Understanding the complexities of the sovereign CDS market is tricky... so we are constantly bemused by the mainstream media's constant comment on it as if they have a clue. The fact is that the USA CDS market is indicating a higher risk of imminent technical default now than in 2011. As we explained in painful detail previously, you cannot compare a 71bps (+8 today) 1Y USA CDS spread to a 1200bps JCPenney CDS spread - they are apples and unicorns. Having got that off our chest, the fact that the cost of 1Y protection is at 2011 extremes (implying around a 6.5% probaility fo default) and has been higher (inverted) relative to 5Y now for 3 weeks is a clear indication that investor anxiety is very high this time (just look at T-Bills!).
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.
Four decades ago no one had cell phones, the Internet, or personal computers; households had landlines, only offices or research centers had any kind of computer, and wireless anything wasn’t even close on the horizon. These days, of course, there is more than 1 cell phone per person in the US, laptops are standard fare, and using dial-up or wired Ethernet is like living in the Stone Age. But each of these technological advances comes with a cost; and, more specifically, a cost a family in the 1970s didn’t have to cover. The price of a cell phone plan and wireless internet is well over $1,000 per year; more if you add in the price of a $1,500 laptop or a $200 smartphone, which most of us tend to replace after a few years of wear and tear. With average post-tax income of $63,000, according to the latest Consumer Expenditure Survey, these bills might not seem like a lot to shell out – only about 4% of post-tax wages – but they’re costs that the families of 1973 avoided completely. How have the households of the 21st century managed to incorporate these added expenses?
For the greater part of human history, leaders who were in a position to exercise power were accountable for their actions. The problem we are faced with today is that our political and (frequently) business leaders are not being held responsible for their actions. Thomas Sowell sums it up well: "It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong." Fortunately, there is an institution that exercises control over the academics at the Fed; it is called the 'real' market economy... and it has badly humbled the professors at the Fed.
TedBits - Newsletter
Stock market now held up by its one and final prop, a jerry-rigged, haphazard device with destructive side effects.
Planned job cuts in the third quarter rose 25% from a year ago. With September jobs cuts up 19% from last year, it represented the fourth month in a row in which job cuts were higher than the same month last year. Despite the current trend, employers are on pace to cut roughly the same number of jobs that were cut last year. We already have declining real wages. Small businesses are geting wiped out by taxes, regulations, and Obamacare. These mega-corporations are firing thousands. Retail and restaurant sales are plunging. Consumers are scared straight and are reducing credit card debt. Government spending in states and localities is declining because they are required to balance their budgets. The Boomers are old, with no savings. They can no longer live in a delusionary credit bubble. Sounds like a reason to buy stocks.
Only a week ago, the consensus among most mainstream economic analysts and even some alternative analysts was that a government shutdown was not going to happen. The Republicans would fold in the shadow of President Barack Obama’s overwhelming drive for socialization, spending would continue to grow unabated, and the debt ceiling would be vaulted yet again to feed the bureaucratic machine with more fiat. Today, there is no consensus, very few people continue to be so blithely self-assured and even the mainstream is beginning to wonder if a much bigger game is afoot here.
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.
"...The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value.
We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros.
The sooner the better."
- Ron Paul, 2006
Even as Washington stares into a fiscal abyss of its own construction, there is one bright spot: the ongoing global popularity of the $100 bill. The U.S. Treasury/Federal Reserve launched their latest version of the venerable C-Note just this week, printing $350 billion worth over the last 12 months to meet anticipated robust worldwide demand. Given that $100 bills last about 15 years in circulation, ConvergEx's Nick Colas notes that these record amounts seem to indicate very strong worldwide demand for hard currency rather just replacing old stock. In the US, by contrast, the ‘Cashless economy’ is coming hard and fast.
"... the announcement of a reduction in asset purchases at this meeting might trigger an additional, unwarranted tightening of financial conditions, perhaps because markets would read such an announcement as signaling the Committee’s willingness, notwithstanding mixed recent data, to take an initial step toward exit from its highly accommodative policy...the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market... it was noted that if the Committee did not pare back its purchases in these circumstances, it might be difficult to explain a cut in coming months, absent clearly stronger data on the economy and a swift resolution of federal fiscal uncertainties.... postponing the reduction in the pace of asset purchases would also allow time for the Committee to further discuss and to implement a clarification or strengthening of its forward guidance for the federal funds rate, which could temper the risk that a future downward adjustment in asset purchases would cause an undesirable tightening of financial conditions."
It’s clear to everyone by now that the government of the largest country in the world is careening towards default in just over 200 hours. Yet curiously, even though the US government’s completely ridiculous, untenable fiscal situation is a front page embarrassment for the entire world to see, markets have barely budged. A few very short-term rates have shot up, but for the most part, stocks are very close to where they were before the shutdown. Stocks and bonds haven’t moved because nobody cares what’s happening in the US government anymore. And that’s because every serious investor understands that the US government long since abdicated any economic power to the banking sector. Everyone knows that the Fed is going to keep printing money, ergo they’re going to keep sending markets higher. And this debt ceiling charade only proves it. The secret is out there in the open. And now it’s completely obvious who’s really in charge.
In an ominous supplication to the fact that a deal may not be coming President Obama admitted that his administration is "exploring all contingencies on the debt limit." We assume, given his dismissal of the 14th Amendment and the idiocy ("there are no magic bullets" to avoid default) of the trillion-dollar-coin and premium-bond issuance to the Fed, this implies - unlike the ECB - that they are conceding it is possible we cross the "X" date. His remarks were a perfect rehash of everything he has said before... unless the Republicans stop demanding 100% of what they want and give him 100% of what he wants, he will not negotiate. In Summary: no negotiation with extremists holding hostages
Pay no attention to that Keynesian moron behind the curtain!