The farce is ending. Watch the Senate vote on the debt ceiling live below. The vote is expected to pass comfortably.
And like that the Congressional circus is over 269 to 161. Market reaction? ES sells off 5, then rallies 3, and now is selling off again. Next up - the Senate but that is a given. So now that we know that America is not going to file for bankruptcy tomorrow on we go to the economic collapse.
Two weeks ago we presented a chart that shows the uncanny correlation between the debt ceiling and the price of gold. Now that we know the final amount of the next debt ceiling hike, somewhere in the $2.5 trillion ballpark, it allows us to extrapolate where gold will end up as a result of the debt ceiling hike which will likely be voted into law at 7pm PDT. A simple correlation rule of thumb allows us to predict that gold will be at $1,950 by the end of the year if it simply retains it close correlation to the debt ceiling. Should Bernanke announce that he will additionally need to monetize some or all of this incremental debt amount, we anticipate that gold will be well over $2,000 by the end of the year, courtesy of yet another round of accelerated dollar debasement, which also means that real gains in US stocks will be negated courtesy of the devaluation of the currency in which they are priced. The same, however, does not apply for gold, which with every passing day is priced in nothing but itself.
Treasury To Issue $331 Billion In Debt In Fiscal Q4, $660 Billion Gross, Expects Debt Ceiling To Be RaisedSubmitted by Tyler Durden on 08/01/2011 15:26 -0400
Tim Geithner has released his projection of expected borrowing needs for the final fiscal quarter of 2011 (ending on September 30). But before that, we learn that while back on May 1 the Treasury had expected to raise $142 billion in marketable debt in Q3, instead if raised $190 billion, with the difference going primarily to build up the EOQ cash balance which instead of being $95 billion, was $137 billion, obviously due to the threat of the debt ceiling breach. That threat however has not prevented the Treasury from assuming that the debt ceiling will be raised without a hitch, and it now predicts issuing $331 billion in net marketable debt issued in Q4, $74 billion less than the projection from May 1 (and further sees another $285 billion in borrowing needs in Q1 2012). In other words, if there is no debt ceiling deal, the Treasury will be $616 billion short in revenues over the next 6 months. Of course, the numbers net out the massive issuance that has to hit the market to fund the "disinvested" government retirement funds and various other mechanism that were used to prevent the Treasury from running out of cash, which amount to about $300 billion primarily in the form of short-term bills that matured and were not rolled over to make space for marketable debt issuance. In other words, gross issuance in the next quarter will be about over $660 billion. This is just a little under the total debt issued in the last 3 quarters (due to the May 16th debt ceiling breach)! And people think the Treasury can raise this money without the Fed monetizing at will? Fascinating.
There's a drunken debt party going on right here...
With the debt ceiling "compromise" deal still in flux, although at least according to the FX market expected to be approved shortly, despite the protestations of liberal democrats (one wonders if Obama will accuse said group of hostage tactics much as he accused conservative republicans of the same last week), below is what the current shape of the proposed deal looks like courtesy of the WSJ's Washington Wire blog.
This could very well be another red herring like the NYT article from two weeks ago that proved to be a dud, but for what it's worth according to ABC's Jonathan Karl, the White House and the GOP have just reached a tentative deal as follows...
It's time for your daily teleprompted brainwashing. Frontal lobes: out.
Giant Banks Lobby to Raise the Debt Ceiling and Slash Public Benefits ... So They Can Keep Sucking at the Public TeatSubmitted by George Washington on 07/28/2011 14:30 -0400
The debt crisis might be real ... I've been warning about it for years.
The potential downgrade to America's credit is real ... I've been warning about that for years, as well.
But the way that the rating agencies and Wall Street are approaching the debt ceiling debate is a scam.
The latest meaningless headlines from White House spokesman Jay Carney:
- CARNEY SAYS NO REASON TO REPEAT DEBT DEBATE LATER THIS YEAR Except for retaining Obama's job of course
- CARNEY SAYS AMERICAN PEOPLE WANT COMPROMISE ON DEBT LIMIT Preferably the democrat compromise which saves a few quadrillion by not launching war on Mars?
- And sure enough there it is: CARNEY SAYS REID PROPOSAL REPRESENTS COMPROMISE
- CARNEY SAYS SENATE WILL REJECT BOEHNER DEBT PROPOSAL
- CARNEY SAYS TREASURY WILL EXPLAIN HOW IT WILL MANAGE FINANCES
- CARNEY SAYS BOEHNER PLAN VOTE WILL NOT LEAD TO COMPROMISE
- CARNEY SAYS CONGRESS `CONTROLS OUR FATE' ON DEBT LIMIT
- CARNEY SAYS ONGOING DEBATE HAS HAD NEGATIVE IMPACT ON ECONOMY
- CARNEY SAYS `NO QUESTION' BOEHNER PROPOSAL IS `POLITICAL ACT'
Bottom line: algos now using every appearance of the word "compromise" in a headline as buying trigger.
For the record, I still believe that there will not be a breach of the debt ceiling and no overt default for the US. Things will be worked out in the nick of time, like they always are. However, the media is full of articles wondering about what ‘investors’ might do in response to a US default and/or credit downgrade. What will happen to Treasury prices? Will they go down as investors dump them en masse in response to a credit downgrade forcing interest rates to climb? It’s a big question and the most likely answer is “No, not really”. Partly because these so-called investors have been well-conditioned to believe that another bailout is always around the corner, but mainly because they have nowhere to go. The big money is trapped... The Treasury market is the largest and most liquid in the world, by far. For many big money funds there really aren’t any realistic options other than the Treasury market, and this present reality will limit the market reaction to any downgrade.
In the past week, almost every single sellside bank and their mother has released a report on "what happens to the US if there is a [default|debt extension|compromise|zombie apocalypse (if one believes Tim Geithner)]. Sure enough, here is Credit Suisse with its three scenarios. This is notable as it presents the binary outcomes for the stock markets as a result of what develops in Congress. The scenarios are: i) debt ceiling extension (market up 3%); ii) debt ceiling not extended (market down 15%); iii) default (market plummets by at least 30%). Of course, if there is really is a default it is game over for equity markets but that is a moot point. Either way, any report that has zero mention of the word gold when contemplating the impact of a US default goes straight into the garbage. Such as this one.
Some have said that the Fed and Washington want the value of the dollar to plummet so the nation’s debt may be repaid in cheaper dollars. Perhaps all this debt ceiling mess is just part of the grand design? If so, then pretty soon, these Art of Defaced US Dollars would be worth more than the real dollar.
Boehner Releases Revised Plan: To Cut $91.7 Billion Each Year For A Decade, Buys 4 Months Before Next Debt Ceiling HikeSubmitted by Tyler Durden on 07/27/2011 18:10 -0400
The epic revision in the just revised Boehner plan is to cut a grand total of ... $91.7 billion per year for 10 years (back-end loaded of course: 2012 will see just $22 billion in cuts - can't have any real cuts too early or else). The spin is that this is sufficient because the $917 billion in cuts is more than the proposed $900 billion debt ceiling hike, so all shall be well. Of course that is only part one of the two-part debt ceiling hike process. The next step is a $1.8 trillion cut to "protect programs like Medicare and Social Security from bankruptcy." The problem is that Boehner continues along the path of a two-step debt hike, a formulation that Obama will never agree to, since it effectively guarantees him no-reelection chance, as the last thing the people will want is the same bickering as we are experiencing every day again some time in 2012, when the current $900 billion in incremental debt capacity runs out. And actually, with the US debt already $300 billion below trendline and with the government's two pension funds already plundered by a like amount (which means they have a net IOU position), it means that the Boehner plan really buys only $600 billion of dry powder. At a burn rate of $150 billion a month, this means the first step of the Boehner plan buys precisely 4 months before the debt ceiling has to be raised again! Oh yes, this plan also guarantees at least a one notch downgrade to the US debt, with more notches coming up before the end of the year when this whole farce is repeated.
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