The day after Congress raised the debt level, the official US debt soared ahead to $17,075,590, 107,964.57. This increase is over $327B for one day. No, the record one day spending was not all done in one day but was money borrowed from other government sources. It must be real nice to have a source of funds hidden from the public of over $300B. The result. We now have over $17T US sovereign debt.
Now that this money has been paid back, how do we know the same fund sources will not be available the next time the US government is short on spending change? If we have this secret stash of $327B, was the government shutdown and the debt ceiling merely the time line for a government charade?
The saddest moment was when President Obama said interest rates would determine when the US was in trouble. Subsequently the default card was played. He said unless Congress raised the debt ceiling, the US risked default on sovereign debt. The US rates started working higher. Soon thereafter talk of a US credit down grade increased. How much did this play a part in a debt ceiling settlement?
With the increase in the debt to $17T from the $10.6T at the beginning of President Obama entry to office, this means $6,4T of deficit spending has been injected into the economy. Where is the Keynes multiplier affect?
A recent study by Lacy Hunt, Executive VP of Hoisington Investment Management Company, reached some interesting conclusions. Hunt claims that the Fed does not understand how its program of Large Scale Asset Purchases (LSAP), or QE works. He makes several points:
First, the Fed's forecasts have consistently been too optimistic, which indicates that its knowledge of how LSAP operates is flawed. LSAP obviously is not working in the way its had hoped, and its are unable to make needed course corrections.
Second, debt levels in the U.S. are so excessive that monetary policy's traditional transmission mechanism is broken.
Third, recent scholarly studies, all employing different rigorous analytical methods, indicate LSAP is ineffective. So we have Bernanke's choice monetary cure for the ails of the US economy not working, and we have the newly appointed Janet Yellen waiting to continue the QE policies of Bernanke. The market was correct toward the end of this week, anticipating a delayed taper, and continued easy money from the Fed.
But the most recent political donnybrook in Washington has brought out the America doom and gloomers. Before departing down that path best consider observations of Ambrose Evans-Pritchard in the Telegraph from last week. Among other things he says:
"Taken in the stride of 20th century history, the latest bleatings about America's demise seem more than a little overdone. Is Washington really rendered unfit for world leadership by an acrimonious dispute over the debt ceiling, or the passions of the Tea Party?........
However, let me say in defense of Congress that the size and role of the US government are matters of great political weight. This epic battle in Washington is evidence of a vibrant democracy wrestling with issues that are not easily solved. The parties are bitterly divided because the people are bitterly divided. As before in US history, rifts are overcome peacefully or otherwise."
The market action has taken the EURUSD (FXE, UUP, UDN) above the 1.37 handle close to the yearly high of 1.3710 in early February. The move, while impressive, seems to have run out of momentum around this level. Another technical indicator, Bollinger Bands shows we are at the top side of the two deviations from the simple moving average. At this extreme, this often precludes a market correction so a pull back might be in order.
The extraordinary events from Washington the past several weeks may have caused some traders to ignore some of the European news. According to Zero Hedge:
"European Macro Fundamentals Slump To 3-Month Lows; Stocks At Record Highs"
While "hard" data has been scarce in the US thanks to the shutdown, we recently noted that what little we had recently indicated notable weakness relative to the survey-based "soft" data. Goldman has, in the past, indicated how little forecasting power the soft survey data has in Europe and yet still, day after day we are treated to the herd of mainstream media types proclaiming that Europe is recovering and that their fundamentals have turned a corner. The problem with that "story" is that is that is a lie. In fact, European macro data has been sliding since the start of September and has plunged recently to 3 month lows.
With the "non-essential" government workers returning to work, next week should produce an abundance of reports. On Monday we get the US Existing home sales, which will be followed by the Non-Farm Payroll report and the Unemployment numbers on Tuesday. This is only the beginning of the week in the US, and there are enough reports to keep the market active in the coming week.
I really would like to see a fresh reading of the COT report. The last report, from September 24th, showed the specs had amassed a big euro long, almost 64K contracts. It seems like we may see a lively two way trade. Sometimes it is possible to trade the extremes and take some pips from either side of the market. This flexible trading approach works best if you focus on what the market is doing, not what you think it should do.