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Treasury Fortune Telling Turns Real

Over the last few weeks, I was making two predictions that have moved from being prediction to now being mundane news facts. The first was easy: there would be no debt default. The number-one reason I gave, however, was being told (or foretold) by almost NO ONE. David Stockman and a few others not withstanding, almost all claims in the media were that the US could default. I pointed out that it legally cannot default, so it would not default. The whole default narrative was smoke and mirrors created by both parties who desperately want to avoid any serious cutting of the US budget they have already approved.

We saw that resistance to cutting in the outlandish sky-is-the-limit expansion of the debt ceiling to a time limit, versus a monetary limit, which Speaker McCarthy embraced as a huge feather in his cap. Congress can now create as much debt as it wants until after the 2024 election! Hallelujah! sang the congressional chorus, minus a few disgruntled conservatives who wanted less and a few renegade Dems who joined them in the vote against raising the ceiling because they wanted even more. Both parties could keep their favorite pork, rather than doing the only thing which would actually have to happen — a partial shutdown of government spending. That, I noted in face of endless articles that ignored it, can be done because it has been done!

So, that was the one big reason it was safe to predict no default, in spite of all the fear mongering. The other reason is far simpler: Default is the one thing that never has been done. We’ve been through this exercise about 80 times since the sixties, and default has never happened. We got our credit downgraded because both parties kept threatening default, but both seem to realize the constitution forbids it, which requires prioritizing debt expenses over all other expenses of the government. Talk is not cheap as it can cause credit agencies to believe you will actually do it, and none of them is likely to wait until after you already have to make the downgrade.

But, NOW here is where the prognostications of last week get interesting in the REAL news. My other forecast was that a huge tsunami of Treasury issuances would swamp markets, making the lifting of the debt ceiling no certain reason to rise for stocks. Within just a couple days of signing to raise the ceiling, hundreds of billions of dollars in new debt that I said would have to come pouring through already did — a massive rush of new issuances to make up for lost time.

So far, all of it was readily sopped up by the Treasury-dry market at favorable rates for the government. However, the first fruit is the low-hanging fruit. As these issuances continue at this rate in the next few months, other financial writers are now starting to worry about that which they did NOT foresee — the turmoil it is likely to create in the bond market AND in the stock market as it eats up liquidity during a time, as I had noted, when the Federal Reserve is no longer there to be the government’s buyer of first resort.

Anyone still thinking the Fed will flip and go to sudden QE to save the government, still needs to think again, as I said almost all of last year in the face of the endless “Fed pivot” mania by market marketeers. No Pivot! As they now state their beliefs that the Fed may pause at its next meeting (possibly true) and claim that the pause will become permanent (not so likely true), they should all take a lesson today from the Reserve Bank of Australia. It paused, and nearly everyone looked at that as the bellwether for all central banks, saying its pause was the last raise it would make. Well, since that pause, it has now raised rates by 25 basis points TWICE!


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