What Is the US Treasury Doing with All that Cash?

Monday, 10 August 2020
Melbourne, Australia
By Greg Canavan
 

With the US presidential election less than three months away, Trump is doing everything he can to keep the economy afloat, while the Democrats are doing everything possible to bring it to its knees.

The human cost is just collateral damage. What matters more to politicians, of course, is grabbing four more years of power.

On Friday, budget negotiations between the White House and Congress broke down, leading to Trump issuing Executive Orders to get the job done.

As The Wall Street Journal editorialised:

Mr. Trump took his actions after talks with Mrs. Pelosi and her wing man, Senate Democratic Leader Chuck Schumer, broke down on Friday. The President was right to walk away rather than succumb to their multi-trillion-dollar blackmail.

They are demanding $800 billion in aid to the states, an extension of $600 a week in jobless insurance into 2021 despite its disincentive to work, and they refuse to budge on Covid-19 liability protection for businesses and nonprofits. They want election mandates on states that have nothing to do with the pandemic.

This is less a negotiation than a stick-up. The Democratic political calculation has been that Mr. Trump would listen to Treasury Secretary Steven Mnuchin and roll over again. This would let them impose much of their long-term agenda, divide Republicans in Congress, and set the table to make their welfare-state expansions permanent next year when they expect to run Congress and the White House.

Mr. Trump’s escape frees him to lay out his own campaign policy agenda for Covid-19 relief and reviving the economy.

Reviving the economy, eh?

This brings me to an interesting little issue that every asset price appears to be commenting on, if only implicitly.

Let me explain…

The Treasury’s account with the Fed has a cash balance of US$1.7 trillion.

This is an unprecedented Treasury cash balance. Before this crisis hit, it was below US$500 billion.

What does it mean?

Well, it tells me that the economic damage from this virus shutdown is probably worse than most people think. That the US government is accumulating an unprecedented amount of cash suggests that it will need to prop the economy up for some time.

The Treasury says as much itself:

For prudent risk management, Treasury holds a substantial cash balance to allow it to cover anticipated outflows in case of a temporary interruption to market access. This policy was implemented in 2015 and its objective has not changed.  Treasury’s recent record-high cash balances are driven by several factors, including the unprecedented size and ongoing uncertainty regarding the timing of COVID-19 related outlays. 

While Treasury expects its cash balance to decline over the quarter, the extent of the decline will depend on several uncertain factors, including the pace of outflows under current law and the potential for additional legislation. Informed by its risk management objectives, Treasury has taken a precautionary approach to projecting outflows.  Accordingly, Treasury’s cash balance may remain elevated by historical standards until the uncertainty regarding potential outflows diminishes.

In a word, the cash hoard is due to high levels of ‘uncertainty’.

Which is not surprising. The economy has just fallen into a massive hole. This represents a huge loss of economic value. Government deficits should be seen in the context of filling up this hole (offsetting deflation) rather than dumping stuff on an already healthy economy (which would be inflationary). 

The government’s concern (and that of the bond market) is completely lacking in the stock market. Stocks have voted in favour of an inflationary outcome in all this.

Well, not all stocks. But certainly tech companies and much of the smaller, more speculative end of the market, is firing right now.

Oh, and gold stocks are on fire too.

Which is kind of weird. I’ve made the argument previously that gold is rising not on inflationary concerns, but systemic concerns about the health of the monetary system.  

Maybe I’m wrong on that. But when I look at inflationary expectations as inferred by bond market pricing, inflation isn’t exactly a big deal. I mean, inflation expectations are rising, but they’re still very low.

The chart below shows five-year inflation expectations (on average) are just 1.5%.

Maybe the bet is that they will keep on rising, to 2%, 3% and then 5%?


Port Phillip Publishing

Source: FRED

[Click to open in a new window]

Is this what has set gold stocks off on another bull run?

As I said, I’m not buying the inflation argument.

And anyway, the ‘why’ isn’t as important as the ‘what’. The simple fact is that gold stocks are rising, whatever the reason.

Look at the chart below. It shows that the Junior Gold Miners ETF [AMEX:GDXJ] has been on a tear this year, especially since June, following a short correction in May.


Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

From this perspective, gold miners are due for a much-needed breather.

But in my view, it’s a correction that you should use to your advantage.

Why?

Have a look at this longer-term chart of the gold juniors…


Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

As you can see, we are A LONG WAY from the old peak back in late 2010. In fact, the sector has only just broke out of a multi-year basing pattern.

It would be extremely bullish to see a correction take prices back to the green break out line and find support.

What’s interesting about this chart is that stock prices are much, much lower now, despite gold prices breaking out to fresh all-time highs recently.

It’s also interesting to note that this index peaked in late 2010, well before the peak in silver in April 2011 and the former peak in gold in September 2011. So it’s potentially a good one to keep an eye on for future clues about the precious metals.

For now though, watch for a correction in precious metals stocks. But the message is, don’t get shaken out of your positions. Because this could be the pause that sets things up for a much bigger move in the months and years ahead.

If you’re after some guidance with what to buy in the coming (potential) correction, check out Shae Russell’s recent webinar here. It’s only available until midnight tonight, so make sure to watch it soon.  

Continue scrolling for today’s ‘Week Ahead’ update from Pivot Trader editor Murray Dawes.

Cheers,
Greg


[WATCH] Battery Metals Turn the Corner
By Murray Dawes

 

[Click on the picture to see why Murray thinks many commodities are turning the corner and looking bullish. He looks at monthly buy signals in zinc, copper, rare earths, nickel and cobalt.]

While gold and silver are stealing all the headlines there are other commodities that are starting to come alive.

I have noticed long-term buy signals across the board in many commodities and especially those related to inputs for electric car batteries.

In today’s comprehensive ‘Week Ahead’ update, I show you the monthly buy signals in zinc, copper, rare earths, nickel and even cobalt.

I end the update by showing you three cobalt stocks that have seen strong buying pressure over the past month from the buy zone of a multi-year wave. If things are turning bullish in cobalt we are still early in the move, which means the upside could be substantial.

Regards,

Murray Dawes Signature

Murray Dawes,
Editor, Pivot Trader