Archive - Apr 6, 2011 - Story

With just 72 hours left until a possible government shutdown, everyone will be following each and every take from the DC soap opera over the next three days with great interest. As such, here is a summary of today's key events in DC via Goldman's Alec Phillips. "All eyes on fiscal issues today. Yesterday, the consensus regarding budget negotiations seemed to have swung from viewing a shutdown as a clear risk to now viewing it as the most likely outcome (though still very uncertain). That said, talks will continue, in an effort to close the gap between positions on proposed spending cuts. House Speaker Boehner is reported to have proposed cutting $40bn from current levels versus the $33bn compromise floated last week, which if nothing else indicates that the gap between the parties amounts to a few billion dollars, and there is still a possibility of another very short-term extension of spending authority."

With everyone offering some version of a US budget, one more ridiculous than the other, one thing is certain: nobody has any clue how to fix America's fiscal catastrophe. And while the biggest soap opera rages in D.C. Larry Kotlikoff, who recently served as the only rational contributor to the just released IMF what paper "An Analysis of U.S. Fiscal and Generational Imbalances: Who Will Pay and How?" summarizes the "progress" so far: "The two parties are having a heated debate over the Republican plan to slice $61 billion off Uncle Sam’s projected $3.6 trillion budget. If the Republicans get their way, the deficit will fall from 9.5 percent of gross domestic product to 9.1 percent. If they don’t, they’ll probably shut the government for a couple of days. Then they’ll compromise on, say, a $40 billion budget cut, having proved they gave it their best shot." And sick of the corrupt petulance in DC, Kotlikoff has decided to propose his own budget. " I launched www.thepurplehealthplan.org last week
to solicit endorsements for what I call the Purple Health Plan -
- a proposal that offers common ground to both Republicans and
Democrats. To date, five Nobel laureates in economics, George Akerlof, Edmund Phelps, Thomas Schelling, Vernon Smith and
William Sharpe, have signed on. So have other prominent
economists." We have not read it but fail to see how it can be possibly worse, especially since one Paul Krugman has not endorsed said plan.

• More from the Oracle: Central Banks Grapple With Competing Forces (Hilsenrath)
• U.S. Sees Array of New Threats at Japan’s Nuclear Plant (NYT)
• China’s Rate Tightening Threatens Copper (FT)
• Fed’s Biggest Foreign-Bank Bailout Saved U.S. Muni Bonds (Bloomberg)
• NATO Blamed as Libyan Rebels Flee Assault By Qaddafi Forces (Bloomberg)
• Government Shutdown Looms Despite Obama's Intervention (Reuters)
• Another "brilliant" HFT "fix": SEC Unveils 'Limit' Curbs to Prevent 'Flash Crash' (WSJ)
• Ouattara forces storm Gbagbo bunker in Ivory Coast (Reuters)
• U.S. Fiscal Crisis in Spitting Distance (Laurence Kotlikoff)

Stagflation: meet economic collapse. The UK basket case is getting very, very ugly, with today's obliteration of Industrial Production putting in doubt expectations of a BOE hike. From AP: "British industrial production fell 1.2 percent in February from
January, an official report said Wednesday, marking the largest monthly
fall since August 2009 and far worse than analyst expectations for an
increase of 0.2 percent. The Office for National Statistics said a
7.8 percent drop in oil and gas extraction was the main reason for the
fall, while the manufacturing sector was flat." And the winner: "It may be that the industrial recovery is past its peak," said Samuel Tombs, U.K. economist at Capital Economics. Industrial production accounts for 17 percent of British GDP." That's the bad news; the good news is that with runaway inflation which is now surging at 5%+ the economy has got to be improving: after all where would all this demand be coming from if not from some massive latent recovery. Oh wait, what's that you say: endless liquidity? You don't say. Well, never mind then. In other news GBP crosses get obliterated as rate hike expectations are put on hold. In fact what you can put on the front burner is more money printing, both at the BOE and the Fed because central banks are so much more adept at "controlling" inflation than deflation.

In trading in London this morning, gold reached a new record nominal high ($1,459.07) and silver a new 31 year nominal high ($39.50) as investors bought the precious metals to hedge deepening sovereign debt risk (in the EU but also in the US with the threat of a federal budget shutdown), geopolitical risk and deepening inflation. Brent crude reached $123.00 a barrel this morning and looks set to challenge the high seen in July 2008 of $145.49. Anemic economic growth, extremely loose monetary policies, sovereign debt risk, geopolitical risk and surging oil and commodity prices is a recipe for stagflation which would see the precious metals replicate their performance of the 1970’s when gold rose 24 times in value (from $35 to $850) and silver by over 32 times (from $1.55 to $50). Silver over $100/oz is not as outlandish as once thought with dealers in Hong Kong mooting that possibility. Strong demand for silver is being seen in Asia (see news). Inflation has taken hold in much of the developing world and is taking hold in developed world markets now. Despite very significant price increases in vital commodities, particularly the essentials of food and energy, there remains much denial about the threat of inflation and indeed the threat of stagflation.

Earlier today Portugal, by the skin of its teeth, sold €1 billion in 6 and 12 month Bills, which however may be its last auction before the country is forced to beg for a bailout: the yield on the 6 Month bill rose from 2.984% three weeks ago to 5.117%, while the 12 Month surged from 4.311% to 5.902%. This is simply a ridiculous yield and at this rate pretty soon the country will be paying more to issue Bills than Bonds. "I suspect that as far as the market is concerned, funding at these levels can only be viewed as a temporary measure," said Peter Chatwell, rate strategist at Credit Agricole. "There has been a very important signal from the
banks for the future," said BNP Paribas analyst Ioannis Sokos. "Portugal
can still make it through April, but probably won't get to June without
a bailout." Which incidentally is when the country is going to have new government elections: cruising through a period of insolvency without a man in charge is probably not the best idea. But what is worst is that the country's social security fund is once again rumored to have been a buyer of last resort. Since these bonds will eventually default, Portugal's pensioners will not be happy to find out that a notable portion of their retirement capital will soon be wiped out.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 06/04/11