Archive - Oct 15, 2013 - Story

As markets twiddle their thumbs waiting on Washington to come up with a political solution to the Federal Debt Limit/budget debate, ConvergEx's Nick Colas decided it would be a good time to review the academic literature on how markets discount expectations in the first place. Behavioral finance posits that human nature skews perceptions of risk and return, causing everything from irrational risk aversion to asset price bubbles. Against this current backdrop of theoretical uncertainty, measures like the VIX are currently somnambulant.  So, using the modern vernacular, WTF?  The bottom line, Colas explains, is that Wall Street thinks it has the current "Crisis" all figured out: a last minute deal with no Treasury default.  And just as we haven’t sold off materially during this drama, don’t expect a huge (+5%) lift afterwards.

The only thing exceptional about the USA is "its the largest debtor nation in the history of the world" is how Jim Rogers begins this brief interview with RT and he doesnt back away from the rhetoric. The sad truth, he notes, is that the US "has been kicking the can down the road for years..." how do you think we got so much debt, he chides. "Every year that goes by we go deeper and deeper into debt," adding, rather ominously, that it "will be solved one way or another." They will kick the can once more; then next week, we will be told that the problem is fixed and compromise is here. However, Rogers warns, eventually the market is going to turn away; "this is going to end badly... and the rest of the world knows it."

At 53.5bps, the 10/31/13 T-Bills are now at Debt-Ceiling-Debacle 2013 highs having pushed higher in yield once again this evening. This may come as a surprise to those staring incredulously at the 14 point rampapalooza in S&P 500 futures on the back of Harry Reid's "optimism". Of course, what really matters is what the JPY crosses are doing since that is the key driver of risk-on at the margin (and is for all intents and purpose inseparable from equity markets for the last 4 days). The initial momentum ignition, however, is beginning to fade as equity investors the world over glimpse over their shoulders at the ghost of debt-ceiling future that T-Bills are reflecting...

As Jim Grant recently recently noted, America's default is inevitable, as he confronts the implied message of the Federal Reserve’s pro-inflation policy: We will default in the future, though no lawyer will call it “default.” However, a glance back at the last 213 years of global history shows it is not that unusual for major sovereign nations to rapidly crumble and enter a state of default. As Global Financial Data's Ralph Dillon points out, all of this fear and rhetoric over a US default had him thinking about history and defaults. How have other countries that have defaulted faired over history? Some good and some bad for sure, but for the developed markets and global economic powerhouses, those that did default are still here alive and kicking. In fact, some have defaulted 8 times and are still a major player on the world stage.

In the aftermath of the latest House Republican debacle, the Senate had no choice but to go back to where it was on Thursday morning, and attempt to cobble a deal together. Only unlike Thursday, it now has just a little over 24 hours, and a House that it knows will not play ball with pretty much anything that the Senate proposes (at least not until that ultimate arbiter Joe Biden shows up and starts laughing). So while the outcome of this latest regression to square 0 is unknown, one thing we do know is that when it comes to matters such as these, Harry Reid is one very optimistic guy.

The House CR & DL bill is dead. The Senate CR & DL bill is not written. What was murky is now opaque. #CrunchTime

— Major Garrett (@MajorCBS) October 15, 2013

Update: Sure enough, NO HOUSE VOTE TONIGHT ON FISCAL IMPASSE PLAN, LAWMAKER SAYS

In a repeat of the Sequester farce, in which Boehner was unable to even get the needed votes to pass the House Republicans' version of their own bill, the debt ceiling impasse is becoming a sequester sequel deja vu when McConnell and Joe Biden had to hammer out a deal over the impotent political corpse of John Boehner. The reason, as various beltway journalists report, in this case the NRO, that House Republicans are now set to postpone tonight’s vote on their plan to end the fiscal impasse is that "The votes aren’t there," says a leadership aide. "We’ve been amending the bill all day, but we’ve been unable to get people around this strategy." As the NRO's Robert Costa adds, this development leaves Speaker John Boehner with few options as Thursday’s debt-ceiling deadline nears, and it throws the action back toward the Senate, which has been working on a bipartisan package.

A farming harvesting his fields in North Dakota has come across a massive oil spill, undetected long enough to become the size of seven football fields. Local media reports cite farmer Steve Jensen as saying the crude appeared to becoming from a rupture in an underground pipeline operated by Tesoro Corp. The farmer noted that he had smelled the crude for days but it wasn’t until he began harvesting his wheat fields that he discovered the source of the smell, as his combine got caught up in crude spewing up to six inches above the ground. The spill, discovered on 29 September and since contained, is one of the largest ever in the history of North Dakota.

With a stunning 41% of global wealth in the hands of a mere 0.7% of the world's population, the lower- and middle-class continue to fight amongst themselves for the scraps to maintain a decent standard of living. In the US, with the home-equity ATM now closed (and maybe EBT interrupted), those struggling to make ends meet are turning to the only "asset" they have left that is unencumbered (for now) - their body parts. As Bloomberg reports, since the beginning of 2011, 'hair,' 'eggs,' or 'kidney' have been among the top four autofill results for the Google search query, 'I want to sell my...;' and "the fact that people even explore it indicates that there are still a lot of people worried about their financial outlook," as hair, breast milk and eggs are doubling as ATMs for more and more cash-strapped Americans.

While the broader public's attention continues to be distracted by the circus that America's legislative and executive branches have become (an expected development at a time when the monetary branch reigns supreme), the real, non-scripted and truly devastating catastrophe continue to unfold in Japan, and specifically in Fukushima, where both TEPCO and the government have long since lost control of the worst nuclear disaster in history. However, in addition to the now usual daily spills of hundreds of tons of radioactive coolant into the environment, a potentially far more dangerous situation which may lead to an even greater loss of contaiment is taking place right now as both the destroyed nuclear plant and soon Tokyo are about to be buffeted by Typhoon Wipha - a "once in a decade storm."

So what exactly did Reid know and when?

• *UNITED STATES' AAA IDR RATING MAY BE CUT BY FITCH :3352Z US
• FITCH SAYS PUTS U.S. ON RATING WATCH NEGATIVE AS U.S. AUTHORITIES HAVE NOT RAISED FEDERAL DEBT CEILING IN A "TIMELY MANNER
• *FITCH STILL SEES U.S. DEBT CEILING TO BE RAISED SOON :3352Z US
• *FITCH SEES RESOLVING US RWN BY END OF 1Q '14 AT LATEST
• *FITCH STILL SEES U.S. DEBT CEILING TO BE RAISED SOON :3352Z US
• *FITCH SEES U.S. ECONOMIC GROWTH REVERTING TO 2.25% AFTER 2017

Just out from Glenn Greenwald, and the Guardian, which both announce the Snowden-connected journalist is leaving the publications to start his own venture. Amusingly, the news of Greenwald's departure was "leaked" before he was fully prepared to announce it. Define irony. "My partnership with the Guardian has been extremely fruitful and fulfilling: I have high regard for the editors and journalists with whom I worked and am incredibly proud of what we achieved. "The decision to leave was not an easy one, but I was presented with a once-in-a-career dream journalistic opportunity that no journalist could possibly decline. "Because this news leaked before we were prepared to announce it, I'm not yet able to provide any details of this momentous new venture, but it will be unveiled very shortly"

The USD ends the day higher but tumbled all afternoon and despite the weakness in stocks, US Treasuries were also being sold (+3-4bps). T-Bills were smashed higher in yield (to recent highs) as reality set in that this farce could turn tragic very quickly. We warned yesterday that longer-dated protection was being bid aggressively and sure enough once again Dec VIX broke higher early today (even as stocks surged higher) but soon after Spot VIX began to surge too (ending the day inverted once again). Gold and Silver were well bid as the world seemed to turn its back on USD assets and gold ended +0.75% on the week (with the S&P -0.5% on the week). The Dow closed back below its 50- and 100-DMA.

It's been a while since Dylan Ratigan made some headlines but the farce under way in Washington reminded us of his epic 'falling over the edge' rant from 2011. In a Santelli-esque rage, Ratigan loses it over the banking, trade, and taxation that is draining America of everything and how nothing will ever change as the Congress is completely bought-off. Both political parties are to blame but "until we get the money out of politics" there is no policy that will fix the mess that we are in, he exclaims (and is once again proven rigfht today). The sad truth is these kind of honest truth moments are few and far between on the mainstream media (though we suspect will increase as reality sinks in)... and Ratigan's "mathematical facts" and vehemence make this must watch on a day when the US equity market hovers incredulously near all-time highs.

The future of the US economy with Chairman Yellen at the helm is grim indeed, which provides all the more reason to end our system of central economic planning by getting rid of the Federal Reserve entirely. Ripping off the bandage may hurt some in the short run, but in the long term everyone will be better off. Anyway, most of this pain will be borne by the politicians, big banks, and other special interests who profit from the current system. Ending this current system of crony capitalism and moving to sound money and free markets is the only way to return to economic prosperity and a vibrant middle class.