The debt has ballooned at a mindboggling pace in recent years, and at the end of Q2 had reached $34.8 trillion. Since then, it has further ballooned to $35.3 trillion. This is what the government has to pay interest on.
The higher interest rates are filtering into the debt as old lower-interest-rate Treasury notes and bonds mature and are replaced with new Treasury securities that carry a higher interest rate.
Short-term Treasury bills have ballooned from $4 trillion a year ago to $6 trillion now, as the government has shifted issuance from longer-term notes and bonds to T-bills. Now, about 22% of the $27.8 trillion in marketable Treasury securities are T-bills, up from 16% a year ago.
Oil News:
Friday, August 30th, 2024
It's been a volatile week for oil markets, with Libya's oil blockade sending a supply shock through markets before traders refocused on concerns around Chinese demand. At the same time, Iraq has been ratcheting up pressure on Kurdish producers to cut output, and the US has released some constructive macroeconomic data. Early on Friday morning, oil prices had swung back into the red, with Brent trading at $78.54 and WTI below $75.
US Oil Major Eyes Permian Divestment. Seeking to focus on higher-growth assets, top US producer
ExxonMobil (NYSE:XOM) is
reportedly looking to sell some $1 billion worth of non-core assets in the Permian Basin, offering 14 asset groups of which 8 are currently operated by Exxon.
Libya’s Oil Output Falls as Fields Get Shut. More than half of Libya’s crude production, some 700,000 b/d, was offline by the end of this week after the eastern Benghazi government halted production at key fields such as Sharara, Sarir, Abu Attifel, and Amal and
blocked most export terminals in the country.
US Midstream Giant Gets Even Bigger. US pipeline operator
ONEOK (NYSE:OKE) said it would buy midstream assets across the country worth $5.9 billion from Global Infrastructure Partners, less than a year after it purchased Magellan Midstream for $19 billion,
boosting its standing in the Permian.
Baghdad Calls For Kurdish Compliance. The federal Iraqi government has presented an ultimatum to Kurdistan’s Regional Government to reduce its crude production after market reports indicated output in the region is as high as 350,000 b/d, undermining Iraq’s commitments under the OPEC+ compensation plan.
Golden Pass LNG Asks for 3-Year Extension. The 18 mtpa Golden Pass LNG project, jointly
developed by
ExxonMobil (NYSE:XOM) and
QatarEnergy, asked for a regulatory extension until November 2029 after its contractor Zachry Industrial filed for bankruptcy after a row over $2.4 billion in cost overruns.
Shell Seeks to Curb Exploration Spending. According to Reuters, UK-based energy major
Shell (LON:SHEL) is
considering cutting oil and gas exploration and development workforce by 20% after curbing investment in renewables and low-carbon businesses, eyeing cost reductions of $2-3 billion.
Red Sea Insurance Surges on Sinking Tanker. After Houthis attacked the Greek-flagged Sounion tanker in the Red Sea last week, still
leaking into the sea, the cost of additional war risk insurance for ships sailing through the Red Sea more than doubled to 1% of the vessel’s value from 0.4% before the attack.
China Maximizes Summer Coal Production. Despite much more robust hydro and solar generation this year, China has boosted its coal production to all-time highs as its July output
reached 390 million tonnes, seeking to avoid blackouts at a period of peak air conditioning demand.
Baltimore Sues Shale Producers over Alleged Fixing. The city of Baltimore
sued US shale oil producers Occidental, Hess, Pioneer, Diamondback, and others for conspiring to lower production and boost petroleum product prices even if most are not refiners, mostly stemming from the FTC’s Pioneer probe.
UK Will Not Defend Future Oil Projects. The UK government stated it would not
defend its largest upcoming oil projects Rosebank and Jackdaw after Greenpeace won a Supreme Court case, seeking to overturn their development approvals on the grounds that emission impacts were not assessed properly.
Qatar Mulls Taking Over a German Refinery. Qatar is in talks with the German government over possibly purchasing Russian state oil firm Rosneft’s 54.17% stake in the Schwedt refinery that feeds the capital city Berlin, after Berlin put the assets under a government
trusteeship two years ago.
White House Finalizes Solar Expansion Plan. The Biden administration said it had
finalized a plan to accelerate the development of solar energy on 31 million acres in federal lands in 11 western states, eyeing high solar radiation and low conflicts with wildlife and plant habitats.
Drought Hinders European Navigation Again. Dry weather across Germany has led to low water levels in the River Rhine, preventing cargo vessels from sailing fully loaded and
boosting freight rates as drought surcharges kicked in, but the impact is not expected to be as substantial as in 2022-2023.
So (below) from the Ritholtz crew:
Obviously mocking the drawing of the current chart over the historical chart.
Have they actually thought about the fundamentals underlying the two charts: are they similar also?
The answer is yes: both charts have as underlying fundamentals a sovereign debt crisis. The 1929 chart depicts the ongoing debt crisis and overhang from WWI debts that plagued Europe and spread to America.
Today, there is again a world debt crisis of some $350 Trillion and the US (as the above charts demonstrate) has major issues.
If the US defaults (direct default) would the charts look similar? Oh yes.
No-one actually expects a direct default. What is expected is a slow motion default (lots of inflation) to default over time, which is why buying Bonds is such a bad idea.
Stocks will likely fluctuate widely, but ending in real terms pretty much nowhere. Nominally we could be higher. Gold and real assets will appreciate in real terms.
Mr fff
So August is in the books:
So pretty good month for the bulls, but, warning signs ahead for September.
Another take on the 1929 thing:
From the standpoint of full-cycle investment prospects and risks, little has changed since July. Valuations remain near record extremes. Certain elements of market internals have improved somewhat despite a slight decline in the S&P 500 from its peak, but our key gauge remains in an unfavorable condition. While recent economic data have been comfortable, many reliable leading gauges remain just at the border that distinguishes expansion from recession (though we would need more evidence to expect a recession with confidence). Meanwhile, we see numerous stocks being taken behind the shed and clobbered by 10%-30% on earnings reports that are quite good but notch down guidance even slightly. When you see that behavior at extreme valuations, it tends to be a sign of underlying skittishness and risk aversion. When valuations are setting record extremes because the news can’t get any better, even a slightly less optimistic outlook becomes a risk.
As Jeremy Grantham
observed a few months ago: “We have totally full employment, totally wonderful profit margins. All the things you would
not want to start a bull market from. This is where you start bear markets from. Great bull markets start with exactly the opposite. You’ve got the peak P/E, so you feel wonderful, the stock market has gone up and up and up and up. So everyone feels great, and that’s how you get to a market peak. You feel great about everything. Of course, almost by definition. When do you start going down? You still feel great. You just don’t feel quite as great as you felt the day before.”
While the current level of the Federal funds rate remains consistent with systematic benchmarks that consider inflation, unemployment, real sales, economic slack, and other conditions, we do expect the Federal Reserve to cut interest rates beginning in September. Still, as I noted
last month (see the section titled “Unfavorable internals dominate monetary easing, favorable internals amplify it”), even if one knew for certain that the Federal Reserve would cut interest rates over the coming 6-month period, that knowledge would not have historically justified taking a pre-emptive bullish position in the face of unfavorable internals.
As always, our investment discipline is to align our market outlook with measurable, observable market conditions. In 2021, with investors drowning in zero-interest Fed liquidity amounting to 36% of GDP, we abandoned the “ensemble methods” that embraced historically-reliable “limits” to speculation, and shifted greater emphasis to the uniformity and divergence of market internals, which since 1998 have proved to be our most reliable gauge of broad speculation versus risk-aversion.
Presently, I don’t expect a constructive shift in market internals, but as is always true, we can’t rule one out. Given current valuation extremes, any constructive shift would demand position limits and safety nets. A favorable shift in internals would not amount to a bullish “buy signal,” but it would increase our exposure to local market fluctuations without removing our defense against major downside risk. In any event, we’ll respond to market conditions as they shift. No forecasts or scenarios are required.
The chart below shows our most reliable gauge of market valuation, based on its correlation with actual subsequent 10-12 year S&P 500 total returns in market cycles across history. MarketCap/GVA is the ratio of market capitalization of U.S. nonfinancial companies to their gross-valued added, including our estimate of foreign revenues. The current level exceeds both the 1929 and 2000 market extremes.
I realize that any reference to 1929 is immediately dismissed as preposterous. On that point, I certainly don’t expect a market loss anywhere near what stocks experienced between 1929 and 1932. Rather, I think it’s useful to think of that 89% market loss as having two parts. The first initial loss of two-thirds of the market’s value restored historically run-of-the-mill valuations. Policy errors and bank failures then resulted in a loss of two-thirds of what remained. That’s how the market lost 89% of its value (1/3 x 1/3 – 1 = -89%). Presently, I view the first bit as more likely than the second.
The chart below shows a variant of a chart I’ve periodically shared. Here, the blue line is the estimated loss in the S&P 500 that would be needed for MarketCap/GVA to reach run-of-the-mill valuation norms historically associated with subsequent total returns averaging 10% annually. At present, that potential loss (not a forecast) is about -70%. The red shading shows the deepest actual percentage loss in the S&P 500 index over the subsequent 10-year period.
In practice, these losses often emerged in the first three years following a valuation extreme, but it’s essential to understand that valuations are not timing tools and can remain elevated for extended periods of time (which is why market internals are important as well). There’s often a good deal of “white space” between the blue potential and red actual market losses. This white space represents risk with no apparent consequence.
Clearly, more than a decade of zero-interest monetary policy, coupled with the recent exuberance surrounding mega-cap technology stocks, has deferred the full-cycle consequences of extreme valuations. Still, the deferral of consequences is not the same as the absence of consequences.
jog on
duc