When on October 1, fallen billionaire Eike Batista's OGX Petroleo & Gas, missed a $45 million bond coupon payment, some were surprised but most had seen the writing on the wall. After all, Brazil's second largest oil company after Petrobras, and the crowning jewel of Batista's EBX Group, had been under the microscope of investors and certainly creditors (and if it wasn't it certainly should have been) after oil deposits that Batista had valued at $1 trillion turned out to be commercial failures. And so the countdown to the inevitable bankruptcy filing began. Overnight, Bloomberg reports that the wait should not be long (in fact it may coincide with the default of that other insolvent mega-creditor: the United States), and will mostly certainly take place before the end of the month, following the retention of bankruptcy specialist law firm Quinn Emanuel.
- Janet Yellen, a Backer of Pushing the Fed's Policy Boundaries (WSJ)
- Jos. A. Bank proposes to buy Men's Wearhouse for $2.3 billion (Reuters)
- J.P. Morgan to Cull Business Clients (WSJ)
- RBS Said to Pass Currency Trader Chats to FCA Amid Probe (BBG)
- Prosecutors give SAC settlement ultimatum (FT)
- U.S. builders hoard mineral rights under new homes (Reuters)
- Bill Comes Due for Brazil's Middle Class (WSJ)
- US expected to slash aid to Egyptian government (AP)
- Samsung launches world's first smartphone with curved screen (Reuters)
- Microsoft’s $7.2 Billion Nokia Bet Not Luring Apps (BBG)
- China raises hurdles for foreign banks (FT)
As we have discussed previously, the "partial government shutdown" that we are experiencing right now is pretty much a non-event - especially with the un-furloughing of The Pentagon. Yeah, some national parks are shut down and some federal workers will have their checks delayed, but it is not the end of the world. In fact, only about 17% of the federal government is actually shut down at the moment. This "shutdown" could continue for many more weeks and it would not affect the global economy too much. On the other hand, if the debt ceiling deadline (approximately October 17th) passes without an agreement that would be extremely dangerous. A U.S. debt default that lasts for more than a couple of days could potentially cause a financial crash that would make 2008 look like a Sunday picnic. If a debt default were to happen before the end of this year, that would bring a tremendous amount of future economic pain into the here and now, and the consequences would likely be far greater than any of us could possibly imagine.
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
- Hilsenrath: Tense Negotiations Inside the Fed Produced Muddled Signals to Markets (WSJ)
- Biggest US Foreign Creditors Show Concern on Default Risk (BBG)
- Shutdown Costs at $1.6 Billion With $160 Million Each Day (BBG)
- What default? Republicans downplay impact of U.S. debt limit (Reuters)
- Top Bankers Warn on U.S. Debt Proposal (WSJ)
- India to stick with austerity despite looming election (Reuters)
- Japan's Current-Account Surplus Plunges (WSJ)
- Amazon Wins Ruling for $600 Million CIA Cloud Contract (BBG)
- German Factory Orders Unexpectedly Fall on Weak Recovery (BBG)
- Britain's Higgs, Belgium's Englert win 2013 physics Nobel prize (Reuters)
- Supreme Owner Made a Billionaire Feeding U.S. War Machine (BBG)
We strongly suspect that both government debt growth and money supply inflation will continue unabated – any pause will immediately bring about the kind of short term economic pain these policies have explicitly sought to prevent and will therefore be quickly reversed. It is not unlike the situation the revolutionary assembly of France found itself in during the late 18th century: when it issued new money, industry seemed to revive. As soon as it stopped, industry slumped again. And so it was decided to issue ever more money, until the entire scheme blew up. There can be little doubt that modern-day governments are on the road to a similar date with destiny – and lately the speed at which they travel toward it has increased markedly.
Youth unemployment around the world is dreadfully high and rising. An entire generation is now coming of age without being able to leave the nest or have any prospect of earning a decent wage in their home country. Young people in particular get the sharp end of the stick - they’re the last to be hired, the first to be fired, the first to be sent off to fight and die in foreign lands, and the first to have their benefits cut; and if they’re ever lucky enough to find meaningful employment, they can count on working their entire lives to pay down the debts of previous generations through higher and higher taxes. But when it comes time to collect... finally... those benefits won’t be there for them. Case in point: the British government has just announced a new push to eliminate benefits for young people. And this is just step 1.
It just keeps getting worse and worse for Bill Ackman. A few weeks after the epic humiliation, not to mention even more epic losses, he suffered on his now defunct JCP long position (despite ample warnings by the likes of Zero Hedge who said long ago JCP is merely a melting icecube and fast-track Chapter 11/7 candidate) all those who predicted (such as Zero Hedge back in January) that an epic HLF short squeeze would result in the aftermath of Ackman's Herbalife short announcement leading to Ackman's ultimate capitulation, have been proven correct. Moments ago, in a letter to investors, Bill Ackman just announced that he has covered over 40% of his Herbalife short position, with his forced buy-in explaining the endless move higher in Herbalife stock in recent weeks. The explanation of being forced out of nearly half of his position is amusing: "we minimize the risk of so-called short squeezes or other technical attempts by market manipulators to force us to cover our position." So Ackman is forced out by his Prime Brokers so as not to be forced out by market manipulators? That's an interesting explanation for what is a far simple situation: booking your paper losses.
- Government Shuts Down as Congress Misses Deadline (WSJ); Shutdown starts, 1 million workers on unpaid leave (Reuters); Government Shutdown Begins as Deadlocked Congress Flails (BBG)
- This is not The Onion: Stocks Rise on U.S. Government Shutdown (BBG)
- Pentagon chief says shutdown hurts U.S. credibility with allies (Reuters)
- In historic step, Japan PM hikes tax; will cushion blow to economy (Reuters)
- Obama Says He Won’t Give Into ‘Ideological’ Budget Demand (BBG)
- More part-time warehouse workers: Amazon to Hire 70,000 Workers for the Holidays (WSJ)
- Less full-time legitimate workers: Merck to fire 8,500 workers (BBG)
- Education cuts hit America’s poor (FT)
- Euro-Zone Factory Growth Slows (WSJ)
- Watchdog Warns EU Not to Water Down Insurance Rules (Reuters)
There is a considerable amount of debate in alternative economic circles as to whether a federal government shutdown would be a “good thing” or a “bad thing”. Sadly, a government shutdown is sizable threat to the American financial system, and few people seem to get it. Perhaps because the expectation is that any shutdown would only be a short term concern. And, this assumption might be correct. But, if a shutdown takes place, and, if “gridlock” continues for an extended period of time, We have little doubt that the U.S economy will experience renewed crisis. Here's why...
Now that "bail-ins" have become accepted practice all over the planet, no bank account and no pension fund will ever be 100% safe again. In fact, Cyprus-style wealth confiscation is already starting to happen all around the world. As we warned two years ago, "the muddle through has failed... and there may only be painful ways out of this."
The high priests of academic and “official” history love a good villain for two reasons: First, because good official villains make the struggles and accomplishments of good official heroes even more awe-inspiring. And, second, because nothing teaches (or propagandizes) the masses more thoroughly than the social or political lessons inherent in the documented rise and fall of the world's most despicable inhabitants. We get shivers of fear and excitement when we discuss the evils and the follies of ancient monsters like Nero, Attila the Hun, Caligula, etc, or more modern monsters, like Mussolini, Stalin Hitler, Goebbels, Mao, Pol Pot, Idi Amin, and so on. We take solace in the idea that “we are nothing like them”, and our nation has “moved beyond” such animalistic behavior.
Back in April, in a desperate scramble to raise liquidity courtesy of a hail mary Goldman syndicated term loan, we penned "Confused By What Is Going On At JCP? Here's The Pro Forma Cap Table And The Cliff Notes", where in addition to the obvious - that this is merely buying a few months for the melting icecube company which with every passing day is closer to a Chapter 11 (or 7) bankruptcy filing - we also laid out that what Goldman was doing was merely positioning itself to be at the top of the company's capital structure with a super secured and overcollateralized credit facility, through what is effectively a pre-petition DIP... As it turns out we only had to wait for five months before the same Goldman that raised the company's emergency liquidity term loan turned around and launched a vicious attack on the same company that paid it millions in dollars in underwriting fees. Specifically, what Goldman just did is write a report (perhaps one of the best bearish cross-asset investment theses we have seen to come out of the firm in a long time) in which it laid out, in a lucid and compelling manner, why JCP is doomed. The report is titled appropriately enough: "Initiate on JCP with Underperform: Looking for cash in the name"... and not finding it.
- Iran Icebreaker Set at U.N. (WSJ)
- Chrysler Feud Triggers IPO Filing (WSJ)
- JPMorgan Chase, 12 More Banks Said to Be Sued Over Libor (BBG)
- Regulator sues Morgan Stanley, eight others over faulty securities (Reuters)
- Monte Paschi Seen Boosting Cost Goals to Meet EU Demands (BBG)
- Here we go again - "not enough funds": CFTC chair Gary Gensler warns on fund cuts to police derivatives (FT)
- Congress Fuels Private Jails Detaining 34,000 Immigrants (BBG)
- KKR, Sycamore looking to buy Jones Group this week (NYPost) - take with lots of salt
- Fiat rethinks alliance with Chrysler after IPO filing (Reuters)
- Young Invincibles Caught in Crossfire Over Obamacare Cost (BBG)
- Mayfair Office Squeeze Spawns New London Real Estate Hubs (BBG)
While the commemoration of the 5 year anniversary of the start of the Great Financial Crisis is slowing but surely fading, another just as important anniversary is revealed when one goes back not 5 but 15 years into the past, specifically to September 23, 1998. On that day, the policy that came to define the New Normal more than any other, namely the bailout of those deemed Too Big To Fail, a/k/a throwing good (private or taxpayer) money after bad was enshrined by Wall Street as the official canon when faced with a situation where capitalism, namely failure, is seen as Too Dangerous To Succeed. This was first known as the Greenspan Put, subsequently the Bernanke Put, and its current iteration is best known as the Global Central Banker All-In Systemic Put. We sow the seeds of bailing out insolvent financial corporations to this day, when instead of making them smaller and breaking them up, they are rewarded by becoming even bigger, even more systemics, and even Too Bigger To Fail, and their employees are paid ever greater record bonuses.