Yesterday we brought you the news that US debt quietly soared by $90 billion overnight to celebrate the new fiscal year end, reaching $16.2 trillion and sending total US debt to GDP to 103%. Needless to say, this comes at an exciting time, with the first Wall Street muppet presidential debate in about 12 hours, where the US debt crisis will be a front and center topic because in about 2 months, the US debt ceiling will again be breached adding to the Fiscal Cliff fiasco, resulting in a flashback to August 2011 when the market had to tumble by nearly 20% for Congress to get the hint that first and foremost its job is to make sure the money on Wall Street keeps flowing, all else secondary. And while it has become fashionable to say that US debt rose by this much under that president, the truth is that the Presidency is merely one of three institutions that are responsible for the shape of the US debt-to-GDP line (which is now going from the lower left to the upper right by default). The other two are, of course, Congress and the Senate. Luckily, to simply things substantially, we have a handy graphic from today's Bloomberg Brief which conveniently plots not only the political affiliation of the presidency, but of the House and Senate, in the chronology of the US debt crisis.
Evoking the dark days of 2009 - after a steep and bumpy slide
The Philly Fed's current September Business Indicators index, long ignored when bearish and cheered when bullish, came slightly above expectations of -4.5, printing higher from last week's -7.1 to -1.9. This was the fifth consecutive negative print. And while there were no major highlights in the index, whose New Orders rose from -5.5 to 1.0 at the expense of Shipments and Inventories, both of which imploded to worse then -20, the real story is the Six Months expectations index, which exploded from 12.5 to 41.2: this was the biggest spike may not ever, but certainly in the past 22 years! Is there any wonder why everyone is transfixed with hope that Q4 will be the deus ex that saves the US economy. And so we are back to being a hopium driven economy - when reality sucks, there may not be much change, but there is always hope that finally, the central planners will get it right, and the future will be so bright you've gotta wear Made in China shades. One word of caution: if the so very much anticipated and 100% priced in Q4 recovery does not materialize, and with the fiscal cliff and debt ceiling issues still unresolved, get the hell out of Dodge, as the spread between hope and reality comes crashing.
Bob Janjuah - "Central Banks Are Attempting The Grossest Misallocation And Mispricing Of Capital In The History Of Mankind"Submitted by Tyler Durden on 09/18/2012 07:45 -0400
"The bottom line is simple: The Fed and the ECB are directing and attempting to orchestrate the grossest misallocation and mispricing of capital in the history of mankind. Their problem is that their actions have enormous unintended and even (eventually) intended consequences which serve to negate their actions in the shorter run, and which could create even bigger problems than we currently face in the near future. Kicking the can is not a viable policy for us now. The private sector knows all this, consciously and/or sub-consciously, which is why I feel these current policy settings are doomed to fail. Having said all that, the one area which for some reason still holds onto hope that Draghi and Bernanke can still perform feats of "magic" is the financial market, which central bankers assume, rely on and are happy to encourage Pavlovian responses. The reality here though is that even financial markets are, collectively, either sensing or assigning a half-life to the "positives" of central bank debasement policies, which to me means that even markets are only suggesting a short-term benefit from the latest policy actions. This is not what Draghi and Bernanke are hoping for, but in order for them to see the half-life outcome averted they know that we need to see major political and structural real economy reforms which somehow make Western workers competitive and hopeful again. The track record of the last four to five years inspires very little confidence that we will see such great necessary reformist strides taken anytime soon."
As we have explained recently, the US fiscal cliff is a far more important issue 'fundamentally' than the Fed's economic impotence. While most market participants believe some kind of compromise will be reached - in the lame-duck session but not before the election - the possibility of a 3.5% drag on GDP growth is dramatic to say the least in our new normal stagnation. As Goldman notes, the window to address the fiscal cliff ahead of the election has all but closed, the 40% chance of a short-term extension of most current policies is only marginally better than the probability they assign to 'falling off the cliff' at 35%. The base case assumptions and good, bad, and ugly charts of what is possible are concerning especially when a recent survey of asset managers assigned only a 17% chance of congress failing to compromise before year-end. Critically, and not helped by Bernanke's helping hand (in direct opposition to his hopes), resolution of the fiscal cliff will look harder, not easier, to address as we approach the end of the year - and its likely only the market can dictate that direction - as the "consequence is terrible, but bad enough to force a deal."
To all who miss the highly volatile days of August 2011, when as a result of the congressional deadlock on the debt ceiling, and the S&P downgrade of the US, the DJIA swung by 400 points every day for 4 days in a row just to get Congress to come to the "compromise" exposed in painful detail by Bob Woodward a few days ago, fear not: they are coming back, and with a vengeance. Because while last year only the debt ceiling was under discussion, now we get the double whammy of the debt ceiling and the Fiscal cliff. And just so the suspense meter is pushed off the charts early, and the performance gets maximum billing for theatrics if not execution, House Speaker John Boehner has just said he's not confident Congress can reach a budget deal and avoid a downgrading of the U.S. debt rating. Let us paraphrase: there will be no deal until the 11th hour, 59th minute, 59th second, and 999th millisecond, at which point the market will plunge and get Congress to do what it always does: Wall Street's bidding, which now and always, is a smooth and seamless continuation of the status quo.
13 months ago, in the aftermath of the debt ceiling fiasco, which we now know was a last minute compromise achieved almost entirely thanks to the market plunging to 2011 lows, S&P had the guts to downgrade the US. Moody's did not. Now, it is Moody's turn to fire up the threat cannon with a release in which it says that should the inevitable come to pass, i.e. should congressional negotiations not "lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term" then "Moody's would expect to lower the rating, probably to Aa1" or a one notch cut. Moody's also warns that should a repeat of last year's debt ceiling fiasco occur, it will also most likely cut the US. Of course, that the US/GDP has risen by about 8% since the last August fiasco has now been apparently forgotten by both S&P and Moodys. Sadly, continued deterioration in the US credit profile is inevitable, as every single aspect of modern day lives that is "better than its was 4 years ago" has been borrowed from the future. More importantly, with the S&P at multi year highs courtesy of Bernanke using monetary policy to replace the need for fiscal policy, Congress will see no need to act, and Moody's warning will be completely ignored. This will continue until it no longer can.
A few days ago, the BOE's Andy Haldane, rightfully, lamented that the apparent "solution" to the exponentially growing level of complexity in the financial system is more complexity. Alas, there was little discussion on the far more relevant central planning concept of fixing debt with even more debt, especially as the US just crossed $16 trillion in public debt last week, right on schedule, and as we pointed out over the weekend, there has been precisely zero global deleveraging during the so-called austerity phase. But perhaps most troubling is that with 2 days to go to what JPM says 77% of investors expect with be a NEW QE round (mostly MBS) between $200 and $500 billion in QE, the world is, also in the words of JP Morgan, drowning in liquidity. In other words, according to the central planners, not only is debt the fix to record debt, but liquidity is about to be unleashed on a world that is, you guessed it, already drowning in liquidity. The bad news: everything being tried now will fail, as it did before, because nothing has changed, except for the scale, meaning the blow up will be all that more spectacular. The good news: at least the Keynesians (or is it simply Socialists now?) out there will not be able to say we should have just added one more [ ]illion in debt/liquidity and all would have worked, just as our textbooks predicted. Because by the time it's over, that too will have happened.
"It Is Really Disheartening That This White House Did Not Have A Plan B" - A Preview Of The Next Debt Ceiling CrisisSubmitted by Tyler Durden on 09/09/2012 11:37 -0400
As of Friday, total US debt subject to the limit was $16.006 trillion, or $387 billion below the latest and greatest official debt ceiling. In the past 3 months the US has been raising debt at a slower pace than usual precisely for this reason. Debt issuance will now pick up at far faster pace as the trendline mean reversion reasserts itself. It means that sometime over the next few months, and certainly before the end of the year, the US debt ceiling will be breached (with all the usual tactics employed to delay this event from happening as much as possible, including resuming the pillaging of various government retirement funds) as the Treasury itself warned. It also means that either just before or just after the presidential election, the topic of the debt ceiling will be once again upon us. As a reminder, the reason why the market plunged back in August of 2011 is because as the GOP proved unwilling to compromise, suddenly everyone, led by Tim Geithner, realized just how close to a failed auction, read endgame, the US was, and the dire need for a wake up call became paramount. Furthermore as is well-known, the only stimulus Pavlovian politicians react to is a market collapse, which not only instills the fear of the "401(k)" god falling to earth, but lights up the switchboards as concerned "voters" suddenly realize that all their mark-to-Bernanke's market "wealth" may disappear in a puff of smoke. It is now, courtesy of Bob Woodward, that we learn just how close we came. And since the polarity and discord in Congress after the election, already at record levels, will soar to new all time highs after November, it is safe to say that the debt ceiling debacle deja vu is coming, and this time it will make the first one seem like child's play.
Bernanke takes the wind out of the market's euphoric sails: "Substantial further expansions of the balance sheet could reduce public confidence in the Fed's ability to exit smoothly from its accommodative policies at the appropriate time. Even if unjustified, such a reduction in confidence might increase the risk of a costly unanchoring of inflation expectations, leading in turn to financial and economic instability."
The market over the summer has been quieter than we had expected - thanks to Draghi's threats placating-words and Bernanke's promises. Equities rallied, Bunds and Treasuries sold off, and government spreads in Europe declined. All these markets look more constructive. However, the event calendar in the near future is very heavy, notably the political one. This article from UBS' global strategy group does three things. First, they provide a list of events until the end of the year. Second, the relative importance of the various events are ranked; and finally, they provide, where needed, a comment on what to expect. We still believe three topics will drive markets: (1) the ongoing European sovereign crisis, where we see some progress (albeit slow) as Draghi has pushed forward his agenda and found some support from politicians; (2) the political issues in the US, although the main change is the more dovish Fed; and (3) world growth, which has been disappointing and is a major risk to monitor.
It is one thing for various anti-Central Planning (and thus central bank) outlets to warn, over 3 years ago, that easy monetary policy is merely an enabling substance, and is addictive as any drug to a dysfunctional political establishment which is more than happy to avoid fiscal prudence if monetary policy is readily available to delay the inevitable day of reckoning when monetizing the debt will no longer work. It is a different matter entirely when the head of the world's only solvent central bank - the German Bundesbank, which happens to be the biggest guarantor of that other mega hedge funds the ECB, and which of all developed economies also happens to have had the closest recent encounter with hyperinflation (unlike all the "other" theoretical experts who enjoy talking extensively about matters they have zero experience with). In an interview with German Spiegel magazine, Buba head Jens Weidmann, once again has loudly warned what as recently as 2009 very few dared to even think: namely that rampant and gratuitous deficit plugging using central bank debt issuance, and thus explicitly monetizing the debt, "can be addictive as a drug." Obviously, like any drug overdose, the aftereffects are always fatal.
The S&P 500 is at its 2012 highs, and rapidly approaching all time highs, even as nothing has changed over the biggest near-term challenge facing America: the fiscal cliff. Ironically, with every tick higher in the market, the probability that Congress will come to a consensus over what would be a haircut of up to 4% to next year's GDP as soon as January 1 2013 gets smaller. Why - the same reason that Spain is unlikely to demand a bailout now that its 10 Year bond is back to the mid 6% range (ironically on expectations it will demand a bailout!): complacency - both by investors, and by politicians. After all, it's is all a matter of perception, and the market is seen to be "perceiving" an all clear signal. It means that the impetus to do something constructive simply does not exist, as we explained recently in the case of Spain (and Italy). It also means that Congress has no reason to be proactive about the biggest threat facing the economy: just look at the S&P - it sure isn't worried, and the market is supposed to be far more efficient than elected politicians. At least on paper. This line of thinking is also the reason why Goldman's head of equity strategy David Kostin (not to be confused with the person he replaced: permabull A Joseph Cohen, who off the record sees the S&P rising to 1600 or more) refuses to raise his year end forecast for the S&P, which has remained firmly at 1250 for the entire year. More muppetry, more dodecatuple reverse psychology, or is Goldman telling the truth? You decide.
The market may have found itself in the purgatory of the summer doldrums, where unlike last year this time, not only are volumes over 50% lower, but volatility is non-existent, but that doesn't mean that investors are sleeping easy. In fact, quite the opposite because as the following chart from MS confirms, the lack of market volatility merely mimics the complete chaos and lack of decisiveness in Congress, where each passing day brings America not only closer to the most contentious presidential election in ages, but to another debt ceiling hike debate, and, of course, the fiscal cliff. All of these combined have brought US policy uncertainty to the third all time highest level, on par with September 11 and the collapse of Lehman/TARP, and just short of last year's imminent European collapse, which was only staved off courtesy of the coordinated global central bank intervention on November 30.