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June 24, 2024 | Scary Stat Alert: The Government Liquidity Index

John Rubino is a former Wall Street financial analyst and author or co-author of five books, including The Money Bubble: What to Do Before It Pops and Clean Money: Picking Winners in the Green-Tech Boom. He founded the popular financial website in 2004, sold it in 2022, and now publishes John Rubino’s Substack newsletter.

Not that we need any more scary statistics, but here’s one that might be worth watching. From the Brave browser’s AI summarizer:

Government liquidity index

The government liquidity index is a metric that measures the ease or difficulty of trading in government securities, such as U.S. Treasury bonds. It is a gauge of deviations in yields from a fair-value model, indicating the level of liquidity in the market.

Measures of liquidity in the Treasury market are near crisis levels, raising concerns about underlying fragility in the functioning of the market. This can lead to historically large daily swings in yields, making it difficult for traders to carry out trades.

Government Intervention

In response to these concerns, the U.S. Treasury has announced that it will begin regularly buying back its bonds starting May 29, for the first time in over two decades. This move is aimed at improving liquidity in the market and reducing the risk of market mayhem.

In a recent tweet, market analyst Tavi Costa explains what this means:

The liquidity index for US government securities is deteriorating significantly, now at its worst levels since the European debt crisis in 2011.

Notably, it’s already more severe than the environment during the Covid crash in 2020.

What is even more alarming today is that this is all happening while the US currently has one of the largest interest rate differentials compared to other developed economies in history, yet liquidity appears to be eroding.

This situation is setting the stage for the US to experience its own “Bank of England moment” as we approach elections.

In September 2022, UK yields saw one of the steepest increases in history after the announcement of £45 billion in unfunded tax cuts, which raised concerns over increased borrowing needs and debt sustainability.

Does that scenario sound familiar to US policymakers?

We are facing one of the worst fiscal imbalances in history amidst an inflationary environment with declining demand from foreign central banks relative to Treasury issuances.

At the same time, 60/40 portfolios are starting to realize the need to shift back to other defensive allocations — with gold and other hard assets potentially playing an important role as other haven alternatives.

How Should We Respond?

Treat the Government Liquidity Index as one data point among many, but respect the predictive value implied by the above chart. Between spreading war, an unpredictable election, and global de-dollarization, we’re headed for potentially chaotic times. And this indicator is a sign of where the chaos might begin.

Put another way, if you aren’t already stacking and prepping, you might want to start. See the Table of Contents for backgrounders and actionable advice.

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June 24th, 2024

Posted In: John Rubino Substack

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