The Treasury Department’s TIC update for the month of June 2021 was, well, interesting. Not in a good way, either (post-2014, is it ever actually good?) There are just too many nuggets to digest in one sitting, so here I’ll merely go over three major developments: an update to the May 2021 big dollar warning; a big, nasty wince given this particular China twofer; and what the hell must be going on without US banks being able to borrow US T-bills from foreign non-banks (yes, you read that right).
Last month first; the TIC data gave us one of those preliminary global dollar shortage alarms when for the month of May 2021, it recorded foreign selling of all types of US$ assets outpaced foreign buying. A net negative, especially for private holders, a rarity at the level Treasury logged therefore telling us something important about the inability of the offshore money world to fluidly, efficiently, and necessarily gather US$ funding.
The details of this “selling”, the very long history behind it, and how to properly account for interpret the minus sign, all are described here.
Buying (net) returned in June, according to these updated figures. Crisis canceled? No, not quite. The month-to-month behavior especially at the beginning stages of past global (euro)dollar events tend to be this noisy. It hasn’t been unusual for there to be the big minus/warning one month, then seemingly back to normal the very next.
The substance of this omen is itself that any month turns negative at any time; if the dollars are indeed flowing, let alone flooding as advertised, there shouldn’t be one at all. That there was indicates trouble the entire global system has already been trying to work around which raises the possibilities of rippling effects for months hereafter.
Should this monthly downturn – regardless of the subsequent rebound in net buying – come along with other such dollar shortage indications (which have been increasingly plentiful) then we’d expect more of this to come.
One of these other is China. Economic woes, the PBOC longtime devoid of new dollar flows, and now something that always makes me just cringe.
For the last half of last year, on into late January this year, CNY was unstoppable. Once left for dead because of 2020’s GFC2 shortage, it rebounded like the proverbial Phoenix – even though, as noted above, the magnitude was inconsistent with what we’d otherwise have expected to be its cause, meaning a very clear record of unambiguous, huge inflows.
In terms of TIC data, it would have been a surge in UST’s being held by various Chinese pockets – including any of those storing these “reserves” over in Belgium (Euroclear) for use in derivatives markets (already a clue). But we’d already seen this same hollow rebound in CNY before, just a few years ago back during Reflation #3 in 2017 and January 2018.
How Chinese officials manage these various inflection points once the hollowness is exposed, from reflation to dollar shortage, Euro$ #4, in that case, also tells us something important about them. During 2018’s turnaround, CNY kind of hung in there for a few months before eventually the shortage turned drastic and China’s official sector did nothing to stop it. CNY went DOWN hard, confirming it was about to get BAD everywhere as it eventually did.
Back in 2015, by contrast, the Chinese government took a far more managed approach to attempting to manage the growing dollar shortage presented by Euro$ #3 – including the piece that can only make you cringe in the wrong kind of anticipation. Here it is:
Between late March 2015 and early August, CNY went near perfect sideways, as if guided by an unseen giant keeping the exchange value absolutely steady; too steady. There was only one possible way this could have been done, via extremely costly stealth intervention. The idea behind it was simple enough, to buy time for the situation to work itself out (back when these central bankers still thought these dollar shortages might ever be temporary problems).
In reality, it was like coiling a spring (the nightmare scenario); once loaded with too much dollar stress, the thing snaps. Thus, CNY in August 2015 (it was never currency “devaluation” as some kind of export “stimulus”) which was followed, relatedly, just two weeks later by a flash crash across Wall Street’s invulnerable equities.
Not only has CNY in 2021 stopped rising since around January, look what it’s done since late June. Shudder as well as cringe:
That’s not all. We can “map” China’s reserves levels in the form of UST’s, including Belgium, from the TIC data in order to more completely check CNY trends. Sure enough, CNY has struggled during the very same months (since February) that UST’s “disappear” again from both Belgium and mainland China.
The same months, you recall, when anti-reflation came to subsume global bond markets as well as various large parts of the global economy (only starting with China).
Together, sideways CNY in a narrow range plus the anti-reflation if not outright deflation dollar shortage suggested by falling Chinese holdings of UST’s all point to an increasingly troubling global monetary situation – not necessarily crisis, but certainly disconcerting. So much that, if our view of CNY since June is correct, stealth measures undertaken if only to hope and play for time.
Maybe this time will be the first time it works out.
A big reason why dollar shortage indications are showing up all over the map, something we’ve obsessed about since, oh, January: T-bills. The third section of this TIC review takes us to the utterly confusing cross border trade of bills and their primacy in problematic repo periods.
Repo is the true lender-of-last resort in the world given how the US Federal Reserve is not a central bank (a fact that is tacitly acknowledged by what the Fed nowadays does, or tries to do). If Jay won’t, somebody’s got to do it. The problem has been that repo volumes go up when times are good, or less bad (reflation), and then they disappear when less bad goes right back to outright bad.
Outright bad is acute dollar shortage largely predicated upon collateral shortages (which you can read all about here; collateral multiplier and all that stuff). Expansion of the multiplier and repo, then collapse which herds everyone into limited supply and redistribution of acceptable collateral.
The intensity of this negative pullback in collateral has been dictated by how stupid and reckless the financial system gets in the period before the inevitable downward spiral. The more junk that ends up in it on the way up, helping expand the multiplier, the more the multiplier will likely shrink as dealers’ eventual risk-aversion always seems to end up inversely proportion to that prior stupidity. Rinse. Repeat.
This collateral situation and potential for eventual tightness is further complicated by QE, stripping the system of its best issues, as well as Treasury refunding meaning reducing gross supply at some of the worst possible times (such as early 2011 contributing much to the destructiveness of Euro$ #2).
With that background in mind, first the reflation:
That’s a pretty sizable increase in US banks borrowing securities (repledged, undoubtedly) under repurchase agreements with foreign entities; both FOI’s, or official institutions like central banks, as well as “other” which includes both banks and non-banks.
Now, here’s the punchline (to clarify: the data above and the figures below are from separate entries in TIC, which means they are not directly related):
This makes sense given the reduced supply of bills; fewer bills, or ST Treas Secs, have been borrowed since really January (there’s that February inflection again) by US banks from these various foreigners even though the other data tells us repo collateral borrowing has gone way up during these same months.
More collateral being borrowed, yet it doesn’t seem to be, it can’t be since January, T-bills. This, obviously, begs the question as to what security is being borrowed either through repledging or other means?
Whatever that might be, these results are certainly consistent with T-bill prices and low yields.
Admittedly, the indirect indication of junk concern/bottleneck potential is speculative on my part and is not drawn from these TIC series alone. However, the TIC data is importantly consistent with each aspect of that speculation. In other words, not only is it not being ruled out, these indications are actually more evidence on its side.
In terms of deflationary potential, one more thing pointing toward potential repo junk piled in on the way up:
Suddenly, the rest of the world wants US corporate bonds again, meaning that a ton of them, more than at any time since before 2008, at the same time US banks can’t borrow nearly as many T-bills from foreign institutions, official and otherwise, even though their usage and conditions of repo have reflationary jumped along the way.
Where vaccine and “stimulus” hysteria once rule in unchallenged reflationary excessiveness, it actually didn’t last very long at all. Instead, the opposite indications continue to pile up one after another, at times several all at once. Though headline TIC rebounded, that may prove the exception.
This doesn’t mean bad, bad things tomorrow, or that such might be unavoidable. For now, there are just too many things which continue to seriously raise those possibilities. Deflation potential truly seems to have proliferated in very meaningful ways. But we already knew this.