Where Did The More Than $500 Billion Come From?

Sprott Asset Management has "pulled forward" something I intended to cover in my "year end review" Ticker but since he’s put it out there I think I need to cover it now:

As a thought experiment, we separated all the various US Treasury owners and asked our readers whether each group could afford to increase their 2009 treasury purchases by 200%. In the end, we surmised that most groups couldn’t, and prepared our readers for the worst.

Almost seven months later, however, nothing particularly bad has happened on the US debt front. There have been no failed auctions, no sovereign defaults, no downgrades of debt and no significant increase in rates…not so much as a hiccup in the treasury market. Knowing what we discussed this past June, we have to ask how it all went so smoothly. After all – it was pretty obvious there wasn’t enough buying power to satisfy the auctions under ‘normal’ circumstances.

In the latest Treasury Bulletin published in December 2009, ownership data reveals that the United States increased the public debt by $1.885 trillion dollars in fiscal 2009.


To our surprise, the only group to actually substantially increase their purchases in 2009 is defined in the Federal Reserve Flow of Funds Report as the "Household Sector". This category of buyers bought $15 billion worth of treasuries in 2008, but by Q3 2009 had purchased a whopping $528.7 billion worth. At the end of Q3 this Household Sector category now owns more treasuries than the Federal Reserve itself.8

If you believe that you’re more gullible than I.

Here’s why.

The 2009/3Q Z1 shows an alleged annualized inbound (purchase) flow rate for "households" of $742.9 billion.  This was exceeded only by the 1Q 2009 number of 1066.5, which in the context of the stock market meltdown makes perfect sense.  Likewise, in 2008 Q2/Q3 when the market was falling apart flow rates into Treasuries by households were very heavy as well.

Before you write this off and say "oh but people still are scared and thus not willing to invest in the stock market" you better look below at the Money Market Mutual Fund holdings!  In Q1, Q3 and Q4 of last year this segment saw massive buying of Treasuries.  Not so this year – Money Market funds have been NET SELLERS all year long, and in Q4 the rate of selling has dramatically increased, mostly as a consequence of broker/dealer sales. 

This, of course, is perfectly consistent with the stock market rising – money flows out of Money Market funds and into equities, thus causing Money Markets to be net sellers.

So how is it that "Households" allegedly are (individually, via Treasury Direct?) buying Treasuries at a $700+ billion annualized rate when the other categories under which "households" transact in the markets - via money market accounts, mutual funds and similar instruments – are showing either small increases or significant net sales?

There are other oddities in the Z1 as well related to net borrowing and lending – one of the more important being the fact that GSEs suddenly became negative net borrowers to the tune of more than a half-trillion dollars in the second and third quarter!  Wait – they’re paying down outstanding lending commitments?  I thought The Fed was absorbing all their net new issue and Treasury was backstopping their operating costs?  Hmmmm…… is someone trying to de-lever due to knowledge of "fun times" to come in 2010? Perhaps Timmy knows too, eh?

The two companies, the largest sources of mortgage financing in the U.S., are currently under government conservatorship and have caps of $200 billion each on backstop capital from the Treasury. Under the new agreement announced today, these limits can rise as needed to cover net worth losses through 2012.

Hint: Treasury believes those losses are going to be massive, and so do the GSEs, judging not by statements but by their behavior.

Commercial banks are neither lending OR borrowing, and after what looked to be a let-up in their divestment in the 2nd Quarter it has picked up bigtime once again in their third.  Again: What do they know that we’re not being told about their losses?

I have previously opined (in October) that it is more than a bit unlikely that "Caribbean Banking Centers" have the GDP (or sovereign wealth) to support more than $200 billion in Treasury Security acquisitions:

Who is the real holder of all the Treasuries in "Caribbean Banking Centers"?  You don’t actually expect me to believe that little islands like Antigua and Grand Cayman have the sovereign wealth to support holding nearly two hundred billion dollars of Treasuries, do you?  Is that a vehicle by which back-door monetization can (and has) taken place?  Germany, with a real economy and government, by contrast holds a mere $55 billion dollars, and even Russia (and Hong Kong!) have only $121 billion.


Now we have more than $500 billion in further discrepancies that make absolutely no sense, especially when one looks at the rest of the patterns in the Fed’s most-recent Z1 release.

This, of course, begs the obvious question:

Who really "bought" that Treasury debt – and did it really "subscribe"? 

Or is the truth that there were in fact no buyers for upwards of half of the total Treasury issue in the last year and it was instead monetized – one third openly via Federal Reserve "open market" purchase, and the other two-thirds via "covert" or "stealth" means, complete with bucketing the alleged "buyers" into categories in The Fed’s and Treasury’s data releases?