Global Debt Hits Record $233 Trillion (US Taxpayers On Hook For $921K In Unfunded Liabilities)

(Bloomberg) Global debt rose to a record $233 trillion in the third quarter of 2017, more than $16 trillion higher from end-2016, according to an analysis by the Institute of International Finance. Private non-financial sector debt hit all-time highs in Canada, France, Hong Kong, South Korea, Switzerland and Turkey.

At the same time, though, the ratio of debt-to-gross domestic product fell for the fourth consecutive quarter as economic growth accelerated. The ratio is now around 318 percent, 3 percentage points below a high set in the third quarter of 2016, according to the IIF.
 
“A combination of factors including synchronized above-potential global growth, rising inflation (China, Turkey), and efforts to prevent a destabilizing build-up of debt (China, Canada) have all contributed to the decline,” IIF analysts wrote in a note.
 
The United Nations calculates the global population is 7.6 billion, suggesting the world’s per capita debt is more than $30,000.
 

The debt pile could end up acting as a brake on central banks trying to raise interest rates, given worries about the debt servicing capacity of highly indebted firms and government, the IIF analysts wrote.

No guff, Chet!

Here is the debt picture in the US since The Fed’s ZIRP (or NIRP) was put in place. The US debt now stands at over $20.5 TRILLION while household debt has risen to over $15 TRILLION as of 2016. Yes, The Fed NIRP have enable the US government AND households to gorge on debt. Problem? Our children and grandchildren are on the hook for this debt.

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But even if you think that $20.6 TRILLION in public debt is outlandish, look at the US unfunded liabilities that politicians have racked up: $111.5 TRILLION, almost 6 TIMES the public debt!! That is $921 thousand per taxpayer (on top of  the $170 thousand in liability per taxpayer in public debt).

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US politicians blithly keep promosing more ‘free things’ and borrow even more money to pay for them.  The US is already at over $1 million in taxpayer liabilities for unfunded liabilities and public debt.

College students should be concerned about politians borrowing and promising trillions of dollar and stick the burden on them for repayment. But they are generally apathetic about their impending demise. Not to mention their likely unfunded pensions.

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$1.5 Trillion GOP Tax Bill Signed By Trump – Housing Largely Uneffected Thanks To Lower Marginal Tax Rates (Ham and Mayonnaise!)

President Trump on Friday signed the Republican $1.5 trillion tax overhaul that is expected to trigger tax cuts for most Americans next year. The GOP/Trump bill undoes some of the damage caused by the tax increases put in place on January 1, 2015 by the Obamacare legislation such as increasing the top bracket from 35% to 39.6%.

Although this is not related to housing per se, the corporate tax rate has been cut to 21%, putting the US in the middle of the G-7 nations instead of being the most heavily tax major nation on earth.

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Mortgage interest GRANDFATHERED FOR EXISTING FIRST MORTGAGES AND SECOND HOMES, CAPPED AT $750,000 INTEREST
Remains deductible for those who itemize, but for new mortgages on first and second homes, only the interest on the first $750,000 borrowed is deductible. The interest on home equity loans will no longer be deductible.

Alternative minimum tax EXEMPTION INCREASED TO $1 MILLION (COUPLES)
Repealed for corporations. Remains for individuals, but exemption increased to $1 million for couples.

College students INTEREST CONTINUES TO BE DEDUCTIBLE
Student loan interest would continue to be deductible. The deferred tuition provided to graduate students who teach or the children of university employees would not be taxable.

Personal Exemptions ELIMINATED
Personal exemptions, which in 2017 reduce taxable income by $4,050 each for taxpayers, spouses and dependent children, are eliminated.

Standard Deduction RAISED
The standard deduction, from $12,700 this year to $24,000 next year for couples filing jointly. For individuals, the amount goes from $6,350 to $12,000. The additional standard deduction for the elderly and the blind is unchanged.

State and local tax deduction (SALT) CAPPED AT $10,000
New maximum of $10,000 for a combination of property and income taxes or property and sales taxes.

Obamacare Tax Penalty REPEALED
Starting in 2019, the Affordable Care Act mandate that people have insurance or face a fine imposed by the IRS would be repealed.

Tax brackets and rates TOP BRACKET LOWERED TO 37% FROM 39.6%
10% on the first $19,050 of income for couples and $9,525 for individuals
12% above $19,050 for couples and $9,525 for individuals
22% above $77,400 for couples and $38,700 for individuals
24% above $165,000 for couples and $82,500 for individuals
32% above $315,000 for couples and $157,500 for individuals
35% above $400,000 for couples and $200,000 for individuals
37% above $600,000 for couples and $500,000 for individuals

So, the bottom line is that for renters, the standard deduction has been almost doubled to $24,000.  This is only appropriate since the value of US aparments has over doubled since 2010 with The Fed’s extreme low rate policies.

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Since mortgage interest and property taxes remain the largest deduction for many household that own a home, the tax changes are net beneficial below the $750,000 level on mortgage interest due to the decline in the marginal tax brackets. Of course, high home price areas like Seattle, San Francisco, Los Angeles, San Diego and New York City will feel a pinch if mortgage financing exceeds the cap.

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In other words, most middle class Americans will be okay.

How will the changes in the tax code impact the renting/homeownership decision? Probably not a lot. In a partial equilibrium world, raising the standard deduction would seemingly encourage more households to rent than than own. But as I already mentioned, they almost doubled the standard deduction while apartment values have over doubled since 2010 (thanks in part to The Fed’s zero interest rate policies), so the incentive to rent remains the same. And if the household’s marginal tax bracket declines, there will be less incentive to own a home. In general equilibrium world, continued slow wage growth will result in more households renting. The cap in interest and property tax deductions will give greater momentum to renting in the high cost coastal areas.

Say, can we tax The Federal Reserve for helping drive up home and apartment prices making housing less affordable? US housing is simply unaffordable for many households.

But here is a video of the typical debate over the tax legislation in the New York Times, Washington Post, CNN and MSNBC. And by House Minority Leader Nancy Pelosi.

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Fiscal Inferno! US Fiscal Gap ($200T) 10X Official Federal Debt ($20T)

The USA is in a “fiscal inferno”  where the fiscal gap is 10 times higher than the acknowledged public debt of over $20 trillion.

The fiscal gap is the present value difference between all projected future government spending obligations (including official debt service) and all projected future tax revenues. The “all” is key. The fiscal gap puts everything on the books. Since the fiscal gap is $200 trillion and the official debt is $20 trillion, Congress has kept $180 trillion of net liabilities off the books.

Unfortunately, America’s $200 trillion fiscal gap, which, scaled by GDP, is the largest of any developed country.  Closing it requires either an immediate and permanent 50 percent hike in all federal taxes or an immediate and permanent 33 percent cut in all federal spending. The longer we wait, the larger the required adjustment.

Economist Lawrence Kotlikoff measured the fiscal gap showing that the US has the world’s largest gap.

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And the longer we wait to correct the problem, the worse the problem becomes.

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Actually, President George HW Bush implemented fiscal gap accounting, but that was negated by President William J Clinton leaving the US in a fantasy land of fiscal denial.

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Disco inferno!

 

Bond Trader Up $10 Million by Joining Bets Yield Curve Too Flat (Game of Drones)

Big futures trade adds to steepening momentum amid selloff.

(Bloomberg) — Traders in the $14.1 trillion Treasuries market are signaling that the persistent flattening of the yield curve this year has gone far enough.

The outperformance of longer-maturity debt has been a dominant theme in the market for months. Now, open interest data show investors are unwinding wagers that the slope of the yield curve from five to 30 years will fall, after it turned the flattest in nearly a decade.

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In one case, a trader executed large block trades in 10-year and ultra-long futures. The combination created a bet on curve steepening that gains or loses $4.2 million for each basis point move in the yield spread. It’s already up more than $10 million, extending gains after Treasury’s $28 billion seven-year auction drew a yield that was below indications from before the sale.

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The futures positioning reflects a sentiment shift in Treasuries as traders gain conviction that the Federal Reserve will tighten again in December and as President Donald Trump promotes his tax plan. The benchmark 10-year yield, at 2.31 percent, broke above its 200-day moving average for the first time since August.

“Selling blocks have weighed on long duration Treasury notes” as traders adjust expectations for a tax overhaul, John Herrmann, director of U.S. rate strategy at MUFG Securities Americas, wrote in a note Thursday. At the same time, shorter maturities “are barely pricing in any FOMC interest rate action beyond the December” meeting, leading the curve to steepen.

To be sure, the benchmark is right around its 2017 average, a long way from the 3 percent level that some analysts predicted to start the year. And the curve is still within spitting distance of pre-financial crisis lows. But the pullback highlights that traders may have gotten too aggressive in wagering long-term yields couldn’t move higher.
At the very least, it shows investors are wary of a repeat of the events of right around this time last year, when 10-year yields rose 75 basis points in seven weeks. Money managers in Japan, where the fiscal half-year closes Sept. 30, were hit particularly hard.  

Treasuries tumbled in Asia trading hours Thursday, with some traders saying Japanese investors are stepping back. The selling momentum intensified after the 10-year yield rose above its 200-day moving average, spurred in part by hedging with options against even-higher interest rates.

And investors aren’t just turning bearish on long-term rates. Traders are alsoadding to wagers on declining eurodollar futures, positions that profit if the market prices in more Fed hikes. The odds that policy makers boost rates again in December are about 66.6 percent, based on overnight index swaps and the effective fed funds rate. A full rate hike isn’t priced in until mid-2018.

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So while Treasuries aren’t in a bear market just yet, the bullish momentum that pushed long-bond yields to the lowest since November has certainly faded. 

In other words, the hope that President Trump could undo Obama-era legislation (amongst other things) has faded to near zero.

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So now we are in a Game of Thrones world where the 10 year Treasury yield has to rise faster that the 2 year yield to get the curve climbing again.

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Debt Limit Gums Up Treasury’s Plan for Supply Bump as Fed Tapers

(Bloomberg) — The U.S. Treasury has been planning for years how to deal with the funding gap set to open up when the Federal Reserve begins unwinding its $2.5 trillion hoard of the government’s debt.

Now there’s a new wrinkle to prepare for, as the latest deal to extend the nation’s debt limit complicates matters for Treasury Secretary Steven Mnuchin just as the Fed is expected to unveil the start of its balance-sheet reduction.

With the debt-cap suspension expiring Dec. 8, there’s a growing sense among investors and analysts that Treasury will have to slow or hold off on the inevitable — increasing note and bond sales to deal with the shift in Fed policy and rising federal deficits. Most strategists had predicted that long-term tilt toward more coupon issuance would start in November, so a delay may provide a boost for bond bulls betting yields can stay near historic lows.

“The debt-limit issue will in the near-term affect what Treasury does with coupon issuance,” said Gene Tannuzzo, a money manager at Columbia Threadneedle, which oversees $473 billion. “At the end of the day, Treasury will have to do a lot more coupon sales. On the margin, for now, if there is less coupon issuance it is a modestly positive technical” for Treasuries.

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Just how exactly Treasury will respond to the Fed’s tapering is one of the great unknowns facing investors. The mix of maturities it decides on has far-reaching implications for the world’s biggest bond market, with the potential to alter the shape of the yield curve for years to come.

A Treasury spokeswomen, Marisol Garibay, declined to comment.

That is, IF the Fed tapers their balance sheet.

The Fed is likely to cap reinvestments of Treasuries and Agency MBS rather than outright sell them out of their portfolio. Agency MBS gradually bleed off due to mortgage refinancings and Treasuries eventually mature.

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If anyone is worried about the budget gap, imagine what it will look like with Bernie Care (Medicare for all)!

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Since Medicare is already growing at an explosive rate.

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The Hysteria Curve: US Treasury 10Y-2Y Curve Slope Declines To 78.6 BPs As 10 Year Soveriegn Yields Decline In Americas and Europe

Choose your hysteria to explain the Treasury market: 1) debt ceiling crisis, 2) hurricane (Global Warming) crisis, 3) North Korean nuclear attack crisis, 4) Trump’s Russian collusion investigation crisis, 5) the DACA (“Dreamer”) crisis, 6) Brexit crisis, 7) NAFTA crisis or 8) fill-in-the-blank crisis dejure. Please tune to CNN or MSNBC (and even Bloomberg) for the latest in hysteria.

Which ever portfolio of crises you select, we watching the US Treasury 10Y-2Y curve slope fall below 80 to the lowest slope since September 2016.

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10 year sovereign yields in the Americas and Europe can down with the US falling around 10.1 BPS and Argentina down almost 40 BPS.1010

Gold prices are up since the 2016 election while the US dollar basket is down.

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We are seeing a jump in equity and Treasury volatility, but not much.

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Tune into MSNBC’s Rachel Maddow and Lawrence O’Donnel for particularly entertaining hysterical rants (like about Trump’s 2005 tax return).

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Wall Street, Not Waiting on Mnuchin, Readies Debt-Limit War Room (Sifma revisiting, revising 2011, 2013 contingency plans)

(Bloomberg) The key industry groups that seek to prevent seismic disruptions in the world’s biggest debt market aren’t waiting around to see if Treasury Secretary Steven Mnuchin can get Congress to lift the debt limit before America exhausts its borrowing capacity.

The Securities Industry and Financial Markets Association, the $14.1 trillion Treasury market’s self-regulatory body, is revisiting and revising work done ahead of previous debt-ceiling showdowns in a bid to lessen the potential market disruption should politicians fail to raise the debt ceiling in time. The group’s primary focus is how operational issues such as trading, clearing, and settlement would be affected should debt payments get delayed. Sifma’s preparations coincide with similar efforts being undertaken by the Federal Reserve-sponsored Treasury Market Practices Group.

Call this “A View to a Shill.” Or the war room for the US invasion of Grenada.

5 year Credit Default Swaps on the US are rising, but not by much.

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Although we are seeing some reaction in the swaps market, but only back to May 2017 levels.

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Market participants and credit arbiters say a plan that was secretly considered by the Obama administration when the country almost breached the debt limit in 2011 signals that debt prioritization is a likely option if needed in 2017.

Good luck with that debt ceiling fight-off when mandatory Federal spending is going into warp-drive.

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With Medicare leading the way.

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