Sequestration On, Risk Off

Tyler Durden's picture

The push higher in stocks today peaked as the voting began and now as we receive the 'shocking news' that:

  • Senate Lacks Votes to Advance Democratic Sequestration Plan

We see the equity market fading fast - reverting to VWAP first of course. Whocouldanode? What happens next is anyone's guess but FX and bonds sure aren't buying it.


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ejmoosa's picture

Imagine the market rally if we could shut the Federal Government down for just one year.



fomcy's picture

RISK ON this Morning - GOLD down, Risk OFF afternoon - GOLD down again?

What is GOLD then? Some hated Asset which is sold on any accasion?


Dr Paul Krugman's picture

Inflation is low and gold bugs have been holding their precious expecting, any day now, that inflation is going to jet off like a rocket and we will be the new Weimar Republic.  Little known fact - except to the historically knowledgeable - it wasn't the Weimar Republic that ushered in the Nazi Regime, but Heinrich Bruning.

If we make the cuts the GOP wants, then we will slide into deflation and the depression will get worse.

LawsofPhysics's picture

What are food and fuel costs in fiat relative to 5, 10, 15 years ago?  What's the value of my physical PM holdings relative to 5, 10, 15 years ago?  Funny how people will still very willingly provide me with the fruits of their labor for that "relic".

Dr Paul Krugman's picture

There has been a lot of fear in the market since 9/11 and so there has been a lot of demand for gold, considering it is the fear trade.

Also you are forgetting that GDP has been rising steadily through that time frame, so people have been living a lot better during this time period.

pods's picture

1.  GDP is not measured in an absolute term, but a relative one ($).

2.  Somehow we count Government spending as a PLUS to GDP.  Where does government get money?  Oh, they print it?  See 1 above.

Thanks for playing Paul.  


Money 4 Nothing's picture

because we have to run deficits to print money.

OldE_Ant's picture

Stop thinking in terms of USD!!!

GDP in terms of Gold rolled in 2000 and continues to fall, S&P as well.  GDP in real terms hasn't actually grown in any sustained fashion relative to real measures of value for at least a decade.

I've been looking for same chart priced in Silver, Oil and Natural gas as well as a reasonable basket of food prices but can make inferences from other things priced in gold. 

Food prices in gold have fallen 50% over past 20-30 years so perhaps we actually have improved food production.  (Quality suffering though imo)

And FYI college education priced in Gold is back to about the norm.

When you stop thinking in FIAT and start thinking about value of something real and imporant vs. something else real and important then and ONLY then can you make reasonable deductions about 'the economy'.    Everyone complains Gold is in a bubble.  Actually Gold has finally caught up with all the other asset bubbles.   If they deflate, gold will deflate with them.  If they inflate Gold will inflate with them.    Based on the above charts I don't see that the price of Gold is low relative to other measures (i.e. a bargain)  It was in the 90's, not now.   Silver on the other hand I think IS undervalued relative to historical norms and relative production/consumption basis.  In the 90's was waaaay under valued.

Hence I conclude not just from the above but other analysis that we have reached peak growth around 2000 (relative to real measures) and without some serious game changer (in energy or other real goods) as more people are added on this planet they will have 'less' real need goods of value than those who came before them for the same amount of hours worked.   Which means in real terms deflation is going on.   So far it hasn't hit the average AmeriKans waistline though.

akak's picture

Our worst fears are actually the result of the crimes and depredations committed against us by our own sociopathic and increasingly authoritarian rulers in Washington, and our anger the direct product of the servile and corrupt cheerleading of those abuses of power by spineless and amoral lackies and Quislings such as yourself.

espirit's picture

My worst fear is running out of boolits.  Guess I'll save the last one for myself.

akak's picture

Why not save the first one for yourself instead?

LawsofPhysics's picture

You didn't answer the question regarding the purchasing power of PM's.  Nor did you answer the issue of the cost of essential commodities over the same time period.  Living better?  So you want to ignore what the average wage has been as well?  This is how we give out nobels now, by ignoring things?  People are living better?  So now living better means even fewer people can afford healthcare and college? Must be my lying eyes again.  Halarious, a troll of the highest caliber.

Vashta Nerada's picture

Brilliant.  So, you are saying that the only way to economic paradise is to keep spending 50% more than we take in, or raise taxes? 

I think I will go tell my boss that my 6000 square foot house, three SUV payments, plus student loans and credit card debt are costing more than I make, and it is his responsibility to increase my pay so that I can succeed.

fomcy's picture

Dude, GOLD preforming well in both deflation and inflation invironment. In the great Depression

Gold stocks trippled while general stock market loss 40%+..

Dr Paul Krugman's picture

That is because it is the fear trade.

pods's picture

Fear trade meaning you moneychangers will FEAR for your life if people see the value of gold while holding a handful of colored pieces of linen.


fuu's picture

C'mon Dr. Redneck Fischer for Prosperity you can do better than that.

ejmoosa's picture

You foolishly compute inflation based upon the planet Earth's relative position around the Sun. 

There is nothing magical about the time frame of 1 year, other than it marks the copletion of another lap.

But rest assured, an ounce of gold or silver will have gained a greater amount of purchasing power than an ounce of $100 bills will the next time we have a real balanced budget.


EmmittFitzhume's picture

Yeah and he was some idiot ivy league professor like you!

Dr Paul Krugman's picture

Imagine the hunger if we shut the Federal Government down or just one year.

cifo's picture

I can't imagine. Care to describe it?

Dr Paul Krugman's picture

Millions of jobs would be lost and their revenue would dry up, the productivity from the services provided from the government would crush GDP; we would be thrown into total chaos as there would be no police officers to fight crime, no fire fighters to extinguish burning buildings, no road crews to fix the streets.  The U.S.A would collapse.

Vashta Nerada's picture

Keynesianism would collapse, which is what you really fear.

ejmoosa's picture

Millions of government jobs will be lost, eliminating those ineffective, productiviity draining positions, leaving the country in a stronger position.  Just the mere halt in regulatory growth will be enough to spur the real US economy into a sustainable recovery.

cifo's picture

It sounds like pre-1900, but with iPhones.

Hunger only for those depending on govt.

I would be left with more money, since I won't be forced to pay any taxes. I don't mind politicians losing their jobs.


Vashta Nerada's picture

Government dependents could use some hunger - go look around at a Walmart on the first of the month.

Zap Powerz's picture

Mr. Krugman,

With all due respect, there would be plenty of people to eat.

imapopulistnow's picture

Regarding sequestration, a couple of observations from someone who worked in government budget and finance for 30 years.

1) Some portion of the budget cut was covered in Q4 of federal fiscal year 2012 by spending surplus budget authority in anticipation of the fiscal cliff.  (see ZH chart showing positive government contribution to GDP in Q4 2012)

2) Likewise some portion of the budget cut will be covered by the surplus budget authority that otherwise would have been available at the end of the current fiscal year.

3) Some portion of the budget cut has already been made by cautious managers in the first 5 months of the current FFY. (again see link above)

4) Some portion of the budget cut will come from appropriations and accounts that have no real dollar impact on spending levels of respective agencies.  Due to the vagaries of governmental budget processes, there are more of these than you would think.

There almost always are budget authority surpluses within various governmental accounts.  Some more than others obviously and an across the board cut will cause problems.  However with flexibility,  the percentage reductions will be far less painful than many think.

As a general observation, government agency budget cuts of 2% to 3% can be made without much real pain.  Since, unlike state and local governments, the federal government has not really had to go through the exercise of cutting the budget excesses that "naturally" grow over time, they might actually be able to cut an even higher percentage before any real economic pain is felt.

I agree that, but for deficit spending and QE, the economy is in a depression.  If it slides back to negative growth in the next quarter or two, sequestration will have some effect, but the real culprits will more likely be elimination of the payroll tax credit ($120 billion) and higher fuel prices ($! billion per penny increase).

imapopulistnow's picture

"positive government contribution to GDP in Q3 2012, which is Q4 of FFY 2012."

Wile-E-Coyote's picture

Let it collapse so we can hang every banker and economist by their bollocks by piano wire from the nearest street light.

rotagen's picture

Yeah right, we need a babysitter because people are too violent and stupid to take care of themselves, speak for yourself.

McMolotov's picture

Fat bureaucrats and parasites cut off from mooching. Senators and representatives forced to get real jobs. No dronings of brown people. Citizens keeping the money they earn.

Oh, the humanity.

knukles's picture

I get shivers just thinkin' of it...

LawsofPhysics's picture

God forbid individuals provide for themselves.  Come to think of it, you are a rather plump motherfucker, roasted pig anyone?

Being Free's picture

OT? - The Fed's March purchase operations schedule is out...another $45B in treasury securities...

Fuck you Bernanke.

Vashta Nerada's picture

I would be equally happy if they shut down 5 or so federal departments permanently. 

TruthInSunshine's picture

That 1/3 of 1% of the Annual Federal Budget (sequestration amount as implemented upon timeline) will be the DEATH OF US ALL!


HOLD ME, HANK "Look you Congressional Puppets, I've Got 200 Million in Tax Exempt Stock Options Vested, so Pass TARP/TALF/QE4ever-POMO Now Bitchez" PAULSON!!!!

Edward Fiatski's picture

Dude, we're operating here at so low margins, that even the 10-yr UST at 1.889% is Too Damn High. :P

francis_sawyer's picture

But NOBODY beats 'Frank the Tank'...

francis_sawyer's picture

[Voiceover.] Dear Mitch, if you're holding this letter you already know. The house has been boarded up. The doors. The windows. Everything. We're at the Comfort Inn. Room 112. I love you. Frank

You know I was thinking we could go back home...have some dinner and pop in the Sisqo Weren't thinking that? Ok.

[Sitting naked in the car.] Hey honey! Do you think KFC's still open?

[Funnels a beer.] Fill it up again! Fill it up again! Once it hits your lips, it's so good!



francis_sawyer's picture

It's UNIMAGINABLE that there's yet to be a "Frank the Tank" username/avatar on ZH...

McMolotov's picture

I'm surprised there's no "Bernank the Tank."

francis_sawyer's picture

INSPIRED ENTRY!... But ~ I'd go with "Frank the Tank" unless you had a burning passion & desire to become a junk magnet...