Debt Ceiling

The most anticlimatic news of the week is that, as everyone expected, DSK has resigned his post as IMF head. "“I want to devote all my strength, all my time, and all my energy to proving my innocence,” Strauss-Kahn said in a statement released by the Washington-based IMF four days after his arrest on sexual-assault charges. The fund said it will comment “in the near future” on the succession. Strauss-Kahn, 62, had been leading polls for France’s 2012 presidential election." And with his passage, the Feudal (as defined by El-Erian) "conclave" to pick his successor begins. Per Bloomberg: "European officials, who have picked IMF heads for 65 years under a deal that also gives the U.S. the lock on the top World Bank post, moved to retain the privilege, with Sweden backing French Finance Minister Christine Lagarde. Russia and South Africa have called for an emerging-market candidate, while some Asian policy makers suggested someone from their region." And now the specter of mutual assured destruction posturing shifts to selecting a desired candidate quickly. "Time is of the essence,” said Julie Chon, a senior fellow at the Washington-based Atlantic Council and former adviser to the U.S. Senate Banking Committee. “The longer the IMF allows the specter of uncertainty to hang over its leadership, the more exposed it becomes to the jittery actions of sovereign debt and foreign-exchange traders who have been speculating on what the leadership vacuum means for their portfolios."

The presumed default catastrophe driven by an inability to increase debt is precisely why it shouldn't be increased.

David Stockman has become every major news organization's (and CNBC) go to critic when it comes to bashing each stupid idea currently preoccupying the DC C-grade soap opera artists. Obviously, at the current time this would mean the budget deficit and the debt ceiling. On both those issues, Stockman's position is well-known. Today, when asked by Bloomberg's Tom Keene to compare the current deficit with that of Reagan's, Stockman spares no praise: "The essential distinction is that we had a clean balance sheet then - $1 trillion of national debt. Today we have $14 trillion in national
debt.  We have used up all the runway, so to speak. We
have piled our national balance sheet with so much debt that the
government is at the very edge of a huge solvency crisis that isn't
going to be addressed unless both parties dramatically change their
position, and I see no sign of it.  So we're going to have a gong show." Stockman also opines on the Monetary Roach Hotel that the US debt has become: "We have not had a two-way bond market.  We have had a rigged
market that has been dominated by not just the Fed, but all the central
banks.  Today over half of the $9 trillion in publicly-held debt is in
central bank vaults. I call it the 'Monetary Roach Hotel.'" Lastly, on a proposal endorsed by Zero Hedge back in the summer of 2009, namely the introduction of a Tobin tax for Wall Street's high-frequency casino: "Wall Street needs to have a transaction tax.  I know they won't like it.
A tax on every trade, a small amount, would go a long way to putting
money in the coffers." As usual: absolutely spot on recommendations, which have little to no chance of occurring before the final bond crash finally takes away the multiple-use heroin needle from both DC and Wall Street.

Take a moment and conduct a mini thought experiment. Imagine that you're from the future many hundreds of years from now, researching what life was like in the early 21st century. You pull up an archive of newspaper headlines from the year 2011 and read the following...

The only thing on today's light economic calendar is the FOMC’s April 26-27 meeting minutes, as the Fed proceeds to monetize bonds now that the debt ceiling has been reached. And meanwhile in Washington we get a debt limit discussion, two securitization-related events, and another energy vote that is expected to fail...

While it won't be a surprise to anyone at this point, seeing it in black on white is about as startling as hearing that one's credit card has been denied. Yesterday, following the settlement of all of last week's auctions, total debt held by the public increased by$51.4 billion, just as we had predicted, bringing the total to $9.717694 trillion. And with the total debt subject to the ceiling maxed out legally by $14.294, Tim Geithner reported a total of $14,293,975 MM, $25 million away from the ceiling. What was the plug? Why "Intragovernment Holdings" of course, which declined by $14.3 billion. As Tim Geithner warned yesterday this is now money held in retirement trust funds, which is now being directly sacrificed in order to keep the ceiling from breach: "I will
be unable to invest fully the portion of the Civil Service Retirement
and Disability Fund (“CSRDF”) not immediately required to pay
beneficiaries. In addition, I am notifying you, as required under 5 U.S.C. §
8438(h)(2), of my determination that, by reason of the statutory debt
limit, I will be unable to invest fully the Government Securities
Investment Fund (“G Fund”) of the Federal Employees’ Retirement System
in interest-bearing securities of the United States." And as expected, once the debt ceiling is raised, the accrued shortfall will be filled, meaning upon a debt ceiling hike, which will come some time in July, total debt will explode higher, surging by about $300 billion in a few days.

It was another manic Monday with lots to cover, setting the record straight on Bill Gross, China, and the commodity selloff...

Only The Bernank is fool enough to lend money to US at these rates but, then again, he's only lending us our own money so it's not like he himself is taking on any risk at all.

Equities have significantly underperformed credit the last two days but have plenty of room to go before they re-sync with any kind of value. Rotation under the surface points a risk-averse crowd seeking safety and not poised to BTFD.

I’ll come to the point. Despite talk of a recovery, the economy is badly underperforming. Growth last quarter came in at just 1.8 percent. We’re not even creating enough jobs to employ new workers entering the job market, let alone the six million workers who lost their jobs during the recession. The rising cost of living is becoming a serious problem for many Americans. The Fed’s aggressive expansion of the money supply is clearly contributing to major increases in the cost of food and energy. An even bigger threat comes from the rapidly growing cost of health care, a problem made worse by the health care law enacted last year. Most troubling of all, the unsustainable trajectory of government spending is accelerating the nation toward a ruinous debt crisis. This crisis has been decades in the making. Republican administrations, including the last one, have failed to control spending. Democratic administrations, including the present one, have not been honest about the cost of the tax burden required to fund their expansive vision of government. And Congresses controlled by both parties have failed to confront our growing entitlement crisis. There is plenty of blame to go around. Years of ignoring the drivers of our debt have left our nation’s finances in dismal shape. In the coming years, our debt is projected to grow to more than three times the size of our entire economy. This trajectory is catastrophic.

Stocks appear to have largely ignored the technical default of the US (fire and brimstone warnings from the tax expert notwithstanding), and instead appear to be tracking the EURUSD tick for tick, as every algo continues to be an inverse USD "hedge." Earlier today, Goldman's Thomas Stolper, who is danger of once again appearing rather foolish with his 1.50 EURUSD call (despite the pair rising as high as 1.4925 earlier), and has a stop at 1.35, released another note in which he said that while Europe may be insolvent, things are not really all that bad. "It appears FX markets and the Euro play the role of a safety valve
with investors buying protection in case the sovereign situation gets
notably worse...Having said this, apart from the Euro, things seem to stabilise
otherwise. Greek 2yr yields have been stable, slightly below 24 percent
for about 3 weeks and this despite no peripheral bond purchases by the
ECB within the SMP program in recent weeks. Greek stocks appear to be
stabilising at low levels as well, having been on a downtrend for
several months....we remain structurally constructive on cyclical assets, including
stocks and oil, which in turn suggests there could be further upside in
the Euro, induced from cross asset correlations." Ergo, GS is now betting the ranch on a dead cat bounce which will lead the market dominating robots to an IMF like release of buying programs soon enough. And with that we have now seen it all.

As GS summarizes the week ahead in politics, it will be "a somewhat quiet week, with the House on recess and energy legislation on the Senate floor; fiscal debates will continue in the background, with possible action in the Senate on competing budget plans starting later this week…" In other words, the soap opera on the debt limit will soon start getting very interesting.

It's official: the US credit card has officially been maxed out, just as we predicted on Wednesday, and throughout Q1 and Q2. The United States is expected to reach the legal limit on its debt later on Monday and will start dipping into federal retirement funds to give the country more room to borrow, a Treasury official said. As Reuters reports further, The U.S. Treasury will settle $72 billion in maturing bonds on Monday, which will push the country right up against its $14.294 trillion borrowing cap, the official said. To all those who thought only the insolvent government of Ireland will plunder pension funds, our condolences.

The Financial Times reported on Saturday that “the sharp drop in gold and silver prices has stimulated a surge in buying from India in a sign that consumers in the world’s largest gold-buying country retain faith in the decade-long bull story for precious metals.” Chhabil Jain, a Mumbai silver trader told the Financial Times that “demand for silver bars was going through the roof” and that “many vendors were starting to run low on stocks”. “People are booking incredible amounts of silver as they see the current drop in prices as a great opportunity to buy more ... most are buying for pure investment,” he added. Bloomberg reports this morning that silver was the most traded commodity in April.

Lots of data with Empire Index, Capital Flows and the Housing market index on deck, but the biggest news everyone will be waiting for is the predicted debt ceiling breach, which should be formalized at 4:00 pm today.