Thursday the 17th, US debt limit day approaches

Last week was a strange one for the markets. At the slightest hint of a possible compromise over the US budget and debt limit being raised the markets showed their euphoric side. However, the Republican proposition to extend the time until December so that further talks can take place was actually loaded with strings attached. These strings were again around ObamaCare, so it shouldn't come as a surprise that it was rejected. What was a surprise was that the market seemed to buy into the possibility that this might work.

If anything, what we saw towards the end of last week was a relief rally. Markets had been falling off for a while and they were prepared to grasp hold of anything that might suggest a deal was just around the corner. They are still living in hope that common sense will prevail and a deal will be done by Thursday, European markets are currently treading water in wait, while the US market is currently predicted to give back some of the gains made towards the end of last week. So far a big sell off has been avoided and the US bond market is closed today.

If you are an investor in shares these are troubling times. Perhaps not so much if you are a trader. Investors perhaps don't want to think too much about liquidating everything before Thursday, but also why would anyone open any new long positions before that date? Traders, especially those with short term time horizons will probably be out and waiting or looking to get out the closer the date approaches. They will also be looking at opportunities to short in the event of no agreement. Longer term investors may also look to hedge against the fall out of share price falls by taking out an index short, the more sophisticated may be using options. Many investors however, will probably just sit tight and hope the worst doesn't happen.

We should be under no illusion as to what a US default, even if it is only technical, actually means.

The stalemate is now damaging confidence and denting the recovery, bankers at a satellite Institute of International Finance meeting in Washington warned.

“It would be utterly catastrophic,” Deutsche Bank co-chairman Anshu Jain, said. “This would be a rapidly spreading fatal disease.”

JP Morgan chief executive Jamie Dimon added: "I think it would ripple across the global economy in ways you couldn’t possibly understand.” 

http://www.telegraph.co.uk/finance/economics/10376058/US-debt-ceiling-Markets-on-edge-as-talks-drag-on.html

The fact is that to a large degree it would be entering unknown territory, but markets do tend to react to such events in a way that is entirely predictable, they go crazy. There is a good chance of a market crash if Thursday comes and goes without a decision, because this is the way markets respond to such news. It's no good trying to be rational about it, it is unlikely the markets would simply respond by staying calm.

The reality is that many of us know that any deal before Thursday does not solve the problems the US face going forward in relation to its budget and debt, it is kicking the can down the road, but this is effectively what an inflationary money system does. The can kicking can go on for a long time, because for long periods it depends on whether you are good at controlling the can as it rolls on. Ultimately issues like debt and the budget have to be resolved, but within our current financial system it will always be relative to other things, like manageable debt. To stop the can kicking in total requires a different financial system, but whether it can ever be changed in a way that isn't destructive in a horrific way until something new replaces it is a much bigger debate.

One final point about the current Republican stance in relation to ObamaCare, is that the politics of this is saying they are doing this for their voters, or middle America, but how will this constituency respond to crashing markets if they push it to the wire? As they see their investments collapse, jobs and pensions in danger, recession or depression and the US name across the world being about as bad as it could get? If they default, who would lend to the US again at such generously low interest rates? Middle America has a lot to lose from a default, which is perhaps one of the main reasons why it is believed unthinkable that Republicans will go that far. They must know what the outcome would be from default?

The market still believes that a default is unthinkable, it is as Warren Buffett recently referred to as the financial market equivalent of using nuclear weapons. Are the US politicians really prepared to do that come Thursday?

Decision time ahead.

Well, here we are again heading towards a potential crisis point which let's face it was so predictable. Politicians in the US continue to argue and stand their ground on the issue of the budget, the debt limit and of course what appears to be holding it all up, the politics behind "ObamaCare". In the meantime the markets have gone cold, some profits have been taken. They have been falling session after session but no strong message has yet been sent to Washington that if this goes to the wire and beyond, crisis awaits.

According to Obama the votes are there to pass a clean bill, which would mean that they could then argue and negotiate afterwards for as long as it takes. The impasse appears to be that the President won't negotiate under threat and he won't back down on his health initiative, while elements of the Republican opposition see this as their chance to put a line in the sand and get what they want. The end result appears to be stalemate in the face of disaster that awaits elsewhere if an agreement isn't reached in the next week or so.

Chances are it will be a disaster if there is no agreement as history shows that ultimately markets will throw a hissy fit to get what they want, but this goes slightly deeper than what has gone before. If the US were to default, even if it is only a technical default, then trust will go, the chances are the rating agencies will come out with US downgrades and the stock markets will crash. Maybe some on the Republican side can live with this out of principle, but will their voters and what about their financial backers? The Republican Party might be feeling some heat right now from those that back them to get a deal done, otherwise the money that finances them will drain up. Unless of course, you believe in conspiracy and that the financial elite want this crash and the crisis to come to further their ends.

There is a general view that while the markets have been falling recently an agreement is ultimately expected, because the alternative is pretty dire. Sooner or later the politicians, or enough of them, will cobble together some agreement that will stop the immediate crisis, but in reality simply pushes things further down the road. Nevertheless this should be enough to at least placate the markets for now.

In the meantime, hold on to your hats.

Whatever happened to....Part two

So, tapering seems to be taking a back seat for the moment, but markets seemed to go awfully quite on that other big outstanding issue, the US debt ceiling. It is interesting how markets can choose to ignore something as and when they choose to do so, perhaps in part because they want to draw in the unsuspecting before they have a sell off. It isn't as if the debt ceiling issue had gone away or even looked like being resolved, if anything attitudes on both sides seem to have hardened.

It's been a while since we read this sort of news.

A potential shutdown for the U.S. government by Monday weighed on sentiment. Fears the Treasury will hit the debt ceiling by mid-October only added to investor worries. 

Naeem Aslam, chief market analyst at AvaTrade, said traders are “taking the profits from the table.”

“With political opera taking place in Washington, with the government shutdown threat and the Italian political crisis in Italy, volatility in the market is extremely elevated and perhaps sitting on the sidelines could be the best option for traders,” he wrote in a note.

http://www.marketwatch.com/story/stock-futures-sag-on-shutdown-fears-2013-09-27

Given that the poilticians will probably take this down to the wire, it is difficult to feel comfortable going long in the market right now. For those that feel comfortable however, shorting might offer better opportunies, as long as you keep one eye on the prospects for a deal.

Whatever happened to....

Tapering, the debt time bomb, US debt limit talks, EU crisis, need I go on?

In the US the Fed has been meeting and is due to report today on its latest findings and whether they will taper their bond buying sooner rather than later, or just keep things on hold again awaiting better data. Markets seem to be in hiding, waiting for the latest from Ben Bernanke. Each time he has reported, without giving too much away on what the Fed intends to do, markets have tended to want to sell off a little on the news or rather lack of it. I was reading yesterday that markets might actually be relieved once the Fed starts to taper as at least they would then be doing something. Markets would then no doubt move on to something else that they might worry about.

So, whatever happened to the US debt limit talks?

President Barack Obama won't negotiate with congressional Republicans over the U.S. government's borrowing limit, he said in an interview that aired Sunday.

Obama told ABC News' George Stephanopoulos that he would not cooperate with House Speaker John Boehner's demand for budget cuts in exchange for House Republicans' allowing the government to continue paying its obligations.

"I'm happy to have a conversation with him about how we can deal with the so-called sequester, which is making across-the-board cuts on stuff that we shouldn't be cutting, while continuing tax breaks, for example, for companies that are not helping to grow the economy," Obama said on ABC's "This Week." "What I haven't been willing to negotiate, and I will not negotiate, is on the debt ceiling."

Much of the federal government will shut down unless Congress passes a budget, or a temporary spending bill, by next month. Not long after that, the U.S. will run out of borrowing authority, with potentially catastrophic consequences for the world economy if the government defaults on its debts. Some Republicans want Obama to gut his own health care law in exchange for a functioning government.

http://www.huffingtonpost.com/2013/09/15/obama-debt-ceiling_n_3930243.html

This is a potential calm before the storm. US politicians have a habit of doing last minute deals, but they are usually dragged along by all sides to get the best political result that suits them. This is not what the markets want to see. So, we could be heading into a period of volatility after a period of relative calm. It's not an easy time to call the markets. US charts look more positive than the UK, but that could change quickly if some of these old fears take hold in the market again and it's been a while since that happened.