The Balloon That Leaks

Balloons like that do not pop. They leak. And every leak gets a finger.

Here is the thing about the people holding the fingers. When things start falling apart you get aggressively defensive. That is human nature, and it is also government nature. An administration watching the balloon leak does not get calmer. It gets innovative, and it will go to any level to defend the thing, including printing money on top of the forty trillion dollars of debt we already have. The debt crossed forty trillion this week, on the Treasury's own count. The same week, the president promised five thousand dollars to every adult in the country if his party holds Congress in November. That is about 1.3 trillion dollars. Nobody has said where it comes from.

Over the past five weeks we watched three fingers go on. The record is public and dated, so it can be checked. Then, on September 16, we watched something different, and it is the reason this piece got rewritten.

Leak one: the long bond

On August 19 the 30-year Treasury yield printed 5.33 percent, the highest since 2007. Two trading days later the Treasury announced it was doubling its long-bond buybacks, operations that run through November 4.

When I first wrote this section, I told you the buyback worked. The yield had come back to 5.21. I was wrong, and the way I was wrong is the point.

The operations started on September 9. Here is what happened to the yield while the Treasury was buying, next to the two prices that actually decide where inflation goes:

The 30-year went up seventeen basis points across the window the Treasury was buying it. The day the operations started, oil went from 96 to 102 and diesel from 4.80 to 5.06 in one session, and that is the session the yield went through the level that triggered the whole program.

He tried, and he failed, because inflation was running the other way and a few billion dollars a day was never going to be enough against a twenty-dollar move in oil. A buyback can absorb supply. It cannot absorb an energy shock. Nobody should have expected it to, and I did.

We wrote about the verbal version of this in June, when the Fed chair declined to draw his dot (It's All Going to Be Alright). Guidance is suppression with words. Buybacks are suppression with a balance sheet. Same rubber.

Leak two: the yen

On July 31 the United States and Japan bought yen together, the first joint operation in roughly three decades. Japan later disclosed it spent a record 96.4 billion dollars supporting its currency over the following month.

By the end of August the dollar was back above 160 yen, right where it started, and I called the defense a failure. Today the dollar is at 156. The yen is stronger than when I said the finger had come off.

But that is not because the intervention worked. It is because the Treasury Secretary spent six weeks publicly telling Japan to raise interest rates instead. On August 14 he said he expected Japanese hikes and the yen jumped. On September 1 he said he expected Japan to act. On September 3 the yen surged on rate bets. As I write this, a quarter-point hike from the Bank of Japan is priced at better than even odds for its meeting on September 17 and 18.

Ninety-six billion dollars bought four weeks. Six weeks of demanding the instrument did what the money could not.

There is a reason he wanted it this way, and he told Congress himself. In a letter answering a senator who asked why American resources were used to defend a foreign currency, he wrote that disorderly moves in the yen can trigger forced unwinds that ultimately raise borrowing costs for US households and businesses. That sentence is the transmission mechanism, in the words of the man who runs the Exchange Stabilization Fund.

Follow it one step further and the two leaks become one leak. Defending the yen by intervention means selling dollars. Japan's dollars are its foreign reserves, and the bulk of those reserves are US Treasuries. So the 96 billion dollar defense was Japan selling the very bonds the Treasury was buying back. One arm of the effort was creating the supply the other arm was trying to absorb. A rate hike supports the yen without selling a single Treasury. That is why he wants Tokyo to raise rates rather than intervene again. It is the only way to defend leak two that does not feed leak one. Whether higher Japanese yields pull money home on their own is a fair question, and the honest answer is that the net effect on the 30-year is contested. What is not contested is that intervention sells Treasuries and a rate hike does not.

There is a digression worth making here, because it is the kind of thing that only makes sense in a balloon. The letter also says the best-managed crisis is the one that never happens, and cites Argentina as precedent. Argentina. The country whose currency defenses are a genre of financial literature. When your own precedent for stabilizing the second-largest holder of your debt is Argentina, you are not describing a fix. You are describing a habit.

And then there is what he said out loud.

The same Treasury Secretary who answered that senator has since said that he is the house. And on September 1 he said this about the Bank of Japan, a central bank he does not run:

"I have information that the market doesn't have, and it's my belief that the Japanese government and the BOJ will do the things that will lead to a stronger yen."

He met the BOJ governor ahead of the meeting. Japan's own finance minister publicly played the pressure down. Bloomberg's read was that the BOJ had been left with no good option, because failing to follow a barely camouflaged demand would send the yen tumbling.

This is a person at the highest position telling everyone that he can manipulate markets. This is coordination, I scratch your back you scratch mine, and he is not hiding it. I am not going to dress that up. I am going to leave it there.

Leak three: oil, the one without a finger

The Strategic Petroleum Reserve sits at its lowest level in 43 years. The draws of 2022 worked, briefly, the way every finger works, and they cannot be repeated at that size because the reserve is not there to draw.

On August 28 the administration announced a deal giving a US-controlled venture rights to more than 65 billion barrels of Venezuelan reserves for up to 100 years. The number is real. The barrels are not, yet. Venezuela produces somewhere between one and one and a quarter million barrels a day today, depending on whether OPEC or Washington is counting. The optimistic private forecasts get it to 1.2 million by year end and perhaps 1.5 million by 2028, and the extra-heavy crude in the Orinoco belt needs diluent, upgraders, and a decade of capital before it is oil in the sense a refinery means it. Both sides of Venezuela's politics rejected the deal within a day, which tells you what the legal risk premium on that capital will be.

This is what a finger looks like when there is no finger: an announcement. It is not nothing. Announcements move prices for a week. They do not move barrels for a year. In the five weeks after this one, crude went from 85 to 105 and diesel set a record.

Someone will say the barrels are already moving, and they are. On August 18, ten days before the deal, the Energy Department said about half of Venezuela's output, more than 500,000 barrels a day, was coming to US refineries built for that crude. The government's own count went from 7,000 barrels a day in July of last year to 630,000 this June, and the week ending September 11 printed 782,000, the highest of the year. That is real, and it is the point. Those barrels were being pumped anyway and sold to someone else. They were redirected, not added. A lease on oil in the ground does not load a tanker two weeks later. And crude went from 85 to 105 across the very weeks the flow to the Gulf Coast was climbing, because moving a barrel is not making one.

Why the fingers keep coming

Why is all this happening? They know things are not looking good under the hood. So hold the markets up by any means before the midterms. Become innovative.

That is my read, and the receipts show the timing even if they cannot show intent. July 31, the intervention. August 21, buybacks doubled. August 28, Venezuela. September 1, information the market doesn't have. Around September 10, five thousand dollars per adult if the election goes the right way. September 13, the president in Ireland saying the United States should pay the lowest interest rate in the world regardless of the Fed's formulas. The week before the Fed met, the president, the vice president and the Treasury Secretary all publicly told it not to raise rates. November 3 is the election.

This is not a point about which side wins. Every patch in this piece is a loan against time, and a loan has a due date. The calendar is what set it.

"Become innovative" is the phrase to hold onto. Every finger in this piece is an innovation. A buyback instead of a rate hike. A joint intervention instead of a Japanese rate hike. An announcement instead of barrels. Innovation is what you do when you have ruled out the thing that works.

Who pays

Here is what I noticed on September 16, and it is the thing the rest of the piece has been building toward. The Fed raised rates, unanimously, and sounded like it meant it. It saved its own face, and in doing so it looked like the one institution in this story that cares about the people for whom the stock market is a rounding error. That is not a small group. Fifty-eight percent of American adults own stock in some form, most of it inside a retirement account, and the top ten percent of households hold ninety-three percent of it. For roughly nine in ten households the market going up or down is not a fact about their lives.

The bill for the patches reaches them through two prices nobody can opt out of. The long end of the Treasury curve is where mortgage rates come from, so every finger that failed to hold it down is a mortgage that did not get cheaper. And the oil finger that never came is diesel at a record, which is the price of everything that arrives on a truck. The market got held up. The cost of living did not get held down.

Those are the people the patches cost. I have been watching it in my own feeds. Foreclosure starts across North Texas are running about a quarter higher than a year ago, and Houston is posting more than a thousand a month. And there is a third group nobody counts: families here on H-1B visas, and spouses on work permits that no longer renew automatically, trying to rush out of the gate before the crowds.

The numbers exist for Dallas. Since September of last year, new H-1B petitions carry a 100,000 dollar fee. Registrations for the coming year fell 38.5 percent. Work-permit extensions for spouses stopped renewing automatically last October, and the government has put stripping those permits entirely on its regulatory agenda. In the northern suburbs of Collin County, where the Indian population went from 70,000 to 116,000 in five years, home prices are down about nine percent from a year ago. One builder there went from seventy percent South Asian buyers to under thirty, with 125 unsold homes. Builders had been putting prayer rooms and spice kitchens into spec houses. That is what a demand assumption looks like in drywall. A family that bought on the assumption of permanence is now selling into a nine percent decline before the neighbors do, because a fee and a paperwork gap changed the math on a mortgage.

I should say where I stand in this, because you would notice if I didn't. I own the assets. I built a product that sells to people who own assets. The patches that hold the market up before an election hold my book up too. My position is the trader's position, not the moralist's: ride along and be ready to cash out both ways. The Treasury Secretary says he is the house. I am saying I know the game and I am betting on when it breaks. Two people who see the same thing, one running it and one waiting.

A finger is not a fix

Every defense is real, and every defense adds pressure. The buyback works for a day and becomes future supply. The intervention works for a month and becomes Treasury selling. The lease works, as a headline, and becomes a promise a future Venezuelan government may not honor. None of it lets air out of the balloon. It moves the air from the thin spot that is showing to a thin spot that is not showing yet.

Then September 16 happened, and it was different in a way that matters.

At two in the afternoon the Fed raised rates a quarter point to a range of 3.75 to 4 percent. The vote was unanimous; in July it had been nine to three. The projections showed one more hike and then no cuts until 2028. The chairman, who dislikes the dot plot, did not submit one.

That afternoon the five-year yield rose two basis points and the 30-year fell two. The long end of the curve went down on a rate hike. Weeks of buybacks could not move it. Twenty-five basis points and a credible statement moved it in ninety minutes.

Today's story was about credibility, not patching. Every finger in this piece was a technique, and the techniques failed. The instrument worked, and it worked twice in one week, in Washington by using it and in Tokyo by demanding it. And the one man demanding both is the man telling the market he already knows what happens next.

Our read is that something breaks, and sooner than the consensus expects. We are saying so on September 16, before the Bank of Japan decides, so it can be scored.

The valve works. The problem is that the person who owns the balloon has forbidden it, and he is selling tickets to the show.