Preparing For the Coming US Debt Default Pt 1

Posted by: Phoenix Capital...

Post date: 07/26/2011 - 21:40

Round Two of the Crisis, the Sovereign Debt Round, began over Thanksgiving of 2009 when... 

Everything Not Nailed Down Getting Sold

Submitted by Tyler Durden on 07/27/2011 - 09:47
The market has finally realized that "this" is getting real. As of the open everything, including USTs, has been sold off aggressively. Well, except for gold of course, but we all knew that. Gold just hit a new all time record above $1628. In other news, there will be a Republican press briefing at 10 am according to C-Span. Stay tuned.

MF Global: 55% Chance Congress Fails To Raise Debt Ceiling By August 2

Goodbye 11th hour. Hello 12th hour and 1 minute. According to MF Global's Chris Krueger, the probability that congress fails to raise the debt ceiling by August 2 is now 55%. Which means at least a 1 if not more notch downgrade by the rating agencies, which means massive and completely unpredictable spillover effects in money markets, structured finance, muni and all other financial products, which means the military will soon have to conduct many more urban exercises to prepare for "Tehran" (because the Iranian capital's downtown has at least 3 John Hancock center replicas). In the meantime, the market still thinks that Bernanke can fix this.

Gold New Record Nominal Highs ($1,625.70) As CDS Traders Start Positioning For U.S. Downgrade(s)

Gold is trading at USD 1,620.40, EUR 1,120.50 and GBP 989.08 and CHF 1,298.50 per ounce. Both the dollar and the euro are under pressure again today and gold has reached another new record nominal high of $1,625.70/oz in early European trading. Economists in the U.S. believe that the U.S. will lose its vanguard AAA credit rating according to a recent poll conducted by Reuters. A survey of 53 economists showed 30 believed that one of the three leading credit rating agencies will downgrade US debt. The economists do not believe that the U.S. will default. A downgrading of the U.S. is inevitable given its very poor fiscal position – the question is by how much the U.S. is downgraded and AA looks possible in the coming months. The widening in U.S. CDS has so far been modest but the bond vigilantes may be awakening from their slumber as net notional CDS on US debt has risen above that of Greece and Italy. They either believe that the U.S. government will default on its debt or are taking out insurance against of this happening. Investors internationally -- including everyone from individual consumers in their pension funds, to hedge funds, to the Chinese government -- currently hold $9.3 trillion (with a T!) in Treasury bonds, and they're counting on Uncle Sam paying up when those contracts mature. The U.S. government will have a three-business-day grace period to make good on any default before credit default swaps are triggered, the International Swaps and Derivatives Association said Tuesday.

CBO Finds Reid Plan Half A Trillion Short Of $2.7 Trillion Promised; Actual Cuts Are $375 Billion Over Ten Years

Yesterday, we roasted Boehner over his proposed deficit-cutting plan after it was discovered that it cut about $250 billion less than had been promised. Now it is time to do the same to Harry Reid, after the CBO has just released its analysis of his so-called "plan", which has double the credibility, and dollar, hole: per the CBO the plan will only generate $2.2 trillion in savings, half a trillion short of the promised $2.7 trillion. But wait, it gets far, far more idiotic. Per the CBO "The caps on appropriations of new budget authority excluding war-related funding start at $1,045 billion in 2012 and reach $1,228 billion in 2021" - that's right: savings from not fighting future wars - a cool trillion. But why stop there - savings from not declaring war on Mars: $1 quadrillion; savings from not paradropping suitcases full of $1 billion dollar bills for every US citizen: $333 quadrillion, and so forth. But wait: there's more: "The legislation also would impose caps of $127 billion for 2012 and $450 billion over the 2013-2021 period on budget authority for operations in Afghanistan and Iraq and for similar activities." But wait, there' even more: "Savings in discretionary spending would amount to nearly $1.8 trillion, mandatory spending would be reduced by $41 billion, and the savings in interest on the public debt because of the lower deficits would come to $375 billion." Gotta love the circularity: less interest payments are part of the actual deficit cuts! So, here's the math: of the $2.2 trillion in "savings" strip away non-savings from non-authorized "wars" and you get... $750 billion... and take out the $375 billion in, no really, interest savings, and you get... $375 billion. OVER TEN YEARS! Is there a wonder why with idiotic leaders like this the true US rating is CCC at best?

Is It That Time Again? Military Conducting Training Exercises In And Around Boston

Sooner or later it was inevitable. Next up: the "tea party" lives up to its true name.

June Durable Goods: Another Miss

Those who had read our prediction that the Paris Air Show was a harbinger of weaker durable goods will not be surprised to read that June durable goods just came at a very disappointing -2.1% on expectations of an increase to 0.3%, from 1.9% in May. But it wasn't just Boeing's fault: ex-transportation the number was a subpar +0.1% on consensus of a 0.5% beat, with the May reading revised up to 0.7%. The driver according to Bloomberg's Joseph Brusuelas: "decline in transportation bookings, incl. 28.9% drop in non-defense aircraft orders." And that's not all: "Non-defense ex-aircraft, proxy for capex, points to slower growth in coming qtr." This means that as expected not only is Q2 GDP trending now much lower, possibly below 1%, but the weakness is starting to spill over into Q2 data. As AP reports, "Manufacturing has been the stellar performer in the two-year-old recovery. But activity slowed in the spring, reflecting in part supply disruptions following the March earthquake and tsunami in Japan. Manufacturing was also hurt by the hit the overall economy took from higher energy prices which dampened consumer demand." Ah, still blaming it all on Japan. And to think in Joe LaVorgna's world it was supposed to be a boost to GDP. Kneejerk reaction: USD plunges, futures down, gold surges to new record over $1,626. On so forth.

Daily US Opening News And Market Re-Cap: July 27

Markets remained apprehensive as the impasse over the issue of raising US's debt ceiling prevailed, and further risk-aversion materialised after German finance minister expressed his reluctance in the use of EFSF/ESM to purchase government bonds in the secondary market. This resulted in weakness in European equities, led by financials, which provided support to Bunds, and also weighed upon the EUR across the board. In other news, AUD received strength following higher than expected inflation data from Australia overnight, whereas a downtick was observed in GBP/USD after a sharp decline in CBI trends total orders figures from the UK.  Moving into the North American open, markets look ahead to key economic data from the US in the form of durable goods report, DOE inventories figures, as well as the release of Fed's Beige Book. In terms of fixed income, USD 35bln 5-year Note auction is scheduled for later in the session. Markets will also watch keenly US corporate earnings from the likes of Boeing, ConocoPhillips, and Visa.

Frontrunning: July 27

• IMF Chief Raises Idea of Seeking More Cash (WSJ)
• US Money Market Funds Build Liquidity (FT)
• Interbank Loan Probe Focuses on Yen Rates (FT)
• Watchdog Sees Financial Weak Spots (WSJ)
• China’s 29% Jump in Industrial Profit to Spur Growth by Fueling Investment (Bloomberg)
• Shanghai to Step Up Probes of Home Prices (Bloomberg)
• Lessons From the Malaise (NYT)
• Hurtling toward economic chaos (LA Times)
• Who Elected the Rating Agencies? (WSJ)

Today's Economic Data Docket - Ignore Durable Goods And The Beige Book: It Is All About Headline Risk

Today's economic docket consists of Durable Goods numbers (if the Paris Air Show was indeed as bad as we expect, Boeing, i.e., aircraft, orders may slip substantially), the Beige Book, and $35 billion in 5 Year Notes (+$20.065 net). All of it irrelevant: the double whammy of major headline risk out of both Europe and the US (Europe bailout 2 unwinding, no deal 24 hours ahead of the Thursday congressional deadline) will be the key driver of the market once again.

European Banks Tumble On Schauble Comments Against "Blank Check" EFSF

When we first summarized our take on the second European bailout package we completely ignored the specifics of the rollover mechanism and the private investor participation scheme because they were entirely irrelevant. We said: "This is merely a red herring that attempts to confuse the issues associated with the first, and far more important concept: the nuances of the EFSF and its imminent expansion. And expand it will have to, because in reality what is happening is that the net debt of the countries will end up growing even more over time for one simple reason: this is not a restructuring of existing debt from the perspective of the host country! Simply said Greek debt will continue growing as a percentage of its GDP, meaning it, and Ireland, and Portugal, and soon thereafter Italy and Spain will be forced to borrow exclusively from the EFSF. Therein lies the rub... The bottom line is that for an enlarged EFSF (which is what its blank check expansion today provided) to be effective, it will need to cover Italy and Belgium." We further said that "by not monetizing European debt on its books, the ECB has effectively left Germany holding the bag to the entire European bailout via the blank check SPV." We concluded with the rhetorical: "what happens tomorrow when every German (in a population of 82 very efficient million) wakes up to newspaper headlines screaming that their country is now on the hook to 32% of its GDP in order to keep insolvent Greece, with its 50-some year old retirement age, not to mention Ireland, Portugal, and soon Italy and Spain, as part of the Eurozone?" Well, German Finance Minister just gave us an answer, and it is the reason why various European banks are once locked limit down, and the entire banking industry in Europe is bleeding: "German Finance Minister Wolfgang Schaeuble said the euro zone's rescue fund should only purchase bonds on the secondary market in exceptional circumstances, according to a letter obtained by Reuters on Wednesday. "The government rejects a 'carte blanche' for widespread purchases on the secondary market." Translation: Germany finally realized the horrors of the fine print and just said no. This means that the entire second bailout package has now been unilaterally unwound courtesy of...

Buy me a cup of coffee

I'm PayPal Verified