First Impressions

Do What You Say, or Stop Saying It
Jon Matte
Martin Wolf (“The Debt-ceiling Doomsday Device”) talks about the idiocy of having a deadline beyond which is placed the self-imposed punishment of the partial destruction of a major world economic player.  He’s right, but I’ll add to that the idiocy of having a line in the sand that we must obey… except that every single time we smudge out and redraw it so we don’t have to cross it OR be limited by it.

These are the same people who try to get their kid to go to bed every night by saying, “C’mon Jenny.  I’ve told you four times now.  I’m going to count to three. One… two… two and a half… ok, that’s it. Jenny, if you don’t go to bed right now, I’m really going to get angry.”  Seriously.  Yes, it’s stupid to load a crate full of dynamite and then sit on it and threaten to blow it up if people don’t make a responsible budget, but it’s even dumber to keep restarting the clock because they couldn’t do it the last time.

Here’s how much difference it makes to overspend like crazy, versus overspend like crazy while braying like a jackass about how this year by God it’s going to be different around here: None.  Just get rid of the debt ceiling law, Congress. You’re not following it anyway.

 

Quote of the Day

“You ever see ‘Dog Day Afternoon’? Al Pacino, as crazy as he looked, you knew on some level he was ready to make a deal. There’s a level of unpredictability and recklessness that seems to me to be breaking new ground.”

Pat Griffin, Bill Clinton’s director of legislative affairs on the looming government default.

 

Lead Stories

Senate cuts deal to raise U.S. debt ceiling, reopen government
By Richard Cowan – Reuters
The U.S. Senate announced a last-minute deal on Wednesday to avert a historic lapse in the government’s borrowing ability and a potentially damaging debt default, and to reopen the government after a two-week shutdown.
http://jlne.ws/1aNHYEx
**JK – Great job guys! Next stop – Feb. 7, 2013

Bond Investors Said to Mull Consortium in Trade Talks With Banks

Matthew Leising – Bloomberg
BlueMountain Capital Management LLC, Pacific Investment Management Co. and Fidelity Investments are among money managers that are in discussions to form a consortium that would seek ways to make it easier to buy and sell corporate bonds in the U.S.
http://jlne.ws/GQYquK
**JK – This is Dodd-Frank and Basel shrunk the corporate bond market.
Interesting tidbit from this story: Citi said its fixed-income trading revenue excluding an accounting adjustment dropped to $2.78 billion, a decline of 26 percent from a year ago, while JP Morgan’s reported an 8 percent drop, to $3.44 billion.

The debt-ceiling doomsday device
Martin Wolf – FT.com
Some laws are too dangerous to be allowed to remain on the books. Take, for example, the US debt ceiling. It is the legislative equivalent of a nuclear bomb aimed by the US at itself, with the rest of the world within its blast radius. What must never be used should not exist. Regardless of the outcome of the current negotiations, the law needs to be repealed. Orderly government cannot be pursued under so destructive a threat. It is quite different from a partial government shutdown. Albeit foolish and unjust, that is just about manageable. Failure to lift the debt ceiling is not.
http://jlne.ws/173cnCk
**JK – Ain’t gonna happen.

Why the U.S. Should Be Downgraded
Michael J. Casey – MoneyBeat – WSJ
The world has lost its faith in the U.S. It no longer deserves to be a Triple-A credit. This was encapsulated in the nods of agreement that were seen in a packed auditorium at a Washington conference of international bankers on Friday when a visibly angry BlackRock Inc. CEO Laurence Fink told the audience that the U.S. is not a “principled nation.” It matters not whether the U.S. is actually forced into a devastating default–still an extremely unlikely event. Triple-A credits do not behave like this.
http://jlne.ws/1hW4T3l
**JK – “You mean to tell me that the success of the economic program and my re-election hinges on the Federal Reserve and a bunch of f—ing bond traders?” said Bill Clinton, from Bob Woodward’s The Agenda.

CME Boosts Margin for Rate Swaps by 12% on U.S. Default Concern
Matthew Leising – Bloomberg
CME Group Inc. (CME) increased margin levels by 12 percent for the interest-rate swaps that its clearinghouse guarantees, citing the risk that negotiations over avoiding a U.S. government default will spur volatility.
http://jlne.ws/19RNXMg

Reminder: the US isn’t welching on Thursday
Cardiff Garcia | FT Alphaville    
Not that we want to discourage the squabbling ninnies in Washington from concluding a deal, of course… Below is a brief reminder from Capital Economics that the US won’t actually run out of money on Thursday, an explanation of what happens after, and a chart with the Treasury’s spending and auction schedule.
http://jlne.ws/173coGq
**JK – Hey, everything’s cool. We have until Oct. 20th actually.

Gauging the Momentum of the Labor Recovery
Mary C. Daly, Bart Hobijn, and Benjamin Bradshaw – Federal Reserve Bank of San Francisco
Among the 30 indicators we analyze, six stand out as excellent predictors of future improvements in the unemployment rate. Indeed, these six predict future changes in the unemployment rate better than lagged improvements in the unemployment rate itself. These indicators are the insured unemployment rate, initial claims for unemployment insurance, capacity utilization, the jobs gap, the Institute for Supply Management (ISM) manufacturing index, and private payroll employment growth.
http://jlne.ws/173cnCl
**JK – An in-depth look at how the Fed looks at labor stats.

South Korea Sees Won-to-Bond Risks as U.S. Impasse Adds Stress
Cynthia Kim – Bloomberg
Prolonged tension over U.S. fiscal policy adds to the danger of increased volatility in financial markets, the finance ministry said in a report prepared for a parliamentary audit today.
http://jlne.ws/1aMKGdr
**JK – Google translator says the Korean word for stress is: seuteuleseu. Just trying to pronounce that is stressful.

Who Says Gold Is Money?
Janet Tavakoli – The Market Oracle
Who is right? Warren Buffett and Charlie Munger and many more say you shouldn’t own gold. Ray Dalio, David Einhorn, Jim Rogers, John Paulson, George Soros, and I (among many others) own some gold—but that doesn’t mean you should own it.
http://jlne.ws/173cnCm
***JM: I was so startled to find a neutral “should you own gold” article, free from mouth-foaming and bizarre dystopia-anticipation, that I just had to include it. Whatever is the world coming to.

 

Central Banks

Federal Reserve’s expected ‘taper’ of easy-money policies gets pushback from abroad
Howard Schneider – The Washington Post
International pressure is aimed at slowing U.S. plans to wind down the loose monetary policies used to battle the economic crisis as Federal Reserve officials sort through a deluge of criticism, warnings and evidence that their decisions in coming months might derail growth in other countries.
http://jlne.ws/173coGr

Draghi Turns Judge on EU Banks as ECB Studies Accounts
Jeff Black & Boris Groendahl – Bloomberg
The European Central Bank is sizing up just how tough it wants to get with the region’s lenders. Policy makers at the Frankfurt-based ECB will this week try to agree on the ground rules of its three-pronged probe into the health of the 130 banks it will start supervising next year.
http://jlne.ws/173coGs

A jobless guide to interest rates
Mike Peacock – Reuters
The Bank of England’s decision to peg any move in interest rates to the downward progress of unemployment has invested the monthly figures, due today, with huge importance.
http://jlne.ws/173cnCn

Fed’s Dudley: Bad fiscal policy threat to central bank independence
Reuters
Unconventional monetary policy poses a small risk to central bank independence but a far larger threat comes from fiscal authorities if they insist on policies that harm the economy, a senior U.S. Federal Reserve official said on Tuesday.
http://jlne.ws/173coGt

China c.bank sees credit expansion pressure amid FX inflows
Reuters
China faces upward pressures on credit expansion due to rising capital inflows, the central bank said on Wednesday, after data showed upbeat bank lending growth in September.
http://jlne.ws/173coGu

 

Currencies

Fed Relegates Default to Sideshow as Volatility Ebbs: Currencies
Emma Charlton & Candice Zachariahs – Bloomberg
In the world’s largest market, the potential for a U.S. default is proving to be a distraction to what really matters: whether the Federal Reserve will maintain its extraordinary monetary stimulus.
http://jlne.ws/173cnCq

Four key questions on the internationalisation of the renminbi
Claire Jones, Economics Reporter – FT.com
George Osborne, Britain’s chancellor of the exchequer, thinks the renminbi will “become almost as familiar as the dollar” within his lifetime, which explains his efforts to promote London as a hub for offshore trading in the Chinese currency.
http://jlne.ws/173coGw

U.S. Dollar Set to Rally But Blink and You’ll Miss It
Jerry Tan – MoneyBeat – WSJ
The U.S. dollar is poised to strengthen as lawmakers in Washington inch closer to a contingency deal to avoid a U.S. debt default, but analysts say any gains would likely be short-lived.
http://jlne.ws/173coGy

China Intervened Aggressively in Currency Markets in Latest Quarter
Shen Hong – WSJ.com
Beijing has intervened aggressively in currency trading lately to blunt a rise in the yuan’s value, data indicate, and analysts said the moves indicate China’s caution in liberalizing its foreign-exchange policy.
http://jlne.ws/173coGz

Dollar’s role as world’s leading reserve currency may be at risk
NY Times
Remember the last time the country came to the brink of default? It was August 2011. For the first time in history, Standard & Poor’s, the ratings agency, downgraded US government debt.
http://jlne.ws/173coWM

HK dollar peg: Lessons for Washington
FT.com via euro2day.gr
When Hong Kong tied its currency to the US dollar 30 years ago this week, watchers wondered whether an economic remedy could cure a political disease. Posturing by Beijing and London over the territory’s future had plunged the currency into crisis. There is an irony, then, that the peg reaches its birthday just as posturing in Washington risks undermining the very credibility that Hong Kong clung to in 1983.
http://jlne.ws/173coWN

 

Indexes and Index Products

ETF assets to top $9.5 trillion by 2020, says Principal Financial
ETF Strategy
The Principal Financial Group has published a report, entitled ‘A 360 Degree Approach to Preparing for Retirement’, assessing innovations, gaps and trends within the US retirement system. Among its findings, the report identifies key areas of innovation in lifecycle investing and paints a rosy picture for the exchange-traded funds industry.
http://jlne.ws/1hW4U7a

Morningstar to Launch First 529 College Savings Plan Indexes
Press Release (via Sacramento Bee)
Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, plans to launch a family of 529 college savings plan indexes later this year. Designed to benchmark state-sponsored 529 college savings plans, the Morningstar 529 Indexes are expected to be the first of their kind in the market.
http://jlne.ws/173coWP

 

Gold

European central bank gold sales lowest since 1999 accord
Bloomberg
European central banks sold 5.1 metric tons of gold in the fourth year of an accord that originated in 1999, the lowest on record, according to data from the World Gold Council.
http://jlne.ws/173cnCt

Gold, a Tarnished Haven
Alen Mattich – The Wall Street Journal
The prospect of a U.S. default should a major catalyst for a precious metals rally. After all, a U.S. default would threaten to trigger the sort of financial apocalypse that makes money substitutes like gold especially valuable.
But, if anything, gold has been on a downward trend.
http://jlne.ws/173coWQ

 

Miscellaneous

Deutsche Bank rates swap emails refer to customer being ‘screwed’
Matt Scuffham and Estelle Shirbon – Reuters
A Deutsche Bank (DBKGn.DE) employee referred to a client not liking to know they were being “screwed” in a 2007 email concerning the sale of an interest rate swap which is now at the centre of a landmark UK court case.
http://jlne.ws/173coWR
**JK – Who in the markets think you are not getting screwed by a bank?

Fama’s Nobel Work Shows Active Managers Fated to Lose
Charles Stein – Bloomberg
The work that earned Eugene Fama the Nobel Prize in economics provided the intellectual foundation for index-tracking funds, which have upended stock picking as investors abandon active money managers.
http://jlne.ws/194qlB5

 

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