Gold, The Debt Ceiling, And The Fed

We are now into a second week of a partial Federal Government shut-down, which is causing considerable concern, centred on the Government’s ability to finance its debt and pay interest without a budget agreed for the new fiscal year. Should this continue into next week and beyond, the Fed will have to enter damage-limitation mode if the Treasury cannot issue any more bonds because of the separate problem of the debt ceiling. With gold at an extreme low in valuation terms, current events, whichever way they go, seem unlikely to drive it much lower. A wise man perhaps should copy the Asians, who know a thing or two about paper currencies, and are buying gold in ever-increasing quantities.

CME Hikes E-Mini And Big S&P, Nasdaq And Dow Jones Margins

Following three consecutive and increasingly more severe margin hikes by Interactive brokers (from Monday, Wednesday and Thursday), it was only a matter of time before the CME joined the party. And even if CME had hiked E-mini margins for all of two or three times since Lehman, whether it is due to recent surge in volatility or for whatever other reason, it had no problem doing so after the close on Friday, when moments ago it hiked initial and maintenance margins on the key market moving futures contracts including the E-Mini and big S&P, Nasdaq and Dow Jones, as well as pages of other contracts (see below) anywhere between 8% and 16%.

Guest Post: Does The US Have A "Sane" Government?

The dollar is the world’s go-to currency. But for how much longer? Will the dollar’s status as the only true global currency be irreparably damaged by the battle in the US Congress over raising the federal government’s debt ceiling? Is the dollar’s “exorbitant privilege” as the world’s main reserve currency truly at risk? Sane governments do not default when they have a choice – especially not when they enjoy the “exorbitant privilege” of issuing the only true global currency. We are about to find out whether the US still has a sane government.

Consumer Confidence Misses Expectations; Slumps To Lowest Since January

With Gallup indicating the biggest 3-week decline in economic confidence since Lehman, it is hardly a surprise that UMich consumer confidence slumped to its lowest since January having fallen 3 months in a row. This is the 2nd monthly miss in a row - and biggest 3-month drop in 25 months -  and appears to confirm the cyclical turn we have been discussing for a few months. And remember, the exuberance of multiple expansion relies on the ever-rising confidence of the people to lift it back to nebulous heights.

The Biggest Banking Disconnect Since Lehman Hits A New Record

As regular readers know, the biggest legacy disconnect in the US banking system is the divergence between commercial bank loans which most recently amounted to $7.32 trillion, a decrease of $9 billion for the week, and are at the same the same level when Lehman filed for bankruptcy having not grown at all in all of 2013 (blue line below), and their conventionally matched liability: deposits, which increased by $60 billion in the past week to $9.63 trillion, an all time high. The spread between these two key monetary components - at least in a non-centrally planned world - which also happen to determine the velocity of money in circulation (as traditionally it is private banks that create money not the Fed as a result of loan demand) is now at a record $2.3 trillion.

Hong Kong Raises Haircut On Treasury Bill Collateral Over Debt Default Fears

While there is hope that DC will engage in its favorite, can-kicking activity any minute and if not resolve then at least push back the funding and debt ceiling stalemate by a few weeks, the reality is that without a deal in seven days, there may be no cash to pay down maturing Bills starting with the October 17 issue whose yield soared to nearly 50 bps yesterday. The reason for the capitulation as was revealed yesterday, is that various money market funds such as Fidelity's have been selling all paper around the X-Date. This morning the contagion surrounding the use of Bills as collateral has crossed the Pacific, following news that the "Hong Kong’s futures and options market operator will require traders to put up more collateral when using some Treasury bills to back their positions, citing concern that the U.S. is at risk of a default." In other words, as we forecast on Monday, the debt-ceiling confusion in cash-land has now openly engulfed the repo market, which only makes the states of a debt deal that much higher. Because if the repo, $2.5 trillion money market, and subsequently, the entire $80 or so trillion custodian market freeze up, what happens next will make Lehman seem like a quiet walk in the park.

Pivotfarm's picture

As Warren Buffet openly states that he believes that a default on US debt will be catastrophic and that lawmakers in Congress need to get their act together and get the federal government back to work by passing the budget we might well wonder if it’s just for show or if he really believes that.

Meet The 28 Other Money Market Funds That Broke The Buck After (And Before) Lehman

Everyone knows that one of the immediate catalysts of the near systemic collapse in the aftermath of the Lehman bankruptcy, one which set in motion the sequence of events that led to Bernanke increasing the Fed's balance sheet fourfold, was when the Reserve Primary Money Market Fund announced on September 16 that the value of its shares had dropped to 97, sparking an epic run on money market funds, and requiring an immediate bailout first from its sponsor, and then the Federal Reserve and US government. What is far less known is that the Reserve Primary Fund was just one of many money market funds that got locked out and was in danger of collapse following the decision to let Dick Fuld hang. How many? According to a research note released by the NY Fed itself, at least 28 more!

Phoenix Capital Research's picture

Remember, every single Treasury and T-bill out there is utilized as collateral for millions of Dollars worth of trades. So if the big financial institutions begin to refuse to accept some US debt as collateral based on the perceived risk of a deb ceiling debacle there could quickly be capital call in the market similar to what happened when Lehman failed.

Fed Admits It Is Caught In A Reflexive Catch 22

"... the announcement of a reduction in asset purchases at this meeting might trigger an additional, unwarranted tightening of financial conditions, perhaps because markets would read such an announcement as signaling the Committee’s willingness, notwithstanding mixed recent data, to take an initial step toward exit from its highly accommodative policy...the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market...  it was noted that if the Committee did not pare back its purchases in these circumstances, it might be difficult to explain a cut in coming months, absent clearly stronger data on the economy and a swift resolution of federal fiscal uncertainties.... postponing the reduction in the pace of asset purchases would also allow time for the Committee to further discuss and to implement a clarification or strengthening of its forward guidance for the federal funds rate, which could temper the risk that a future downward adjustment in asset purchases would cause an undesirable tightening of financial conditions."

12 Ominous Warnings Of What A US Default Would Mean For The Global Economy

As we have discussed previously, the "partial government shutdown" that we are experiencing right now is pretty much a non-event - especially with the un-furloughing of The Pentagon.  Yeah, some national parks are shut down and some federal workers will have their checks delayed, but it is not the end of the world.  In fact, only about 17% of the federal government is actually shut down at the moment.  This "shutdown" could continue for many more weeks and it would not affect the global economy too much. On the other hand, if the debt ceiling deadline (approximately October 17th) passes without an agreement that would be extremely dangerous. A U.S. debt default that lasts for more than a couple of days could potentially cause a financial crash that would make 2008 look like a Sunday picnic. If a debt default were to happen before the end of this year, that would bring a tremendous amount of future economic pain into the here and now, and the consequences would likely be far greater than any of us could possibly imagine.

US Treasury Default Risk Now The Same As JCPenney's Was In July

The cost of protecting against a default on US Treasuries for one-year has surged to 60bps this morning. This is the highest since the Debt-ceiling debacle in 2011 and worse than Lehman. The 1Y cost is the highest relative to the 5Y cost ever. However, many people look at the 60bps and shrug it off as de minimus, after-all, JCPenney trades at 1200bps and is still alive. This is a mistake. The price of protection for US sovereign debt depends on recovery expectations and the EURUSD exchange rate expectations. Based on current levels, USA CDS imply a 5.9% probability of default - the same as JCPenney in July.