Category Archives: US Deficit

17th October 2013 — Debt ceiling extended, taper back on, short stocks?!

If it wasn’t for the last minute, nothing would ever get done in American politics. For the third time in a row, a compromise was reached, seeing the debt ceiling temporarily extended, the government reopen and the crisis averted.

In reality, absolutely nothing of any substance was achieved last night, other than a further delaying of the inevitable. America’s structural deficit remains unchecked and the shutdown of the last few weeks will prove to be utterly pointless, as federal workers will receive back pay. The Federal Government is now permitted to continue borrowing until February 7th next year.

This might sound like we have four months to wait until the next installment of this never ending drama, but there are some potentially significant repercussions of what has happened in the last few days, which could have altered the landscape dramatically.

 

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October 15th 2013 — Hedge your bets; 48 hours from an American default

If you are not watching this story, it’s time to switch on. The deficit ceiling debacle is back in full force. News crossed the wires, about an hour ago, that the Republican leaders in Congress have had to admit defeat in their efforts to provide an alternative plan to the bipartisan agreement, which is taking shape in the Senate.

We are now just over 48 hours from a US Default.

While the odds are still against this actually happening, they have nevertheless just shortened significantly.

The Democrats have a new found hardness about them and it looks like they are determined not to blink first in this latest fractious standoff.

 

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14th October 2013 — The will get rid of the debt ceiling (at some point)

Last week’s joyous market rally, in response to the Republican offer to extend the debt ceiling by six weeks, was absurd. Quite exactly why a marginal stay of execution was a reason to buy stocks is beyond me. American politicians have had over two years to reach a resolution, since the deficit ceiling became a full-blown crisis, so why should we have expected any magic after six more weeks?

But whatever the case, clearly this time was reason enough for stocks. On reflection, I suppose it’s quite simple really. When the market wants to go up, it goes up, defying logic and reason. Either you choose to go with it or you get out of the way. For what it’s worth, I’m electing to do the latter for the time being.

 

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28th February 2013 – The Sequester and short the Dow

There are some topics I ignore in this blog, largely because there is so much coverage of them elsewhere. I often figure what else is there to say?

The trend of events is clear and we keep receiving confirmation after confirmation of the trouble ahead. Excessive debt, stagnant economies and political deadlock

The Italian election is one issue I’ve ignored. Their bond yields have jumped and whichever parties eventually form a government, it probably won’t last more than 18 months if recent history is anything to go by.

The fact is the hard choices are just too hard to make now. Economies are so bitterly over-leveraged and populations have become used to such unsustainable lifestyles that there is no way the current ruling classes can possibly hope to implement desperately needed reform, without also ensuring their own downfall in popular uprisings. Continue reading

19th February 2013 – Can the Fed exit QE?

I saw this piece in the FT a couple of days ago.

I have given a lot of thought to the Fed’s move just before Christmas, when it tied QE to unemployment. As the FT piece mentions the key word is “substantially”. Page 10 of the January minutes of the FOMC meeting confirm that “if the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in the context of price stability”.

The obvious question to ask is what does “substantially” mean?

I have seen a lot of commentary suggesting this means the American unemployment falls to 6.5%, but this is not categorical. The language is no-doubt deliberately ambiguous to give the Fed flexibility when making future decisions and it’s the future decisions that interest me most.

Stopping the asset purchase programme will be an important step, but what comes after this? How is the Fed going to repair its balance sheet?

Remember this link?

To remind you the Fed has roughly $3trillion sitting on its balance sheet, which it is going to have to do something with. To pay for these purchases, the Fed has created bank reserves. Total bank reserves created to date equal $1.6trillion. This is likely to grow by $1trillion over 2013. Continue reading