The Default Nobody Wants – Except Us!
After recovering from a losing streak in the middle of last week, the Dow fell again on Friday – down 70 points. Gold rose $15 an ounce.
Who knows? When Mr. Market wants to do something he doesn’t need a reason. He doesn’t ask permission. He doesn’t give any “forward guidance.” He just does what he wants.
But the reason all the commentators are talking about is the looming clash in Washington over the debt ceiling.
We didn’t read about it in any detail; it seems trivial. But if Congress doesn’t get off its collective butt and pass another law the government will have to shut down. That’s because a previous law requires the feds to stop borrowing when they reach a certain limit.
According to the Financial Times over the weekend: “Shutdown looms over budget.”
As near as we can make out, everyone is in favor of seeing the feds continuing to spend money they don’t have. The fight is over what to spend it on. The Republicans want to stop spending on Obamacare. The Democrats want to spend on everything.
Unless they can agree, spending will stop on almost everything.
Here’s another headline: “The Default Nobody Wants.”
That is surely incorrect. We would be delighted with a default. It’s precisely what should happen.
Congress spends more than it brings in by way of taxes. It has done this for years. In a rare moment of clarity, it saw the handwriting on the wall and vowed to stop. It set a limit on how much debt the government could take on. The feds will reach that level soon. So the borrowing should stop.
We’d like to see it happen. Not so much for the financial health of the nation. We’d just like to see the looks on their faces – all those zombies suddenly cut off from fresh blood.
But wait. Who are we kidding? This is like a fat person who has decided to hold the line. He watches his weight inch up. He resolves to stop eating so much when he hits 250 lbs. He feels good about himself for having taken such resolute and forthright action. Now he has his weight under control, right? His wife should be proud of him.
Then he hits the magic number. “Oh, my…” he says.
That evening the dessert is passed around. He begins to think: What’s so special about 250 lbs? Why not 260 lbs? Or 270 lbs?
He could not eat the dessert. But it’s his favorite chocolate cake. So, heck, he changes the resolution! He’ll eat the cake. But starting in the New Year, he will bring his weight down to under 250 lbs again.
Congress has the nation watching. Everybody wants a piece of chocolate cake!
The military-industrial complex Ike warned us about wants more planes, more drones, more tanks, more snoops, more contracts, more retirement benefits – in short, more money. So does the education industry. And the healthcare industry. And the poverty industry. And all the other industries that have put the government in their pocket.
And what about all the retirees? Haven’t they earned their Social Security? Don’t they have a right to Medicare?
Yes, everyone thinks he has a need… and a right… to a piece of cake.
So, what to do?
Pass another resolution!
A Real Deficit of 33%
Besides, the deficit is going down. There’s nothing more to worry about. As a percentage of GDP, it’s only 5.7%. That’s well down from the levels of 2009-10.
Wait a minute. What kind of flimflam is this? Colleague Simone Wapler points out that expressing debt as a percentage of GDP is nonsense. GDP is the income of the whole nation, not the income of government.
It would be like telling people that your excess spending was equal to only 2% of the income of the people on your block.
The government doesn’t have everyone’s income to draw on for debt service. It only has its own tax revenues. Deficits only make sense in relation to the resources available to pay them. In the first 11 months of the fiscal year, the feds had record income of $2.4 trillion. But they spent $3.2 trillion… or one-third more. As a percentage of its own revenues, the US government deficit is running at 33%, NOT the 5% people are talking about.
The spectacle is vastly entertaining, provided you’re not hooked on the cake. That’s why the best place to watch this farce is from the sidelines… well away from the action. Out of stocks and bonds, that is.
But is there any real chance the feds will default?
Maybe they will do a symbolic default. One side – Democrats or Republicans – will try to gain some partisan advantage from it. But the system works by paying off zombies to retain political power. There is no way it will come to an honorable or voluntary end.
Instead, it will come to a bitter end – when the feds really do run out of money and are unable to get any more.
When will that happen?
Wish we knew. It could be many years in the future. For the moment, their credit is still good. And they have a willing central bank backing them up too.
Why the Real Estate Rally
Could Be Short-Lived
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
One sector that has been doing well over the last 12 months is US residential real estate.
The July S&P/Case-Shiller home-price figures released last week revealed that the Composite 10 and Composite 20 indexes – which track the 10 and 20 largest metropolitan areas in the US – were both up almost 1.9% month over month and about 12.3% year over year.
In the 12 months to the end of July 2013, Las Vegas had the fastest rate of increase (an average gain of 27.5%)… then San Francisco (an average gain of 24.8%)… then Los Angeles (an average gain of 20.8%)… and then San Diego (an average gain of 20.4%).
But the two composite indexes are still over 20% down from their pre-crash peaks. So the pain is not over for anyone who bought at or near highs.
US real estate investors will take comfort from the recent “no taper” announcement by the Fed.
As you can see from the chart below, Bankrate.com’s national average 30-year fixed mortgage rate rose from about 3.4% to about 4.6% between April and the end of August. This happened as taper talk helped push up yields in longer-dated Treasurys (off of which mortgage rates are set).
Source: Bespoke Investment Group
But the national average 30-year fixed mortgage rate has since come down off its highs.
A full recovery in home prices depends on the Fed keeping a lid on rising bond yields. But as Bill has been warning, we’re at or near a secular top in Treasury prices and a secular bottom in yields… and in interest rates.
Conclusion: The US residential real-estate rally could be short-lived.