Monday Massacre

  • Stock image: The edgy broker is back
  • The Treasury goes for broke
  • New Cold War annals
  • Intuit bails on IRS “free” file program
  • ABC dunks on LeBron
  • “Speaking of soft white wheat,” says a longtime reader… “What’s wrong with a constitutional convention”?…. And more!

After the major U.S. stock indexes snapped a three-week winning streak last week… the new week is off to a rollicking start.

Morning Sell-Off

That’s from CNBC’s homepage. Hold that thought about a 10–20% correction. We’ll come back to it. It’s giving us flashbacks about the market at this very time in 2011.

Anyway, the mainstream is chalking up the losses to rising numbers of COVID cases, both at home and abroad, putting a further crimp in the “roaring recovery.”

Makes sense — the “reopening” plays are taking some of the biggest hits as we write, United Airlines for instance down more than 7%.

If a 10–20% correction is indeed underway, you’ll want to take protective measures. As in right away. Like the one at this link.

Of course a 10–20% correction can have more than one catalyst. It doesn’t have to be just a resurgence of the pandemic.

We still have the debt ceiling on our mind this morning. Unless Congress acts sometime in the next two weeks, an arbitrary limit on federal borrowing comes back into force on July 31.

At that point, the Treasury has to start resorting to various accounting tricks to stay under the limit. The tricks work… but only for so long.

Eventually — and it’s impossible to estimate precisely when — Uncle Sam runs the very real risk of missing a debt payment to someone somewhere, and the federal government is in default.

Granted, that’s never happened, but consider this: The House goes on summer break the day before that July 31 deadline… and isn’t scheduled to return until Sept. 20, two weeks after Labor Day. And we see nothing in the news today to suggest congressional leaders are getting off the dime.

This “summer recess” factor is the reason we see a rough analogy with the debt-ceiling drama that happened right around this time in 2011.

Depending on who you listen to, Uncle Sam came closer to default at that time than during any of the other debt-ceiling dramas we’ve experienced during the 21st century.

And the stock market knew it — tumbling nearly 17% in 17 days.

There’s that “10–20% correction” right here.

Our thinking about the debt ceiling has evolved over the years.

We were long of the opinion that the government can’t default if it can still make the interest payments on the national debt. There’s even a word for that, “prioritization.”

During fiscal year 2020, Uncle Sam’s interest expense totaled $345 billion… while federal tax receipts totaled $3.4 trillion. No problem, right?

Wrong, says Morgan Stanley economist David Greenlaw. During that debt-ceiling drama in 2011, he issued a fascinating report. The gist was this: Cash flow isn’t a year-to-year thing. It’s a day-to-day thing.

“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,” wrote Greenlaw, “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,” affirmed our own Jim Rickards when I quizzed him about it during a brief debt-ceiling drama in early 2018.

He 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.

So back to Greenlaw’s report in 2011, where he paints a nightmare scenario: “For example, 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?”

The question answers itself.

Now do you have a sense of why the debt ceiling matters? And why the market took such a steep spill in such a short time during 2011?

As we check our screens, the Dow is now down 750 points on the day. We urge you to watch this short message from Jim Rickards — before it’s too late to take protective measures.

It’s the Dow taking the biggest hit today among the major U.S. indexes, down more than 2%. On Friday it was still within striking distance of a first-ever 35,000 reading. Now it’s below 34,000.

The S&P 500 is down more than 1.5%. The Nasdaq is holding up rather well by comparison, down 1%.

Alas, precious metals are not benefiting from the safety trade: Gold is losing ground while still holding onto the $1,800 level, but silver’s down nearly 2% at last check to $25.14.

No, it’s bonds that are the big beneficiary — prices up, yields down. The yield on a 10-year note has cracked below 1.2% for the first time since mid-February.

Crude? Yikes. Between fears of the virus slowing down the economy again and the OPEC nations coming to terms on production increases, crude is down nearly five bucks to $67.12. That’s a level last seen in early June.

And contrary to what you might think, the stage is set for more oil drilling on federal lands — at least for now.

“Approvals for companies to drill for oil and gas on U.S. public lands are on pace this year to reach their highest level since George W. Bush was president,” says The Associated Press after poring over reams of government data.

“The Interior Department approved about 2,500 permits to drill on public and tribal lands in the first six months of the year” — and only about 400 of those were done by the departing Trump administration.

True, Team Biden wants to suspend new oil and gas leases on federal lands. But here we’re talking about reserves that are already under lease.

Drilling on government lands and waters, by the way, accounts for about a quarter of U.S. production.

New Cold War annals, Part 1: The Biden administration is blaming China for the big cyberattack targeting Microsoft’s Exchange email software.

No sanctions yet. Nor are any diplomats being kicked out. But Washington has decided hackers “linked” to Beijing’s Ministry of State Security are responsible.

Two points: First, “attribution” of a cyberattack is always a squishy thing; it’s easy for hackers to cover their tracks, or to create a false trail that makes it look like someone else is to blame.

Second, trotting out the accusation this morning looks like a shiny-object distraction from the bombshell cyber story broken over the weekend by The Washington Post, among others: Spyware made by the Israeli firm NSO Group has been sold to authoritarian governments all over the world, which are using it to spy on businesspeople, reporters and dissidents.

The Guardian was also in on the scoop. It says the disclosure “shatters the lie that the innocent need not fear surveillance.”

New Cold War annals, Part 2: The U.S. government is warning companies about the risks to their business posed by Hong Kong’s new “national security” law.

An advisory issued by no less than four Cabinet-level departments warns that multinational firms are subject to the law, that they might have to hand over data to Chinese authorities and that their personnel might be subject to arrest.

To underscore the point Joe Biden said, “The Chinese government is not keeping its commitment that it made, how it would deal with Hong Kong.”

You can just imagine how your typical multinational executive is reacting to Washington’s benevolence here: You know, we’ve been doing business in Hong Kong for decades, but honestly we haven’t paid any attention to the news about the Chinese crackdown and we haven’t put any of our highly paid lawyers on the case. Truly we had no idea, so THANK YOU for alerting us to these risks. WHAT WOULD WE DO WITHOUT YOU?!

Not that any executive is going to snark like that on Twitter. The closest we’ve seen is “a person close to U.S. multinationals” cited anonymously in the Financial Times: “The general tone is the business community doesn’t need Foggy Bottom [the State Department] to tell them there are risks or how to manage them.” Heh…

For the record: The joke that is the IRS’ Free File Program just got joke-ier.

Developed in cooperation with both Intuit and H&R Block, Free File is so complex that you could be forgiven for thinking it’s designed to steer you to Intuit’s TurboTax software or H&R Block’s prep services.

Block pulled out of the program last year… and now comes word that Intuit is following suit.

From the ProPublica site, which has kept tabs on the Free File saga for years: “The Free File Alliance, the industry group that administers the program with the IRS, did not immediately respond to a question about the viability of the program after Intuit’s departure, but said, ‘We appreciate [Intuit’s] service in providing millions of free returns to American taxpayers.’”

Meanwhile, legions of taxpayers in other countries file their taxes online at no charge using simple web interfaces designed by the government. Granted, those interfaces might not capture every available deduction and credit for folks with more complicated situations, but still…

Great moments in media competition: Here’s what we presume is a screen capture from ABC’s coverage of the NBA finals on Saturday. Look closely, especially at the bottom…

Space Jam 2

Somehow we suspect the catty Chyron rolled off King James’ back, if he was even aware.

As one comment says, “And I thought I was petty.”

“Speaking of soft white wheat,” begins a new week of reader mail, “my brother-in-law is a small-time farmer, runs 400 acres, just he and his wife.

“He has been harvesting and storing his wheat at his local elevator and paying storage fees for the past 10 years hoping for a good price. It finally hit his profit target a few weeks ago. Sold all 10 years worth.

“A few days later the elevator/storage guys called and said they had ‘contracts’ to fill and would pay him $2.00 over ‘spot price’ for every bushel he had at his home storage. Sold everything! Yee-haw!”

“What’s wrong with a constitutional convention?” a reader writes after we made a passing criticism of the notion the other day.

“The Founding Fathers were smart enough to put that ability in the Constitution for good reason.”

The 5: Nothing wrong with a constitutional convention in theory. But in practice, it opens the proverbial Pandora’s box.

A fellow reader of yours made the case here last year: “Once the convention is opened, who knows what might wind up on the agenda?

“Knowing our liberal-progressive friends, there would be calls for amendments enshrining all of the goodies on their wish list: abolishment of the Electoral College and of private ownership of firearms, open borders, guaranteed income, free pre-K–Ph.D. education, universal health care, more taxes on productive citizens, need I go on?”

That said, any proposal has to be ratified by three-quarters of the states. As Harvard law prof Lawrence Lessig told The New York Times a few years ago, “There’s no controversial idea on the left or the right that won’t have 13 states against it.”

Dave Gonigam
The 5 Min. Forecast

P.S. The sell-off is accelerating as we go to virtual press, with the Dow down 850 points.

In addition to the virus and the debt ceiling, there’s another potential catalyst to send stocks sliding well beyond today.

Earnings season picks up steam again tomorrow, with more than 330 companies set to report this week alone. What if one or two big names — Netflix, Coca-Cola, American Airlines — miss Wall Street’s expectations?

Thing is, you don’t want to indiscriminately dump your holdings. Instead, you want to take a simple protective step. With only 1% or so of your portfolio, you can more than cover any paper losses you might incur if indeed a 10–20% correction is underway.

And depending on how events play out, this simple step might even make up to 40 times your money. See for yourself, right here.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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