Debt Ceiling

GOP Proposal "Sure To Go Nowhere" In The Senate

The market ramped, modestly, on the earlier news that the House would push the debt ceiling by three months with an implied budget/spending cut provision. That the market actually moved on this headline shows front and center just how clueless the algos doing all the trading truly are, because one doesn't need Politico to tell them that this proposal is absolutely DOA and is nothing but more theater. However, those who do need Politico to tell them that, here it is: "House Republicans will vote next week on a bill that would raise the nation’s debt ceiling for three months and attach a provision that would stop pay for members of Congress if the Senate doesn’t pass a budget, GOP officials said Friday. It’s an attempt to force the Senate to lay out a spending plan, but is sure to go nowhere in the Democratic controlled upper chamber."

Consumer Confidence Plunges To December 2011 Levels, Biggest Miss To Expectations In 7 Years

Yesterday, UBS' Maury Harris released a naive note titled "UofM confidence bounce after tax deal?" which we did not understand: would the bounce be on the ongoing depression, the uncertainty over the debt ceiling, the fate of the sequester and coming spending cuts, the manipulated market which just saw a $610 million reserve injection via repo to be followed by another $1.5 liquidity injection via POMO, or the fact that everyone is now paying more taxes in 2013? Turns out the confusion was irrelevant as the preliminary January UMichigan consumer confidence number just printed at 71.3, far below the December final 72.9, and the biggest miss to expectations in seven years. It was also the lowest print since November 2011. And of course, the reaction of the central bankers' soapbox formerly known as the "market" is.... up.

“Gold Will Prove A Haven From Currency Storms” – OMFIF Study

Demand for gold is likely to rise as the world heads towards a multi-currency reserve system under the impact of uncertainty about the stability of the dollar and the euro, the main official assets held by central banks and sovereign funds. This is the conclusion of a wide-ranging analysis of the world monetary system by Official Monetary and Financial Institutions Forum, (OMFIF), the global monetary think-tank, in a report commissioned by the World Gold Council, the gold industry’s market development body. The report warns of “twin shocks” to the dollar and the euro and of a “coming dollar shock” and points out how gold would be a safe haven in a dollar crisis. “Gold has a lot going for it; it correlates negatively with the greenback, and no other reserve asset seems safe from the coming dollar shock.” “The world is preparing for possible twin shocks from the parlous. position of the two main reserve currencies, the dollar and the euro... The OMFIF offers a confidential, convenient and discreet forum to a unique membership of central banks, sovereign funds, financial policy-makers and market participants who interact with them. They note that “western economies have attempted to dismantle gold's monetary role. This has failed.”

So Much For That "Record Inflow" Into Equity Funds - Domestic Equities See $4.2 Billion Outflow In Most Recent Week

The most talked about story of the last week was undoubtedly the relentless chatter about that massive $18 billion in equity fund inflows as reported by Lipper (not ICI), which tracks primarily institutional and ETF flow of funds, and which, as we explained even before the Lipper data came out, was driven exclusively by a surge in bank deposits into the year end, to be recycled for risk investment purposes by the commercial banks' own prop desks. The details, however, were largely ignored by the mainstream media which took that inflow as an indication that the tide has finally turned and that the great rotation out of bonds into stocks is on. Turns out that just as we expected it was a year end calendar asset rebalancing. As Lipper reported earlier, the enthusiasm for US stocks appears to have abruptly ended, with a whopping $4.2 billion pumped out of domestic equities, offset by some $4.5 billion invested in non-domestic equities. The blended flow? Just $286 million going into equities. Now our math may be a little rusty, but $18 billion followed by $0.2 is not really indicative of an ongoing rotation out of bonds and into stocks, and is more indicative of a one-time, non-recurring event, just the opposite of all the Bank of America addbacks.

Republicans Considering "Temporary" Debt-Ceiling Increase

In what is sure to be a complete non-starter with the Obama administration, WSJ reports that Paul Ryan said that "Republicans are discussing whether to support a short-term increase in the nation's borrowing authority, possibly linking the debt ceiling to future talks aimed at reaching a major deficit deal....Mr. Ryan said no decisions have been made about how to approach the debt and spending negotiations, but that leaders hope House Republicans will reach consensus on a strategy by the end of the week. The former vice-presidential candidate said "we're discussing the possible virtue of a short-term debt limit" increase that would lead to broader deficit talks with Senate Democrats and the White House. "We hope to achieve consensus on a plan to proceed so we can make progress on controlling spending and deficits and debt," Mr. Ryan said." The logical question immediately arose, and promptly received a non-answer "Mr. Ryan wouldn't say what he meant by a temporary debt-ceiling increase, declining to give a specific increase figure or timeframe for an extension."

Germany's Gold Repatriation Unlikely To Assuage Public Concerns

Whether the repatriation of only some 20% of Germany's gold reserves from the Federal Reserve Bank of New York and the Banque of Paris back to Frankfurt manages to allay German concerns remains in question.  Especially given that the transfer from the Federal Reserve is set to take place slowly over a seven year period and will only be completed in 2020. The German Precious Metals Association and Germany's ‘Repatriate Our Gold’ campaign said that the move by the Bundesbank did not negate the need for a full audit of Germany's gold. They want this to take place in order to protect against impairment of the gold reserves through leases and swaps. Indeed, they have called for independent, full, neutral and physical audits of the gold reserves of the world's central banks and the repatriation of all central bank gold - the physical transport of gold reserves back into the respective sovereign ownership countries. It seems likely that we may only have seen another important milestone in the debate about German and global gold reserves.

Debt Ceiling 2011 Vs 2013 Compare And Contrast

The last few months have seen US equity markets swinging from confidence to grave concerns (briefly) and back to exuberance even as the looming 'debt ceiling' and sequester remains dead ahead. The pattern is eerily similar in price (and volatility) terms to the movements ahead of the Summer 2011 'debt ceiling' debacle. What is just as concerning is, as Bloomberg's Chart of the Day shows, is the mass psychology aspect, as mentions of the words 'debt ceiling' are once again gathering pace, just as they did in 2011. Markets may not repeat, but they do echo; and as UBS' Art Cashin noted, this month marks the 40-year anniversary of a significant top in the market as stocks broke to all-time highs and "all appeared right with the world." Perhaps, it is our inexorably optimistic belief that the politicians will fix it all (or kick the can) at the last minute - so there is nothing to fear but fear itself; or perhaps this time, there is a line in the sand that both sides need to defend.

Futures Refuse To Remain Grounded, Unlike Global Boeing Fleet

Same overnight pattern, different day. After a late day ramp in the US market, followed by a selloff in the futures after hours, taking the ES to trading session lows, we get the European trading crew which day after day sends the EURUSD soaring as Europe opens, pushing futures to unchanged or even green and easily negating the key news event of the day, in this case the full grounding of the entire global Boeing fleet which will once again weigh on the stock and DJIA. In the meantime, the big rotation behind the scenes in FX land continues, with the ongoing and very sudden pounding of the Swiss Franc taking the EURCHF to 1.2450, or the highest, since 2011. Same with the USDJPY which after another attempt to fall, rallies on more of the same regurgitated rumors. Not to mention the EURUSD of course, which as mentioned above has surged some 100 pips since the European open. In other words the overnight beating of the USD is enough to push the US stock market high enough in nominal terms, avoiding that there is no incremental cash flow. Then again, who needs cash flow when you have "multiple expansion."

Another V-Shaped Stock Recovery - But Rates And Credit Ain't Buying It

From last Friday, the S&P 500 had decoupled somewhat (trading in a 10 point range) from credit markets (which had widened notably) while spot VIX had caught up (and over-taken) stocks. Today saw HYG (the high-yield bond ETF) trade sideways to lower all day long, catching down to its credit derivative market cousins, as VXX was the lever of choice to ramp stocks to test the week's highs once again (and scratch a few more stops). However, while AAPL made it up to the lows of the last swing down amid thin volumes, the last hour saw mid-dated volatility being bought which pushed VXX higher and reverted it towards rates and credit un-exuberance. Treasuries ended the day green once again and the USD drifted higher (though most of FX traded in extremely tight ranges). Silver rose further, Gold trod water, and oil played some catch up to the precious metals. Tech outperformed (thanks to AAPL) but financials (apart from some early vol) did nothing - despite Mario Monti's call that "the crisis is over." Another low-range, low volume, mediocre trade size, close-near-the-open day in stocks with bonds bid - and futures fade after-hours.

Crossing Through The "X Date" - What Happens After The US "Default"?

Call it "X Date", call it "D(elinquent/efault)-Day", call it what you will: it is simply the day past which the US government will no longer be able to rely on "extraordinary measure" to delay the day of reckoning, and will be unable to pay all its bills without recourse to additional debt. It is not the day when the US defaults, at least not defaults on its debt. It will begin "defaulting" on various financial obligations, such as not paying due bills on time and in full, but since this is something Europe's periphery has been doing for years, it is hardly catastrophic. It will hardly be pleasant, however, as some 40% of government obligations go unfunded, and the US is converted to a walking, talking bankruptcy as unsecured claimants rush to demand priority, as the market, long living on hope and prayer, realizes that only now is it truly without a cliff under its feet, and most importantly, as suddenly $500 billion in maturing debt between February 15 and March 1 finds itself in a very, very precarious position.

David Rosenberg On "Fascinating Markets", Or 2011 vs 2012 vs 2013

Unsure what the current blistering start for the S&P 500 means in the new year? Here is David Rosenberg putting the last two years in perspective to the last two weeks. Alas, with fat tails now solely emanating from politicians (as the Fed has guaranteed nothing wrong can ever happen again on the monetary side, until everything goes wrong of course), and politicians being inherently irrational and unpredictable, it is not exactly clear how anyone can factor for what in just one month is sure to be the biggest clash in history between two sides of a Congress that has never been more polarized.

Here Comes The Sequester, And Another 1% Cut To 2013 GDP

From Goldman Sachs: "Allowing the sequester to hit would, in our view, have greater implications for growth than a short-lived government shutdown, but would not be as severe as a failure to raise the debt limit. Although Republicans in Congress generally support replacing the defense portion of the sequester with cuts in other areas, there is much less Republican support for delaying them without offsetting the increased spending that would result." And in bottom line terms: "Sequestration would reduce the level of spending authority by $85bn in fiscal year (FY) 2013 and $109bn for subsequent fiscal years through 2021. The actual effect on spending in calendar 2013 would be smaller--around $53bn, or 0.3% of GDP--since reductions in spending authority reduce actual spending with a lag. The reduction in spending would occur fairly quickly; the change would  be concentrated in Q2 and particularly Q3 and could weigh on growth by 0.5pp to 1.0pp." In other words: payroll tax eliminates some 1.5% of 2013 GDP growth; on the other side the sequester cuts another 1%: that's a total of 2.5%. So: is the US now almost certainly looking at a recession when all the fiscal components to "growth" are eliminated? And what will the Fed do when it is already easing on "full blast" just to keep US growth barely above 0%?

Citi On The Debt Ceiling: "First Complacency, Then Horror"

While we will shortly present some practical perspectives on what the debt ceiling fiasco due in just about a month, means practically for the economy (think sequester, and another 1% cut to US GDP, which when added to the payroll tax cut expiration's negative 1.5%-2% impact on 2013 GDP, and one wonders just how the US will avoid recession in 2013), here is a must read perspective from Citigroup on how the markets may and likely will react to what is shaping up to be another "12:30th hour" (the New Normal version of the eleventh hour) debt ceiling resolution, which is now under a month away. To wit: "We think this means that 1) risk will sell off less approaching the debt ceiling deadline; 2) currency investors will hold on to risk in spot but buy tail risk hedges; and 3) there will be a wholesale cutting of positions in FX and other asset classes, if the debt ceiling is breached. So it may looks as if the debt ceiling breach is not worrying asset markets, but it means that investors are banking on the chestnuts being pulled out of the fire. If they are not pulled out, positions go up in smoke."