Hey trader,
I kept circling back to one number today, so I want to show it to you.
The session went nowhere. SPY finished up 0.1%, and pretty much everyone logged off feeling like they’d watched paint dry.
Gold ran 0.9% in that same stretch. That’s nine times the move on a day nothing was supposed to happen.
You could call that a safe haven bid and move on.
I’d rather look at what it actually measures.
Priced in gold, the S&P 500 lost ground today. Your position sat still.
The dollar you’re pricing it in got a little smaller underneath you.
There’s a reason for that, and it starts with the Treasury’s general account sitting near $1 trillion when it usually carries $500 to $600 billion.
So where did all that money go?
Let me take you through the plumbing.
The Treasury is running a catch and release program
Normally the Treasury keeps somewhere around $500 to $600 billion in that general account.
It’s been scaled up to nearly a trillion. Getting there took borrowing.
Over the past year or so, the Treasury raised roughly an extra $500 billion and parked it as a reserve to deploy.
Money that gets borrowed and set aside stops circulating. The total pile of dollars in existence never changed. The portion of it actually moving through markets shrank by about $500 billion.
I think of it like a pond. You catch a fish, you drop it in a bucket, and the pond is down one fish. You release the fish later, and the pond is right back where it started.
That’s the piece people keep mislabeling. Quantitative easing restocks the pond, because the Fed creates new money out of thin air and buys Treasuries from primary dealers like JP Morgan.
This is different. The Treasury already caught those dollars. Now it’s letting them back out, $2 to $4 billion at a time, buying 10 year notes and 20 and 30 year bonds. The program was planned at $2 billion. They’re stepping it up.
At $4 billion a week, that’s $16 billion a month flowing back into circulation.
Somebody has to be willing to buy
Here’s the part I want you to sit with, because it explains why the Treasury is standing there in the first place.
Prices don’t fall because of some abstract force. Every market has a bid and an ask. Prices fall based on who is marginally more willing to sell at the bid.
If everyone is hitting the bid and nobody is lifting the ask, you get free fall. That mechanic is how a Treasury market crashes.
The Treasury is essentially posting a sign that says don’t do that. It’s ready to step in to the tune of $4 billion to keep that scenario from developing.
The reason it needs the sign is that plenty of holders may become motivated sellers. Japan holds roughly $1.5 trillion in US Treasury debt. It needs dollars to buy oil, gas, and diesel, and it needs dollars to support the yen.
China has been reducing its holdings. Russia eliminated its Treasury position entirely.
The Fed owns 50% of our debt that runs 10 years and out, and the Fed isn’t going to dump it. It would let that paper mature instead.
The yen sits at the center of the risk
The single biggest threat I’m watching is the dollar to yen carry trade.
The trade is simple in concept. You borrow cheaply in yen, convert to dollars, and buy assets like Treasuries, stocks, or real estate.
Japan is now trying to strengthen its currency, and it won’t let the pair break much above 160. A meaningfully stronger yen wrecks the math on that trade.
Those returns stop looking good in dollar terms, because it suddenly takes fewer yen to buy the same dollars. The assets get sold, converted back to yen, and the loans get retired.
That unwind is what caused the fire sale scare a little over a month ago when Japan intervened in the yen market.
What the dollars are choosing right now
Dollars released into the system have to land somewhere, and gold is where I keep seeing them go.
Gold got heady earlier in this run because of the leverage in the paper futures market. We de-leveraged, and now it’s breaking back out.
The stagflationary setup favors it. Silver was actually down 1% today, because silver carries industrial demand and the economy is slumping under higher energy and goods prices.
Countries facing weak Treasuries may not stop at selling. They can convert reserves into dollars and then convert those dollars into gold.
What I’m watching this week
The yield picture tells you whether $4 billion is enough. TNX is pushing 4.7%, which is punitive for any company that needs to borrow.
Technology is starved for capital right now, and Nvidia is proposing a $500 billion facility of its own. Its earnings land this week.
Three month T-bills moved from 3.5% to 3.7% or 3.8% over the last month, which starts pricing in a rate increase. The five year popped to 4.4%, so the curve is flattening.
A flattening curve carries a recessionary flavor, and it isn’t good.
Jackson Hole comes Friday, with Warsh telling us where this goes. PCE prints this week as well.
The question I’m carrying into all of it is whether $4 billion a week holds the line, or whether we start breaking toward 5% and 5.25%.
Brandon Chapman, CMT
Creator of Ghost Prints
