Debt Ceiling

At Least One Market Is Open

Aside from the occasional deranged FX algo which today has decided to take out all its pent up binary anger on the GBPUSD, everything else today is closed. Everything, except, of course, for InTrade which come holiday, rain or apocalypse, is a true OTC market and is open all the time 24/7, non stop. Of particular interest is InTrade's market on "The US debt limit to be raised before midnight ET 31 Dec 2012" which moments ago once again came closer to reflecting reality and not the clueless gibberish of "expert" political pundits, and plunged to a contract low 10.1% probability (and price) which considering the late stage in the game, and that at this point the Fiscal Cliff is beyond any 2012 resolution, let alone the debt ceiling, is 10.1% too high (as forecast here nearly two months ago). And like a true market, one can naked short on InTrade. So for all the habitual gamblers out there just itching for some global futures market to reopen somewhere: have at it (but mind the brief squeeze at the next appearance of the "we have a deal" rumor, only to be refuted by the sad political reality of this country moments later). 

Sentiment: Listless Traders Looking Forward To Abbreviated Rumor Day

As DB's Jim Reid summarizes, "it is fair to say that newsflow over the next 72 hours will be fairly thin before we head into a tense final few business days of the year." It is also fair to say, that the usual tricks of the new normal trade, such as the EUR and risk ramp as Europe walks in around 3 am, precisely what happened once again overnight to lift futures "off the lows", will continue working until it doesn't. In the meantime, the market is still convinced that some compromise will appear miraculously in the 2 trading sessions remaining until the end of the year, and a recession will be avoided even as talks now appear set to continue as far down as late March when the debt ceiling expiration, not cliff, will become the primary driving power for a resolution. That said, expect to start hearing rumors of a US downgrade by a major rating agency as soon as today: because the agenda is known all too well.

Guest Post: 'Sandy Effect' Boosts Economic Data

The slew of economic releases over the last couple of days have all had two things in common:  1) the data has been markedly improved which has given a silver lining to the economic storm clouds we have witnessed over the last several months; and 2) the fingerprint of Hurricane Sandy has been very visible.  This is not a surprise. The question that needs to be addressed, however, is whether these surges are sustainable in the months ahead?

How The Fiscal Cliff Talks Collapsed

The collapse of the Fiscal Cliff talks should come as no surprise to anyone (except, of course, for all those "expert" political commentators virtually all of whom saw a deal by December 31: a full list of names is forthcoming). The reason: a simple one - a House torn, polarized to a record extreme, and a political environment in which the two parties, in the aftermath of a presidential election humiliating to the GOP, reached unseen before antagonism toward each other. In this context, it was absolutely inevitable that America would see a replica of last summer's debt ceiling collapse, which mandated a market intervention, in the form of a crash, and the wipeout of hundreds of billions in wealth - sadly the only catalyst that both parties and their electorate, understand. We had prefaced this explicitly in early November when we said that "the lame duck congress will posture, prance and pout. And it is a certainty that in the [time] remaining it will get nothing done. Which means, that once again, it will be up to the market, just like last August, just like October of 2008, to implode and to shock Congress into awakening and coming up with a compromise of sorts." Which of course brought us to Thursday night's mini-TARP moment. With all that said, there are those forensic detectives who are addicted to every single political twist and turn, and who are curious just where and when the Fiscal Cliff talks broke down in the past week. In this regard, the WSJ provides a useful timeline.

The One Thing Everyone Is Forgetting About The Fiscal Cliff

While everyone is hypnotized by the melodramatic theater in D.C., it is worth reminding readers just what the one most important statement so far uttered by anyone on the topic of the Fiscal cliff is. That statement belongs to Chairman Bernanke, it was uttered during the December 12 Fed press conference when QE4EVA was announced, and is his response to Peter Cook from Bloomberg TV who asked "if the policy makers were not to agree to some sort of deficit deal by the end of this year and we were to go over the fiscal cliff, that the size of these asset purchases could indeed grow in response to that?' Bernanke's response: "if the economy actually went off the fiscal cliff, our assessment, the CBO’s assessment, outside forecasters, all think that that would have very significant adverse effects on the economy and on the unemployment rate. And so, on the margin, we would try to do what we could. We would perhaps increase a bit." And there you have it, and there goes any sense of urgency, at least until the real deadline in late March, when the Treasury will have tapped out the G-fund and can't extend the debt ceiling any more.

"Get to work, Mr. Chairman."

Twas The Last Obama Conference Before Cliffmas...

... and all through the collocated server house, GETCO algos were stirring, hoping (as this is the only "strategy" left) that maybe, just maybe, Obama can pull a unicorn out of his skittles-dispensing hat. He won't, and most likely we will get one last does of stern fingerpointing, harsh language and accusative condemnation of those wascaly wepublicans. But find out for yourselves in 15 short minutes, when the market may be closed, but futures will still be open, although at least subject to the limit down rule. Of course, if the news was good, it would have come before 4 pm...

Is The S&P Set To Test 1370 (Or 1150)?

We noted the VIX divergence (and most importantly the 14-month flatness of the term-structure - which is following the 'debt ceiling' path perfectly!) yesterday and pointed out how illiquid markets were. Critically, those that could were selling into strength and those that couldn't (due to size and illiquidity) bought protection. Overnight the flash crash recoupled S&P to VIX but this morning has seen more protecction buyers step in, driving VIX towards 20% (5 month highs). Given the recent correlations (and managers knowing full well they can't unwind their exposure into the cash market as the avalanche will be too large), VIX implies the S&P at around 1370. Interestingly, this level of S&P is also approximately what a 2% rally in the USD would imply (the FX implication we suggested yesterday of a failed cliff resolution in the short-term).

Quad Witching Cliff-faller

It may not be apparent immediately, but in the aftermath of last night's epic collapse in fiscal cliff negotiations, which incidentally was perfectly obvious to anyone with half a brain and who experienced last summer's debt ceiling fiasco, which sadly excludes all paid political and financial - including sellside - commentators, all of whom expected a prompt resolution to this polarized issue as recently as a week ago, there is major behind the scenes panic. Because while banks would write profuse, long-winded essays to explain the logic and rationality of the "deal", now that they are all faced with adjusting their narrative the best they can come up with are two sentence fragments such as this one from Citi's Steven Englander "Problem is that it is the right wing of the Republican Party that wouldn’t give Boehner their support, making it less likely that he could win broad support among Republicans for a compromise with the White House. Also he will have to spend next couple of days negotiating with both his own party and the Democrats without knowing how much he can deliver." The answer: nothing at all. In fact as Scott Rigell said “I’m not sure the people who have been up here 20 or 30 years really understand what the next iteration of this process is”.  He is speaking for pretty much everyone else who has now been made a total fool by the Black Swan that is Congress. As a reminder a 3 month delay resolution assures a US recession, and a ~20% or so minimum correction in the stock market, which has been priced for absolute perfection for months, and which will once again have to be used by Wall Street as a means to get a consensus out of DC. Just as we predicted over a month ago. Finally while we may have avoided the Mayan apocalypse, we do have a quad witching and a NASDAQ rebalance to look forward to. Enjoy!

Plan 'C' Anyone? Boehner Humiliated As "Plan B" Lacks Enough Votes To Pass

Update: wow:


Absolute total chaos. ES at lows of the days right now. Luckily, at least the debt ceiling is a firm deadline... Sometime in late March. Oh, and goodbye Boehner?

House Passes Sequester Replacement "Spending" Bill By 215-209 Vote, "Plan B" Vote Next - Live Webcast

Update: an unexpected setback for Boehner appears to have appeared with rumors that there may not be enough votes in support of Plan B. As a result the vote on Plan B is for now delayed, and the Republican leaders are said to plan a 7:45pm conference. Suddenly it is becoming a real nailbiter. Stay tuned and grab your popcorn.

The first key vote on the House's docket - the Spending Cut Bill, i.e. the Sequester removal, has just passed as widely expected, by a vote of 215-209 with 21 Republicans voting now. Shortly thereafter, the House will vote on the "Plan B" Boehner tax proposal which too is expected to pass the House, and then be blocked by the Senate. At that point the Fiscal Cliff debate for 2012 is likely to be shelved and reopened in 2013 only after the consequences of the Fiscal Cliff have taken place. A final resolution may well stretch out into March, as we predicted previously, when the drop dead decision date is due - that coinciding with the debt ceiling increase, which by mid-March will no longer be extendable.  Watch the vote live below.

Guest Post: Why Reported Inflation Seems Different Than Reality

The subject of inflation has remained an emotionally charged topic of debate over the last several years.  As rising prices for individuals, and businesses, has negatively impacted their prosperity; reported inflation has remained at very low levels.  With the Fed pumping trillions of dollars into financial system the fear of much higher inflation, as the dollar is debased, has caused gold prices to soar in recent years. The sole purpose in measuring inflation is to help businesses, individuals and government adjust their financial planning for the impact of inflation.  Inflation erodes future purchasing power, and decreases economic prosperity, if not accurately accounted for.  The accuracy of measuring inflation, and accounting for it properly, is essential to long term economic prosperity. Shortly after Clinton entered the White House the Bureau of Labor Statistics (BLS) altered the calculation of inflation by changing the weighting of goods in the CPI fixed basket. But the manipulation of the data did not stop there.

Phoenix Capital Research's picture


I’m going to lay out everything you need to know about the fiscal cliff negotiations. After reading this, you can ignore all of the media’s coverage of this topic as well as various politicians’ announcements pertaining to this subject. All you need to know consists of just one sentence. Politicians are in charge of this issue.

It Really Is Different (Again) This Time

Despite the seemingly generational destruction to household and bank balance sheets and an entirely unprecedented fiscal and monetary policy reponse, investors would never know it given the market's reactions from the 2009 lows relative to its rally from the 2003 lows. Different this time? hhmmm... Worried about gold prices falling also? Doesn't look like we learned anything from the 'Debt Ceiling' debate either...

Frontrunning: December 18

  • Obama Concessions Signal Potential Bipartisan Budget Deal (BBG)
  • Cerberus to sell gunmaker after massacre (CNN)
  • With New Offers, Fiscal-Cliff Talks Narrow (WSJ)
  • Judge rejects Apple injunction bid vs. Samsung (Reuters)
  • U.S. policy gridlock holding back economy? Maybe not (Reuters)
  • President fears for Italy’s credibility (FT)
  • Struggles Mount for Greeks as Economy Faces Winter (WSJ)
  • Abe leans on BoJ in post-election meeting (FT)
  • Bank of Japan to mull 2 percent inflation target as Abe turns up heat (Reuters)
  • EU exit is ‘imaginable’, says Cameron (FT)
  • Mortgage Risk Under Fire in Nordics as Bubbles Fought (BBG)
  • Sweden cuts interest rates to 1% (FT)
  • External risks impede China recovery, more easing seen (Reuters)

Indirect Takedown In Today's 2 Year Auction Lowest On Record

While generally a rather boring auction, with the 0.245% When Issued coming right on top of the final High Yield, in addition to bringing the US another $35 billion closer to the debt ceiling breach, today's 2 Year auction was remarkable for one more thing: the Indirect Take down of 17.7% was the smallest such award on record, which in turn confirms that last week's trend of collapsing Indirect interest is persisting. Has the Chinese boycott of US paper now moved to all foreigners? Forget the 2 month delayed TIC data, and keep an eye on the weekly updated Fed Custodial holding data - if we see a drop in this week's update for TSY paper, it may be time to start getting concerned.