Gold fell $4.00 or 0.24% in New York yesterday and closed at $1,654.90/oz. Silver climbed to $31.30 in Asia before it eased off to $30.73 and finished with a loss of 1.09%.
Early in the 4th century, Emperor Diocletian issued an infamous decree to control spiraling wages and prices in the rapidly deteriorating Roman Empire. As part of his edict, Diocletian commanded that any merchant or customer caught violating the new price structures would be put to death. This is an important lesson from history, and a trend that has been repeated numerous times. When nations are in terminal economic decline, governments will stop at nothing to keep the party going just a little bit longer. I thought of Diocletian’s desperation a few days ago when I read about the recent sanctions imposed on US rating agency Egan-Jones. Given that all this is happening at a time when Congress is voting to suspend the debt ceiling entirely, these actions are the clearest sign yet of just how desperate the government has become. Could the warning signs be any more obvious?
It is refreshing to see that the SEC has taken a much needed break from its daily escapades into midgetporn.xxx and is focusing on what is truly important, such as barring outspoken rating agency Egan-Jones from rating the US and other governments. From the SEC: "EJR and Egan made a settlement offer that the Commission determined to accept. Under the settlement, EJR and Egan agreed to be barred for at least 18 months from rating asset-backed and government securities issuers as an NRSRO. EJR and Egan also agreed to correct the deficiencies found by SEC examiners in 2012, and submit a report – signed by Egan under penalty of perjury — detailing steps the firm has taken." Hopefully the world is no longer insolvent in July of 2014 when this ban runs out.
Call it "X Date", call it "D(elinquent/efault)-Day", call it what you will: it is simply the day past which the US government will no longer be able to rely on "extraordinary measure" to delay the day of reckoning, and will be unable to pay all its bills without recourse to additional debt. It is not the day when the US defaults, at least not defaults on its debt. It will begin "defaulting" on various financial obligations, such as not paying due bills on time and in full, but since this is something Europe's periphery has been doing for years, it is hardly catastrophic. It will hardly be pleasant, however, as some 40% of government obligations go unfunded, and the US is converted to a walking, talking bankruptcy as unsecured claimants rush to demand priority, as the market, long living on hope and prayer, realizes that only now is it truly without a cliff under its feet, and most importantly, as suddenly $500 billion in maturing debt between February 15 and March 1 finds itself in a very, very precarious position.
With precisely one month left until the early bound of the debt ceiling crunch and a possible US government shut down and/or technical default, and with M.A.D. warnings from the president and treasury secretary doing nothing to precipitate a sense of urgency (which will not arrive until there is a 20% market drop, so far consistently delayed but which will eventually happen), here comes the most toothless of rating agencies, French Fitch which somehow kept its mouth shut over the past 18 months, when US debt rose by over $2.1 trillion and debt to GDP hit 103%, shaking a little stick furiously, no doubt under guidance by its corporate HoldCo owners: French Fimilac SA.
The debt limit was formally reached last week, and we expect the Treasury's ability to borrow to be exhausted by around March 1 (if not before) and while CDS are not flashing red, USA is at near 3-month wides. Like the previous debt limit debate in the summer of 2011, the debate seems likely to be messy, with resolution right around the deadline. That said, like the last debate we would expect the Treasury to prioritize payments if necessary, and Goldman does not believe holders of Treasury securities are at risk of missing interest or principal payments. The debt limit is only one of three upcoming fiscal issues, albeit the most important one. Congress also must address the spending cuts under sequestration, scheduled to take place March 1, and the expiration of temporary spending authority on March 27. While these are technically separate issues, it seems likely that they will be combined, perhaps into one package. This remains a 'very' recurring issue, given our government's spending habits and insistence on its solvency, as we laid out almost two years ago in great detail.
Having passed the 'easy-do-nothing' bill that created a 5% uplift in US equities, D.C. have left the most difficult set of issues for last: entitlement reform, which Republicans have said they will insist upon in return for raising the debt limit, and tax reform, which the President has said he will insist on in return for entitlement reform. The upshot is that reaching an agreement on the next debt limit increase could be at least as difficult as the last increase in August 2011. As Goldman notes, the next debate on the debt limit will be the fifth "showdown" on fiscal policy in the last two years. Adding further angst, in the summer of 2011 politicians had started the debate some three months prior to the real deadline. This time it appears that nothing serious will happen until the 11th hour as usual, meaning far more last minute volatility. However, one new twist to this now familiar routine may come from the rating agencies, which look likely to be more active in 2013 than they have been since 2011.
Moody's has stepped forward with the first warning shot across the bow that:
- *MOODY'S: MORE MEDIUM TERM ACTIONS MAY BE NEEDED TO SUPPORT Aaa
Has contradicted itself (from September) on the debt-ceiling breach; and warns that while the deal 'mitigates' some fiscal drag, it does not remove it. To wit: the IMF piles on:
- *IMF SAYS `MORE REMAINS TO BE DONE' ON U.S. PUBLIC FINANCES
- *IMF SAYS U.S. DEBT CEILING SHOULD BE RAISED `EXPEDITIOUSLY'
Full statements below.
- Grand Bargain Shrinks as Congress Nearing U.S. Budget Deadline (BBG)
- Budget Talks Cloud Outlook (WSJ)
- Obama to cut vacation short to deal with fiscal crisis (Reuters)
- Stop-gap fix most likely outcome of "fiscal cliff" talks (Reuters)
- Aso Named Japan’s Next Finance Chief as Abe Primes Fiscal Pump (BBG)
- Aluminum Glut No Bar to Gains as Barclays Says Sell (BBG)
- Morsi signs controversial charter into law (FT)
- Children, many ill, would be victims of Russia ban on U.S. adoption (Reuters)
- Turkey Central Bank Unveils New Tool to Limit Bank Debt Risk (BBG)
- Refi Program Expansion Eyed (WSJ)
- India Joins Indonesia Facing Heightened Policy Dilemma (BBG)
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.
UPDATE: GBP at lows of day - moar QE?
UK's Chancellor of the Exchequer George Osborne delivered his Autumn 'Budget' Statement this morning and, as Citi notes, while he signaled that the struggling still-AAA nation is on course to achieve its cyclically-adjusted surplus on a rolling five-year horizon; the government now expects that net public debt/GDP ratio will start falling only in 2016/17 - a year later than originally planned. Mr Osborne attributed the softening in the debt/GDP target to growth underperformance in the UK and the Eurozone; leaving Moody's decision in early 2013 on the AAA rating still in jeopardy (the rating agency put the UK on negative watch and warned the coalition government to refrain from abandoning its ambitious fiscal austerity targets). GDP forecasts have been lowered, with a 0.1% contraction now seen this year (from a +0.8% forecast in the March budget). The 2013 and 2014 forecasts are also lowered to 1.2% and 2.0%, from 2.0% and 2.7% respectively. For now, cable (GBPUSD) has rallied back off knee-jerk reaction lows to around unchanged.
EU Allowing Rating Agencies To Be Sued For Errors Should Backfire Spectacularly - Cause Massive Downgrades Across The Continent!Submitted by Reggie Middleton on 11/30/2012 12:59 -0400
If common sense was truly common, the rating agencies should get the shit sued out of them unless & until they start downgrading EU countries en masse, and quite quickly. Read this & you'll have all you need to start suing! Hmmm, the best laid plans....
This EU juggler simply has too many balls in the air...
Greece? Sorry, what’s with Greece? French downgrade. Unexpected, but then again not that much. So what? Fiscal Cliff? As no one speaks about it, it can be ignored. Risk? If it doesn’t fall, it has to rise.
"Rise To The Occasion" (Bunds 1,43% +2; Spain 5,7% -9; Stoxx 2518 +0,4%; EUR 1,282 +10)
- More QE could distort rather than deliver (FT)
- Soros Buying Gold as Record Prices Seen on Stimulus (BBG)
- EU Leaders Face Greek Aid Gap in Brinkmanship With IMF (BBG)
- Weak data point to bigger economic drag from Sandy (Reuters)
- Shirakawa Pushes Back With Criticism of Abe Unlimited Easing (BBG) But... but... Bernanke??
- French Downgrade Widens Gulf With Germany as Talks Loom (BBG)
- Japanese Poll Shows LDP Advantage Ahead of Election (WSJ)
- BOJ in the Balance as Next Government Picks Top Posts (BBG)
- Exchanges Get Closer Inspection (WSJ)
- Greece edges closer to €44bn bailout (FT)
- Japan Government to Spend 1 Trillion Yen on Next Stimulus (BBG)
- China’s Richest Woman Divorces Husband, Fortune Declines (BBG)