Courtesey Nick Gillespie.

As the momos are selling into this panic, we belive the market will once again fool everybody. Longs will puke on the lows, the bears will add to shorts and later buy in panic. Every newspaper is reporting on the debt ceiling, even the non financial press. Look out for the leg up, as it has the potential of becoming rather strong, just like we suggested two hours ago. Note how the SPX usually finds bottoms with a classical hammer formation, proving once again people’s stupidity.

Some charts below, before the World ends, according to some at least. Yes, the trader is bearish, and we see the market going lower long term, but let’s not forget, the market is moving on extremely small illiquid volumes, all summer. Some of the moves are almost not significant statistically speaking. Before one gets too bearish reading the newspapers, consider we are once again approaching support levels in the market. Despite everything feeling very bad, the Economy is falling once again, and the long term charts are saying sell, we are approaching some support levels. Beware selling into these supports and then chasing everything much higher, at least in the short term. Don’t be surprised to see the market reverse, and confuse everybody. Also note, the big Vix formation we mentioned weeks ago,  is reaching some resistance levels. SPX, Vix, Stoxx, Italy ans Spain.

GDP figures absolutely crap. With the Economy in freefall and money printing to be extended, we will look for the stagflation scenario.

Gross domestic product expanded at a 1.3% annual rate in the second quarter, the Commerce Department said, after a downwardly revised 0.4% gain in the January-March quarter. Economists had forecast GDP growing at a 1.6% rate in the second quarter from a previously estimated 1.9% rate in the first quarter. This was the weakest six months period since the recovery began in the second quarter of 2009. Growth in the second quarter was held down by weak consumer spending, which only expanded at a 0.1% rate. State and local government spending was also weak in the quarter. Inflation, as measured by the core personal consumption expenditure index, rose 2.1% in the second quarter, the fastest pace since the fourth quarter of 2009. (Marketwatch)

Gold ius surging, CHF getting stronger yet again while the markets slowly realize the Recession is back.

Once upon a time there was a really nice country, Yugoslavia,but due to huge Economic and Religious problems, the country eventually was divided into smaller countries. Tito used to run the country successfully, balancing between the West and the East. It all worked well for Tito, who financed debt with printing money. Eventually, reality caught up, and Yugoslavia experienced one of the biggest Hyperinflation periods the World has ever seen. Sounds familiar? Courtesey Thayer Watkins,

Under Tito, Yugoslavia ran a budget deficit that was financed by printing money.  This led to a rate of inflation of 15 to 25 percent per year.  After Tito, the Communist Party pursued progressively more irrational economic policies. These policies and the breakup of Yugoslavia (Yugoslavia now consists of only Serbia and Montenegro) led to heavier reliance upon printing or otherwise creating money to finance the operation of the government and the socialist economy.  This created the hyperinflation.

By the early 1990s the government used up all of its own hard currency reserves and proceded to loot the hard currency savings of private citizens.  It did this by imposing more and more difficult restrictions on private citizens’ access to their hard currency savings in government banks.

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MOODY’S PLACES SPAINS AA2 RATINGS ON REVIEW FOR POSSIBLE DOWNGRADE further reading click here

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Ft.com

Nerves are fraying among holders of Treasury bills maturing on August 4, which bondholders fear could be a prime candidate for a default. One trader told the FT he had dumped all his bills maturing on August 4 http://ftalphaville.ft.com/thecut/2011/07/29/637521/short-term-treasury-owners-on-edge-as-yields-rise/

Money market funds continued to pull billions of dollars worth of cash out of the market on Thursday. Nomura says investors took $9bn a day out of money funds this week, while the Investment Company Institute says $62bn has left the funds in the past two weeks http://ftalphaville.ft.com/thecut/2011/07/29/637486/money-markets-repos-suffer/

The United States and North Korea on Thursday began discussions on whether to reopen talks on the latter’s nuclear weapon programme. Two years after the countries’ last diplomatic exchange, the US special envoy for North Korea, http://ftalphaville.ft.com/thecut/2011/07/28/637421/us-and-north-korea-begin-nuclear-talks/

Chinese Premier Wen Jiabao has tried to quell rising public anger by visiting the scene of last weekend’s high-speed rail crash and vowing to “severely punish” those responsible for the accident that killed 39 people and has fuelled concerns about the safety of the country’s bullet train system http://ftalphaville.ft.com/thecut/2011/07/28/637381/china-blames-signalling-error-for-crash/

Credit Suisse will cut 2,000 jobs after becoming the latest bank to announce weak trading in the second quarter, Reuters reports. Net profit fell to SFr 768m ($959m), below the SFr 1bn estimates of analysts and down 52 per cent on the year. Net fixed income sales and trading revenues plunged by 59 per cent, http://ftalphaville.ft.com/thecut/2011/07/28/636986/credit-suisse-trading-revenues-plunge/

Brazil has announced a harsh tax on currency derivatives, sending the Real tumbling against the dollar from its 12-year high, the FT reports. The government’s 1 per cent transactions tax could be increased to up to 25 per cent and carry requirements for both registration of over the counter trades and minimum trading margins, http://ftalphaville.ft.com/thecut/2011/07/28/636971/brazil-clamps-down-on-real-speculation/

The UK’s benchmark borrowing costs have fallen below those of the US for the first time in 15 months as markets continue to fret about the risk of a US default. Yields on 10-year gilts, which move inversely to prices, were at 2.95 per cent at about midday in London on Thursday, two basis points below Treasury yields. Gilt yields were last lower than Treasuries briefly in 2009 and April 2010 and before that throughout most of 2006. http://www.ft.com/intl/cms/s/0/b1916334-b907-11e0-bd87-00144feabdc0.html#axzz1TBR7mQo3

Wsj.com
Asian markets were mixed in choppy trade Friday amid continued concern over the stalled negotiations on raising the U.S. debt ceiling, with a key House vote delayed Thursday night, while key Japanese tech plays dropped on poor earnings reports.  Japan’s Nikkei Stock Average edged up 0.1%, Australia’s S&P/ASX 200 was down 0.1%, South Korea’s Kospi Composite fell 0.2% and New Zealand’s NZX-50 tacked on 0.4%.  Dow Jones Industrial Average futures were eight points higher in screen trade. http://online.wsj.com/article/SB10001424053111904800304576474993815099076.html?mod=WSJEUROPE_hpp_LEFTTopWhatNews

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The US might go into technical default, but at least we have the Big Mac intact. The Economist’s Big Mac index is giving us some insight on currencies and their value. The Brazilian Real is the most overvalued currency, while the Chinese Yuan is reaching fair value. Wonder what Geithner thinks of this?

House Speaker John Boehner is delaying today’s planned vote on debt-limit legislation, according to a congressional aide.

Majority Leader Eric Cantor’s spokeswoman, Laena Fallon, told reporters, “the vote will be this evening.” The vote had been scheduled for about 6 p.m.

and the S&P is testing 1295…..

The World in some 20 years according to Nassim Taleb. Wonder what will happen to that skew if US defaults, and Taleb is right on his black swans? They must fix that debt ceiling, or?

From The Economist;

Paradoxically, one can make long-term predictions on the basis of the prevalence of forecasting errors. A system that is over-reliant on prediction (through leverage, like the banking system before the recent crisis), hence fragile to unforeseen “black swan” events, will eventually break into pieces. Although fragile bridges can take a long time to collapse, 25 years in the 21st century should be sufficient to make hidden risks salient: connectivity and operational leverage are making cultural and economic events cascade faster and deeper. Anything fragile today will be broken by then.

The great top-down nation-state will be only cosmetically alive, weakened by deficits, politicians’ misalignment of interests and the magnification of errors by centralised systems. The pre-modernist robust model of city-states and statelings will prevail, with obsessive fiscal prudence. Currencies might still exist, but, after the disastrous experience of America’s Federal Reserve, they will peg to some currency without a government, such as gold.

Companies that are currently large, debt-laden, listed on an exchange (hence “efficient”) and paying bonuses will be gone. Those that will survive will be the more black swan-resistant—smaller, family-owned, unlisted on exchanges and free of debt. There will be large companies then, but these will be new—and short-lived.

To debt or not to debt. Debt is not “evil”, but to prosper, countries and corporations need growth. With the increasing discussions regarding the debt ceiling, many seem to forget talking about the Economic Growth. The Economy is unfortunately in a new normal where growth will be less than many project. Therefore, debt increases might be very painful long term. El Erian on the debt ceiling;

Some have suggested that all the drama over the debt ceiling will be justified by the long-term benefit of forcing America to embark on medium-term plan for deficit reduction. Yet at this point, the benefits of a deal will be offset by how it was achieved.

I am confident that Washington will find a way, albeit very awkwardly, to compromise on a mini-deal, rather than a grand bargain, that raises the debt ceiling and avoids a debt default. They may even manage to evade a downgrade of the nation’s vaunted AAA credit rating, though this is much more uncertain.

But fiscal solvency is not merely a function of deficits and debt, interest rates and the profile of maturities. It is also highly sensitive to economic growth: The lower an economy’s growth rate, the higher a budget deficit is likely to be, the larger the debt accumulation, and the greater the need for yet another round of fiscal austerity to safeguard solvency. All are components of the much-feared debt trap.

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