Debt Ceiling

A plausible debt ceiling agreement is finally on the table, but BofAML doesn't expect a deal until next week or later.

• Dot Com part deux: Investors are showing increasing hunger for initial public offerings of unprofitable technology companies  (WSJ)
• Poll Finds GOP Blamed More for Shutdown (WSJ)
• House, Senate Republicans Offer Competing Plans on Debt-Limit, Government Shutdown (WAPO)
• Obama, Republicans aim to end crisis after meeting, hurdles remain (Reuters)
• US Rethinks How to Release Sensitive Economic Data (WSJ)
• Chinese East Oil Fuels Fresh China-US Tensions (WSJ)
• ECB Agrees on Swap Line With PBOC as Trade Increases (BBG)
• China September Auto Sales Surge 21% on Japanese Rebound (BBG)
• JPMorgan Taps Taxpayer-Backed Banks for Basel Rules (BBG)

Despite stock (not bond) euphoria yesterday that a DC debt ceiling deal was sealed leading to the second largest risk ramp of 2013, last night was spent diffusing the excitement as one after another politician talked back the success of a "non-deal" that Obama rejected, at least according to the NYT. As a result, with both retail sales data and the PPI not being released (and the only data of note the always leaked UMichigan consumer confidence) markets will again be at the behest of developments on Capitol Hill, with some talk from Republicans suggesting a deal as early as today could be possible in an effort to reopen government on Monday. It is entirely possible that talks could continue over the weekend though, which would ensure a gappy open to Asian markets on Monday.

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.

UPDATE: The Day in Washington in 2 minutes added

In what can at best be described as a "fluid" situation, one in which according to initial press reports the White House and the GOP couldn't even compromise on what had actually been said, it seems that while both sides are eager to move on with the debt ceiling extension, the GOP is still hoping in trying to preserve some political capital, of which it will be left with virtually nil if it caves to every last demand by the democrats, namely "reopen the government and then we can negotiate" losing all leverage in the process. And a loss of all capital and leverage is precisely what the GOP will "achieve" according to Politico, which clarified that "House Republicans told Obama that they could reopen the federal government by early next week if the president and Senate Democrats agree to their debt-ceiling proposal" - a proposal which Obama has already said he would accept. In other words, full capitulation by Boehner appears imminent. Politico adds: "President Barack Obama and House Republicans clashed in a meeting Thursday afternoon over how soon the government can be reopened, even as the GOP offered to lift the debt limit for six weeks, according to sources familiar with the session. Aides will continue the discussion through the night to see if they could find common ground on how to move forward on the debt limit and government funding."

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.

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.

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.

U.S Government would rather default than lose their bullion.

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.

"The debt limit deadline looks increasingly likely to be pushed off with a short-term extension. It looks less likely that the partial federal shutdown will be ended with the extension, but this is still unclear. There is still some uncertainty on the path to resolution over the next week, but the fact that both parties have accepted the notion of a "clean" extension reduces the risk of the Treasury's missing scheduled payments due to the debt limit...  In our view, the developments over the last day reduce the probability of "tail risk" scenarios that would result from going far past the deadline, but there is still a good chance that Congress will run up to the deadline before reaching a final resolution and there is a clear possibility that final resolution might not be reached until shortly after October 17. "

As the White House statement suggested earlier, the GOP gambit for a "clean" 6-week debt limit extension, already accepted as a given by the market, may not be able to pass unless the Republicans fold some more, according to the latest news out of The Hill which reports that "Senate Democrats could reject a House GOP proposal to extend the nation’s debt ceiling by a few weeks, saying any short-term debt-limit increase should also reopen the government." This step was to be expected: the House Republicans are once again in disarray and this is the perfect time to demand even more concessions. However, with their political credibility, and capital, already at record lows, will the republicans agree to not only fold on the debt ceiling, albeit temporarily, but also passing a Continuing Resolution - which as a reminder was the source of contention all along?

Here's where we stand...

The Speaker of the House has a plan - apparently - that enables the debt-limit "can" to be kicked 6-weeks down the line to Nov 22nd in a "clean" bill that appears dirtied by the lack of a CR for the government shutdown (though including a broader budget talks process). Democrats are already pushing for an end-2014 debt-ceiling extension that McConnell says "wil not fly." We look forward to hearing from Boehner on how this is not a "fold" and how the rank-and-file will agree to this... see you in six-weeks... (and while stocks are incapable of discounting anything that far out, T-Bills are starting to price in that reality). But. U.S. HOUSE REPUBLICAN LAWMAKERS CONCERNED THAT CLEAN DEBT LIMIT INCREASE WOULD NOT FORCE OBAMA TO NEGOTIATE-SENIOR REPUBLICAN AIDE and HOUSE REPUBLICAN LEADERS PLAN TO PRESENT PROPOSED SHORT-TERM DEBT LIMIT HIKE TO WHITE HOUSE ON THURSDAY; WANT TO SEE WHAT OBAMA OFFERS IN RETURN-SENIOR REPUBLICAN LAWMAKER