This objective report concisely summarizes important macro events over the past week. It is not geared to push an agenda. Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases.
It would appear, judging by the market's response and the headlines, that Obama's "unconditional surrender or default" negiotiating tactic has worked... According to AP, the Republicans look to have folded once again:
- *HOUSE REPUBLICANS SAID TO OFFER PLAN ON SHUTDOWN, DEBT LIMIT
- *REPUBLICANS SAID TO SEEK TALKS ON REDUCING U.S. SPENDING
The House Republicans are apparently waiting to hear back from the White House on this latest proposal - which amounts to - our translation - "Ok, you can have your government re-opened, and we'll let you raise the debt ceiling... as long as you really really promise to talk about spending cuts at some point in the future maybe possible please."
Forget about the headlines, the most concerning statement from the entire circus of Jack Lew's hearing was his comment that the world counts on the US to be responsible. It seems that boat sailed a long time ago. The following succinctly summarizes the key aspects of his testimony and the Q&A. As a reminder, Lew noted "Obama did negotiate," denied the chance of "prioritization," and warned that other nations appear ready (and somewhat excited) for the US to falter.
As reported previously, the latest meme surrounding the D.C. impasse is that Obama is suddenly willing to compromise on a short-term, supposedly six-week funding and debt ceiling extension, on the verge of his latest talks with republicans at the White House scheduled for this morning, as previously floated by the GOP. Throw some additional headlines such as "Ryan steps up to shape a deal" (in line with what we predicted yesterday) and "The ice breaks; fiscal talks set", by The Hill, and "GOP quietly backing away from Obamacare" from Politico, and one can see why futures are in breakneck soaring mode this morning, driven as usual by the two main JPY cross (USD and AUD), the first of which is less than 100 pips now away from being Stolpered out. So will a compromise deal finally emerge 7 days ahead of the first X-Date, or will a last minute snag once again derail the (non)-negotiations? We will know quite soon.
In 4 minutes (and really under 1 minute when the summary headlines hit), WSJ's Jon Hilsenrath managed to parse the 25-page and considerably more diverse of opinion FOMC Minutes into a bite-sized 535 words summarizing the key sections. His conclusion, as we noted previously, despite the various members' angst, they still want to start winding down QE this year and end it next year. It would appear that his 'translation' of the minutes for the investing public offers little hope for moar QE anytime soon - even if fiscal drags are sustained. We are confident neither Hilsenrath, nor anyone else in the legacy media, ever breache[s|d] s the FOMC embargo when they receive the minutes ahead of general release for broader preparation: after all, in a time when everyone is suddenly concerned with the Fed leaking data in advance, that would just be uncivilized.
Stocks Resume Ramp As Old News That Republicans Are Heading To White House, Is Again Regurgitated LateSubmitted by Tyler Durden on 10/09/2013 13:41 -0500
In a second iteration of news not being read hours ago and suddenly surprising the algos in charge of stock market momentum, minutes ago headlines blasted reports that Boehner would go to a White House meeting. This is precisely what Politico, again, said would happen at 7 am this morning but since apparently nobody bothered to read it, and since it is suddenly news again, everyone is grasping on this "revelation" as if it is a new development. It isn't.
For all expectations of a big jump in US futures overnight on the largely priced in Janet Yellen nomination announcement which is due at 3 pm today, the move so far has been very much contained, as expected, with a modest 90 minute halflife, as the markets' prevailing concern continues to be whether the debt ceiling negotiation will be concluded by the October 17 deadline or if it would stretch further forcing the government to prioritize payments. There is however some hope with Bloomberg reporting that some possible paths out of the debt impasse are starting to emerge with less than a week before U.S. borrowing authority lapses after Obama said he could accept a short-term debt-limit increase without policy conditions that set the terms for future talks. Whether this materializes or just leads to more empty posturing and televized press conferences is unclear, although as Politico reports, the stakes for republicans are getting increasingly nebulous with some saying they are "losing" the fight, while the core GDP constituency is actually liking the government shutdown.
Last week we showed the cognitive dissonance, nurtured by a liquidity-providing Fed, that has growth this year between stocks and economic confidence. In the last week, fed by a diet of DC headlines, Gallup's economic confidence index has collapsed. In fact, this is the worst 3-week plunge since Lehman - worse than during the 2011 Debt Ceiling debacle.
We strongly suspect that both government debt growth and money supply inflation will continue unabated – any pause will immediately bring about the kind of short term economic pain these policies have explicitly sought to prevent and will therefore be quickly reversed. It is not unlike the situation the revolutionary assembly of France found itself in during the late 18th century: when it issued new money, industry seemed to revive. As soon as it stopped, industry slumped again. And so it was decided to issue ever more money, until the entire scheme blew up. There can be little doubt that modern-day governments are on the road to a similar date with destiny – and lately the speed at which they travel toward it has increased markedly.
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Stocks have fallen for 9 of the last 11 days since the Un-Taper and the S&P has falen 3.7% from its highs. Volume today was above average (as we note CBOE SPY options volume set an all-time record yesterday) and thanks to a 1% or so rally off the lows on the back of a restatement that Speaker Boehner doesn't want to see carnage, the S&P managed to scramble back above the 50DMA. A late-day collapse (what no VIX pumpathon today?) closed us below that crucial level for the first time in a month. VIX rose 1 vol to 17.6% by the close (off its highs). Treasuries rallied in general (but the 30Y ended the day unch as the curve steepened notably). The USD fell some more (-0.65% on the week) as JPY and EUR strength didn't help but gold and silver closed unch, oil and copper down 1%.
Remember all those headlines about the "milions" of people swamping the new Obamacare exchange sites and how that explained why the "glitches" appeared and how this proves the American people are so desparate for the insurance... well, the truth appears to be leaking out. As Politico reports, California’s health insurance exchange reported - wrongly - that it had received 5 million hits on its website the first day of Obamacare. State officials said the real number was only about a tenth of that, or 645,000. Is it any wonder that fewer Americans trust other Americans than ever before?
Any hopes that tonight's meeting between the president and members of Congress, which lasted about an hour, would yield results just went up in smoke:
BOEHNER SAID OBAMA REITERATED HE WILL NOT NEGOTIATE
BOEHNER SAYS TIME FOR SENATE TO APPOINT NEGOTIATORS
Reid chimes in:
- REID SAYS BOEHNER HAS TO ACCEPT `YES FOR AN ANSWER'
Which means the government shutdown will proceed into its third day, with little hope for a political resolution on the horizon.
15 Bankers just paid a visit to the White House, listened to President Obama, and explained what a total disaster it would be if the US debt-ceiling is breached and Treasuries technically default. While the politicians exclaimed how bad a government shutdown would be, the banks have turned the panic dial to 11 as Goldman's Lloyd Blankfein noted, bankers are “in a position to really know early what the consequences are,” and it would be catastrophic. The irony that the firm which the government is trying to fine $20 billion for selling fraudulent debt and giving bad advice is now providing the same government with advice on its own bad debt, is not lost on us as Dimon was among the visitors but it is Blankfein's warning, echoing Obama, that will get the headlines, "they shouldn't use the threat of causing the U.S. to fail on its obligation to repay debt as a cudgel."
Even though there is no technical link between the two main fiscal issues – the continuing resolution (CR) and the debt ceiling bill - there is a link in the minds of market participants because prompt resolution of the CR could spell a favorable outcome for the debt limit. On the other hand, a government shutdown tonight could lead the market to be more pessimistic on the chances of a debt default. As BofAML notes, the link between the two issues is fairly complex but the shutdown battle is just the beginning - and, as the suspect "the fight could get ugly."