Debt Ceiling

Update: the Senate has failed to reject a bid to stop the debt ceiling hike with a simple 52 vote majority all of it along party lines. The US now has $16.4 trillion in debt capacity as of Friday. Since roughly $100 billion was plundered from Pension Funds in the past month, The US will have about $15.4 trillion in debt with the Monday DTS. The question then is how long will the $1 trillion in debt capacity last: at $125 billion/month it won't be enough to carry the US past the election without another massive debt ceiling spectacle.

While Congress recently voted down the increase in the US debt ceiling, that vote was largely irrelevant. And all that matters is how the Senate will vote. Watch it live in progress below. It is virtually unlikely that the process of debt ceiling increase will be overturned so within minutes the US should have a brand spaking new debt ceiling of $16.4 trillion.

Yesterday the Japanese Finance Ministry made a whopper of an announcement: in the year ending March 2013, total Japanese debt will surpass one quadrillion yen, or ¥1,086,000,000,000,000. This is roughly in line with the Zero Hedge expectations that by this March total Japanese debt would surpass one quadrillion yen. In USD terms, at today's exchange rate, this is precisely $14 trillion. And while smaller than America's $15.4 trillion (net of all post debt ceiling breach auctions), which was $14 trillion about a year ago, the GDP backing this notional amount of debt, which just so happens is greater than the GDP of the entire Euro area, is a modest ¥481 trillion, so by the end of the next fiscal year, Japan will have a Debt to GDP ratio of 225%. And that's not counting all the household and financial debt. So prepare to add quadrillion to the vernacular. At this exponential rate of increase quintillion will appear some time in 2015 and so on. Yet the scariest conclusion is that as Bloomberg economist Joseph Brusuelas points out, America is not only next, it already is Japan. Actually scratch that, America is worse than Japan, which at least generated a real housing bubble in the years just preceding the onset of its multi-decade credit crunch, something not even America could do in comparable terms. More importantly, "the debt-to-GDP ratio of the U.S. recently surpassed 100 percent, and it did so in the four years after the onset of the recession, compared with the six years it took the Japanese debt-to-GDP ratio to do so." The Japanese may be better than America in most things, but when it comes to destroying its economy, the US has no equal. Brusuelas' conclusion: "If below trend growth is the most probable scenario in the U.S., the most likely alternative is that the U.S. economy is headed for a lost decade… or two." So... go all in?

Today's early (due to the FOMC statement and press conference) $35 billion in 5 year bonds auction was another uneventful issue of debt. Pricing at 0.899%, or well inside of the 0.915% When Issued, today's latest addition to the US $15.3 trillion in debt came at a 3.17 Bid To Cover, the highest since May 2011. The fact that BTCs continue to rise consistently even as yields decline makes lots of sense in some parallel universe, or in this one, when one considers that the bulk of the paper promptly makes its way to the repo market where it is quickly swapped for cash. The reason for the jump in implied demand was primarily the Direct Bid which took down 15.1% of the final allotment, the most since November 2010. The Indirect Bid was in line at 43.4%, compared to the TTM average of 43%, while Dealers saw a modest drop in their take down, coming below the average of 45.8% at 41.5%. This leave just tomorrow's $29 billion in 7 Year bonds in the weekly issuance docket, even without a formal debt ceiling raise. Net of all auctions that have taken place while the debt ceiling has not been increased, total US debt is now well in the $15.3 trillion bucket.

While Paulson's star was finally setting in 2011, that of mega macro fund Brevan Howard was rising, and has been rising for years by never posting a negative return since 2003. The $34.2 billion fund, now about double the size of John Paulson's, returned 12.12% in a year marked by abysmal hedge fund performance. But how did it make money? Simple - by taking advantage of the same permabullish market myopia that marked the beginning of 2011, and that has gripped the market once again. "The Fund’s large gains during the third quarter were due predominantly to pressing the thematic view that markets were ignoring clear signs of economic slowdown and were not correctly pricing the probability of central bank accommodation, particularly the reversal of the ECB rate hikes in April and July." Not to mention the €800 billion ECB liquidity accommodation that started in July and has continued since. So yes: those betting again that the market correction is overdue, will once again be proven right Why? Because "we are about to witness an unprecedented policy move. In the US, Eurozone and UK, fiscal austerity is being prescribed as the cure following the bursting of the credit bubble and to overcome the malaise following a balance-sheet recession. Unfortunately, there is no historical example of when this approach has been successful." As for looking into the future, "we continue to believe that markets remain at risk of  substantial dislocation."

SOTU Post Mortem:

The best news possible: "Nothing will get done this year, or next year, or maybe even the year after that." Barack Hussein Obama
The worst news: Everything else.

Here is the text of President Barack Obama’s State of the Union Address as prepared for delivery at 9 p.m. ET. "Jobs" 33 vs. "Fat Cats" 0, Rich 3 vs Poor 1, Hope 2 vs Unicorns 0, Change 9 vs Tooth-Fairy 0, Mortgages 5 vs Apple 0, Main Street 1 vs Wall Street 3, China 4 vs Europe 1; DEBT CEILING 0

With the Fed expected to at least extend the period of guaranteed ZIRP from 2013 to 2014 tomorrow, it is no surprise that the just priced $35 billion in 2 year bonds did so very uneventfully, and at a high yield of 0.25% (38.96% allotted), in line with the When Issued, the note priced like what is was: an issue explicitly guaranteed by the Fed, and a yield reflecting it. The pricing was uneventful in the headline, and in the internals, with the Directs taking down 8.27% (quite lower than the TTM 13.05%), Indirects in line with average at 32.89% and Primary Dealers as usual accounting for more than a majority, or 58.84%. The Bid To Cover was a solid 3.75 if not a record. And now the Dealers will promptly reverse repo the bond back to the as nobody can do anything with a 0.25% yield in an environment in which investors demand double digits ROEs. Most importantly, however, was that this was merely the latest bond auction concluding even with the US debt ceiling still not getting an extension, and even more plundering from the G-fund. Once the ceiling is finally lifted, total US debt will move the maximum $15.2 trillion to well over $15.3 trillion overnight, maybe higher, just as it did back in August.

The debt ceiling, coporate taxes and health care.

The reason I don’t write about markets so much anymore is because I don’t believe there are markets any longer. Sure there are flashing prices on the screens for various assets and those can be addicting to look at on a daily basis, but I think these “markets” are now merely a mechanism for government propaganda and a method to ultimately fleece more money from the uniformed masses that play in it by the casino operators and their puppets in government. It’s basically a hologram. I have alluded to this in recent interviews, but I myself feel extremely uncomfortable being involved at this point in a way I have never felt before. For now, I am still willing to play the game with some of my own capital but I fear I may regret this decision and that the smart thing would be to pull out completely and go entirely into hard assets as well as real estate abroad. This game is not safe. By definition, the longer the period of tension building the more explosive the release will be when it ultimately happens. This period has already been going on for almost five months with only minor releases so I think we are already staring down the barrel of something horrific. Should they actually succeed and delaying the release until after the election I expect the release scenario to be downright cataclysmic. Should they succeed to delay it that far I hope I am wise enough to pull the remainder of my assets out of this casino beforehand and get entirely physical.

As financials and builders (and implicitly markets in general) levitate further, Peter Tchir of TF Market Advisors takes a brief and somewhat sarcastic look at the factors that are supporting the rally.

A short time ago, the House of Representatives rejected (by 239-176 though not enough to avoid Obama's veto) the $1.3tn increase in the federal debt limit. As Reuters notes, this vote seems like 'a largely symbolic vote aimed at staking out election-year positions on government spending' as we know by now that Timmy G will underfund yet another pension plan (on the promise to transfer-pay it all back very soon) if it ever came to that. The Hill also adds Democratic comments that this was clearly 'a political stunt' as the House Minority Whip Steny Hoyer says "This is a game that will say, see, I voted against debt." Where the sound-and-fury is laughable of course is that both the House and Senate need to 'disapprove' of the debt ceiling hike that is already 'pre-approved' in last year's Budget Control Act (and the Senate is widely expected not to disapprove). As politician after politician sought media-time, Ron Paul echoed his sensibilities (though not really helpful in this situation) that "we're in denial", and "you can't solve the problem of debt by accumulating more debt."

Back on January 5, when we first broke the news that the US debt ceiling has been reached, and breached, yet again, we said "And now the Social Security Fund pillaging begins anew until Congress signs off on the latest interim debt ceiling increase." Sure enough, operation rape and pillage is a go.

• U.S. SUSPENDS PAYMENTS TO PENSION FUND TO AVOID DEBT CAP BREACH
• GEITHNER INFORMS CONGRESS ON SUSPENSION OF PAYMENTS TO FUND
• GEITHNER SAYS `G' FUND PARTICIPANTS `UNAFFECTED' BY SUSPENSION
• GEITHNER SAYS `G' FUND TO BE MADE WHOLE AFTER DEBT LIMIT RAISED
• GEITHNER: DEBT LIMIT WILL BE INCREASED JAN. 27 UNLESS BLOCKED

In other words: Congress better pass the debt ceiling pronot, or else it will have to explain to government retirees the tens of billions in deficit funds, i.e., marketable debt, already issued will permanently offset the level in G-fund holdings. Lastly, any comparison to similar acts of commingling performed by other insolvent entities in recent months is purely coincidental and no Obama handlers were thrown in jail as a result of this post. 

That after last year's abysmal performance on Wall Street, best summarized by the following quarterly JPMorgan Investment Banking revenue and earnings chart, bonuses season would be painful should not surprise anyone. But hardly anyone expected it to be quite this bad. The WSJ reports that Morgan Stanley, likely first of many, will cap cash bonuses at $125,000 and "will defer the portion of any bonus past $125,000 until December 2012 and December 2013" with bigger 'sacrifices' to be suffered by the executive committee which, being held accountable for the collapse in its stock price, will defer their entire bonuses for 2011. Morgan Stanley is likely just the beginning: "As banks report fourth-quarter results this month and make bonus decisions for 2011, total compensation is likely to be the lowest since 2008." This means that once Goldmanites get their numbers later this week, we will likely see a mass exodus for hedge funds which remain the only oasis of cash payouts on Wall Street. Alas, unlike the Bank Holding Companies, a series of bad decisions will result in hedge fund closure, as the TBTF culture will never penetrate the stratified air of Greenwich, CT. And with bonuses capped at about $80K after taxes, or barely enough to cover the running tab at the local Genlteman's venue, the biggest loser will be the state and city of New York, both of which are about to see their tax revenues plummet. And since banker pay is responsible for a substantial portion of Federal tax revenue, look for Federal tax withholding data in the first few months of 2012 to get very ugly, making America even more responsible on debt issuance, and likely implying the yet to be re-expanded by $1.2 trillion debt ceiling will be breached just before the Obama election making it into the biggest talking point of the election cycle.

It is a pure coincidence that following the previous report of stern condemnation of traditional ECB QE in the form of Large Scale Asset Purchases (LSAP) by the Bundesbank, we should follow it up with the latest analysis by Chris Wood of CLSA's famous Greed and Loathing newsletter, in which the noted skeptic does an about face on his existing short European financial trade and covers such exposure, while observing the much-discussed major shift in ECB liquidity provisioning as the catalyst. And while his trade reco may or may not be right (if we were betting people we would put our money on the latter), what is interesting is the basis for the material change in exposure which to Wood is explained simply by the dramatic shift in the ECB approach toward monetary generosity, courtesy of the arrival of ex-Goldmanite Mario Draghi. The basis is the first noted here massive surge in the European balance sheet (Figure 2) which while not engaging in prima facie monetization, has done so via indirect channels, in the form of an LTRO, which is basically a 1%, 3-year loan, but more importantly, a balance sheet expansion which while having failed to increase the velocity of money in any way (with all of the LTRO and then some now having been redeposited back at the ECB as reporter earlier), has at least fooled the market for the time being that any sub 3 Year debt is "safe". So just how large will the next LTRO be? "Market talk is focusing on an even bigger amount to be borrowed at the next 3-year longer-term refinancing operation (LTRO) due on 29 February. GREED & fear has heard guesstimates of up to €1tn!" That's right - it is possible that in its quanto monetary diarrhea (but at least it's not printing, so the Bundesbank will be delighted), the ECB is about to increase its balance sheet from €2.7 trillion to € €3.7 trillion, or a €1.7 trillion ($2.2 trillion) expansion in 8 months! And gold is where again?

• China’s Forex Reserves Drop for First Quarter Since 1998 (Bloomberg) - explains the sell off in USTs in the Custody Account
• Greek Euro Exit Weighed By German Lawmakers, Seen as Manageable (Bloomberg)
• Greek bondholders say time running out (FT)
• Housing policy to continue (China Daily)
• Switzerland’s Central Bank Returns to Profit (Reuters)
• US sanctions Chinese oil trader (FT)
• Obama Starts Clock for Congress to Vote on Raising Federal Debt Ceiling (Bloomberg)
• Turkey defiant on Iran sanctions (FT)
• ECB’s Draghi Says Weapons Working in Debt Crisis (Bloomberg)
• Greece to pass law that could force creditors in bond swap (Reuters)

All you need to read.