The first prints are in and the relief kneejerk is here, as much expected. ES prints +17 at 1306, USDJPY jumps, although the fade is already there, while the Franc is dripping lower although we expect the same fade to come to it soon. Obviously gold is off, by just about 1% to levels last seen... five days ago. We wonder how long until the vacuum tubes realize that with the debt ceiling raise, Obama has just given Bernanke the green light to monetize up to $2.8 trillion in brand spanking new pieces of one-ply US debt. In other news, a Reuters blast just announced that a Senate vote on a debt deal is "highly unlikely" before Monday, confirming that the market will now have to price in what is effectively becoming TARP 2, with the same potential dire consequences to the market if it is wrong as it was last time around. Overall, we expect the computers to create their self-referential momentum buying sprees until such time as the big boys come in and start offloading the big blocks.
With the debt ceiling "compromise" deal still in flux, although at least according to the FX market expected to be approved shortly, despite the protestations of liberal democrats (one wonders if Obama will accuse said group of hostage tactics much as he accused conservative republicans of the same last week), below is what the current shape of the proposed deal looks like courtesy of the WSJ's Washington Wire blog.
Guest Post: Deconstructing Algos, Part 4 -Phase Space Reconstructions Of CNTY Busted Trades Suggests High Speed Gang-Bangs In The MarketSubmitted by Tyler Durden on 07/31/2011 - 16:43
What is going on here? Is there a single algo? Two duelling algos? Something more? The key difference is the "blocky" character of the last several graphs. That" blockiness" arises in phase space from repeated trades at a single price. The blockiness is absent in the bowl of spaghetti as one entity moved the share price around (was this a test?). The blockiness that followed was the result of numerous followers blasting away at the same price. I think (but cannot prove) that the initial strange behaviour in the share price was noticed by other algos, which began to look for short episodes of volatility in the share price to exploit it for very short term gains. The initial bowl of spaghetti was manipulation from a single algo--a signal (perhaps unintentionally) for other algos. The blocky trajectories are the follow-on gang-bang of the stock as the other algos join in.
Grant Williams summarizes: "So, keeping it real, what happens now? Well, the debt ceiling will get raised - most likely this weekend - and the usual photo-op of sycophants cheering and applauding behind a podium will be all over the news, but the raise will be just another step on the road to financial ruin for the United States if it continues to layer fresh debt upon existing debt as a way to solve its problems and turns to printing presses and raised ceilings as the balm of choice. In this kick-the-can culture we now live in since the events of 2008, it’s never that difficult to figure out WHAT the powers-that-be will do (simple: whatever short-term fix involves the least short-term pain to banks and to their own chances of reelection), but it seems to be getting harder to ascertain WHEN they will do it. This is all well and good, except sooner or later they will wake up and find that the adults have decided enough is enough and they’ll vote with their money...So tell me - and keep it real - would YOU lend money to a country with THOSE debt dynamics that is being run by a bunch of incompetent, bickering grandstanders if it DIDN’T possess the world’s reserve currency? Me either."
Goldman's Jim O'Neill "Go On President Obama And Congress; Give Us A Nice Pleasant Summer Surprise!"Submitted by Tyler Durden on 07/31/2011 - 12:08
While there are some undertones of caution in the latest letter from the head of Goldman's worst performing group ("I suspect the reason why the bond market has rallied and the Dollar and equities have fallen, is because there is going to be a budget deal, which the markets worry will weaken the cyclical GDP growth outlook further"), his bottom line (literally) is precisely what everyone on Wall Street, and everyone else who writes rants against responsible fiscal management (wait, wasn't Congress responsible 1 year ago? or two years ago? No of course not. It became an emergency a week ago) thinks. And it is as follows: "Go on President Obama and Congress; give us a nice pleasant Summer surprise!" Indeed, when you cut out all the hollow rhetoric of all those whose livelihood depends on the status quoTM and on "borrowing" from the future (cold fusion will certainly help with our energy problems one day... so will the tooth fairy), this is what it is all about.
Goldman's Themistoklis Fiotakis summarizes the main events in the upcoming week, which will likely see a very short term bout of buying frenzy on the debt ceiling deal, following by the realization that America can kiss fiscal stimulus goodbye and that real GDP is set to contract over the next quarter to a negative print as the last benefits from QE2 vanish and are replaced by nothing. Also, with the upcoming weekly earning focusing on financial companies as announced yesterday, there will be little help from the only bright spot in the so-called economy, especially with the flashing red sign of the July Nonfarm Payroll Print (consensus +95K, Goldman +50K, even LaSagna +50K) due on Friday. The half life of Europe's second bailout was under 5 days. We give America about the same.
With a debt ceiling deal now a given and purely a matter of dotting i's and crossing t's, potentially pending a several day debt "breathing room" extension to be approved by Obama, whose TV appearance we expect shortly to provide a conclusion to this "grand compromise" farce, here are some of the key soundbites from the three primary constituents as of their media appearances this morning.
Below are the key clips from this morning's Meet The Press which is devoted exclusively to proponents of the status quoTM, whose entire argument boils down to the syllogistic: "cut spending yes... but not today...never today" In fact, it is best to make any cuts the next administration's problem. So assuming Obama gets reelected, and there is another debt ceiling hike, which there will have to be, it means about $7 trillion on top of the currently debated $3 trillion, whoever inherits this mess from Obama (who in turn inherited his mess from Bush, who in turn inherited his mess from Clinton, and so on), will have $24 trillion debt to deal with on day 1, with about $16-17 trillion of GDP. And that person will have to cut spending? What idiot would want that job? Anyway, we fully expect the paid government workers from the rating agencies to shortly upgrade the US to AAA+ on renewed growth prospects courtesy of 140% debt to GDP in 5 years...and that excludes the $7 trillion in off balance sheet GSE debt.
And there you have it. Mark Zandi, better known for predicting at least 18 occurrences of a US recovery in the past 4 quarters, and being as wrong on the shape of the US growth curve as everyone else on Wall Street (although being Moody's head economist that is a perfectly normal track record), just told CNN's State of the Union that the deal is substantive enough to where Moody's will not move to downgrade the US' AAA rating. Naturally, the fact that this is merely another massive can kicking exercise which will see the US debt ceiling raised by $3 trillion with actual cumulative cuts of about $100 billion tops by November 2012 at which point yet another debt ceiling hike will have to be planned is irrelevant. All that matters is to get the S&P back to the year's highs, 120% debt/GDP (same as Greece) be damned.
This could very well be another red herring like the NYT article from two weeks ago that proved to be a dud, but for what it's worth according to ABC's Jonathan Karl, the White House and the GOP have just reached a tentative deal as follows...
Politico's Ben White has pointed out something interesting, namely that while the 14th Amendment may or may not be practical under the current situation (especially not without a full blown constitutional crisis), one potential loophole that Obama may have comes from none other than former president Bush, in the form of the Homeland Security Presidential Directive-20, one which deals with such trivia as "Catastrophic Emergency", "Continuity of Government", "Continuity of Operations", and lastly, and perhaps somewhat ironically, "Enduring Constitutional Government." Considering the amount of doom and gloom spun by the government is bigger than anything seen even under Hank Paulson, could this "crisis" be interpreted by the constitutional scholar as one that merits the invocation of Homeland Security privileges? Is America's maxing out its credit card comparable to a nuclear or terrorist attack on the continent? We may find out in less than 48 hours.
While the biggest winner of the ongoing political melodrama is C-SPAN, whose ratings have likely never been higher, and the broad audience is logically largely distracted by the hourly lack of development out of the White House, what we do know is that QE2 has failed to generate any growth in the economy, with both Q2 and Q1 GDP crashing spectacularly to a point where post another revision Q1 will be the inflection point where America re-entered another recession. Furthermore, we have seen a stark example of the economic snake eating its tail, whereby the more than proportional increase in the price of commodities, courtesy of Bernanke's policies, has offset any potential incipient growth germs that may have been lingering in the economy in Q3 2010 through Q2 2011. Yet all of these are backward looking indicators. The question is what happens to the global economy going forward? For the answer we again turn to Sean Corrigan, who remarks on some very disturbing developments in the global macro arena, which when tied in to core tenets of the Austrian Business Cycle theory, indicate that the global soft landing may be a mirage, and that the downslope we are already in, may convert into a stall from which the global airborne Titanic does not recover.
President Obama this Tuesday stated his case for increased taxes on “the rich” as part of his solution to balance the deficit. “Keep in mind,” he assured the American people, “that under a balanced approach, the 98% of Americans who make under $250,000 would see no tax increases at all.” I have a very basic question that I am not sure anyone has pressed Mr. Obama to answer: Where did this figure of 250k, north of which one is considered by him to be among “the rich” even come from? Its very roundness tells me that it was the result not of a detailed actuarial analysis but rather some sort of arbitrary caprice that only those completely isolated from any private sector experience can conjure up. I almost get the feeling it was something as off-hand as: “Hey 250k sounds right to me. Nice number. So whattya think?” Sure write it in there.
Even as the political posturing over who spent what, how much and when reaches ridiculous levels, courtesy of the St. Louis Fed it is a short 5 minute process to fact check (thanks to the St Louis Fed's Fred) what the average annual federal expenditures, investment and consumption were/are under the regimes of Bush and Obama respectively. It also allows us to see what the average government saving, or rather, borrowing has been under the two administrations. The result, or rather the step function contained therein, may surprise some. Furthermore, we present a few observations from Sean Corrigan's latest later on the proclivity of the Obama administration to spend.... and spend... and spend... which demonstrates that while there certainly may be carryover from the previous administration, the eagerness of the current one to fund a record amount of disposable income via state transfer funding can not be blamed on the Bush by any sane person.