Archive - Jul 31, 2011 - Story

Hot off the presses, here is the White House's very own "debt deal" fact sheet, which is apparently a "win for the economy and budget discipline." Which is great since we already know it is a win for the GOP and the Democrats. In other words, the only thing better than a Win-Win, is a Win-Win-Win... in which the only loser, of course, is America. We caution readers on high blood pressure medication, on blood thinners, those on dialysis, and those prone to incontinence or murderous acts of rage to please skip this post.

My fellow Americans...

In a much anticipated statement, Obama just announced that he has struck a deal with Boehner on the debt and the deficit, which will allow the US to avoid default. And also, as Reuters adds, Obama said that spending cuts included in deal to raise the debt ceiling will not happen so quickly that they will drag on the fragile U.S. economy. In other words, there will be no cuts for the immediate future. But there will be a single $2.4 trillion debt ceiling raise (based on a Joint Committee green light, LOL) just as Obama desired. And of course, there will be no tax hikes. Bottom line: there will be about $40 billion in actual, real spending cuts until the next, $16.7 trillion debt ceiling limit is hit some time in Q1 2013, at which point it will have to be raised to $20+ trillion. But no really, they are cutting spending and all that.

SkyNet has taken over the market, it now appears poised to make labor and wages redundant (and while we hardly welcome our new robotic overlords, we doubt anyone would shed a tear if the House and Senate replaced its 535 corpulent windbags with a bunch of Johnny 5s engaged in binary colloquies). The world's biggest non-debt based slave-driver, Taiwanese technology giant Foxconn, also known as the place where all of your iPhones, Pads, etc, are made, has just announced that it will deal with rising wages by doing what US-based quants have figured out years ago: outsource it all to robots. About a million of them. The irony is that the last time we looked at Foxconn, we asked: "what happens when this million realizes it can only buy half a McRib sandwich with the money it makes, courtesy of the primary US export to China, and demands a pay raise. What happens to Apple margins then?" We now have our answer. Per Xinhua: "Taiwanese technology giant Foxconn will replace some of its workers with 1 million robots in three years to cut rising labor expenses and improve efficiency, said Terry Gou, founder and chairman of the company, late Friday. The robots will be used to do simple and routine work such as spraying, welding and assembling which are now mainly conducted by workers, said Gou at a workers' dance party Friday night." As a reminder, with over 1 million workers, Foxconn has enough people on its payroll that if mobilized would be the 5th largest army in the world, and just after WalMart in total number of employees, albeit instead of spread out around the world, are all concentrated in one small space.

Oops. From Washington Wire again: "House Speaker John Boehner (R., Ohio) appears to be balking at the debt ceiling deal that Senate Democratic Majority Leader Harry Reid of Nevada has signed. Mr. Boehner is concerned about provisions in the deal that could lead to sharp cuts in military spending, say people familiar with the situation. House aides have warned that just because Mr. Reid has signed off on the deal doesn’t mean the deal is done." From limit up to limit down in one easy (yet unconfirmed) headline.

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.

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."

By now everyone has seen this. And if the haven't, they should.

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 quo^TM 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 quo^TM, 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.