International Monetary Fund
The debt debate has been going on all summer, a 2 months and running theatrical experience of court jesters parading about while the United States economy teeters on the edge. On both sides of the aisle have been ridiculous solutions that are showing the world daily, America is willing to sacrifice its citizens for the profits of the corporations. The problem is, why will the rest of the world continue to support American multi-nationals, when they have their own. As dollar supremacy begins to wane, and oil prices rise as the dollar’s value descends, maybe it is time to talk about the horrendous policy decisions of these politicians in hopes it opens up a way to point us in the correct direction. Otherwise, when August 2nd comes and the deal is passed anyway, cause it has all just been a “watch this hand” moment, we might find ourselves not understanding why the Social Security check seems meager compared to before.
One big question is what will we do if the data continues to deteriorate? Another stimulus package seems like it would be hard to get done given we allegedly just agreed to keep spending in check. After the latest bits of data, even the most staunch supporters of QE must have some doubts as to its effectiveness. The Bernanke Put and the Obama Put may be difficult to implement going forward. The market has relied so much on government intervention that it will be interesting to see how strong it can be if investors lose faith in the government's ability to provide a strong backstop on any bit of weakness.
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Essentially, growth is not the problem for China, but nor is it the solution.
Amid Debt Battle, More Americans Say Economy Getting Worse (Gallup)
Treasury Faces Pressure to Detail Backup Plan (WSJ)
Debt-Increase Dispute Tests Boehner’s Power (Bloomberg)
U.S. Economic Growth Probably Slowed (Bloomberg)
IMF Board Holds Informal Board Meeting On EU's Greek Financing Deal (WSJ)
Why are we in this debt fix? It’s the elderly, stupid (WaPo)
France Seeks Rapid Adoption of Greek Bail-Out (FT)
IMF Chief Warns America on “Exorbitant Privilege”, Brings Back Flashbacks To de Gaulle And The London Gold PoolSubmitted by Tyler Durden on 07/29/2011 06:57 -0500
New IMF Chief Christine Lagarde has warned overnight that the global reserve currency status of the dollar is at risk due to the “worrisome” US debt debate. Failure by the United States to raise the debt ceiling would likely lead to a decline in the U.S. dollar and raise "doubts" among those using it as a reserve currency, Lagarde said. "One of the consequences could be a decline of the dollar as a reserve currency and a dent in people's confidence in the dollar." The U.S. currency has had an “exorbitant privilege because it was the reserve currency that most central banks had,” Lagarde said in an interview on PBS’s “Newshour” yesterday. “If there was a dent in this exorbitant privilege and the confidence that most people have towards the dollar, it would probably entail a decline of the dollar relative to other currencies.” The use of the “exorbitant privilege” phrase by the former French finance minister is important and not an accident. It echoes the former French President, Charles de Gaulle’s comment regarding the dollar being “America’s exorbitant privilege” at a landmark press conference in 1965 that led to the end of the London gold pool or government cartel which attempted to keep the gold price fixed at $35 per ounce.
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.
Markets witnessed a risk-averse sentiment in early European trade following lack-lustre European corporate earning releases from the likes of Credit Suisse, Telefonica, Siemens, France Telecom, among many others, together with concerns surrounding a lack of progress in the US debt negotiations. Renewed market talk that the Italian finance minister, Tremonti, is set to resign further dented sentiment, although the rumour was later denied by the Italian government. The negative news flow resulted in European equities to trade lower, whereas Bunds and Gilts traded higher, with particular widening seen in the Italian/German 10-year government bond yield spread. Bunds did come under some pressure following market talk of the ECB buying in Eurozone peripheral debt, however that failed to provide any sustainable appetite for risk. Elsewhere, strength was observed in safe-haven currencies including USD, CHF and JPY, whereas the EUR traded under pressure for a vast majority of the European session. Moving into the North American open, markets look ahead to key economic data from the US in the form of jobless claims, and pending home sales reports. In fixed income, USD 29bln 7-year Note auction is also scheduled for later in the session. Markets will also keep a close eye on US corporate earnings from the likes of ExxonMobil.
- Fed under Fire over Default Talks (FT)
- Debt-Crisis Vote Goes Down to Wire in House (WSJ)
- U.S. Rating Rests On S&P’s View of Washington (Bloomberg)
- Why the Debt Crisis Is Even Worse Than You Think (BusinessWeek)
- Japan's Industry Set for Rebound (WSJ)
- Warren Buffett Is Wrong On Taxes (WSJ)
- After the debt-ceiling standoff is resolved (blogger extraordinarie Maddy El-Erian)
- Banks Bracing for Downgrade See Little Panic (Bloomberg)
- China Regulator Targets Nonbank Entities (WSJ)
- How to Cut Taxes, Boost Revenue (RCM)
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We view the proposed restructuring as one that would amount to a "distressed exchange" under our criteria because, based on public statements by European policymakers, the debt exchange or rollover is likely to result in losses for commercial creditors, and the objective of the debt exchange/rollover is to reduce the risk of a near-term debt payment default. Under our criteria, we characterize a distressed borrower as one that would--in the absence of debt relief--fail to pay its debt on time and in full. While no exact date has been announced to initiate Greece's debt restructuring, we understand that it will commence in September 2011 at the earliest. Our recovery rating of '4' for Greece remains unchanged, indicating an estimated 30%-50% recovery of principal by bondholders.
Relevant news by www.thetrader.se
- IMF Chief Raises Idea of Seeking More Cash (WSJ)
- US Money Market Funds Build Liquidity (FT)
- Interbank Loan Probe Focuses on Yen Rates (FT)
- Watchdog Sees Financial Weak Spots (WSJ)
- China’s 29% Jump in Industrial Profit to Spur Growth by Fueling Investment (Bloomberg)
- Shanghai to Step Up Probes of Home Prices (Bloomberg)
- Lessons From the Malaise (NYT)
- Hurtling toward economic chaos (LA Times)
- Who Elected the Rating Agencies? (WSJ)
Morgan Stanley has released its comprehensive quarterly metals outlook update for Q3, which while traditionally furiously wrong in its price targets for the assorted metals under consideration, represents one of the best reference materials for the underlying fundamentals behind each hard asset including base and precious metals, steel and bulk commodities, mined energy, rare earths, even such arcania as zircon and titanium dioxide. We suggest readers avoid the conclusion by Morgan Stanley which ultimately will be based on the firm's prop trading bias, and instead focus on the key supply/demand mechanics in any given product. For the sake of reference, we break down MS' outlook on gold, silver due to the special place these hold in the modern geo-political and voodoo economic discussions.
Today's "Breakfast with Dave" from David Rosenberg is a veritable chartapalooza, the inspiration for which appears to have been the "reversion to the mean" theme presented in yesterday's IMF chartpack, presented here. There is, however, one section that is unique: that dealing with gold, and more specifically, why in Rosenberg's opinion gold is still quite cheap and why it is trading at about 50% of what the Gluskin Sheff strategist would consider bubble value. As Rosie says: "we have liked gold for a long time and we remain very constructive. It is more than just a hedge against recurring bouts of global financial volatility. The growth rate of gold production is roughly stagnant while the growth rate of fiat currency in most parts of the world continues to accelerate. It's all about relative supply curves - the supply curve for bullion is far more inelastic than is the case for paper money. It really is that simple." Indeed it is: when one strips out all the fancy talk, mumbo jumbo, and syllogistic gibberish out of modern economic theories, be they neoclassical Keynesianism (or, god forbid, just classical), chartalism (sorry, infinite debt-money issuance won't work: in two years we will all see why), or any other attempts to reduce a broken imbalance in supply and demand propped up by the "invisible hand", it is all about supply and demand. Sure enough, one thing we have an infinite supply of is fiat money, and the resulting debt necessary to "back it up." As for demand, well that's another matter. With gold: it is just a little inverted.