Archive - Oct 13, 2013 - Story

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November 14th – not October 17th – is the key date for Doomsday watchers to circle on their calendars. For 66 years, Goldman Sachs notes, the Bulletin of the Atomic Scientists has published a Doomsday Clock showing how close the world is to global catastrophe. On November 14th the committee will vote again whether to adjust the minute hand on the proverbial clock face. However, most market participants characterize October 17th as the fiscal Doomsday when the federal government hits its debt ceiling. It seems, for now (though this evening's futures market suggests a little more fear), that everyone assumes a deal will be reached to avert disaster just as nuclear Armageddon has been avoided since 1947.

Enter Goldman Sachs, whose Alex Phillips just said that: "If a longer-term resolution can be reached over the coming days, we would expect the downside risk from the fiscal debate to be limited to about 0.5pp in Q4, compared to our current growth forecast of 2.5%." In other words, pro forma for the 14 day government shutdown (and continuing) Goldman has just cut its Q4 GDP forecast from 2.5% to 2.0%. And to think this was the year that Jan Hatzius was desperately praying his optimism (for the 4th year in a row - and who can possibly forget Hatzius boosting its Q4 2010 GDP estimate from 4% to 5.8% - and the same every year since) would finally be rewarded. Sorry Jan: we were right again, you were wrong. Again.

There are two characteristics of a currency that make it useful in international trade: one, it is issued by a large trading nation itself, and, two, the currency holds its value vis-à-vis other commodities over time. These two factors create a demand for holding a currency in reserve. Of course, psychological factors entered the demand for dollars, too, since the US was seen as the military protector of all the Western nations against the communist countries for much of the post-war period. Today we are seeing the beginnings of a change. The Fed has been inflating the dollar massively, reducing its purchasing power in relation to other commodities, causing many of the world’s great trading nations to use other monies upon occasion. President Obama’s imminent appointment of career bureaucrat Janet Yellen as Chairman of the Federal Reserve Board is evidence that the US policy of continuing to cheapen the dollar via Quantitative Easing will continue.  As we noted before, nothing lasts forever...  (especially in light of China's earlier comments)

As we observed four hours ealier, the EURJPY-implied futures open suggested an immediate 15 points of downside. Sure enough, ES has just opened for trading some 15 points lower to start. Where it ends the overnight session, however, now that the NY Fed and BIS trading desks have both been called in for an emergency overnight session, is a different matter entirely.

With the House, as previously reported, now out of the debt ceiling negotiations, it is all up to the Senate to reach some compromise with 4 days until the midnight of the first X-Date. Unfortunately, or maybe fortunately, at least going into Monday, there is no deal, and not even a glimmer of what a potential deal may look like. Yes, Democrat leader Harry Reid did said on Sunday that he had a "productive conversation" with Senate Republican leader Mitch McConnell on efforts to reopen the U.S. government and raise the federal debt limit, Reuters reports, but that's as far as it gets. "Our discussions were substantive, and we'll continue those discussions. I'm optimistic about the prospects for a positive conclusion to the issues before this country today," Reid said in remarks on the Senate floor. He did not provide any specifics of the conversation. Democrats and Republicans remain divided over spending levels in any temporary government-funding measure.

Stock markets worldwide are faced with the same issue of declines in listings that surfaced in the U.S. a decade and a half ago. The reasons for the contagious collapse in publicly listed entities is unclear (increasing acquisitions, LBOs, filing for bankruptcy, and declines in IPO volumes) but as Bloomberg reports, "the decline in public equities is unquestionable and should be of grave concern to both investors and policy makers alike," CFA Institutes' Jason Voss noted adding - crucially, "having fewer listings may hamper asset allocation, make stocks too expensive and send improper signals to companies looking to go public."

If Congress doesn't raise the debt ceiling soon, the U.S. government won't be able to pay its debts. Here's NPR's simple (and complete) illustration to who the government owes money to — all the holders of U.S. Treasury debt, broken down by category and by how much government debt they hold. It would appear the government's ponzi self-financing may be exposed for all to see... (and is it anywonder the Chinese are complaining?)

Time is nearly up for Ben Bernanke, the chairman of the Federal Reserve who supposedly applied his scholarly knowledge of the Great Depression to steer the U.S. to safety after the financial crisis. In truth, Bernanke navigated a monetarist course that favored intensive intervention, following in the footsteps of many mainstream economists who grossly misunderstood the lessons of the Crash of 1929 and the ensuing malaise. That lesson is that when corrective crashes occur, intervention is far from the cure — it is the cause.

We assume it is a coincidence that on the day in which we demonstrate China's relentless appetite for gold, driven by what we and many others believe is the country's desire to have a call option on a gold-backed reserve currency when the time comes, just posted in China's official press agency, Xinhua, is an op-ed by writer Liu Chang in which he decries the "US fiscal failure which warrants a de-Americanized world" and flatly states that the world should consider a new reserve currency "that is to be created to replace the dominant U.S. dollar, so that the international community could permanently stay away from the spillover of the intensifying domestic political turmoil in the United States." Of course, if China were serious, and if the world were to voluntarily engage in such a (r)evolutionary reserve currency transition, then all Magic Money Tree theories that the only thing better than near infinite debt is beyond infinite debt, would promptly be relegated to the historic dust heap of idiotic theories where they belong.

In a world in which only the central banks' balance sheets matter, and everything, when stripped of its product complexity, is simply a derivation of a cheap money carry trade, as can be seen on the chart below showing the correlation between the the ES and the EURJPY which have become interchangeable then the futures open in 4 hours should be interesting following the early weakness in both EURJPY and USDJPY. Interesting because the implied 15 point ES drop in futures as of the early indications is hardly the large enough drop that is needed to once again the GOP in either the House or the Senate to scramble and get a deal done, following  the recent two-day epic surge in the market on hopes that deal concerns would no longer be an issue.

The "Million Vet March" in Washington D.C. appears to be escalating as reports of barricades being torn down, police in riot gear and snipers being deployed, and a growing crowd at The White House chanting for its shut-down suggest the people are growing restless.

Another of history’s many lessons is that governments under pressure become thieves. And today’s governments are under a lot of pressure.

China has just one thing to say to all those who engage in the now daily slamdowns of gold just around the time of the London fixing, after 8 am Eastern, which lately have gotten so vicious they have resulted in "stop logic" market halts not on one but at least two occasions, keeping the price of gold delightfully low for all those who instead of selling, are looking to buy: "thanks."

Yesterday millions of "shoppers" living on the government dole left their shopping carts in droves in checkout counters, exited countless foodstamp-accepting stores, and made Wal-Marts and other general merchandise stores into veritable ghost towns, after a power outage at Xerox Corp, made EBT usage in 17 states for most of Saturday impossible, and left tens of millions of poverty-level Americans unable to engage in one of their favorite pastimes: shop with other people's money. In short: the Walfare States of America were probably closer to a state of outright revolution than at any time before in history. And had the EBT stoppage continues into today, things would have certainly spilled out from the shopping aisle to main streets where the people's anger may have culminated in an violent expression of disgust at a state which gives with one hand and a xerox company that takes with the other.