Many call the debt ceiling situation going wrong a black swan event. That is totally misleading though. Black Swans are unpredictable events. US failing to raise the debt ceiling, “just because they always have raised it”, is not something “impossible” for the ones having done their homework, just like the Uprisings in the MENA region earlier this year. Maybe the debt ceiling is just another neon swan?

For Taleb’s Black Swan work, click here.

NYT reports;

You’ve heard of black swans—events that are unthinkably rare, immensely important, and as unpredictable in advance as they are inevitable in hindsight. Now, with no one ruling out a default or downgrade of U.S. Treasury debt, investors face a new kind of threat: what we will call the neon swan, an event that is unthinkably rare, immensely important and blindingly obvious.

The politicians in Washington have a couple weeks to forestall a disaster that has begun to seem like a certainty. Investors everywhere are perfectly aware of the consequences if Congress and the Obama administration can’t strike a deal: The U.S. is likely to lose its privileged triple-A credit rating, and corporate bonds and stocks alike could plummet in response.

As Nassim Nicholas Taleb’s bestseller “The Black Swan” made clear, the human mind is poorly equipped to prepare us for rare, important and unpredictable events. But maybe our minds—and our markets—aren’t very well equipped to protect us against neon swans, either.

Continue the NYT article.

With the Debt Ceiling Trade going into Expiration, somebody needs to start hedging the positions. Neither side wants a Default, but the stakes are high. Game Theory at it’s best. The New Yorker reports;

It’s interesting that the debt-crisis talks are happening concurrently with baseball’s trading deadline. As every fan of the sport knows, there’s always a flurry of transactions right at the annual 4 P.M. deadline on July 31st. Why? Game theory. A trade may benefit both teams, but each also believes that holding out may lead to better terms. Eventually, time runs out. When the Red Sox traded away Manny Ramirez, they filed the paperwork at 3:59 P.M.

But perhaps baseball, which is essentially meaningless, is the wrong analogy for Washington’s current self-inflicted crisis. Maybe a more parallel two-party negotiation is the Cuban missile crisis. The stakes are lower now, of course. Potential default does not equal potential planetary obliteration. But the game theory has more than a bit in common.

Read more here.

“…raising the debt ceiling does not allow Congress to spend more money. It simply gives our country the ability to pay the bills that Congress has already racked up. In the past, raising the debt ceiling was routine. Since the 1950s, Congress has always passed it, and every President has signed it. President Reagan did it 18 times. George W. Bush did it seven times. And we have to do it by next Tuesday, August 2nd, or else we won’t be able to pay all of our bills.”

– PRESIDENT BARACK OBAMA, JULY 2011

And we all know what our Mothers said to us while growing up. “just because They (your friends) all do, doesn’t mean you should do it, nor is it right”

This week’s Must read hmmm report, check out the link, Hmmm Jul 31 2011

Seven “what if’” the debt ceiling is not resolved, and the great USA starts defaulting on it’s debt. Before reading, consider the interest rate moving back up to a more normal level, and the little growth that is left in the Economy, will go to pay higher interest payments. Welcome to the real gridlock.

Some questions if US is to Default. For answers and further reading, click here.

1. Should I be worried that I won’t receive my Social Security benefit in August?

2. What if I just filed for benefits, or plan to file next month? Could I lose my benefits in the event of a government default?

3. Will interest rates on mortgages, car loans, student loans and credit cards rise?

4. What’s the outlook for the U.S. dollar?

5. What’s the outlook for U.S. Treasuries?

6. Will we still pay our soldiers?

7. Is there an upside to higher interest rates?

With Friday’s GDP figures coming in below all analyst projections (and yes they still earn  seven digit salaries), the QE 3 is slowly approaching. We need the SPX to fall further though, the 50-60 points from the high is not enough for Bernanke to go another all in. Bernanke has taken the whole recession scenario very personally, and we all know, emotions are not good in making rational decisions. Below a refresh of Quantitative Easing by Omid Malekan.

Some reflections on that GDP figure, while the World is waiting for the debt ceiling to be resolved. From Consumer Metrics;

Included in the BEA’s first (“Advance”) estimate of second quarter 2011 GDP were significant downward revisions to previously published data, some of it dating back to 2003. Astonishingly, the BEA even substantially cut their annualized GDP growth rate for the quarter that they “finalized” just 35 days ago — from an already disappointing 1.92% to only 0.36%, lopping over 81% off of the month-old published growth rate before the ink had completely dried on the “final” in their headline number. And as bad as the reduced 0.36% total annualized GDP growth was, the “Real Final Sales of Domestic Product” for the first quarter of 2011 was even lower, at a microscopic 0.04%.

And the revisions to the worst quarters of the “Great Recession” were even more depressing, with 4Q-2008 pushed down an additional 2.12% to an annualized “growth” rate of -8.90%. The first quarter of 2009 was similarly downgraded, dropping another 1.78% to a devilishly low -6.66% “growth” rate. And the cumulative decline from 4Q-2007 “peak” to 2Q-2009 “trough” in real GDP was revised downward nearly 50 basis points to -5.14%, now officially over halfway to the technical definition of a full fledged depression.

One of the consequences of the above revisions to history is that the BEA headline “Advance” estimate of second quarter GDP annualized growth rate (1.29%) is magically some 0.93% higher than the freshly re-minted growth rate for the first quarter. From a headline perspective, that makes for a far better report than the 0.63% drop from the previously published 1Q-2011 number — since otherwise the new 2Q-2011 numbers would be showing an ongoing weakening of the economy.

Unfortunately, meaningful quarter-to-quarter comparisons are nearly impossible in light of the moving target provided by the revisions. But among the notable items are:

Continue reading →

We learnt this week, George Soros, is closing his hedge fund and will be managing his own money only. The trends within the hedge fund industry have changed a lot recently. The “speculators” are diminishing, while the industry is getting much more commoditised, with many funds becoming rather main stream, but still charging big fees. FT reports on the World’s Best Money Manager;

When George Soros rented a new office by Manhattan’s Central Park in 1973 for his four-year-old hedge fund, he and his fellow “hedgies” were the lone gunslingers of modern capitalism. Shooting wild bets on little more than a hunch, funds lived – and died – fast. No longer. Over the past four decades Mr Soros’s fund has grown from $4m to $25bn, but he is now the grand old man of a maturing industry in which lone gunmen are no longer welcome.

Hedge funds are reinventing themselves as something much less adventurous – and at first glance it looks as if a new sheriff in town, America’s Securities and Exchange Commission, may be responsible. Investors in Mr Soros’s Quantum funds were told this week that they would be given their money back, so the fund could escape new rules brought in by last year’s Dodd-Frank act. By investing only Mr Soros’s family money – all but $750m or so of the total – his fund would be exempt from the new rules.

Full FT article.

From Macro Story,

The IV skew and vix divergence continues to signal further selling pressure. As discussed before the correlations are strong but not 100% on a day to day basis. Still further selling pressure does look highly probable.

I will note though a temporary buy signal may be approaching as noted on the chart below (two prior lows are circled).  Over the past month there does appear to be a lag where the divergence leads the SPX so if in fact this “buy area” is reached there may still be further selling pressure.

As USA is struggling to find a solution to it’s debt problems, Apple reportedly has more cash than Uncle Sam. If Uncle Sam is poor, or Apple to powerful, is a question for debate. While Apple’s mountain of cash has been added to during the last years, the actual taxes paid by Apple have not been growing proportionately. Maybe a bridge loan from Apple could do the thing short term at least? Financial post reports;

Steve Jobs is now more liquid than Uncle Sam.

While it’s highly unlikely that President Barack Obama is looking to ask the founder and chief executive of Apple Inc. for a loan, it became a fact as of Thursday afternoon — the world’s largest technology company now has more cash on hand than the most powerful democracy on Earth has spending room.

Further reading, click here.