Archive - Jul 16, 2011 - Story

For those who think the News Corp. fallout is anywhere near close to ending, we have one word: Nope. The chart below from BusinessWeek is the best visual representation of what started as a simple voicemail tapping scandal and is set to not only topple a media empire, but to revolutionize the tabloid industry (for once into something better we hope), in the process maybe even returning a few IQ points to the average "developed nation" citizen.

One of the "positive" side-effects of the Treasury's plundering of retirement accounts is that total US debt in June actually declined for the first time since January 2010, dropping by $1.6 billion from the May 31 closing print of $14.344 trillion. No doubt this was predicated by the US Treasury officially breaching the debt ceiling on May 16. Yet due to this, or for some other reason (and it is not a surge in net income tax receipts as these appear to have reached an inflection point earlier in the year and are now trendlining lower on a Y/Y basis), something else happened: the slope on the cumulative deficit line since the start of the depression in December 2007 (see below), is now the shallowest it has ever been. In other words, the US over the past few months, faced with the threat and now reality of a debt ceiling breach was actively cutting spending, while benefitting from a transitory spike in income tax revenues, although unfortunately now that the unemployment rate is back on the trendline to double digits, this will be the only true transitory thing about the US economy. Whether this actual, factual fiscal prudence was conscious is unclear, however the result is clear: faced with the threat of being unable to finance every single dollar in perpetuity, the US government's involuntary self-imposed austerity actually... Worked! And yes, the direct side effect is that Q2 GDP is now likely to come at 1.6%: the worst quarterly increase since... Q2 of 2010 (recall that 2010 Q2 GDP was revised from 2.4% to 1.6$ on August 27 last year... hours before Bernanke announced QE2 ). And there once again is the glaring correlation between the slowing of the economy and the decline in debt issuance, and the actual deficit "improvement." Now take this slower deficit growth, and assume it actually is reversed, i.e., America has a budget surplus. While great for the country in the Long-Run, it would mean that GDP, which is now purely reliant on how much debt Geithner can issue, it would mean a collapse in the GDP, in the S&P, and in Wall Street executives' bank accounts. At least in the absence of QE3, 4 and so forth...

After working hard to compile a list of Obama's rather questionable record of fiscal promises and actual executions, the gist of which is represented best by the violent clash between myth and realty in Christina Romer's "The Job Impact of the American Recovery and Reinvestment Plan" whose epic failure is defined by one simple chart, we were disappointed to learn that Paul Ryan had already done this. And leaving Paul Ryan's politics aside, the facts do speak themselves. They speak even louder when one considers the din raised by the same president who back in 2006 said: "The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘the buck stops here. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better." Indeed they do president Obama. Indeed they do. So without further ado...

It may be time to rebrand Congress as the new CTU, although when it comes to who in D.C. should play agent Jack Bauer we are still unsure. The reason is that this morning we get two diametrically opposing fictions about the latest reality on the debt ceiling. On the one hand we read in the LA Times that, "Republican leaders in the House have begun to prepare their troops for politically painful votes to raise the nation's debt limit, offering warnings and concessions to move the hard-line majority toward a compromise that would avert a federal default. For weeks, GOP conservatives, particularly in the House, have issued demands about what they would require in exchange for their votes to increase the debt limit... Unwilling to risk the economic and political consequences of a federal default, which could come as early as Aug. 2, they have started the difficult process of standing down." That, however is not what The Hill heard: "House Republican leaders have missed a 36-hour deadline President Obama set during a Thursday meeting for lawmakers to give him a plan to avert a national default. The deadline came and went Saturday morning without a response from House Speaker John Boehner (R-Ohio). Instead, Boehner and House Majority Leader Eric Cantor (R-Va.) plan to move the Cut, Cap and Balance Act on the floor next week, which would require passage of a balanced budget amendment to the Constitution before the debt limit is raised. A House GOP leadership aide said at noontime Saturday that Boehner and Cantor did not send Obama a revised proposal to raise the debt-limit, as the president requested." So which is it? And has M. Night Shyamalan been retained to write the surprise twist ending to this nail-biter? We doubt it. Unfortunately, we are still convinced the republicans, under the "wise" defection of Mitch McConnell will fold, Obama will get what he wants, and the republican tough stance will go up in a puff of smoke leading to an even great loss of credibility for the GOP. There is less than 168 hours in which we can be proven wrong. We hope we are, but we doubt it.

After clearly demonstrating that last year's flash crash was essentially a byproduct of massive quote stuffing-induced churn surge, which cascaded into a full blown liquidity collapse, coupled with the bulk of HFT "liquidity" providers simply turning their machines off and subsequently reverberating by ETF "amplifiers" to the n^th degree, last week Nanex released what is probably one of the most critical white papers on why in its pursuit of ever higher speed (or, at least speed that is physically capped by the theory of relativity at 300,000km/sec) to gain a frontrunning advantage over everyone else, courtesy of a massively two tiered market in which there is the collocated Ph.D. braintrust focused on millisecond trading (day trading is so 20th century), and then everyone else, the core premise of the "fair and efficient market" - the National Best Bid Or Offer, which is at the heart of Regulation NMS which in turn sets forth the guiding principles behind modern "capital markets" is now an anachronism and is being overrun on a daily basis as the fastest to the market gets to set just what their own NBBO is, in the process literally destroying the premise of market fairness and efficiency, as those who have the newest and shiniest toys are guaranteed to win, while everyone else fights for a fraction of the scraps. Said otherwise, steroids are forbidden in sports but when it comes to capital markets, they are very much accepted.

Never before has the job of Goldman's equity markets strategist been so difficult: on one hand he has to deal with an economy that is openly imploding after a readjustment of Q2 GDP to below subspeed, a drop in Q3 growth from his economic team as of last night to 2.5%, and a growth hockeystick that nobody (except for Joe LaVorgna of course) believes in any more. On the other he has to get paid for spreading propaganda to the firm's whale accounts even as GS is openly selling into any risk rally (Abacus deja vu). And while the latest weekly chartology from David Kostin is already very much outdated, after Jan Hatzius was forced to admit in his latest Friday night bomb installment that our view on the economy (i.e., absent stimulus = game over) is correct, he does make pretty charts. So ignore all the forecasts as they are 100% wrong as usual and focus on the pretty breakdowns of what has already happened. If nothing else, Goldman proves that billions in taxpayer bailout funds and secret Short Term OMO access can sure buy a damn good WP/Graphics department.