A US Credit Default: Not Happening?
Conventional wisdom has a timeline.
"Not happening" are two of the most powerful words around when paired together.
I remember my high-school buddy asking me if the captain of the cheerleading squad would go out with him. I responded, as kindly as I could, "Not happening."
My nine-year-old girl excitedly asked at the beginning of this NFL season if I would take her to the Super Bowl if the Raiders made it. "Sure," I said, which she followed with a quick, "Do you think they'll make it?" "Not happening," I told her as reality set in.
In recent weeks, the smartest smart money has weighed in on the potential of a US credit default. Bill Gross, Larry Fink, and Goldman Sachs (NYSE:GS) institutional research has been uniform in their response: "Not happening—zero chance."
Here in Minyanville, our view has been that while this process will drag out—the theater provides leverage to one side or the other, or the thinking goes—a short-term debt-ceiling resolution would emerge to once again kick the can down the road. It could get hairy and likely will, but in the end, calmer heads must prevail.
The world stage assumed a contingency plan would be knocked out over the weekend—but that proved elusive.
Now, three days before the US government's borrowing authority lapses, the Senate continues to whittle away at an agreement. Senate Majority Leader Harry Reid said yesterday that his discussion with Minority Leader Mitch McConnell was "substantive" and "productive" and he is "optimistic about the prospects for a positive conclusion."
While an eleventh-hour accord remains the most likely scenario—if only because a default would be apocalyptic—it is not, and I repeat not, guaranteed. Anytime you have human beings involved in a process, as is the case with anything political, you have the potential for human error, be it in the form of emotion, judgment, or underestimating a response to your decisions.
For the last six years, I have been writing about the tricky trifecta of "societal acrimony, social unrest, and geopolitical conflict." It has manifested in many ways, shapes, and forms—from The Short Sale of American Icons to Why Kim Kardashian Matters to the Stock Market—and infected companies on Wall Street with the rejection of wealth and families on Main Street through the chasm between the haves and have-nots.
Parallel with This Devolution of Social Mood, in classic "chicken vs. egg" fashion, we've witnessed the emergence of Government .com as the risk from the first phase of the financial crisis transferred from reality to perception. Indeed, as we've repeatedly posited, the state of the global social mood and the steady progression of our tricky trifecta is very much the "other side" of the US fiscal and monetary policy decisions.
Which leads us to this morning: T-3 until October 17.
As the world waits for the headline that an accord has been reached, the shadow of doubt is knocking on the financial market door. The most likely scenario remains on the table—a last-minute deal that somehow positions politicians as magnanimous in their efforts—but these events tie the above dynamics into one not-so-neat moment of truth.
While my inner cynic continues to whisper that an inability of career politicians to agree on the most basic legislative functions is an apropos pin prick to the Government .com bubble—one that would unwind the financial engineering they've worked so hard to create—the husband and father in me hopes those feelings prove fleeting and wrong.
For if that comes to pass, there’s no winner in that game, "who don't go home with all, not with all."
- As gold tickles the all-important 1275 level—which, as breached, "works" through a pure technical lens to $1,180—I wanted to update our gold vs. S&P (INDEXSP:.INX) chart, which you can see below. A picture, as they say, speaks 1,000 words.
- NDX (INDEXNASDAQ:NDX) 3255—the 2013 high—is a level to watch, per the chart below.
Earnings season is in full force, and while numbers could disappoint, you should expect companies to point to the government shutdown as a reason for their misses (even though the government shut down after the third quarter ended).
One potential outcome being bandied about is the prioritization of debt should an accord fail to be reached by October 17. For what it’s worth and so it’s said, I think that’s a recipe for disaster and a catalyst for a deep stock market correction.
Last Thursday and Friday’s rally is being attributed to markets pricing in a debt ceiling and government shutdown accord. That begs the question, if those rallies took place, what will we see when an accord is actually reached?
Thus far in 2013, market corrections have been extremely tame, with a 7.5%, 4.8%, and the latest 4.8% pullback littering an otherwise stellar uptrend. The question is whether we've seen the last spate of fear before performance anxiety kicks in—or if that's just what they want us to think.
The action late last week in the credit markets supported, and some would say drove, the equity move. November and December T-bill rates ratcheted higher on Friday, however, suggesting that concerns remain into year-end.
The bulls will argue that the big money, many of whom are up 20% or more, won't let their gains slip away as they want to get paid. The bears view the conditioned complacency of dip buyers as a recipe for disappointment, if not disaster, as we edge into the meat of the quarterly reports.
The earnings avalanche will continue this week with Citigroup (NYSE:C), Intel (NASDAQ:INTC), Yahoo (NASDAQ:YHOO), Coca Cola (NYSE:KO), BlackRock (NYSE:BLK), Bank of America (NYSE:BAC), Pepsi (NYSE:PEP), American Express (NYSE:AXP), IBM (NYSE:IBM), Goldman Sachs (NYSE:GS), Google (NASDAQ:GOOG), and Morgan Stanley (NYSE:MS). Thursday will bring the October 17 debt deadline, which is widely expected to be pushed out, and China’s third quarter GDP will be released on Friday.
- Let’s roll, and hey—let’s be careful out there.
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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