Debt Ceiling

Hedging The Coming US Debtapalooza

One of the largest potential volatility events for the equity markets this year will be the Q1 US Debtapalooza.  There are three main issues that are to be debated with a crescendo coming in late February – the Long Term Budget Deal, the 2013 Budget Deal and the Debt Limit.  There will obviously be many consequential threats and theatrics associated with these events – including potential threats for government shutdowns and debt defaults – while the very real consequences could be additional US ratings downgrades.  It is important to remember that outside of the 2008 shock, the Debt Ceiling Debate and consequent US Debt Downgrade in Summer 2011 created the biggest volatility event of the past two decades. Volatility metrics show that the market is extremely complacent heading into these events.

Lessons From The 1930s Currency Wars

With Abe picking his new dovish playmate, and Draghi doing his best to jawbone the EUR down without actually saying anything, it is becoming very clear that no matter what level of bullshit histrionics is used by the politicians and bankers in public, the currency wars have begun to gather pace. Japan's more open aggressive policy intervention is the game-changer (and increasingly fascinating how they will talk around it at the upcoming G-20), as if a weaker JPY is an important pillar of the strategy to make this export-oriented economy more competitive again, it brings into the picture something that was missing from earlier interactions among central banks of the advanced economies – competitive depreciation. The last time the world saw a fully fledged currency war was in the early 1930s. Morgan Stanley's Joachim Fels looks at what it was like and what lessons can be drawn for the sequence of events - there are definite winners and losers and a clear first-mover advantage.

Guest Post: The Next Secular Bull Market Is Still A Few Years Away

There have been several articles as of late discussing that the next great secular bull market has arrived. However, the reality is that this cycle is currently unlike anything that we have potentially witnessed in the past.  With massive central bank interventions, artificially suppressed interest rates, sub-par economic growth, high unemployment and elevated stock market prices it is likely that the current secular bear market may be longer than the historical average. No matter how you slice the data - the simple fact is that we are still years away from the end of the current secular bear market. The mistake that analysts, economists and the media continue to make is that the current ebbs and flows of the economy are part of a natural, and organic, economic cycle. If this was the case then there would be no need for continued injections of liquidity into the system in an ongoing attempt to artificially suppress interest rates, boost housing or inflate asset markets. From market-to-GDP ratios, cyclical P/Es, misconstrued earnings yields, and the analogs to previous Fed-blow bubbles, we appear near levels more consistent with cyclical bull market peaks rather than where secular bear markets have ended.

Byron Wien Warns "Oblivious Markets" Of 20% Correction

Just as markets can stay irrational longer than traders can stay solvent, so Byron Wien warns all the market-watching self-confirming bulls that "markets slough off bad news until they don't." Blackstone's top-man fears the "oblivious markets" are missing the point that nothing has been solved and that a "big battle between entitlement cuts and raising the debt ceiling" is coming. Shrugging off the anchor's insistence that earnings have been 'pretty good', Wien states reality as expectations are rolling over and performance following. With people complacent and investors euphoric (ignoring European risk re-emergence and depression and Middle East tensions), Wien's brief clip concludes with his expectation of a 200 point correction in the S&P 500 in H1 2013.

Treasury Forecasts $16.763 Trillion In Debt On March 31 Translating To 105% Debt/GDP

Earlier today the US Treasury released its latest Borrowing Estimates for Q1 and Q2 of calendar 2013. In brief: in the ended quarter, the Treasury borrowed some $297 billion, $9 billion more than the $288 billion previously predicted. One reason for this miss is the build up of cash in the quarter which ended at $93 billion instead of the $60 billion initially expected. However the extra cash buffer will be used in Q1, in which Treasury now expects to burn some $63 billion instead of the $30 billion forecast before, ending the quarter with $30 billion in cash. To get there, Treasury will need to raise some $331 billion in debt in January through March, just shy of the prior estimate of $342 billion in funding need in this quarter. And since the US debt to the penny counter has been stopped since the debt ceiling breach, and is still at the December 31, 2012 debt limit of $16.432 billion, this means we now know, approximately, that US debt on March 31, 2013 will be $16,763,730,050,569.10, give or take a dime, or said otherwise, assuming a generous 1% sequential growth in Q1 GDP, a 105% debt/GDP in two months.

ISM Beats Expectations On Surge In Inventories

While the baffle with BS theme was strong earlier, when the UMich consumer confidence soared, rejecting the plunge in the consumer confidence tracked by the Conference Board, contrary to our expectations, the manufacturing ISM did not do a "China", which last night was reported to have grown and ungrown at the same time, did not drop to disprove yesterday's Chicago PMI and instead soared to 53.1 from 50.2, well above the expectations of a 50.7 print, and above the highest Wall Street estimate. This was the biggest beat of expectations in 16 months, and was driven by virtually every series rising except for Exports and Deliveries, but mostly by a surge in Inventories, which soared from 43 to 51.

7 Year Auction Tails As Treasury Sells $29 Billion At 1.42% Yield

The belly of the curve got whacked in today's $29 billion 7 Year auction, when the high yield of today's debt issuance came at some 1.416% (32.5% allotted at the high), outside the 1.408% When Issued, the first tail on a 7 Year of short maturity bond in a while, and a modest cause for concern, if not quite the "massive rotation out of bonds" we have been hearing about for months. The internals were hardly indicative of a major weakness, with a 2.60 Bid To Cover, below last month's 2.72, Directs taking down 19.75%, Indirects 38.21% and Dealers holding on to 42.04%: all in line with recent results as can be seen on the chart below. The yield, however, was well above December's 1.23%, and the highest since February 2012, when as today, things were supposedly getting much better and inflation was just around the corner, when it was really just the LTRO effect and some $1.3 trillion in liquidity courtesy of Europe.

US Ends 2012 With 103.8% Debt To GDP

Previously, when calculating debt/GDP metrics for the US, we naturally assumed some GDP growth in Q4. Following today's GDP data we now know what Q4 GDP is. We also know that, at least on a preliminary basis, it posted a decline on an annualized basis. This means that we now have an official print for US Debt/GDP as of December 31, 2012. The numerator, or debt: $16.432 trillion, or the debt ceiling, which as we know was breached on the same day, and which has yet to be formally raised. The denominator, or GDP: $15.829 trillion. This means that the formal debt/GDP is now 103.8% and growing fast.

Consumer Confidence Crashes To 2011 Levels After Biggest Plunge Since August 2011 Debt Ceiling Debacle

It would appear that the hike in taxes on 77% of Americans that was heralded as a success, has dented confidence just a little. As the efficient stock market moves to all-time nominal highs in many cases, Consumer Confidence just fell off a cliff. The conference board printed at the worst level in 13 months - so all those 2012 gains are gone - and fell month-over-month by the most since the August 2011 fiscal cliff debacle. For every income levels (except those earning under $15k) confidence plunged with the $35k-$50k bracket crashing the most. It would appear that the driver of 70% of the US economy is not buying the new normal being fed to us daily by any and every media outlet possible. No matter how much the market is held up by mysterious runs in FX markets or volatility compression, it would appear that - just as we have been noting - the underlying macro fundamentals will eventually be priced in, as this does not bode well for retail sales.

Paul Ryan Says Sequester Likely To Take Place

When the Republican party agreed last week to a push back on the debt ceiling discussion by three months to May 19, virtually without a fight in a move that may presage what is set to become a quarterly can kicking exercise on the US credit card max, some were curious what the quo to this particular quid may be. Earlier today on Meet the press Paul Ryan explained: the pound of spending flesh demanded by the GOP in exchange for caving on yet another key GOP hurdle is, as our readers have known for over two weeks, the Sequester, which is set to hit on March 1 and possibly the stop-gap government funding on March 27, after which various government agencies will start shutting down. Both programs are set to kick in automatically as incremental spending cuts, chopping away even more basis points from the 2013 US GDP, unless the GOP votes affirmatively to extend them in what would then be seen as a move that destroys any last trace of leverage and credibility that GOP may have had.

Trading The Macro-Market Disconnect

As we recently noted, the US Macro picture is considerably less sanguine than every talking head would have you believe. Not only are earnings for Q4 coming in notably weak, but the top-down macro picture is its worst in almost five months - and turned negative this week. Of course, the fact that our 'market' is dislocated from any sense of reality will come as no surprise to anyone; but, the chart below provides some, perhaps useful, insight into how to trade this disconnect (and its inevitable convergence). To add a little more impetus to this decision, the past two weeks have seen the US macro picture drop at its fastest rate since June 2011 - right before the last debt-ceiling debate, which was followed by a quite notable decline in stocks.

IceCap Asset Management: "The Queen"

It was rumored that the 2008 crisis hit the Queen of England particularly hard – over USD 40 million in stock market losses. This experience must have jilted something, as when The Queen was visiting the esteemed London School of Economics she asked the professor a rather “un-queen” like question – why did economists fail to predict the biggest global recession since the Great Depression? Speaking on behalf of economists, investment managers and mutual fund sales people everywhere, the professor responded that “at every stage, someone was relying on somebody else and everyone thought they were doing the right thing.“ In short, no one could have predicted the 2008 crash. Meanwhile, in the parallel universe called America, Ben Bernanke January 2013 The Queen was selling everyone the exact same story. If the famed London School of Economics and the Chairman and full committee of the US Federal Reserve were unable to predict the crisis, what hope does the World have with predicting future crises? In actual truth, and despite claims by the US Federal Reserve and the London School of Economics, many people accurately predicted the collapse of the US housing market and the subsequent collapse of the stock market. Fortunately, it doesn’t have to be that way. Accepting, understanding, and embracing the fact that today there are plenty of investment professionals who are willing to view the World objectively should be comforting.

Eric Sprott On Ignoring The Obvious

The purpose of asset purchases by the Fed might no longer be improvements in the real economy, but rather a more subtle financing of U.S. government deficits. However, in the long run, expanding the money supply inevitably leads to inflationary pressures. Luckily for the Fed and the U.S. government, there is so much slack in the labour market that inflation might be years away. And, if we are right about the long run unemployment rate being structurally higher, then the Fed has all the room it needs to continue Quantitative Easing (QE) to infinity. This might allow them to continue to hide the true financial position of the government for many years to come. Nonetheless, the rising GAAP deficit and the sheer size of the U.S. Federal Government’s liabilities to its citizens makes it clear that one day or another, services (health care, social security) will have to be cut. Financial alchemy can hide reality, but it does not provide any tangible services. Europe’s (unresolved) experience with its debt crisis provides an insightful window into the future. Austerity measures in Ireland, Portugal, Spain and Greece have caused tremendous pain to their citizens (25% unemployment rates) and wreaked havoc in their economies (double digit retail sales declines). Are we going to ignore the obvious?

Scam Complete: The US Government Takes A Page From Diocletian’s Book...

Early in the 4th century, Emperor Diocletian issued an infamous decree to control spiraling wages and prices in the rapidly deteriorating Roman Empire. As part of his edict, Diocletian commanded that any merchant or customer caught violating the new price structures would be put to death. This is an important lesson from history, and a trend that has been repeated numerous times. When nations are in terminal economic decline, governments will stop at nothing to keep the party going just a little bit longer. I thought of Diocletian’s desperation a few days ago when I read about the recent sanctions imposed on US rating agency Egan-Jones. Given that all this is happening at a time when Congress is voting to suspend the debt ceiling entirely, these actions are the clearest sign yet of just how desperate the government has become. Could the warning signs be any more obvious?