the free float value of an asset is more representative than the outstanding supply (market capitalization) of an asset.
In 2009 T-bond holdings Fed $475 billion; foreigners $3.2 trillion.
Today Fed $2.4 trillion; foreigners $6 trillion ($3.3 trillion in Fed custody)
Total Fed SOMA $4.1 trillion = Agency MBS $1.7 trillion + T-bonds $2.4 trillion
Last year, T-bond purchases from July 1, 2013, through June 30, 2014 increased the US gross national debt +$864 billion. Who bought? Foreigners +$418 billion; the Fed +$446 billion.
So last FY, lets round up and say the Fed issued $1 Trillion in T-bonds and purchased 50%.
In a normal market $1 Trillion would be the float and the bond prices would be based upon a result of credit, currency and inflation risks.
However, in this market, the stock is $1 Trillion, the float is $500 billion. Therefore, the risk and liquidity profile on a 50% float is not what it would be if all 100% were in play. With the Fed holding 50% of the issuance...
they can greatly influence pricing levels, making the price signaling mechanism unreliable and honest price discovery quite difficult.
Global central bank assets are est. at $14 trillion, SOMA (system open market account) holdings are government, agency and MBS. IMF estimates another $7 trillion in foreign exchange reserves. New banking collateral and liquidity requirements another $4 trillion. This means that $24 trillion is locked up and out of play. i.e. not in the float.
The above leads to:
A. A large and growing difference between the issuance of debt instruments and their float (the real quantity in play in the market).
B. Real supply and liquidity of the market is effectively reduced.
C. Yield, price and their market mechanisms no longer reflect real world conditions, i.e. actual value, potential inflation.
D. Support for lower interest rates and flattening of yield curves.
E. Decreased supply of lower risk assets leads to yield chasing with higher risk assets.
F. Increased demand leads to artificial inflation of other cash flow generating assets.
G. Increased non financial corporate debt i.e. low interest buy back and dividend debt.
H. In the event of further economic adversity, lower rates increase risk for high debt to equity (high cap) companies.
Lets examine, as Scott Grannis AKA The Calafia Beach Pundit aptly points out, in a ZIRP environment, there is a penalty for savers parking in a conservative asset zone.
The $1 Trillion Tax
We are in a prolonged period of inflation adjusted negative short term interest rates. Holding currency, checking accounts, savings deposits and money market funds i.e. cash and equivalents effectively erodes your purchasing power by at least 7%.
Measures of Money Supply
M1 = cash and checking in circulation
M2 = M1 + savings
MZM = M2 + money market
MZM in billions 1959 - Present
M1, M2, M3, MZM since 1980.
Notice M3 was discontinued by the Fed in 2006. That's because M3 = M2 + large deposits + institutional. If continued to it's logical conclusion, the M3 line would probably peak around $21.5 Trillion....
(MZM ($13T) + Fed SOMA (system open market account) government; agency; MBS holdings ($4.5T) + ER (bank excess reserves) + ($2.9T) = $21.5 Trillion.)
Note that in 2008 the difference between MZM and M1 was 6.8 trillion, today it is 9.8 trillion. Round up to $10 Trillion for annual purchasing power erosion on cash equivalents @ 7% equals $700 billion annually.
However, cash equivalents pay less than 1.5%, including treasury securities with < 5 years maturity, which have averaged 1.5% since 2008, adding < 5yr maturity, institutional money market funds, commercial paper, and bank CDs would bring the erosion to well over $1 Trillion annually.
More to come in Part 3.
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