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Speaker 1: Have you ever wondered what would happen if a US

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Speaker 1: Treasury auction failed? In other words, what would happen if

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Speaker 1: the US government tried to borrow money and there were

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Speaker 1: not enough lenders there to lend them the money they

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Speaker 1: wanted to borrow. While many people think this is a

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Speaker 1: scenario that could absolutely never happen, especially because we have

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Speaker 1: something called the Federal Reserve that prints money, if we

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Speaker 1: take a look at a couple key pieces of data

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Speaker 1: from recent Treasury auctions over the last few months, it

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Speaker 1: is becoming a parent. We are actually getting closer and

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Speaker 1: closer to that becoming a reality. In October of twenty

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Speaker 1: twenty three, a thirty year Treasury auction had a three

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Speaker 1: point seven basis point tail and dealers were left with

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Speaker 1: holding eighteen percent of the flow. And don't worry if

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Speaker 1: you don't know what any of that means. I'm going

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Speaker 1: to explain extremely simply why all of that is a

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Speaker 1: terrible sign for US Treasury auctions. But first we have

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Speaker 1: to see that Just a month later, in November of

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Speaker 1: twenty twenty three, the thirty year Treasury had an even

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Speaker 1: worse auction, with a tale of five point three basis

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Speaker 1: points and dealers left holding twenty four point seven percent

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Speaker 1: of the issue. But it's not just the thirty year auctions,

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Speaker 1: because in January of this year, the US Treasury had

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Speaker 1: trouble with their five year note auction that had a

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Speaker 1: two basis point tail and a bid to cover ratio

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Speaker 1: of two point three and most recently, in February of

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Speaker 1: twenty twenty four, the twenty year US Treasury had a

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Speaker 1: tale of three point three basis points, which was its

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Speaker 1: largest on record. Dealers were left holding twenty one percent

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Speaker 1: of the auction and foreign bidders dropped to sixty percent

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Speaker 1: from November's level of seventy four percent. But that's a

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Speaker 1: bunch of mumba jumbo, a bunch of industry jargons. So

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Speaker 1: what in the world does that all mean. Don't worry,

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Speaker 1: I've got you. When the US government wants to borrow money,

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Speaker 1: they do so through the Treasury Department. The Treasury Department

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Speaker 1: is the one that will borrow so by issuing bonds

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Speaker 1: that we call treasury bonds or in other words, treasuries,

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Speaker 1: and they do this by holding an auction. Essentially, the

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Speaker 1: US Treasury says, hey, we want to borrow let's say

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Speaker 1: a billion dollars and we want to pay let's say

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Speaker 1: four percent on the billion dollars that we're going to borrow.

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Speaker 1: There are two groups of people that can participate in

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Speaker 1: this auction. There are individuals and there are institutions. Individuals

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Speaker 1: like you and I can line up if we want to,

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Speaker 1: and we can say either yes, I would like to

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Speaker 1: loan you money, Uncle Sam, at four percent, or we

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Speaker 1: can walk away and not participate. But those are our

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Speaker 1: only two choices. We can opt in or opt out. Institutions,

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Speaker 1: on the other hand, have a third choice. Institutions can

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Speaker 1: opt in to the four percent that the government is

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Speaker 1: trying to borrow at, or they can opt out. Or

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Speaker 1: they have the third option of saying, we want to

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Speaker 1: lend to you, uncle Sam, but only if we can

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Speaker 1: do so at a higher rate than what you're asking.

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Speaker 1: So maybe institutions say, I'll lend you money at four

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Speaker 1: point zero one percent or four point zero two percent. Well,

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Speaker 1: just like any borrower, you're going to go with the

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Speaker 1: person who offers you the lowest rate at least first.

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Speaker 1: And I say first, because for you and me, we

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Speaker 1: may only need one lender when we're trying to borrow money.

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Speaker 1: The US government has a pretty big appetite for borrowing,

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Speaker 1: so most of the time they're going to soak up

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Speaker 1: all of the individuals and all of the institutions that

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Speaker 1: line up and say, hey, we're willing to lend to

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Speaker 1: you at the rate that you request it. Their appetite

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Speaker 1: is pretty big, so they're going to burn through all

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Speaker 1: of those lenders first. After they've borrowed all of the

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Speaker 1: money from everybody that agrees to the original rate, they'll

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Speaker 1: probably still need to borrow some and then they'll look

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Speaker 1: to the institutions who have offered to lend at a

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Speaker 1: higher rate. They'll start from the bottom and work their

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Speaker 1: way up until they have borrowed everything they need for

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Speaker 1: that auction. So if they start off wanting to borrow

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Speaker 1: one billion dollars and they can get five hundred million

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Speaker 1: of it at the they wanted, let's say four percent,

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Speaker 1: now they have five hundred million left over they need

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Speaker 1: to borrow from institutions who are asking for a higher rate.

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Speaker 1: They'll start at the lowest rate and work their way

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Speaker 1: up until they have borrowed enough. The key thing to

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Speaker 1: know about these auctions, though, is that everybody in the

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Speaker 1: end actually walks away with the same exact rate, and

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Speaker 1: that's the rate at which the last person got to

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Speaker 1: lend to the government. And so if that last person,

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Speaker 1: that last institution in line lending to the government, gets

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Speaker 1: to lend at let's say four point zero five percent,

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Speaker 1: then the US government will have to pay everybody that

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Speaker 1: exact same rate. Everybody that participated in that auction gets

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Speaker 1: what's called the high yield. The difference between what the

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Speaker 1: government wanted to borrow at let's say four percent and

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Speaker 1: what they ended up borrowing at let's say four point

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Speaker 1: zero five percent is called a tail. Sometimes auctions go

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Speaker 1: with zero tail, which means they're able to borrow as

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Speaker 1: much as they wanted to borrow at the rate they

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Speaker 1: wanted to borrow at. And sometimes auctions happen with small tales. Recently,

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Speaker 1: we've been seeing more and more auctions happening with larger

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Speaker 1: and larger tales. In October, the thirty year had a

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Speaker 1: three point seven basis point tail, In November, the thirty

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Speaker 1: year had a five point three basis point tail, and

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Speaker 1: in February the twenty year had a three point three

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Speaker 1: basis point tail, which was the twenty year's largest tail

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Speaker 1: on record. Obviously, the larger the tail, the worse the auction.

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Speaker 1: If you were trying to borrow at ten percent, but

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Speaker 1: you could only get lenders to approve you for eleven

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Speaker 1: or twelve or thirteen percent, that wouldn't be good for you.

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Speaker 1: It's the same thing for the government. And a large

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Speaker 1: tail can signal a couple of things about the financial system.

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Speaker 1: Number one, it can signal weak demand for one reason

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Speaker 1: or another, lenders just don't want to lend as much

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Speaker 1: money to the United States government. Number two, it could

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Speaker 1: signal lack of faith in the government's fiscal situation, which

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Speaker 1: means I don't trust that you'll be able to pull

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Speaker 1: your way out of this without causing significant inflation, so

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Speaker 1: I'm not going to lend at the lower rate. I'll

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Speaker 1: only lend if I can get a higher rate. Number three,

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Speaker 1: it could signal a lack of liquidity in the financial system,

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Speaker 1: meaning maybe somebody's out there that would like to lend

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Speaker 1: at the government's requested rate, but they just don't have

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Speaker 1: the cash on hand the reserves available in order to

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Speaker 1: do that lending. And finally, could also signal a lack

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Speaker 1: of actual lenders in the system, like when foreign lenders

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Speaker 1: stop participating and there's just a lack of money available

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Speaker 1: because there's less lenders in total, And over the last

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Speaker 1: couple of quarters, it's become clear that this is a

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Speaker 1: recurring theme. We're seeing larger and larger tales happen at

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Speaker 1: a more frequent pace than we have in the past.

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Speaker 1: So let's talk about three questions that we have to

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Speaker 1: answer because of this. Number one, why is this happening?

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Speaker 1: Why are we seeing larger and larger tales? Number two,

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Speaker 1: when or will it get worse? Is this a deteriorating

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Speaker 1: situation or is this something that has just passed? And

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Speaker 1: number three, what would happen in the case of a

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Speaker 1: worst case scenario, which would be a failed Treasury auction?

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Speaker 1: And there's much more about this than I can cover

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Speaker 1: in a quick YouTube video, And so on Thursday, March seventh,

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Speaker 1: I'm going to be hosting a completely free, live online

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Speaker 1: event talking about this but also how it fits together

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Speaker 1: in the context of everything else happening right now with

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Speaker 1: the Federal Reserve trying to fight inflation, but also is

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Speaker 1: going to have to be the one to be there

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Speaker 1: to save the financial system when this starts to break things.

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Speaker 1: We're going to be looking at all of that together

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Speaker 1: in context with the broader long term debt cycle. Because

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Speaker 1: these things have played out many times throughout history. There's

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Speaker 1: a pattern at play here, and we're seeing it play

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Speaker 1: out again right now, which gives us a better idea

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Speaker 1: of what to expect moving forward. And above all, we're

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Speaker 1: also going to be talking about how to profit off

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Speaker 1: of everything that's happening right now. It's going to be

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Speaker 1: about a one hour event, so make sure you say

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Speaker 1: a side time on your calendar. It's gonna be on

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Speaker 1: the evening of March seventh, and it's actually limited in space.

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Speaker 1: There's only five hundred slots available, so if you are interested,

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Speaker 1: don't wait. Link is in the description below. The reason

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Speaker 1: why the Treasury auctions are getting worse and worse right

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Speaker 1: now has to do with a couple of reasons. Number One,

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Speaker 1: foreign lenders are not participating as heavily as they used it.

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Speaker 1: See in this recent February auction, foreign bidders drop to

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Speaker 1: under sixty percent, whereas they used to be up at

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Speaker 1: words of seventy four percent in November. Another reason this

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Speaker 1: is happening is because the Federal Reserve so far is

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Speaker 1: still doing quantitative tightening. Quantitative tightening is the process by

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Speaker 1: which the Federal Reserve allows its balance sheet to decline.

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Speaker 1: A lot of the Federal Reserve's balance sheet is made

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Speaker 1: up of US treasuries, which means the government owes money

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Speaker 1: to the Federal Reserve. Quantitative tightening is when that money

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Speaker 1: gets paid back. The Federal Reserve doesn't take all of

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Speaker 1: those dollars and lend them right back to the US government. Instead,

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Speaker 1: they allow some of that debt to get fully paid off.

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Speaker 1: Those dollars don't just sit on the Fed's balance sheet,

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Speaker 1: they just get destroyed. They cease to exist. So as

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Speaker 1: the Federal reserves balance sheet moves down, that represents less

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Speaker 1: and less liquidity in the financial system and the government

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Speaker 1: has to find new sources to borrow that money from.

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Speaker 1: The third reason why is because the federal government is

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Speaker 1: actually ramping up how much money it is borrowing. So

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Speaker 1: while the federal reason is not there to be as

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Speaker 1: big of a lender, and while foreign lenders are not

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Speaker 1: there to be as big of a lender, the government

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Speaker 1: is actually trying to borrow even more despite the fact

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Speaker 1: that there's less lenders. So that's why this is happening

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Speaker 1: right now. So the second question is this going to

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Speaker 1: continue to get worse, at least in the near term.

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Speaker 1: We are very likely to see continuing bad auctions as

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Speaker 1: long as the federal government is borrowing at the long

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Speaker 1: end of the curve, auctioning off twenty year treasuries or

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Speaker 1: thirty year treasuries. Liquidity is simply drying up for debt

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Speaker 1: like this, especially considering the growing likelihood that we are

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Speaker 1: entering into a new higher inflation environment for the long term. However,

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Speaker 1: the government currently can borrow at the short end of

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Speaker 1: the curve pretty much anything under a year without having

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Speaker 1: to worry about liquidity issues. And this is because there

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Speaker 1: are still about five hundred billion dollars in excess cash

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Speaker 1: in the financial system that's sitting in the reverse repo facility.

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Speaker 1: And so if the government continues it's borrowing at the

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Speaker 1: short end by issuing tea instead of borrowing at the

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Speaker 1: long end with things like twenty or thirty year treasuries,

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Speaker 1: they'll continue to suck more and more cash out of

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Speaker 1: the reverse repo facility until it's drained. Now, this five

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Speaker 1: hundred billion dollars could go very quickly. There are times

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Speaker 1: when the reverse repo facility drops very quickly, or there

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Speaker 1: are times like right now, when it kind of stagnates

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Speaker 1: and doesn't really drop at all. But given the issues

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Speaker 1: with the government borrowing at the long end and the

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Speaker 1: lack of issues with borrowing at the short end, they'll

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Speaker 1: likely continue leaning on the short end with things like

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Speaker 1: T bills for the majority of their financing needs, which

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Speaker 1: means that it's just a matter of when, not a

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Speaker 1: question of if the reverse repot facility gets completely drained,

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Speaker 1: and once that happens, the government will lose yet another

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Speaker 1: source to borrow from and they won't have a specific

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Speaker 1: area of the yield curve they'll be able to lean

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Speaker 1: on for their financing needs, which means we are likely

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Speaker 1: to see an acceleration of issues in the treasury market,

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Speaker 1: not a passing of these issues. This will have the

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Speaker 1: effect of pushing interest rates much higher, draining liquidity out

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Speaker 1: of the finnancial system, and increasing the problems that many

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Speaker 1: small banks are facing right now, which means the last

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Speaker 1: question here that we have to deal with is what

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Speaker 1: happens if it does push things to the breaking point?

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Speaker 1: What if a treasury auction happens and it fails. A

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Speaker 1: failed treasury auction simply means that the government tries to

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Speaker 1: borrow a specific amount of money and not enough people

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Speaker 1: line up to lend to them. For instance, if they

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Speaker 1: wanted to borrow one billion dollars but only nine hundred

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Speaker 1: million dollars lined up to be lent to them, it

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Speaker 1: doesn't matter what rate the lenders are asking for. It's

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Speaker 1: a failed auction because they tried to borrow a certain

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Speaker 1: amount and couldn't. Not only that, but that auction would

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Speaker 1: probably have a massive, historic sized tail because that last

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Speaker 1: lender that lined up could technically theoretically ask for any

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Speaker 1: rate and they'd get it. A failed treasury auction, however,

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Speaker 1: does not mean that the government defaults. Federal government has

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Speaker 1: their version of a checking account called the Treasury General

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Speaker 1: Account that is currently sitting above seven hundred billion dollars,

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Speaker 1: which which means if they do have a failed auction,

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Speaker 1: it'll certainly be bad for treasury markets and probably the

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Speaker 1: stock market as well. We're probably going to see massive

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Speaker 1: dislocation and disorderly conduct all throughout financial markets, as the

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Speaker 1: safest asset in the world just experienced a failed auction.

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Speaker 1: But it doesn't mean a default. They'll simply just need

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Speaker 1: to spend some of the money from their checking account

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Speaker 1: the Treasury General account to make up the difference, and

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Speaker 1: at that point we are very likely to see a

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Speaker 1: return to quantitative easing, where the Federal Reserve starts to

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Speaker 1: increase its balance sheet again instead of decreasing it like

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Speaker 1: it's been doing for the past few years. That's where

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Speaker 1: they print money, use that newly printed money to buy

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Speaker 1: treasuries from banks, so that banks can then turn around

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Speaker 1: take that new cash and loan it to the government

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Speaker 1: at the end of the day. This is the only option,

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Speaker 1: it's the only way forward. Government borrowing is not slowing

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Speaker 1: down anytime soon. It is only a matter of time

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Speaker 1: before they tap out the liquidity in the markets, and

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Speaker 1: we need the money printer to fire up yet again,

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Speaker 1: which means the government will be able to borrow at

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Speaker 1: whatever rates they need because they're essentially borrowing and directly

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Speaker 1: from the money printer. But for everybody else like you

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Speaker 1: and I, that'll push up inflation because the government will

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Speaker 1: be spending money into existence again. Prices will go up,

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Speaker 1: which means lending rates and borrowing rates for everybody else

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Speaker 1: like us will actually go up. We are in a

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Speaker 1: new phase of the long term debt cycle. Everything we're

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Speaker 1: seeing playing out right now very much mirrors what happened

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Speaker 1: in the nineteen forties through about nineteen eighty. This is

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Speaker 1: going to be very different that what has happened for

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Speaker 1: the last forty years, which took place from about nineteen

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Speaker 1: eighty through twenty twenty. The rules of investing and making

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Speaker 1: money they change given where we're at in this long

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Speaker 1: term cycle. We're going to be discussing all of that

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Speaker 1: and much much more in this free live event webinar

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Speaker 1: that we're having on March seventh. Mark your calendars. It's

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Speaker 1: going to be about an hour long, completely free. There's

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Speaker 1: only five hundred slots available though link is in the

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Speaker 1: description below. Don't wait, sign up now, see you there

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Speaker 1: as always, Thanks so much watching. Have a great day.