While the world's largest hedge fund, the Fed, may not care about the performance of its "bad bank" assets, and thus is largely ambivalent if the US Treasury defaults on the $2 trillion in US paper held by Ben Bernanke, others don't have the luxury of merely printing away any incurred MTM losses. Such as America's largest foreign creditor China, which at last check held at least $1.277 trillion in US Treasurys, which after realizing with a substantial delay that the US Congress is not precisely a "rational actor" and its bonds may be materially impaired in the case of a technical default, is starting to panic. In an oped in the largest media publication, China Daily, vice finance minister Zhu Guangyao, warned that the "clock is ticking" to avoid a US default that could hurt China's interests and the global economy. Somehow we doubt Boehner or Obama are particularly concerned about what happens to "Chinese interests." Of course, if China so wishes, it can pen an Op-Ed in the NYT and tell the US just what will happen if $1.3 trillion in US Treasurys were suddenly to be dumped in a liquidation fire sale.
David Stockman, author of The Great Deformation, summarizes the last quarter century thus: What has been growing is the wealth of the rich, the remit of the state, the girth of Wall Street, the debt burden of the people, the prosperity of the beltway and the sway of the three great branches of government - that is, the warfare state, the welfare state and the central bank...
What is flailing is the vast expanse of the Main Street economy where the great majority have experienced stagnant living standards, rising job insecurity, failure to accumulate material savings, rapidly approach old age and the certainty of a Hobbesian future where, inexorably, taxes will rise and social benefits will be cut...
He calls this condition "Sundown in America".
Here's a new and very bizarre entry for the annals of "the dog ate it" excuses. According to Reuters, Montana man Wayne Klinkel, who last year pieced together the remnants of five $100 bills eaten by his one-eyed golden retriever, Sundance, is sporting a $500 check he says he received this week from the U.S. Department of the Treasury to replace the digested funds. Sundance sniffed the wad of bills out of a car cubby space while waiting for Klinkel and his wife to return from lunch, and the canine made the currency his lunch.
- Troops Forage for Food While Golfers Play On in Shutdown (BBG)
- Police suspect dental hygienist Miriam Carey was behind the wheel of Capitol chase (WaPo)
- Italian Senate committee starts Berlusconi expulsion process (Reuters)
- Swiss Regulator Probing Banks Over Foreign-Exchange Manipulation (WSJ)
- GOP Begins Search for Broad Deal on Budget (WSJ)
- No Jobs Report Means Economists Chew on Football Instead of Data (BBG)
- U.S. default seems unthinkable but investors have options (Reuters)
- Citigroup fined $30 million after analyst sent report to SAC, others (Reuters)
- FBI Snags Silk Road Boss With Own Methods (BBG)
- Recession Warnings Found in Asset Price Falls (BBG)
- Bank of Japan warns of severe global impact from U.S. fiscal standoff (Reuters)
Obama "Prepared To Negotiate" (After Government Reopens), Says This Time "Wall Street Should Be Concerned"Submitted by Tyler Durden on 10/02/2013 15:24 -0500
In an interview with CNBC's John Harwood, Obama once again shows why the polarization in Congress is at record levels. In a brief: he said he is "exasperated", and that the shutdown is "entirely unncessary" but adds that he is (finally?) prepared to negotiate, however only after he gets his way namely after the government is reopened. And another important talking point: Obama added that while gridlock in D.C. is nothing new, "this time I think Wall Street should be concerned." It is unclear how that statement makes any sense in light of Obama's right hand senator Chuck Schumer telling the man who is really in charge, Ben Bernanke, to get to work. Unless of course, Obama is now angling for a "concerning" market crash, which sends the Dow down by 20% like in the summer of 2011, and Obama can tell the stunned public "I told you so."
In and of itself, the government shutdown appears to be a limited market event. The indirect effect, however, is on the other main risk scenario for markets – the deal on the debt ceiling (which will need to be in place before October 17). An increase in the probability of breaching the debt ceiling would likely be destabilizing for the market. For one, the effect on growth will be far larger – our economists estimate that it would imply an immediate cut in spending equal to 4.2% of GDP (4Q average of the fiscal deficit). Second, it would raise the risk of a US sovereign default because the Treasury does not believe it has the authority to prioritize interest payments above other obligations. As such, with markets firmly focused on US fiscal matters - so where to from here?
A week ago, we first reported that Bridgewater's Ray Dalio had finally thrown in the towel on his latest iteration of hope in the "Beautiful deleveraging", and realizing that a 3% yield is enough to grind the US economy to a halt, moved from the pro-inflation camp (someone tell David Rosenberg) back to buying bonds (i.e., deflation). This was music to Bill Gross' ears who in his latest letter, in which he notes in addition to everything else that while the Fed has to taper eventually, it doesn't actually ever have to raise rates, and writes: "The objective, Dalio writes, is to achieve a “beautiful deleveraging,” which assumes minimal defaults and an eventual return of investors’ willingness to take risk again. The beautiful deleveraging of course takes place at the expense of private market savers via financially repressed interest rates, but what the heck. Beauty is in the eye of the beholder and if the Fed’s (and Dalio’s) objective is to grow normally again, then there is likely no more beautiful or deleveraging solution than one that is accomplished via abnormally low interest rates for a long, long time." How long one may ask? "the last time the U.S. economy was this highly levered (early 1940s) it took over 25 years of 10-year Treasury rates averaging 3% less than nominal GDP to accomplish a “beautiful deleveraging.” That would place the 10-year Treasury at close to 1% and the policy rate at 25 basis points until sometime around 2035!" In the early 1940s there was also a world war, but the bottom line is clear: lots and lots of central planning for a long time.
An inept Indian government is attempting to use the age old tactic of scapegoating in order to deflect attention away from its widespread policy failures. In the case of India, the target is gold. It’s a logical target for any crony Indian bureaucrat or Central Banker to go after. Wealth confiscation is a tried and true method historically used by corrupt elites to stay in power, and there is plenty of gold floating around the subcontinent. Easy pickings... or so they thought. It appears some of the temples are now drawing a line in the sand, and are in fact refusing to provide details about their holdings...
The USA is turning into a sorry state of affairs. But, it only has itself to blame. The successive governments for the past decades have done nothing but increase the debt ceiling in the country.
This is at a time when we have real economic growth barely above 2% and nominal growth of just over 3% (abysmal by any standards) after six years of monetary easing and 5 years of QE1; QE 2; Operation twist; QE “infinity” and huge fiscal deficits. After last week Citi notes it is not clear that this set of policies is going to end anytime soon. It seems far more likely that these policies will be continued as far as the eye can see and even if there are “anecdotal” signs of inflation this Fed (Or the next one) is not a Volcker fed. This Fed does not see inflation as the evil but rather the solution. Gold should also do well as it did from 1977-1980 (while the Fed stays deliberately behind the curve). Unfortunately Citi fears that the backdrop will more closely resemble the late 1970’s/early 1980’s than the “Golden period” of 1995-2000 and that we will have a quite difficult backdrop to manage over the next 2-3 years.
Financial volatility since Federal Reserve Chairman Ben Bernanke’s announcement in May that the Fed would “taper” its monthly purchases of long-term assets has raised a global cry: “Please, Mr. Bernanke, consider conditions in our (non-US) economies when you determine when to end your quantitative-easing policy.” That is not going to happen. The Fed will decide on monetary policy for the United States based primarily on US conditions. Economic policymakers elsewhere should understand this and get ready. All of this is just hard reality. The best way to prepare is to limit the use of credit in boom times, prevent individuals and companies from borrowing too much, and set high capital requirements for all banks and other financial institutions. The Fed surprised markets last week by deciding to maintain its quantitative-easing policy. But that underscores a larger point for non-US economies: You never know when the Fed will tighten. Get ready.
The primary trend of the AUD is down. Bernanke has provided us the opportunity to sell the rally and profit from a primary trend continuation.
Almost 3 years ago we noted the oddly hubris-full confidence of Ben Bernanke of his ability to "exit" from the experimental extreme monetary policies:
"You have what degree of confidence in your ability to control this?" Bernanke: One hundred percent.
But last night we got the truth from Fed's Dudley, who more realistically stated:
Dudley: "Exit from these unconventional set of policies is certainly feasible... But we do have to be a bit humble about what we don’t know."
So which is it? Who do you believe?
Here is Part Two of our exclusive interview with World Bank Whistleblower Karen Hudes in which I discuss with Ms. Hudes the need to end an immoral fractional reserve banking system that continually drains the wealth of citizens without their consent and without their knowledge.
Our country owes Bernanke a great deal for pulling us out of the mess several of the largest investment banks go us into in ‘08.
— Carl Icahn (@Carl_C_Icahn) September 24, 2013