Author’s note: Numbers in the original published version of this piece were derived from fed table F.209 not L.209 (in other words, the wrong table). I sincerely apologize to all for the error. And I hope the fact that I’m a dunce won’t distract you from issues I was trying to address. A more detailed description of the error can be found here.
When TrimTabs Charles Biderman questioned the source of the money that propelled stocks 65% from the March 2009 lows, he got beaten with the idiot stick so badly that he turned bullish in April 2010. Lost in the ensuing choke-out was the fact that no one ever actually answered his question, unless scoffing and muttering “dark pools and stuff,” under your breath counts (and he’s the one who should be wearing the tin-foil hat?). Here we go again.
The first thing you should notice when looking at The Treasury’s 2010 Q1 Bulletin is that it’s incomplete, as I’m sure most of Secretary Tim Geithner’s homework assignments were(1). Of the 12 columns on Table OFS-2 (Estimated Ownership of U.S. Treasury Securities), Turbo managed to fill in only 5 (FYI: it takes Treasury more than two months to prepare the bulletin).
From the data actually present, we can determine that Treasury issued 461.7 Billion in new debt Q1. That’s not surprising, we’ve been running at the $500 per person per month clip for almost two years now. What is surprising is that the Fed & Intragovernment holdings went down $17B. Foreigners, God bless ‘em, scooped up an additional $192.5 B, while US saving bond holdings were basically flat (-$1.1 B).
Um, we’re out of data now, but not debt. 287.4 Billion (62%) of Q1′s public debt is not accounted for on the report. Fortunately when discussing who could digest that much debt in three months, we can quickly eliminate 6 of the 7 “not available” data points (depository institutions, pension funds, mutual funds, insurance companies, and State & local governments). The only logical conclusion is at least a quarter trillion in debt was purchased by “Other Investors” in Q1.
Aren’t you glad we cleared that up?
What’s that? “Who the hell are Other Investors,” you say? Good question. It does seem rather nebulous, especially considering that they are now clearly our best customer(s). Not very bright though. They stepped in and bought like crazy as interest rates went to record lows. Still I think we should send a basket of fruit and a nice thank you note, because without them we would surely have had a failed auction (read Keynesian apocalypse).
The Treasury defines Other Investors as:
Individuals, Government-sponsored enterprises, brokers and dealers, bank personal trusts and estates, corporate and non-corporate businesses, and other investors.
Thanks Turbo, for narrowing it down to just about everyone under the sun.
Let’s go ask Ben!
Geithner’s a slacker, this is known, but Fed Chair Ben Bernanke’s SAT score (1590!) suggests analality (?) (mine was considerably lower). Besides, Treasury’s footnotes on tables OFS-2 tell us that the source for 6 of the 7 empty columns is the Federal Reserve Board of Governors, Flow of Funds Table L.209 (and which was actually released before the Treasury Bulletin – don’t get me started…).
The Fed’s flow of funds data is an exercise in convolution, but it wasn’t too difficult to extract the data missing from the Treasury bulletin. Here’s the breakdown:
- Depository Institutions +$67.2 B (up 32.5% in one quarter!)
- Private Pension Funds +$32.4 B
- State & Local Government Pension Funds +$7.1 B
- Insurance Companies +$2.1 B
- Mutual Funds -$13.1 B
- State & Local Governments -6.6 B
Depository institutions and Private pensions purchased record amounts of Treasuries in Q1. Which means that “Other Investors” accounted for $198 B of the Treasuries issued in Q1. Yes, I realize that this is somewhat lower than my original estimate, but in my defense that was a logical conclusion. Who knew banks and private pensions are expecting another stock market collapse? Nobody at CNBC anyway. They’re too busy laughing at Main Street for not seeing the awesomeness of the recovery.
Before putting away the Fed’s flow of funds, it is worth noting that brokers and dealers added $8.4 B in holdings and GSEs bought 38 B (both groups are included as other investors and no the GSE number is not a mistake!)(2). This brings us to the turd in the punchbowl. The Household sector, who the Fed says purchased a whopping $148 B. Now before you start thinking your neighbors are taking their unemployment checks and sneaking off to Treasury auctions, listen to what Sprott Asset Management’s Eric Sprott and David Franklin said of the household sector in their December 2009 report entitled, Is it all just a Ponzi Scheme?:
To quote directly from the Flow of Funds Guide, “For example, the amounts of Treasury securities held by all other sectors, obtained from asset data reported by the companies or institutions themselves, are subtracted from total Treasury securities outstanding, obtained from the Monthly Treasury Statement of Receipts and Outlays of the United States Government and the balance is assigned to the household sector.” (Emphasis ours) So to answer the question – who is the Household Sector? They are a PHANTOM. They don’t exist. They merely serve to balance the ledger in the Federal Reserve’s Flow of Funds report.
I guess that means your neighbor isn’t our superhero, and besides, if he was he’d have a cooler car. So who are these strangers with candy hell-bent on making sure this sugar high doesn’t end? I don’t know. There I said it. Maybe Charles Biderman gets rattled when everyone calls him a moron, but I’m used to it. So fire away, but answer the question.
By the end of 2010, Other Investors will own more than 10% of the US public debt (1.5 Trillion or so). They bought more than 40% of the new debt in Q1. At what point does this kind of opacity become unacceptable? Why can’t the Treasury fill out its own bulletin with information already available? Why do we have to wait five months for information that is so vague, you can’t even call it information with a straight face?
And last but not least, where do we send the fruit basket?
- Treasury’s bulletins have always omitted the most recent data – the omissions are not unique to Geithner. The omissions are inexcusable, especially now, but not new. I didn’t explain that because I didn’t think it was particularly relevant and it ruined a perfectly good joke.
- This sentence was replaced. Data on the GSEs was omitted from the original post, and the broker and dealers number was changed from -19B to +8.4B.
Is it all just a Ponzi Scheme? (Sprott & Franklin)