October 7, 2013
- Closing the ocean and other tales from “the 17% government shutdown”
- “Constitutional crisis” only 10 days away?
- An “extraordinary measure” the Treasury won’t take to stay under the debt ceiling
- The new subprime… and how it will make the shutdown-debt ceiling worse
- John Paulson’s big fat Greek bet… eye candy for gold bugs… readers navigate the Obamacare thickets… and more!
Gee, the “partial government shutdown” is even more partial than we thought.
Last week, 800,000 federal employees were furloughed. That’s 38% of the total civilian federal workforce.
But in dollar-and-cents terms, it’s more like 17%. So says Byron York at the Washington Examiner, citing an anonymous “Republican source on the Senate Budget Committee.”
“This figure,” says the anonymous source, “assumes that the government pays amounts due on appropriations obligated before the shutdown ($512 billion), spends $225 billion on exempted military and civilian personnel, pays entitlement benefits for those found eligible before the shutdown (about $2 trillion) and pays interest costs when due ($237 billion).”
If your head is spinning, here’s the bottom line: “This is about 83% of projected 2014 spending of $3.6 trillion.”
But the remaining 17% includes… closing the ocean.
“Charter guides received a message from the National Park Service this week informing them that they are not permitted to take clients fishing in Florida Bay until the feds get back to work,” reports The Miami Herald. “That means that more than 1,100 square miles of prime fishing is off limits between the southern tip of the mainland to the Keys until further notice.”
“Enforcement rangers will be on duty,” the paper adds. Gee, wouldn’t it be cheaper to — we don’t know — lay some depth charges or something? That’d keep those rogue charter guides in line.
The safety trade is on this morning.
We said as long ago as Wednesday that it looked as if the shutdown would increasingly become mashed up with the debt ceiling, and now House Speaker John Boehner has explicitly tied the two together. Supposedly, the Treasury hits the ceiling on Oct. 17 — a week from Thursday.
The major U.S. stock indexes gapped down hard this morning, but have bounced back a bit. At last check, the Dow is down 84 points, back below 15,000. The S&P is down about a half-percent, at 1,683.
Volatility as measured by the VIX has pushed above the 18 level — still lower than it’s been three other times in the last 12 months, including the “fiscal cliff” and the onset of the “sequester.”
Of course, the only sure thing about the “safety trade” in 2013 is that it sends stocks tumbling. So let’s survey the other asset classes….
- Bonds are a safe haven. Yields on the 10-year Treasury note have climbed back down to 2.62%
- Precious metals are a safe haven. Gold has added more than $10 to $1,323. Silver’s up strong to $22.25
- The dollar is at a standstill relative to the other major fiat currencies; the dollar index is nearly unchanged, a hair above 80.
Most of the commodity complex is selling off. Crude is down more than 1%, to $102.78 now that Tropical Storm Karen has fizzled and no longer poses a threat to drilling rigs in the Gulf of Mexico.
“There is a significant likelihood that the debt ceiling issue will come to a constitutional crisis,” writes David Goldman, “in which the president ignores the debt ceiling.”
Mr. Goldman is with Hong Kong-based Reorient Financial Markets. You might know him better as the columnist at Asia Times with the pen name “Spengler.”
Goldman does not foresee a rerun of the harmless Clinton-Gingrich shutdown charade in 1995-96: “Neither side can back out of this: Obama can’t abandon his signature health care plan and the Republicans can’t walk away empty-handed.
“Ultimately, this will be resolved because neither side wants an American default on debt obligations: It’s political theater, not sabotage. But it might be a scary ride.”
“If President Obama ignores the debt ceiling,” adds our own Dan Amoss, “investors worldwide will rethink their views of Treasuries as a ‘safe haven’ and the U.S. dollar’s role as a reserve currency.
“Odds favor a prolonged government shutdown. And — more stressful for the market — we could see a standoff right up to the brink of a Treasury default. Both political parties have an incentive to delay compromise.
“The result should be a few more weeks of a falling stock market. Earnings season isn’t likely to help the bulls, who are increasingly relying on the stale ‘money printing equals bull market’ idea.”
What would a “default” actually look like, you ask? We’re poring over the possibilities this week and preparing a special report to help you get ready. Look for it on Thursday — one week before the Treasury’s drop-dead date. We’ll keep you posted.
The Treasury will not unload its gold to stay under the debt ceiling.
Recall when Ron Paul was still in Congress and asked Fed chief Ben Bernanke why central banks and governments keep stashes of gold. “Tradition,” was the best the beard could summon on the fly.
Nor will the debt ceiling threaten that tradition. “This week,” writes Wall Street Journal columnist Brett Arends, “I asked them if they would consider selling some of the country’s gold reserves to pay the bills if the budget crisis escalates later this month.”
The reply from a Treasury flack: “Selling gold would undercut confidence in the U.S. both here and abroad and would be destabilizing to the world financial system.”
Arends is flabbergasted: “According to the official position of the U.S. Treasury, the promises and commitments of the government, and its ‘full faith and credit,’ are actually worth less than gold. They’d rather default than lose their bullion.”
Heck, wouldn’t you?
“Student loans are the new subprime,” declares Currency Wars author Jim Rickards. And it too is going to get mashed up with the shutdown and the debt ceiling.
The subprime mortgage market totaled about $1 trillion in loans outstanding before it started to blow up in 2007. The market for federal student lending totals about $1 trillion in loans outstanding now.
Default rates are now at what the Department of Education calls “crisis” levels. One in 10 recent borrowers defaulted within the first two years of required payments. A separate measure reveals one in seven borrowers defaulting in the first three years.
“We’re talking hundreds of billions in losses,” Mr. Rickards recently told Lauren Lyster at Yahoo Finance. “Right now they’re off-budget. They’re going to have to go on budget when the government picks up the tab.
“We have a shut-down government right now because people can’t agree on spending priorities,” he adds. “This will make it worse. This will increase budget deficits, increase the debt-to-GDP ratio, put us on the road to Greece.”
“The Greek economy is improving,” says hedge fund guru John Paulson, “which should benefit the banking sector.”
Mr. Paulson — who made $3.7 billion betting against subprime mortgages in 2007 — is turning his gaze east, picking over the financial ruins in the Hellenic Republic.
His fund has taken big stakes in Piraeus and Alpha — two banks that have emerged from the crisis as good values. “[Both] are now very well capitalized and poised to recover [with] good management,” he said in public comments.
Hmmm… We’re not averse to scavenging from the wreckage of the eurozone, but we’re rather more partial to Chris Mayer’s approach — buying assets that banks are forced to dump at fire-sale prices. It’s a major piece of his “coffee can portfolio” — stocks you can put away for the next 10 years and wind up with 20 times your money.
They’ve beefed up security at the New Museum in New York — given the composition of a sculpture on display.
It’s not eye candy for gold bugs… It’s art
“Tower of Power,” a 1985 work by Chris Burden, is made up of gold ingots totaling 100 kilograms — about $4.2 million at current prices.
“The curators,” reports The Guardian, “have installed Tower of Power in one of the museum’s least-visible locations: a tiny niche on a stairwell between the third and fourth floors. Visitors are only allowed up one at a time and must deposit their coats and bags in a locker beforehand.”
The museum is hosting a Burden retrospective, although we understand he will not attempt to replicate his 1971 work of performance art, “Shoot” — in which a friend shot him in the arm with a rifle.
“Given the confusion of the first three days of Obamacare, we are off to a good start,” a reader writes of our warning that the system has been set up to fail.
“The claimed likelihood that taxes will go up, that doctors will reluctantly retire earlier, that many health care firms will go out of business and that service under Obamacare will be slower than it is today are all cause for concern that will fuel the American electorate’s distaste for Obamacare over the coming months and years.
“When enough adverse fuel has been accrued, the liberal political leadership will spark the fuel to ignite a massive campaign to socialize health care in America. Running in parallel, Medicare will take a hit because it too is paying out more than it brings in to meet current obligations to senior citizens.
“Oh, did I mention that other hideous four-letter word, DEBT, which continues to be the root cause of all these problems? America has been and continues to live beyond its means (now three decades and counting) and the Congress and administration have yet to even attempt to tackle a balanced budget, much less the accrued and growing debt (at the rate of $85 billion per month).”
“It would be interesting,” writes another, “to know the vetting, testing, educational background etc. of the legions of ‘navigators’ who sprang from out of nowhere, to aid and abet the public in the Affordable Care Act enrollment process.
“I am sure they used the same nifty process that gave us the sterling people we encounter via the TSA.”
The 5: And we’re sure they can be trusted with all that personal information you have to divulge before you even get a quote. Speaking of which…
“Weird thing happening here,” a reader writes from Hawaii. “The health exchange doesn’t show any plans. It just asks for you to fill out an application.”
So he wrote to the exchange. Here’s the reply he got…
“The marketplace opened Oct. 1 to help you apply for tax credits and apply for eligibility to use the marketplace. We do not have the benefit or rate detail at this time, but we hope to have these in the coming weeks. Once the information is available online, you’ll be able to shop, compare and select plans through our portal. We apologize for the inconvenience.”
“Note the wording ‘apply for eligibility to use the marketplace,'” our correspondent adds. “What does this mean? I don’t recall anything in OweBamamcare requiring eligibility to use the exchange… for tax credits, yes, but to use the exchange? In any event, here it is, the fourth, and they are still just taking applications, nothing to look at here yet.
The 5: For more amusement, we sauntered over to the healthcare.gov Facebook page…
Then there was the self-described single mother of two, working full time, living “75% below the poverty level” — who doesn’t qualify for a subsidy. “Are you f’ing kidding me???? Where the HELL am I supposed to get $3,000 more a year to pay for this ‘bronze’ health insurance plan!?!???”
Ugh… and this is only the beginning. We urge you to start taking action to “opt out” before the biggest changes kick in come Jan. 1. Learn how to get your step-by-step guide, right here.
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. Popular response to an email we sent yesterday managed to crash our servers. But we have them up and running again.
So if you clicked on the link and it didn’t work, it will now. And if now is the first time you’re reading about this one-of-a-kind opportunity in the energy markets, do yourself a favor and check it out.
