Citi On The Debt Ceiling: "First Complacency, Then Horror"

Tyler Durden's picture

While we will shortly present some practical perspectives on what the debt ceiling fiasco due in just about a month, means practically for the economy (think sequester, and another 1% cut to US GDP, which when added to the payroll tax cut expiration's negative 1.5%-2% impact on 2013 GDP, and one wonders just how the US will avoid recession in 2013), here is a must read perspective from Citigroup on how the markets may and likely will react to what is shaping up to be another "12:30th hour" (the New Normal version of the eleventh hour) debt ceiling resolution, which is now under a month away.

From Citi's Steven Englander:

Debt ceiling --- first complacency, then horror

Asset market markets are likely to ignore the debt ceiling till the last minute, or even later, and then react on panic if it gets breached. For FX this means that the risk on trade for EM and G10 risk-correlated currencies may have a month or six weeks to go before there is any indication that FX investors are even aware of what is going on in Washington.

The reason is that the past three fiscal driven sell-offs have had increasingly little market impact. The July 2011 debt ceiling crises + downgrade led to more than 15% drop in US equities (Figure 1, note that EUR was well north of 1.40 till late in August, so this wasn’t a manifestation of the euro crisis). Right after the November 2012 election we had a bout of fiscal cliff worries that gave us a 5% correction, but when talks broke down in late December, equities barely budged. We suspect investors in FX and other markets have become conditioned to last minute resolutions to US fiscal crises and are increasingly jaded with respect to the political process that will generate the solutions. Hence the tendency will be to hold on to risk even longer on the view that ‘don’t worry, something will turn up’, just as it has in the past.

We think this means that 1) risk will sell off less approaching the debt ceiling deadline; 2) currency investors will hold on to risk in spot but buy tail risk hedges; and 3) there will be a wholesale cutting of positions in FX and other asset classes, if the debt ceiling is breached. So it may looks as if the debt ceiling breach is not worrying asset markets, but it means that investors are banking on the chestnuts being pulled out of the fire. If they are not pulled out, positions go up in smoke.

To be clear, it still seems most likely that there will be a short-term extension of the debt ceiling accompanied by automatic sequesters, but if not the consequences will be more severe than will seem to be the case in the run up.

Figure 1.US asset markets become less responsive to fiscal crises:

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
brewing's picture

the same can be said about gun control - the horror...

SeverinSlade's picture

Citi clearly doesn't appear concerned with the US sovereign downgrades that would follow should Congress fail to actually cut spending and move toward reducing the annual deficit.

I guess another US downgrade is bullish for equities?

THX 1178's picture

Everything is bullish for everything.

Zer0head's picture

The newest voting member of the DoveFED on BBG with Sara Egoisen from Boston President Rosengren earlier today


this is a very very scarey interview

Jake88's picture

WTF? nothing new there

knukles's picture

Do the pols get more coke and hookers for the debt ceiling, tax debates or gun control?
Go figure.

So in reality, Citi oughta write about Non-Seasonal Adjusted Coke and Hooker Effect on Redacted Imaginary Data and News-Worthy Propagandable Important Unimportant Shit of the Day..

nantucket's picture

TXHX 1178: "Everything is bullish for everything."

Yes, and bearish is the new bullish, which is also the new black (in fashion terms). 



GetZeeGold's picture



Need to have a press conference surrounded by children wearing signs that say "Thanks A-holes".

ZeroAvatar's picture

Look.....politicians don't have TIME to worry about no stinkin' debt ceiling.......they got a GUN GRAB in process...what the hell is more important?

Jason T's picture

I remember, I'll never forget, seeing a news report interviewing people in Iraq at a cafe smoking cigaretts and drinking coffee or whatever the day before we attacked them... everything seemed so normal for a country that was to go down in flames.  


Humans want normalcy.. we need it to feel ok.  We're numb I think on this debt ceiling stuff.. but this time, I do think the taxes are going up and cuts are a coming to prevent those bond yields from moving higher.   They will evenutally do so which is why we're fucked. 

buzzsaw99's picture

Risk my ass. No. Such. Thing. The churn that banks are hoping for will not materialize. No-one believes them and no-one is going to sell.

AccreditedEYE's picture

This is 100% spot on. Debt ceiling taught people that this market CANNOT be killed. They got everyone all up in arms back then and...surprise! nothing happened! Market proceeded to explode higher. Until Ben says we are only printing 25 billion, we go higher... much, much, much higher. In BTFD We Trust...  to be followed by, In Gold We Trust.

Dr. Engali's picture

I disagree. This market will never touch the old highs, unless credit is extended to the consumer by the banks. That won't happen in the near future. Ben can buy up all the shit he wants, but until the money creators start lending you have to trade this" market".

AccreditedEYE's picture

We shall see Good Doctor... They've lifted it for 4 years without the public so I see no need for the public to be involved now.

NoDebt's picture

Which old highs are we talking about, good Doctor?  As long as you're not talking about the Nasdaq highs during the .com bubble I might want a piece of this action myself.

In other news..... in case nobody has noticed, the market only starts to care about these cliffs and ceilings beginning 1 week before the deadline.  Go check the charts if you doubt.  So we're cool for another 3 weeks. 

It's the MAGNITUDE of that caring that differs. 

Debt Ceilings are the most potentially damaging since any default on US debt would be the equivalent of instantaneous nuclear annihilation of most of the the world's financial entities.  Like in Ghostbusters when Egon told Ray "don't cross the streams." This is the one that gets bankers and the markets peeing down their leg in fear even if it's only a credible THREAT, not yet actual.

Cuts in spending (the sequester) rank lower, but still it's somebody's manna from heaven that's being turned off, so it matters. 

Increases in income taxes (what just happend a couple weeks ago) barely make a ripple because only schmucks pay income taxes anyway.

buzzsaw99's picture

imo the consumer is irrelevant, fundamentals are irrelevant. multiple expansion if need be but higher we go.

mayhem_korner's picture



First complacency...then horror.  I thought this was referring to federal employees with respect to Timmay's raiding of their pensions. 

fonzannoon's picture

I listened to Egan Jones last night pondering the possibilities of a U.S upgrade after the debt ceiling situation is "resolved" with CNBS.  This is so far gone it's not worth putting thought into. Don't listen to what they say, watch what they (ie: Germany) do.

Stoploss's picture

So who is buying all the euro / asian garbage products if the almighty us "consumer" is now the way of the dodo bird?

Cursive's picture

We definitely have complacency.  TPTB have definitely trained the trading class to "BTFD."  Retail investors are fleeing, day and swing traders are BTFDing and large institutions are holding strong in the face of another leg down in this Greatest Depression.  What could possibly go wrong?

AccreditedEYE's picture

Agree. I like that "Greatest Depression" too. That's perfect name.

pods's picture

I chuckle whenever people talk about re-entering recession.

We never left the depression!


Cult of Criminality's picture

What time is the presidents child ritual ?

Only pussies shield themselves with kids.

retiringteach's picture

and how many innocent kids has the kenyan killed with drones in pakistan/afganistan-soon to be usa??

Inthemix96's picture

Citi should fuck off and shut the fuck up.

They have proven beyond reasonable doubt that they are as usefull as a choclate fire guard.  And that their anaylists are as seasoned and know as much as a frogs green cock.

Citi, if you hear this, you are yet another PART of the problem, now fuck off and die.

Dr. Engali's picture

The politicians will kick, cry ,and scream...they will point fingers and blame each other...they will do all they can to scare the sheep. Then once they feel they have had plenty of camera time, they will raise the debt ceiling. Wash ,rinse, and repeat.

Son of Loki's picture

Bring back Hank Paulson to scare 'the people.' His trembling hands...quivering of the best performances I ever saw.  Sir Lawrence would be proud of him.

koder's picture

Tyler, this is the wrong place, but im short on time. Can you please post a cover on the MSNBC video that came out today stating no assualt weapons were used in the sandy hook deal? Four pistols were used. Mostly relevant to the unfair new york assault weapons ban!!! Story hitting Mainstream now... (just trying to share the knowledge before obummer does something ban them anyways)

Savyindallas's picture

Did the coroner change his mind? He clearly said at his press conference, a rifle was used on all killings,

koder's picture

Yes, he did. according to MSNBC

mayhem_korner's picture



He used a rifle.  Had 2 pistols on him also.  But the rifle was the primary weapon.  Get your facts straight.  That was reported by the state troopers on the scene.

koder's picture

whatever bud....denials a bitch.

Cult of Criminality's picture

Vikram Pandit sure flew under most of the radar.

HD's picture

No one wants a massive sell off more that I...but, didn't we just watch the GOP bend over for the President on the fiscal cliff?

I am 99.9% convinced republicans will roll over on the debt ceiling - because there is no way in hell TPTB will let anything upset the fiat apple cart.

SmoothCoolSmoke's picture

I'm in your camp.  If the SP get to below 1450 i the next week or so....I'm going long..... T-Pubs will cave and we'll get  a FC zoom.

q99x2's picture

1.5 to 2% GDP growth will be the case otherwise the Fraud brings about collapse. Thus spake Dalio.

Zer0head's picture

There is no more debt ceiling, that was made clear when they voted to pork up sandy last nite, when they re-elected the Boner and when they voted the tax increases.

There is no accountability and the majority of the American flock is fast asleep oblivious to everything but the Kardasssisans.


And the folks in charge are so far removed (see Rosengren video) in their ivory towers and/or so totally co-opted that there really is no hope.  And later this AM when the Pres comes to the podium surrounded by a prop of precious little ones, the American flock will once again roll over.

q99x2's picture

Everyone is talking about the emptying of the 401ks today. They talk as if people are going to live until retirement and should leave their money in. You can only fool people for so long.

Its like when I'm around people that actually work, unlike myself, they all know about the collapse that is taking place. Maybe media is trying to convince them that what they are witnessing is not what they are witnessing. We know how that goes over. Everyone then sees the liars for what and who they are.

CNBC comes to mind.

Quinvarius's picture

I remember reading a book on propaganda.  Goebels was quoted in it refering to two kinds of reactions to this kind of propanda on soldiers.  One was believing it and acting.  The other was was paying it lip service and acting.  It sounds like he just misunderstood why people were staying in the German Army and over emphasizing his propaganda impact, until you consider what would have happened if he had not been blowing smoke, but saying the war was lost.  It is clear, the Gov just wants you to go down with the ship in an orderly manner and not defect from the system.  You should definately defect from the paper system and stop following the uncritical herd.  People don't have to believe what they hear to keep acting on it. 

Cult of Criminality's picture

I want to watch everybody as they get hypnotized.


 Fleetwood Mac

ZeroAvatar's picture

The 'Horror' will come when tOmBAMA 'unveils' his gun proposals.  The complacency will be horrific.

Zombie Investor's picture

"President Barack Obama on Tuesday got some moral support from the financial-services industry in the debt-ceiling fight, with the CEO of Evercore Partners and a Citigroup executive arguing to keep the borrowing limit out of ongoing deficit-reduction talks."

Am I correct in assuming that Citi will be removing all credit limits on the credit cards they have issued?

orangegeek's picture

Retail investors have mostly left the market.  Full time discretionary traders, institutions and Ben and Barry - that's all that is left at this top.


SP500 weekly shows a bigger picture - when primary wave 3 down kicks in  - well horror is a good word.  Devastation is another.


SP500 has been in a 20 point trading band since Jan 1 - this implies yet another push up - algos are hard at work.

Cult of Criminality's picture

AH ...but it was an assault rifle