- Even if Congress dodges another shutdown in 6 days…
- … a default on the national debt looms in 6 weeks
- Good job numbers from the Labor Department…
- … add up to bad news for stocks, bonds, gold (huh?)
- Amazon disses “Shady Brady” and co.… “a debt spiral from which there is no escape”… and more!
We hate to wreck your weekend, but the next “partial government shutdown” is only six days away.
Oh, that won’t change your weekend plans? Ours either.
Anyway, the next deadline is next Thursday. At this point, it appears congressional Republicans will push through another kick-the-can measure — by our count, the fifth since Sept. 30, when Congress was supposed to pass an honest-to-God budget. “House GOP leaders are eyeing a spending bill through March 22,” says The Washington Post.
Just one problem: The government might well run out of money to spend before March 22.
The debt ceiling came back into force on Dec. 8. As mentioned toward the end of yesterday’s 5, the Treasury is doing what it typically does to stay under the limit in such circumstances — the so-called “extraordinary measures” like borrowing from government pension funds.
But the Congressional Budget Office is warning that because of the tax cuts, revenue is now coming in $10–15 billion a month lower than before. In the past, “extraordinary measures” could buy the government five or six months before crunch time. Now it’s down to barely three months: By mid-March, Uncle Sam faces the danger of default.
And make no mistake: The default risk is real.
For a long time, we pooh-poohed the possibility. Our reasoning: The government can’t “default” as long as it continues to make the interest payments on Treasury bills, notes and bonds. The government’s interest expense still runs under $500 billion a year. With tax receipts running $3.6 trillion a year, covering those interest payments should be no problem.
But our thinking has shifted. After all, cash flow isn’t a year-to-year thing, it’s a day-to-day thing. Wrote Morgan Stanley economist David Greenlaw during a debt-ceiling showdown in 2011: “While it is true that the government takes in a good deal more in receipts than it pays out in interest on the debt over the course of a full year, on certain days the government takes in much less than it pays out.”
“The Treasury can literally go broke if they run out of cash on a given day,” Jim Rickards affirmed to us in an email yesterday. “They’re getting low right now.”
Jim would know: For 10 years in the 1980s and ’90s he worked for one of the couple dozen Wall Street firms that are “primary dealers” — underwriters at auctions of U.S. Treasury securities.
Again the Congressional Budget Office says the Treasury’s accounts could become overdrawn by the “first half of March.”
Around Washington, they even have a name for this — “the X-Date.”
What would it look like if and when the X-Date arrives?
Rewind again to the 2011 circus. There was a lot of talk in D.C. about “prioritization” — keeping up with interest on the debt, even as the feds would let other obligations slide.
Sounds great in theory, but in practice that gets messy in a hurry.
From the Morgan Stanley report that year: “The Treasury has an interest payment of about $30 billion due on Aug. 15. On that day, it will take in about $15 billion in tax receipts, so it won’t even have enough to make the interest payment alone. Are the proponents of prioritization suggesting that the Treasury should withhold all of the $22 billion Social Security payment due on Aug. 3, so it can cover a debt service interest payment that is due a couple of weeks later?”
Hmmm… Consider the timing of the current X-Date. It’d be mighty easy for the Treasury to sit on your tax refund and use that money to pay other bills, right?
But “prioritization” isn’t the only solution.
“There is a workaround,” Jim Rickards tells us, “which involves some shenanigans between the Treasury and the Fed using ‘gold certificates.’ The Treasury can unilaterally revalue its gold to a higher value (say $2,000 per ounce), send the Fed some paper gold certificates for the increased valuation and the Fed has to pay for the gold certificates with new cash added to the Treasury’s account.
“This does not require congressional approval and would only be used as a last resort. This has been done before; last time was 1953.
“Of course, the price of gold would skyrocket in that scenario.”
[Ed. note: After 15 years, Jim has finally been able to “declassify” a system he developed with the CIA to detect disturbances in the financial markets that tip off terrorist attacks.
The system has a side benefit for retail investors — it also uncovers legitimate financial activity that can result in extremely lucrative trades. Jim shows you how the system works right here.]
To the markets… where good news is bad news today. Heh…
Several years ago when Ben Bernanke was running the Federal Reserve and printing money to a fare-thee-well via “quantitative easing”… there was an opposite phenomenon. Bad news was good news. The Labor Department would put out a lousy jobs number and the Dow would rally 300 points because stock traders were licking their chops at the prospect of still more easy money from the Fed.
Today, though? Good jobs numbers, and nearly every asset class is selling off. There’s nowhere to hide.
To be specific, the wonks at the Bureau of Labor Statistics conjured 200,000 new jobs for January — better than the “expert consensus” calling for 175,000. The official unemployment rate held steady at 4.1%.
But the standout figure in the report is wages — up 0.3% for the month. Year over year, the growth is 2.9% — the strongest reading of the post-2008 “recovery.”
Cue the hand-wringing over inflation: For months we’ve been seeing signs that inflation is heating up, but they haven’t been accompanied by rising worker pay until now. Now Wall Street denizens are starting to fret about the proverbial “wage-price spiral.” Accelerating inflation would push the Federal Reserve to accelerate its tighter monetary policy — raising interest rates and shrinking its balance sheet at a faster clip than it has up till now. Wall Street senses an end to the gravy train.
And with that, the Dow is down more than 300 points at 25,876.
We’ll pause to note that we’re still not at a 3% pullback from last Friday’s record close. But another 75 or so points, and we’ll be there. It would be the first such dip in the market since just before Election Day 2016.
Inflation worries tend to push Treasury prices down and their yields up. Thus the yield on a 10-year note is up to 2.84% — a four-year high.
But contrary to what you might expect, gold is also selling off. Inflation worries are good for gold, but in this case the market psychology is that tighter Fed policy will strengthen the dollar. A stronger dollar is bad for gold. Gold is now back below $1,330 where it was 10 days ago.
What’s been a bad week for many cryptocurrencies got worse overnight, although the freefall appears to have been arrested for the moment: As we write, bitcoin is at $8,950.
Lost amid the market tumult today are good numbers from three of the five biggest companies in the S&P 500.
Apple, Amazon and Alphabet (Google) all reported substantial year-over-year sales growth. Alphabet notched its 32nd straight quarter of 20% or better sales growth. Amazon booked its first $1 billion-plus profit. Apple also recorded record numbers; iPhone X sales might be a mild disappointment in terms of units sold… but the margins on them are so high it hardly matters.
That said, only Amazon is getting any love from the Street amid the broad sell-off; AMZN is up 5.5%, while GOOGL is down nearly 5% and AAPL has shed 2.4%.
No, AAPL did not announce the audacious takeover we’ve been anticipating. But it’s our team’s opinion that Ford remains the most logical way for AAPL to leapfrog the competition when it comes to electric-car and self-driving technology. “At just over $43 billion, Ford’s current market value is just over 1/4 of the cash that Apple has on hand,” Zach Scheidt reminds us.
For the record, we took a similar way-out-there flyer last summer on the notion Apple would make a play for Netflix. And while that deal did not come about, readers of The Takeover Alert had to be pleased regardless: NFLX shares jumped 43% in 6 1/2 months… and the recommended option play leaped 308%.
As long as we brought up Amazon… Even Alexa — cyberassistant on the Amazon Echo — has an opinion about who will win the Super Bowl… and she’s not a Tom Brady fan!
When asked the question, “Who will win the Super Bowl?” Alexa responds: “The team favorite to win is the, cough, the, cough, excuse me, is the Patriots. That was tough to get out,” the device says.
“But I’m flying with the Eagles on this one because of their relentless defense and the momentum they’ve been riding on their underdog status. E-A-G-L-E-S ― EAGLES!”
An Amazon representative said Alexa often “roots for the underdog.”
“She had a friendly rivalry with the Patriots last year, and that sentiment continues this year,” the spokesperson said.
A quick survey of other cyberassistants? Google’s bot gives a more middle of the road response: “I’m still deciding who to root for.” Meh.
And Apple’s Siri doesn’t even bother with grammar: “Apparently the odds favorite the Patriots over the Eagles by 4 1/2 points.”
Our question: Do homes with the Echo need to Crisco climbing surfaces?
“It seems that the Treasury has been resorting to all sorts of ‘extraordinary measures’ to keep the music playing,” a reader writes after we brought up the topic yesterday. “So has the Federal Reserve.
“Every dollar they create from nothing is borrowed into existence — and that’s just the beginning of the nonsense. It sets off a debt spiral from which there is no escape.
“To be fair, Trump and co. didn’t start the profligacy game. It has been going on for a long time. They are doing nothing to stop it, however, and are in fact going to make things much worse with their bigger borrowing/weaker dollar agenda.
“History shows that infrastructure spending projects like the ones they’re proposing don’t help! They further debase our currency and compound our debt. But they feed Congress (and Corporate America) the pork and earmarks that keep them fat and happy.
“I’ll keep stacking bullion as the endgame approaches…”
The 5: Sounds like a plan…
Have a good weekend,
The 5 Min. Forecast
P.S. As we go to virtual press, we’re now in 3% pullback territory with the Dow cracking below the 25,800 level. Barely.
It’s quite normal market action, really. It’s just that we’ve been experiencing abnormal times. More next week…