Archive - Oct 2013 - Story

While the following may look like a broken scene from "Breaking Bad" (one wonders just how much methylamine was on the train) we couldn't help but see the analogy of an oncoming train (no tunnel, so no warning light this time) of inevitable default, whether in one week or later, and the USA sat square across the tracks as reserve currency status (as we discussed last night) becomes increasingly challenged.

It would appear that the two sides cannot even compromise of what was said the compromise talks.

• *REPUBLICAN RYAN SAYS OBAMA `DIDN'T SAY YES, DIDN'T SAY NO'
• *REPUBLICAN ROGERS SAYS OBAMA TOLD LAWMAKERS TO END SHUTDOWN
• *WHITE HOUSE STATEMENT SAYS PRESIDENT SEES `PROGRESS' ON DEBT
• *REPUBLICANS SAY NO FINAL DECISIONS MADE IN WHITE HOUSE MEETING
• *DEBT TALKS TO CONTINUE INTO THE NIGHT: REPUBLICAN STATEMENT

“Well, he didn’t say yes. He didn’t say no,” Ryan said. “We’re continuing to negotiate this eventing,” Ryan said.

UPDATE: S&P Futures recover most of their losses following new reports, denials, and clarifications that Obama did not in fact "reject" but that discussions are and will be ongoing during the night. Most importantly, the meeting was inconclusive, which however seems good enough for stocks which have rebounded to pre-drop levels.

S&P futures are now over 15 points off the day's highs, as it seems equity investors were hoping for a Cumbaya moment after the White House meeting today. However, as Bloomberg reports,

*BOEHNER, REPUBLICANS LEAVES OBAMA MEETING WITHOUT SPEAKING TO REPORTERS and *OBAMA REJECTS REPUBLICAN PROPOSAL FOR SHORT-TERM PLAN: NYT

It would seem that Obama's "unconditional surrender or default" position has merely placed the pressure to act back on Boehner's shoulders. Rep. Cantor:"we expect further talks tonight" keeps the dream alive.

It is unclear exactly what happened but based on Bloomberg's tick data, spot gold prices spiked over $30 after the close of the US day session. After a pillaging of a day, someone's agorithm decided that $1336 and then $1307 were the appropriate prices... triggering...

*SPOT GOLD JUMPS 1.9% TO $1,312.48/OZ, SNAPPING 3-DAY LOSS

Only soon after to correct back to the lows near where we closed the day.

Following his "yearslong scheme to shakedown contractors and reward allies," Kwame Kilpatrick - who served as Detroit Mayor from 2002 to 2008 - was this morning sentenced to 28 years in prison for corruption. Regarded by many as a key contributor to Detroit's eventual downfall, it seems Kilpatrick is somewhat repentant, stating, "the people here are suffering, they're hurting. A great deal of that hurt I accept responsibility for." Agents who pored over bank accounts and credit cards said Kilpatrick spent $840,000 beyond his salary during his time as mayor. Having resigned in 2008 over a sexting scandal, the scale of his corruption, prosecutors added, "exacerbated the crisis."

Yesterday, it was Fidelity who in conducting its fiduciary duty, announced it was getting out of any and all near-term risky Bill insturments, namely those that mature just around the time of a possible technical debt default. Today, while the stock market was soaring on hope that a Washington debt ceiling deal was imminent, it was another firm that was quietly doing the opposite, and was taking "action in light of a possible US government default), and as highlighted earlier when we showed the ongoing divergence between stocks and Bills, was quietly "boosting" liquidity (i.e. selling short-term securities) in order to avoid breaking the buck (which as we also learned yesterday had been breached by not only the Reserve fund but by 28 other heretofore unknown money market funds). The firm: JPMorgan.

For the second time in 2013, Congress folded and stocks erupted higher. The early exuberance went dead during the middle of the day as stocks scambled back to pre-shutdown levels and stayed there but as 3pm hit (and rumors of a CR-amendment to the House DL proposal), volume exploded and broad equity indices filled all gaps and pressed up through technical levels and month- and week-to-date green levels. Much was made of the close-to-close gains in the MoMo names, but closer inspection shows they actually closed below their opening squeeze levels - on a day when the NASDAQ saw its best day of the year. Precious metals were lower on the day but dumped as the 3pm move occurred. Bonds were less impressed with the 30Y (solid auction) unchanged and T-Bills selling off ignoring equity exuberance. The USD closed unchanged.

Wondering why the highest of high-beta muppetry stocks are not screaming higher with the market? Confused why these high-flyers that CNBC promoted all day as time for a bounce are actually below their opening levels? Wonder no more: Interactive Brokers just hiked the margins on the following Super-MoMo stocks once again (following a first hike on Monday and once again yesterday) and as we hope everyone understands by now, its all about the leverage.

With Janet Yellen now confirmed as Bernanke Mark 2, it is time to recall that in addition to a new Chairman, four of the Fed's voting members will also rotate. And while below is the latest preview of the voting FOMC members (previously 2011 and 2012) ranked by Reuters in terms of their dovishness and hawiskness, the reality is that the peripheral Fed presidents (here we focus on the Hawks obviously) are nothing but figureheads whose only function is to be roundly ignored if and when they dissent with the new Chairman.

No news... but green now on the week and month as epic volume ramped stocks perfectly at 3pm...

As regular readers know, the biggest legacy disconnect in the US banking system is the divergence between commercial bank loans which most recently amounted to $7.32 trillion, a decrease of $9 billion for the week, and are at the same the same level when Lehman filed for bankruptcy having not grown at all in all of 2013 (blue line below), and their conventionally matched liability: deposits, which increased by $60 billion in the past week to $9.63 trillion, an all time high. The spread between these two key monetary components - at least in a non-centrally planned world - which also happen to determine the velocity of money in circulation (as traditionally it is private banks that create money not the Fed as a result of loan demand) is now at a record $2.3 trillion.

In the midst of a debacle such as the the one under way in Washington currently and the finger-wagging from various foreign entities (that Jack Lew himself warned Congress would be more than happy to replace the USD as world reserve currency), we thought the following simple chart useful for some context as to the rest of the world's "growth."

While the S&P 500 remains stuck at the pre-Shutdown levels, bond markets are behaving differently. Long-dated bonds, benefiting from the ebullient auction are well bid (not what one would expect given the equity surge) and short-term bills (the ultimate indicator of stress) have actually deteriorated dramatically since the White House statement. So what do bond markets know that stocks don't?

Despite nearly $17 trillion reasons, there are investors stupid enough to believe that debt issued by the world’s largest debtor country (i.e. US Treasuries) should be treated as a risk-free asset. This is even more astounding given that the possibility of formal default is only a matter of days away. Treasury bond defenders will no doubt point out that in a fiat currency world where the central bank has the freedom to print ex nihilo money to its heart’s content, the very idea of default is absurd. But that is to confuse nominal returns with real ones. The piper must, at some point, be paid. And someone must pay him. As to whom? This is the foundation of western economic policy, distilled into just four words: the unborn cannot vote. The debt mountain cannot and will not resolve itself. And this, again, is why we own gold; because we think there is a non-trivial chance of a gigantic financial system reset.

Three explanations have been provided for this peculiar exhibit of "spilled" cash in the Senate's Hart Building:

i) Step aside "Bernanke chopper"; presenting the "Yellen briefcase"

ii) Debt ceiling compromises don't come cheaply

iii) A Senator just cashed out of their SPX calls

All are equally likely, although perhaps what is saddest is that nobody even wants to pick it the strewn "reserve" currency.