An Unusual Christmas Wish?

First, I want to wish all readers a happy Christmas and safe travels during this Christmas holiday weekend. 
 
Now let’s get to a Christmas gift that the dysfunctional Congress could give to the entire country. All they must do is stop making disruption their primary purpose. Here’s my Yuletide story.

 

 

I’ve been writing about how the political dysfunction in the House of Representatives has a cost in financial terms. There are some readers who have politically supported the shutdown and debt-ceiling-fight tactics. Those readers allege that there is no cost. Those readers are declared supporters of the House Freedom Caucus (I call it the Chaos Caucus, using the name given to it by Karl Rove, a person who has impeccable Republican party credentials). 
 
In addition, one public news commentator challenged my data in a public forum (about 300 people) at the Money Show on December 4^th in Sarasota, when I projected a chart like the one you will find below. He refused to accept the coincidence of the dates and the market pricing as having anything to do with the behavior of the House with regard to the debt ceiling and budget. In sum, he disparaged my assertion that there was causality. I will leave it to readers to look carefully at the chart I used and determine causality versus coincidence for themselves. Note the date on the chart is December 6^th, my presentation was on December 4^th, and the Money Show events ran from December 4 to December 6. So, this date is selected to coincide with the Money Show closing date. Also note that a credit default swaps (CDS) chart today would not be much different from what you see below. 
 
Some readers have challenged me on where I get the information about credit default swaps. One said that they don’t see it on TV. One said I made it up. Others claimed it was fake news. Again, I will leave it to readers to decide this for themselves. But here is some evidence for you to consider. For the market prices of CDS, I use the Bloomberg data available to full Bloomberg terminal subscribers. You can see the Bloomberg ID code on the upper left corner of the chart.
 
For the CDS aggregate data I use this source: “OTC derivatives statistics at end-June 2023,” Bank for International Settlements, https://www.bis.org/publ/otc_hy2311.htm
 
Here are a few items to glean from this BIS report. 
 
1.This is a premier source of accurate world financial data. There is no “fake news” here.
 
2. There is a section devoted to CDS. It is loaded with details.
 
3. Note, in the chart (Graph A.8) that, since the debt-ceiling fight of 2011, the use of credit default swaps has been climbing and has increased each time the tactic of debt ceiling default threat or shutdown threat was used. 
 
4. Note that the new level is a record high of $7 trillion in notional CDS (Graph A.6).
 
5. Note that the over 70% of CDS are now cleared by central clearing facilities (Graph A.8). That is a record high.
 
So, here’s my final takeaway: The political antics of the culture-war House Chaos Caucus Members have a cost. We now can estimate how much it is. We can see how it effects the pricing of US government securities and specifically federal agency securities. We can see that it is raising the home mortgage interest rate for every new home buyer in America, and we can estimate by how much. Our best guess is that a new home buyer with a new $400,000 mortgage is paying about $130 a month more than they would otherwise be paying. That is a cost imposed on every new home buyer in every month for 30 years, if that new home buyer uses a conventional mortgage. 
 
Because of the complexity of this CDS subject, it appears that the financial media have ignored the linkages. I believe that Bloomberg, CNBC, CNN Money, Fox Business, Yahoo Finance, and others could do a great service to the country if they could find the way to tell this story to the public and business community. 
 
Below is the recent chart of the CDS on the United States government debt at the 10-year maturity. Note how elevated the pricing is and how it has reached and exceeded (in mid-November) the level of the day before the Biden-McCarthy handshake in May. What happens next depends on the House leadership in January and February as the budget fight continues. One thing is sure: Political dysfunction has a cost and using culture war politics to fight over a budget is a surefire way to raise the cost of finance for the entire business and investment sectors of the United States.
 

A final thought on this Christmas Eve day. Please remember that this is a “spread” indicator and not a directly set rate. The base rate is derived from many market forces and is the market yield on a US Treasury security. The US federal agency debt is tiered off that treasury and is higher. The issue is how much higher. If the US government were trusted by the world’s financial community, the spread would be very tight. It is tight in the very short maturities like one year. But the spread widens in longer maturities. The chart above is 10 years. World market agents are saying, we don’t have long-term trust in the United States. I believe that is due to our political disruption and dysfunction.
 
Were the Congress to codify a no-default law, I believe that this spread would quickly narrow. The Congress could give a Christmas gift to the entire country. And it would lower the mortgage payment of every new home buyer in America.
 
On that note we wish you a Merry Christmas and a safe, healthy New Year.