Washington, DC, Wall Street, and central bankers around the world rejoiced this week as Congress came to an agreement to end the government shutdown and lift the debt ceiling. The latest spending-and-debt deal was negotiated by Congressional leaders behind closed doors, and was rushed through Congress before most members had time to read it. Now that the bill is passed, we can see that it is a victory for the political class and special interests, but a defeat for the American people.
- Top China Banks Triple Debt Write-Offs as Defaults Loom (BBG)
- PBOC suspends open market operations again (Global Times)
- Eurozone bank shares fall after ECB outlines health check plan (FT)
- O-Care falling behind (The Hill)
- Key House Republican presses tech companies on Obamacare glitches (Reuters)
- J.P. Morgan Faces Another Potential Huge Payouta (WSJ)
- Yankees Among 10 MLB Teams Valued at More Than $1 Billion (BBG)
- Free our reporter, begs newspaper as China cracks down on journalists (Reuters)
- Peugeot Reviews Cost-Saving Alliance With GM (WSJ)
Just one day after the deal in Congress was reached, the U.S. national debt rose by an astounding 328 billion dollars. In the blink of an eye we shattered the 17 trillion dollar mark with no end in sight. We are stealing about $100,000,000 from our children and our grandchildren every single hour of every single day. This goes on 24 hours a day, month after month, year after year without any interruption. The U.S. national debt is now 37 times larger than it was 40 years ago, and we are on pace to accumulate more new debt under the 8 years of the Obama administration than we did under all of the other presidents in U.S. history combined. So what will happen when the rest of the world decides that they don't need to use our dollars or buy our debt any longer? At that point the consequences of decades of incredibly foolish decisions will result in an avalanche of economic pain that the American people are not prepared for.
A mere 24 hours before the US was going to run out of money and default on its obligations (in what Jack Lew described as a "catastrophe"), Grant Williams notes the S&P 500 was trading exactly 2.30% from its all-time high. Does that sound like anybody was worried about financial Armageddon? Nope, but as Williams detail sin his latest letter, the danger was very real, as a default by the US on its debt obligations would have gone to the very heart of the "plumbing" that underlies financial markets and caused havoc in the repo market and all kinds of problems with collateral... The key clue passed most people by a week ago; but it came from, of all places, Hong Kong...
There are no simple solutions to the issues that currently plague the U.S. and, unfortunately, the latest debt ceiling debate/government shutdown did nothing to institute any reforms whatsoever. The "kick-the-can" solutions by fiscal policy makers continues to show little understanding about the drivers of real economic growth, the need to reduce governmental dependency or a real "wealth effect" that impacts more than just 1% of the population.
It is rare that investors are given a road map. It is rarer still that the vast majority of those who get it are unable to understand the clear signs and directions it contains. When this happens the few who can actually read the map find themselves in an enviable position. Such is currently the case with gold and gold-related investments.
Yes, the United States dodged another bullet with a last-minute deal on the debt ceiling. But, with 90 days left to bridge the ideological and partisan divide before another crisis erupts, the fuse on America’s debt bomb is getting shorter and shorter. As a dysfunctional US government peers into the abyss, China – America’s largest foreign creditor – has much at stake. For more than 20 years, this mutually beneficial codependency has served both countries well in compensating for their inherent saving imbalances while satisfying their respective growth agendas. But here the past should not be viewed as prologue. A seismic shift is at hand, and America’s recent fiscal follies may well be the tipping point. The days of its open-ended buying of Treasuries will soon come to an end.
If Obama’s budget projections prove accurate, the National Debt will top $20 trillion in 2016, the final year of his second term. That would mean the National Debt increased by 87%, or $9.34 trillion, during his two terms.
Last week, the main area of focus was the political situation in the US where Democrats and Republicans finally agreed upon a short term fix to reopen the government and extend the debt ceiling. The conclusion of this saw equity markets rally to all time highs in Europe and the US, with the USD continuing to slide as markets turn their attention to the Fed’s QE programme and push back expectations of when the central bank will begin to pull back on asset purchases. With the government now reopen, attention will turn to the numerous data releases that were delayed but will now take place over the next two weeks, including the jobs report which is due on Tuesday. The release of this report will once again be used to help predict when the Fed will begin to taper QE however, recent comments from Fed members have suggested that October is likely to be too soon trim bond buying due to the lack of key macroeconomic data and the unknown economic impact as a result of the government closing for 16 days.
Druckenmiller Blasts Obama: "Show Me When You Initiated Budget Discussions Without A Gun At Your Head"Submitted by Tyler Durden on 10/20/2013 21:45 -0500
One of the great ironies of the Obama presidency is that it has been a disaster for the young people who form the core of his political coalition. High unemployment is paired with exploding debt that they will have to finance whenever they eventually find jobs, and as Stan Druckenmiller explains in his WSJ interview, the "rat through the python theory," (that fiscal disaster will only be temporary while the baby-boom generation moves through the benefit pipeline and then entitlement costs will become bearable) is simply wrong; since, by then Druck exclaims, "you have so much debt on the books that it's too late." Unfortunately for taxpayers, "the debt accumulates while the rat's going through the python." The hedge fund billionaire adds that he "did not think it would be nutty to tie entitlements to the debt ceiling because there's a massive long-term problem. And this president, despite what he says, has shown time and time again that he needs a gun at his head to negotiate in good faith." The interview goes much, much further...
The only problem is that this entire “crisis” was a lie. The US actually hit its debt ceiling back in May 2013, a full five months ago.At that time neither the Treasury Department, nor the White House, nor Congress talked about this.
"It’s clear to us now that the US economy just isn't going to reach escape velocity," said Andrew Law, head of Caxton Associates (one of the hedge fund industry’s most successful money managers) in a wide-ranging and rare interview with the Financial Times. "Tapering is off the table for the foreseeable future." As we have explained numerous times, Caxton notes the Fed has little option but to continue its policy of extraordinary monetary easing indefinitely, adding "what happened [last week] was just another can kicking exercise. The problem has not been solved and the hopes for a grand bargain are in tatters." Simply put, he concludes rather dismally, "there are no incentives for the corporate world to go out and spend right now..."
Selling both the rumor and the news turns out not to work... but we cannot yet say whether a trend change is definitely in the bag. However, considering how absolutely dismal sentiment on gold is, considering the many similarities to the 2008 'retest' that could be observed recently (back then, gold was also declared 'dead' by the mainstream) and given the fact that for a change, the gold market has not acted in the way that was widely expected, it continues to make sense to look for more signs of a trend change to emerge. Ideally declines should continue to be kept in check by support at $1275, while any rally that manages to exceed the $1350 level on a closing basis and confirmed by the gold stock indexes can probably be interpreted as a sign that the short to medium term trend has finally reversed for good.
While last week's relentless panic buying has been extensively commented on, it was last week's nearly 50% plunge in near-term stock vol that the major news as the world went from risk off mode to risk on. It wasn't just stocks whose volatility imploded: it was the implied near-term volatility of all asset classes that was hammered in the past three days. But while everyone is fascinated by the rapid VIX down move, it is what someone did on Friday by betting that VIX will double by February in a 24/29 VIX Call Spread, that was of note. The amount wagered: $6.7 million. Whether or not this was an outright trade, or a hedge (and if one listens to Jamie Dimon perjuring himself to Congress, any trade is a hedge, adding further to the confusion) is unknown, but it is not pocket change betting that the plunge in vol will be merely transitory.
The last week has seen dramatic upwards price action in the bitcoin markets, driven by a series of macro and micro events across the globe. The fallout from Silk Road’s closure turned out to be but a blip in bitcoin’s price history, with significant gains since then. Turmoil in global financial markets and recent news of leading global websites accepting bitcoin may have bolstered enthusiasm for digital currency, but most interesting may be CNY’s definitive recent price leadership.