Wednesday 9 October 2013 - Filed under Uncategorized

The president who cried wolf. Jeff Cox:

Washington’s efforts to scare Wall Street haven’t come to much so far.

The message hardly could be clearer from the Obama administration: An impasse over approving a continuing resolution that would keep government going threatens to morph into a crippling battle over the debt ceiling.

Wall Street should be petrified of such an occurrence and is taking the looming crisis too lightly, President Barack Obama told CNBC in an interview Wednesday.

In a statement Friday, Treasury Secretary Jack Lew warned that Social Security recipients, disabled veterans and those on Medicare and food stamps face peril if the debt ceiling deal doesn’t get done.

Oh, and Wall Street should be worried, too, he said.

“The stock market, including investments in retirement accounts, could tumble, and it could become more expensive for Americans to buy a car, own a home and open a small business,” Lew said. “We cannot put our nation in the position of not paying its bills because Congress has refused to raise the country’s debt limit.”

Markets haven’t bitten, however.

But Wall Street isn’t concerned. It is, afterall the job of financial analysts to evaluate various aspects of the economy in order to evaluate risk and plan accordingly so that clients (and themselves) are as insulated as possible,1 and with the non-event known as the sequester proving to have been little more than a minor blip on the overall economy, which Obama also told Wall Street would be disastrous, they just aren’t buying the hyperbole. But not only are they ignoring Obama because he’s had a long and distinguished history of predicting economic and social calamity if he isn’t granted his wishes, but because none of the available data compiled by Wall Street firms suggest that not raising the debt limit will have a huge impact on the broader economy.

Perhaps more importantly, however, bonds have barely budged.

The 10-year yield—considered a benchmark for the bond trade—actually is a few basis points lower since the shutdown began.

“Take a look at yields on 10-year Treasuries,” Nick Raich, CEO at The Earnings Scout and formerly of Key Private Bank, said in a report Friday. “They have been falling ever since the Fed decided not to taper. If bond investors really did not believe they would get their money back from the U.S., they would be selling their bonds left and right causing yield(s) to skyrocket.”

To be sure, credit-default swaps—used to protect against U.S. debt default—have risen this week.

And there was a hiccup in an auction of four-week notes, with the yield going from near-zero to 0.12 percent on fears of short-term redemption problems.

But, overall, Wall Street has refused to take the bait from an administration that has been peddling fear aggressively for the past several days.

“I think we get it resolved,” Kim Rupert, managing director of global fixed income analysis for Action Economics in San Francisco, said of the debt ceiling issue. “The experience from two years ago (during the last debt ceiling debate) wasn’t very helpful, but the fact that we came through virtually unscathed has lessened the fear at this point.”

Reaction elsewhere on Wall Street has been more vitriolic.

Hedge fund manager Keith McCullough, at Hedgeye Risk Management, called the default rhetoric “shameful” and said the market is ignoring Washington.

“Lew should be ashamed for spewing this fear-mongering nonsense,” McCullough said in a blog post. “As for the Bond Market…It doesn’t believe a single word from these guys on default risk. Otherwise yields would be ripping.”

So the bond holders who have a massive financial interest in the government paying its debt is not concerned about the government paying its debt. Hmm. Perhaps it has something to do with the purposeful obfuscation on the part of Obama and the media that purposefully conflates not raising the debt ceiling and the government defaulting, not being able to pay its bills, and those on Wall Street understanding that the narrative is a rhetorical move designed to strengthen Obama’s political position, and not one that sits in economic reality.

1. Though these systems designed to evaluate risk are not foolproof or immune from error, nor am I trying to imply that they are.

2013-10-09  »  madlibertarianguy