Archive - Aug 2011 - Story

Three weeks ago Putin called Bernanke a hooligan. Since that remark came from the (allegedly) largest oil producing country in the world, it provoked nary a peep from America's foreign department. Today, he decided to ratchet up the rhetoric, and in a speech to a Kremlin youth group told his listeners what the bulk of the rest of the world thinks of America: ""They are living beyond their means and shifting a part of the weight of their problems to the world economy," Putin told a Kremlin youth group while touring its summer camp north of Moscow. "They are living like parasites off the global economy and their monopoly of the dollar."" Russia has not made its distrust of America clear in the past, and while others (ahem China) have been jawboning about selling Treasurys even as they continue buying US one-ply paper, Russia has been actively dumping its Treasury paper to the lowest in years. The reason for the unprovoked outburst? The insanity in Congress. "Thank god," Putin said, "that they had enough common sense and responsibility to make a balanced decision." The former KGBer's solution? Other, and more deserving, reserve currencies.

Two weeks ago we presented a chart that shows the uncanny correlation between the debt ceiling and the price of gold. Now that we know the final amount of the next debt ceiling hike, somewhere in the $2.5 trillion ballpark, it allows us to extrapolate where gold will end up as a result of the debt ceiling hike which will likely be voted into law at 7pm PDT. A simple correlation rule of thumb allows us to predict that gold will be at $1,950 by the end of the year if it simply retains it close correlation to the debt ceiling. Should Bernanke announce that he will additionally need to monetize some or all of this incremental debt amount, we anticipate that gold will be well over $2,000 by the end of the year, courtesy of yet another round of accelerated dollar debasement, which also means that real gains in US stocks will be negated courtesy of the devaluation of the currency in which they are priced. The same, however, does not apply for gold, which with every passing day is priced in nothing but itself.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 01/08/11

With total Treasury cash dropping by $15 billion on Thursday, many were expecting a far uglier print as of the close of last week. Instead, total cash in the Federal Reserve Account staged a dramatic bounce on Friday, and is now back to $65 billion, following tax revenues offsetting contractual spending and another $13.7 billion coming in from the settlement of public debt issues. From here on out it is only downhill, and the cash is likely about $20 billion lower as of market close today (we will know for sure tomorrow). If the burn rate is smaller it means that Tim Geithner is dipping far more aggressively in Government retirement and Social Security trust funds than anyone could have imagined (Bruce Krasting discussed this previously). And yes, for those with a double digit IQ, the Treasury has less cash than Apple still.

Here it is...

Just a tweet from ABC's @rickklein for now. We expect Boehner to confirm this during his conference to begin shortly.

Tim Geithner has released his projection of expected borrowing needs for the final fiscal quarter of 2011 (ending on September 30). But before that, we learn that while back on May 1 the Treasury had expected to raise $142 billion in marketable debt in Q3, instead if raised $190 billion, with the difference going primarily to build up the EOQ cash balance which instead of being $95 billion, was $137 billion, obviously due to the threat of the debt ceiling breach. That threat however has not prevented the Treasury from assuming that the debt ceiling will be raised without a hitch, and it now predicts issuing $331 billion in net marketable debt issued in Q4, $74 billion less than the projection from May 1 (and further sees another $285 billion in borrowing needs in Q1 2012). In other words, if there is no debt ceiling deal, the Treasury will be $616 billion short in revenues over the next 6 months. Of course, the numbers net out the massive issuance that has to hit the market to fund the "disinvested" government retirement funds and various other mechanism that were used to prevent the Treasury from running out of cash, which amount to about $300 billion primarily in the form of short-term bills that matured and were not rolled over to make space for marketable debt issuance. In other words, gross issuance in the next quarter will be about over $660 billion. This is just a little under the total debt issued in the last 3 quarters (due to the May 16th debt ceiling breach)! And people think the Treasury can raise this money without the Fed monetizing at will? Fascinating.

Yes, the melodrama is back. Follow the latest developments straight out of Congress, which is now expected to be far closer to passing the bill as more republicans have voiced the support of the Compromise bill. This could be your last chance as today could well be the final day of the debt ceiling episode. At least for the current season.

Friday deja vu with not enough votes once again. Keep an eye on the The Hill's Whip Count (link) which summarizes what the mood of republicans and democrats is as we go into the vote. Unless Boehner can convince enough republicans to share his opinion, and we do get a failed vote, it would make the Tarp vote failure pale in comparison with what happens to the market...

It's not Jefferson County, yet, but it could certainly be seen as the precursor to the first domino. "The state-appointed receiver overseeing the cash-strapped Rhode Island town of Central Falls has filed for bankruptcy on the city's behalf in an effort to help it get back on its feet. Receiver Robert G. Flanders and Rhode Island Gov. Lincoln Chafee announced the step - which Flanders has described as a last resort - at a news conference at City Hall. Flanders filed the legal paperwork seeking bankruptcy protection Monday. "From the ashes of bankruptcy Central Falls will rise again," Flanders said." The biggest losers: unions. "With the city now seeking bankruptcy protection, Flanders said he plans to reduce pension benefits beginning in late August. He has asked the federal court to immediately reject collective bargaining agreements. He said the next set of pension payments will reflect at least the cuts he outlined to city retirees. In addition, he said city workers will face layoffs. Flanders called the step unavoidable, as taxes have already been raised and city services have been cut "to the bone." Expect Barack Obama to thaw Steve Rattner from carbonite explain to creditors, using a variety of four letter words, that they will be last in line of payment after every single union claim has been satisfied, with the resultant husk of a town reverse merged with GM.

First it was Zero Hedge two hours ago, now it is the turn of JP Morgan's Michael Ferolli. "The employment index plunged a huge 6.4 points to 53.5, a print which adds a little downside risk to our already-below-consensus outlook for only 45,000 job growth in this Friday's July employment report." As a reminder, consensus is 90,000 or thereabouts. A negative print this Friday will bring QE3 within weeks. Which, of course, is the plan to go alongside the $2.5 trillion in debt coming to the market.

Headline flashing now openly warning that the BOJ is preparing to intervene:

• JAPAN PREPARES FOR CURRENCY INTERVENTION, NIKKEI SAYS
  
• COORDINATED INTERVENTION MAY FOLLOW JAPAN ACTION: NIKKEI

We call complete bullshit on this. Never do central banks preanounce when they intervene. Never. This is merely more posturing by the toothless and completely powerless BOJ which now has resorted to spreading rumors in order to get the USDJPY higher. Ref: Philipp Hildebrand who has been crouched in a fetal position for the past 6 months in a continuous PTSD daze.

Everyone appears to be confounded by the Dax futures flash crash as noted previously. Here is Goldman's Mark Bellak responding to client inquiries, confirming that even GS has no clue what just happened.

"No plan under serious consideration cuts spending in the way you and I think about it.  Instead, the "cuts" being discussed are illusory, and are not cuts from current amounts being spent, but cuts in projected spending increases.  This is akin to a family "saving" $100,000 in expenses by deciding not to buy a Lamborghini, and instead getting a fully loaded Mercedes, when really their budget dictates that they need to stick with their perfectly serviceable Honda.  But this is the type of math Washington uses to mask the incriminating truth about their unrepentant plundering of the American people.  The truth is that frightening rhetoric about default and full faith and credit of the United States is being carelessly thrown around to ram through a bigger budget than ever, in spite of stagnant revenues.  If your family's income did not change year over year, would it be wise financial management to accelerate spending so you would feel richer?  That is what our government is doing, with one side merely suggesting a different list of purchases than the other."

It was only a week ago that S&P said anything under $4 trillion in deficit cuts would be an automatic downgrade for the US. So according to the CBO's just released score of the bipartisan budget, the S&P will have to cut its rating of the US in half, since the total budget cuts will be just over 50% of what S&P demanded previously. And here's the funny part: of the $917 billion in known cuts (the other $1.2 billion is factored but not even the CBO has any clue what it will look like), a whopping 2% in cuts will take places before the Obama election. 2%! This whole charade is there only to make sure the president is reelected. Oh, and of course to make sure S&P does not downgrade the US. Which is where we get back to the fun. THE FUN. Because as it turns out, that whole $4 trillion thing.... S&P was only kidding. "It appears that the perception Standard & Poor's seemed to harbour, that the U.S. needed to find a $4trn sized package in order to keep its triple A rating, is unfounded. Two credit research reports published today point to the testimony given by S&P president Deven Sharma to the Congressional House Financial Services subcommittee on Wednesday, where he seems to believe his firm has been misquoted in media reports." There you go: to S&P $2.1 trillion (of which $1.2 trillion may never even materialize) will end up being just as good, if not better than $4 trillion. And that, ladies and gentlemen, is how a rating agency regains credibility and stuff.