Archive - Oct 14, 2013 - Story

With all the verbal volleys of the last few days, we thought it seemed like an appropriate time to revisit an interview in which Mr. Reid claimed on camera that income taxes are “voluntary.”

Are we on the verge of another major economic downturn?  In recent weeks, most of the focus has been on our politicians in Washington, but there are lots of other reasons to be deeply alarmed about the economy as well.  Economic confidence is down, retail sales figures are disappointing, job cuts are up, and American consumers are deeply struggling.  Even if our politicians do everything right, there would still be a significant chance that we could be heading into tough economic times in the coming months. Our economy is being fundamentally transformed, and the pace of our decline is picking up speed.  The following are 22 reasons to be concerned about the U.S. economy as we head into the holiday season...

U.K. house prices rose to a record last month as easier access to credit drove first-time buyers back to the market. As Bloomberg reports, the second phase of the government’s Help to Buy program was introduced this week, providing government-guaranteed mortgages to buyers with smaller deposits. The acceleration has fueled further concerns that the initiative may stoke a bubble. But have no fear...

*BOE'S CUNLIFFE SAYS U.K. HOUSING NEEDS TO BE WATCHED CAREFULLY
*CUNLIFFE SAYS DOESN'T AGREE U.K. IS ENTERING A HOUSING BUBBLE

What could go wrong? - "Demand has increased significantly in a short space of time, and raced ahead of the supply of homes." Now where have we heard that before?

Having been closed during the ebullience of the US equity trading session today, we are assured by any and all prognosticators that Treasury-Bills would open to a glorious fanfare of buying as the world their pet rabbit scooped up the 30bps yield for a few days work - since a deal was about to be inked... Not so fast... Most worrisome is that it is not the November/December bills (i.e. the bills in peril from a 6-week extension) but the imminent danger bills that are underperforming. The 10/24/13 (i.e. just past the official "end of the world" date) are 6.5bps wider in early trading at 33bps and as US equity futures roll over very gently, the supporting cast of JPY carry trades are also losing their momentum... time for another rumor of a deal stat!

With two days to go to until dreaded October 17 D-Day (on which incidentally, very little of note will happen, because as Goldman explained earlier today, that is simply the date past which the Treasury can no longer borrow, but still has some $30 billion in cash which could last to fund the Treasury's needs as long as the end of the month if not longer) Washington is now openly playing with fire. Because for all the hopeful talk of an imminent deal on Thursday, then on Friday, then today, not only is there nothing substantive on the table, but Obama will not even meet with the Senate, let alone the House, until tomorrow morning. At that point there will be about 36 hours until October 17. But what is worse for all the end is nigh-ers, who are absolutely certain the world will end if Congress crosses the D-Day deadline (which, again, as Goldman said earlier "going slightly past the October 17 deadline is entirely possible") is that as The Hill explains, Senate could still miss the debt deadline, assuming there is a debt deal in the first place. Which is a big if.

While they often say it is not the size (stock) of the wave (of liquidity) but the motion (flow) of the ocean, as the following chart forewarns, the diminutive Janet Yellen faces a correlation crisis before she even enters office...

With the possibility of a US government default growing day by day (1Y USA CDS rose 12bps today to 72bps) amid impasse after impasse in DC, Bloomberg's Mike McKee looks at the five possible scenarios should the debt ceiling be breached (however unlikely and ridiculous some may appear). From prioritization of payments to across-the-board cuts, 14th amendment interventions and delaying payments, McKee explains the process and implications of each. There are no good options left but we can't help but get the sense the Republicans might just be playing a longer-game here to take us beyond the Democrats' "red-line" of October 17th to highlight their fear-mongering (remember the shut-down devastation?) and potentially regain some election capital (in this increasingly twisted game of picking the worst of two evils)... and indeed, as we have long argued, until we see the market crash, nothing will be resolved.

It’s become almost cliche these days to point out how many governments are broke beyond belief. The theater playing out in the US right now is irrelevant. America’s debt challenge is not a political problem. It’s an arithmetic problem. Same in Japan and most of Europe. However, most of these ‘rich’ western nations aren’t doing anything about it. It’s business as usual, and their debts are only getting bigger. Poorer countries don’t have this luxury of kicking the can down the road and delaying the inevitable. They must face their financial reckoning now... and they are finding increasingly unique ways to encourage 'revenues'.

There is no safe haven, Marc Faber tells Bloomberg TV's Tom Keene, "The best you can hope for is that you have a diversified portfolio of different assets and that they don't all collapse at the same time." Bank deposits are no longer safe; money and treasury bills are not 100% safe; and equities in the US are relatively expensive by any valuation metric. However, at around $1250, gold is a buy, Faber adds on the basis of the ongoing monetization of debt globally. The debt ceiling debacle will lead to the Fed stepping up to directly fund the government (something it already implicitly does but mainstream media prefer not to consider). Faber clarifies the idiocy of the discussions, "both parties want to spend, it's just on different things," with "the idiocies of government" having grown way too large, wasting money everywhere... the Democrats are "buying votes" and the Republicans funding the military complex. The debt-ceiling is merely a symptom of the problem, Faber concludes, that "government has grown disproportionately large and that retards economic growth."

The latest Q2 US Flow of Funds data revealed that the corporate financing surplus declined to zero, for the first time since the Lehman crisis. The financing surplus is a measure of corporate savings, and in principle the lower this financing surplus the more expansionary the corporate sector is. Typically the corporate sector is dis-saving, i.e. capex typically exceeds cash flows from operations. However, the sharp decline in the US corporate surplus is less positive than it appears at first glance because it was driven by a rise in dividend payments rather than a rise in capex. As we have pointed out time and again, with the Fed's ZIRP, the only thing that matters is the share price and with firms increasingly focused on dividends rather than capex, to the extent that it continues, points to lower productivity and potential growth going forward.

Things that can’t go on, the prophet Herb Stein once observed, go on until they can’t. Criticality eventually bushwhacks credulity. The aggregation of rackets that American life has become is rolling over like a great groaning wounded leviathan and the rest of the world is starting to freak out at the spectacle. Instead of a revolution, we’re having a suicide party. But don’t worry, a revolution would not be far behind.

A few days ago many were shocked when JPM disclosed for the first time that in less than four years, or since 2010, Jamie Dimon's den of alleged criminals has reserved a mindblowing $28 billion toward legal expenses.  In light of recent developments, investors may just want to round that number to a good, clean $30 billion, because as the WSJ just revealed, yet another JPMorgan market manipulator has emerged in a seemingly endless line of people whose shortcut to success at 270 Park Avenue has been to manipulate assorted markets, be it Libor, Credit Derivatives, Electricity, Aluminum, or Equities. We can now add FX to that, following news that one Richard "Dick" Usher, until 2010 at RBS, and since then JPM's London-based head of G10 spot trading, has been implicated in the infamous RBS FX London closing fax manipulation "chat sessions."

High-beta growth-hoping Russell 2000 stocks managed to gain 5.2% from last week's lows and make new all-time highs - sure why not. The S&P and Nasdaq regained Friday's highs on moar hopes of a deal (and held them even on the meeting postponement) giving a little back into the close. Spot VIX hugged stocks all day long and as with EURJPY (carry) provided the ammunition on a day bereft of real news and strewn with rumors. With Cash Treasuries closed, futures indicated early modest strength which gave way to selling across the complex in the afternoon. The shortest-dated Treasury futures underperformed (we suspect on some liquidity premia given Bills were closed). Gold and Silver recovered to solid gains before the US equity exuberance began, then leaked lower all day long (gold unch, silver -0.35%). It wasn't all ponies and unicorn farts for the bulls though as December VIX futures went well bid this afternoon - notably divergent from equity's exuberance.

In the midst of a domestic crisis, it is easy to forget that the rest of the world is watching. Now that the U.S. federal government has shut down for the first time since the mid 1990s, the talk of the town is the political problems of the world’s largest economy and sole superpower. In China, most media reports about the shutdown have been merely informative, but every now and then they offer a rare insight into what the Chinese have learned about America’s shortcomings. Yet other commentators find the federal shutdown inspiring. the newspaper Nanfang Dushi Bao commended the strength of American society for being able to function without the government. Interestingly, while the American public sees the shutdown as a government failure, some Chinese are seeing it as a sign of efficiency.

The US is two days away from no longer being able to issue new debt, but at least Obama is busy... Making sandwiches.