You know that the debt kerfuffle is as melodramatically staged as a World Wrestling Federation exhibition when Mr. Obama makes the blatantly empty threat that if Congress does not “tackle the tough challenges of entitlement and tax reform,” there won’t be money to pay Social Security checks next month. In his debt speech last night (July 25), he threatened that if “we default, we would not have enough money to pay all of our bills – bills that include monthly Social Security checks, veterans’ benefits, and the government contracts we’ve signed with thousands of businesses.”
This is not remotely true. But it has become the scare theme for over a week now, ever since the President used almost the same words in his interview with CBS Evening News anchor Scott Pelley.
Of course the government will have enough money to pay the monthly Social Security checks. The Social Security administration has its own savings – in Treasury bills. I realize that lawyers (such as Mr. Obama and indeed most American presidents) rarely understand economics. But this is a legal issue. Mr. Obama certainly must know that Social Security is solvent, with liquid securities to pay for many decades to come. Yet Mr. Obama has put Social Security at the very top of his hit list!
The most reasonable explanation for his empty threat is that he is trying to panic the elderly into hoping that somehow the budget deal he seems to have up his sleeve can save them. The reality, of course, is that they are being led to economic slaughter. (And not a word of correction reminding the President of financial reality from Rubinomics Treasury Secretary Geithner, neoliberal Fed Chairman Bernanke or anyone else in the Wall Street Democrat administration, formerly known as the Democratic Leadership Council.)
It is a con.
Full must read article by Hudson, click here.
So, is the market finally starting to price in the “unthinkable”? Somebody out there is getting rather scared of the mess Washington is producing.
That “implied vol” skew is showing us the way, once again. Chart Macro story.
From Bloomberg; It costs more to insure U.S. Treasuries for one year than for five years for the first time, as investors anticipate that a failure to raise the debt ceiling will prompt rating companies to declare the nation in default.
The CHART OF THE DAY shows that one-year credit-default swaps spiked to a record 80 basis points today, according to BNP Paribas SA, up from 46 basis points on July 22. The contracts now exceed five-year swaps by 23 basis points.
While the World is waiting for the US Debt resolution, S&P is delivering, yet again, a new downgrade of Greece. Yes, Greece is pissed off again, but the inevitable must happen. Greece must default, irrespective of any future bail outs. The trader is arguing for a referendum later this autumn, where the great Hellenic people reach an Icelandic moment, and tell the creditors to forget the Greek people are picking up the tap. From S&P;
Following review of the July 21 statement by the European Council (EC), Standard & Poor’s has concluded that the proposed restructuring, in the form of an exchange into discount or par bonds or a rollover into 30-year par bonds, of Greek government debt would amount to a selective default under our rating criteria.
In anticipation of the debt exchange, we have lowered the long-term rating on Greece to ‘CC’ and we have affirmed the ‘C’ short-term rating.
The outlook on the ratings is negative.
We view the proposed restructuring as one that would amount to a “distressed exchange” under our criteria because, based on public statements by European policymakers, the debt exchange or rollover is likely to result in losses for commercial creditors, and the objective of the debt exchange/rollover is to reduce the risk of a near-term debt payment default. Under our criteria, we characterize a distressed borrower as one that would–in the absence of debt relief–fail to pay its debt on time and in full.
While no exact date has been announced to initiate Greece’s debt restructuring, we understand that it will commence in September 2011 at the earliest.
Our recovery rating of ’4′ for Greece remains unchanged, indicating an estimated 30%-50% recovery of principal by bondholders.
On July 27, 2011, Standard & Poor’s Ratings Services lowered its long-term sovereign credit rating on the Hellenic Republic to ‘CC’ from ‘CCC’. At the same time we affirmed the short-term rating at ‘C’. The outlook is negative. Our recovery rating of ’4′ for Greece remains unchanged, indicating an estimated 30%-50% recovery of principal by bondholders, including on those bonds subject to a 20% reduction in net present value (NPV) as estimated under the Institute for International Finance (IIF) proposal.
A speech says more than a thousand words? Presented without comment….
Quote by Obama 2006:
The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can not pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. Increasing America’s debt weakens us domestically and internationally. Leadership means that, “the buck stops here.’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.” - Senator Obama, March, 2006
For all news continue below,
The volume of bonds sold to finance leveraged buy-outs has reached $16.6bn this year, four times the amount raised over the same period in 2010, as constrained loan markets force private equity firms to rely increasingly on capital markets to fund acquisitions. The FT says shift from loan to bond LBO financing has been particularly sharp in Europe, http://ftalphaville.ft.com/thecut/2011/07/27/635641/buy-out-bond-deals-at-europe-high/
Overseas lending to eurozone countries fell in the first quarter of this year amid worries about the health of Greece and other peripheral countries, reports Reuters, in contrast to a rebound in bank lending across the rest of the world. Lending to eurozone countries dipped by $77 billion, http://ftalphaville.ft.com/thecut/2011/07/27/635621/foreign-banks-cut-lending-to-eurozone/
The family behind Thomson Reuters is pushing for faster results from the three-year-old merger of Thomson Corporation and Reuters, the FT says. The company initially exceeded promises of integration benefits,http://ftalphaville.ft.com/thecut/2011/07/27/635561/thomsons-grow-restless-over-reuters-venture/
US money market funds are stockpiling cash in case Congress fails to raise the debt ceiling, distorting the short-term market for US government debt and raising borrowing costs for banks and other financial institutions http://ftalphaville.ft.com/thecut/2011/07/27/635486/us-money-market-funds-build-liquidity/
Regulators probing alleged manipulation of interbank lending rates have expanded their investigation into yen rates in London and a separate rate-setting process in Tokyo, the FT reports. In the finehttp://ftalphaville.ft.com/thecut/2011/07/27/635491/interbank-loan-probe-widens-to-yen-rates/
At first glance, it looks like the market has become bored with the US debt ceiling game of chicken, with underlying hopes for a busy and positive week of corporate earnings from global companies helping to stabilise equity benchmarks and support commodities http://ftalphaville.ft.com/thecut/2011/07/26/635456/dollar-takes-brunt-of-washington-debt-deal-battle/
The president of the Boston Fed has outlined potential reforms to the money market fund industry in new detail, Reuters reports. ”While several proposals have been suggested, some combination of capital buffershttp://ftalphaville.ft.com/thecut/2011/07/26/634771/fed-signals-money-market-fund-reform/
Fresh foreign investment in Brazilian stocks plunged 70 per cent in the first half of 2011, dragging down a market that had been one of the hottest last year. Rising inflation, political interference in key sectors and measures to slow credit growth have all damped foreign investor sentiment towards Brazil’s equity market, forcing some companies to scrap public offerings despite the strength of the country’s economy.http://www.ft.com/intl/cms/s/0/b00e9644-b79f-11e0-8523-00144feabdc0.html#axzz1TBR7mQo3
The European Peripheral Problems have been painful, but some banks have actively been winding down the exposure. Stratfor reports;
Despite the recent Greek bailout by the International Monetary Fund and European Central Bank, investors remain wary of the possibility of contagion from Greece and the eurozone’s troubled periphery to the core economies of the region. While the eurozone’s strongest economies do have a significant exposure to Greece, Italy, Spain, Ireland and Portugal, their banking institutions have been actively working to divest from these holding since the beginning of the crisis. Germany has been particularly successful, reducing its exposure to fragile economies by more than 40 percent and making itself less vulnerable to a potential default from these countries. It is only recently that Berlin reversed its no-bailout policy regarding the European periphery, a move that contradicts the risk-minimizing and divesting behavior exhibited by its financial sector since the beginning of the eurozone crisis.
As we pointed out earlier this year, volatility is broken. Due to different effects by the QE programs, volatility, and especially VIX, has behaved rather “strange” since the beginning of the QE programs. Many frustrated vol traders have experienced this effect during the last year, and will continue experiencing it until everybody is dragged into believing there is minimal risk in the system. The skew has on the other hand traded somewhat differently, but it is not only an effect of “pro traders” buying protection, but we won’t go into those discussion here.
Instead are presented some charts on the skew (actually the skew in relations to VIX) and SPX index, courtesey of Macro Story. Are we up for some big drop in the Markets, or do we still need the last desperate Alpha chaser to join the bull run? One thing is for sure, not many, even of the experienced vol traders community, understand what is going on in the vol complex, and therefore we expect the unexpected to happen during the autumn.
For further reading on broken volatility and this year’s best vol report, artemis volreport.
Charts, Macro Story
When asked about the end game as he sees it Faber remarked, “Well as I look at Europe and I look at the US and especially at politicians and at central banks, I think the way it will play out is that they will have further massive monetary stimulus and that eventually we will have a reset in the global economy.
But it won’t happen right away this reset, and only after the money printing will have essentially exhausted itself, when it reaches a painful level like in Latin America when we had inflation around 70%, 80% per annum or more, it reached a very painful level where reform was then initiated.”
When asked about the eventual monetary reset he expects and how he sees that playing out Faber had this to say, “Well when the reset comes it will be say a hundred dollar bill will be exchanged for a one dollar bill or something like this. Before we have the Great Reset, the government they will increase the war effort under whatever excuse that will be but I think that is the likely course of action…The wealth destruction will be interesting because…the people that suffer the most before the reset happens are actually the cash holders.”
Ful King World Interview with Faber, click here.