Wednesday, September 04, 2013 - Not Yet but Closer

Not Yet but Closer
by Sinclair Noe

DOW + 96 = 14,930
SPX + 13 = 1653
NAS + 36 = 3649
10 YR YLD + .05 = 2.90%
OIL – 1.24 = 107.30
GOLD – 20.60 = 1392.60
SILV - .82 = 23.56

The Senate Foreign Relations Committee approved a resolution on authorizing limited military intervention in Syria, setting the stage for a debate in the full Senate next week on the use of force.

The committee voted 10-7 in favor of a compromise resolution that sets a 60-day limit on any engagement in Syria, with a possible 30-day extension, and bars the use of troops on the ground for combat operations. The compromise is more limited than President Barack Obama's original proposal but would meet his administration's goal of..., well, actually, I'm not sure what the goal is, except that it would be limited and narrow, and now it would be even more limited.

Yesterday we talked about some of the challenges or headwinds facing the economy and the markets. Today, the Federal Reserve released its Beige Book, and apparently things are better than they look. Conditions continued to improve over the past quarter. The central bank said growth was moving at a "modest to moderate pace" with improvements coming across all the Fed districts.

The Fed said in its Beige Book report: "Consumer spending rose in most districts, reflecting, in part, strong demand for automobiles and housing-related goods."

Increased activity also was reported in travel and tourism, nonfinancial services and manufacturing, which the central bank said had grown "modestly." For most occupations and industries, hiring held steady or increased modestly relative to the prior reporting period," the Beige Book said. "Upward price pressures remained subdued, and prices increased slightly during the reporting period. Wage pressures continued to be modest overall."

Last week, the Thomson Reuters/University of Michigan index climbed to 85.1 in this month’s report, from 84.1 in June. It is the highest level since July 2007. More Americans feel better about the economy. The survey showed they expect interest rates to rise, and that they doubt the economic improvement can keep up the pace. Fear of higher rates has caused many to buy now what they otherwise might buy later. And that would just point to continued expansion of consumer spending in the months and year ahead.

Up, up and away. What could go wrong?

First, Congress returns from recess Monday, September 9, to consider whether to put the government's operations on hold on October 1 because it no longer has an operating budget. Current Federal budgetary authority to spend, Sequester and all, expires at that time (although the Sequester plan nominally carries forward for another nine years).

Democrats want to pare down the Sequester for fiscal 2014, and make up the difference with targeted spending cuts and tax increases. Republicans want to continue the Sequester and make other cuts as well.

Second, some Republicans also want to cut all Federal funding to implement Obamacare, as a price for agreeing to any budgetary plan at all; i.e., they are willing to shut down the government on October 1 unless Obamacare is cut from any spending authority going forward. Even if Democrats and Republicans could find some “continuing resolution” compromise on the mix of spending and taxes, these Republicans would hold out for elimination of Obamacare. They realize the Senate Democrats would not initially go along but believe ultimately Obama will blink, as he did in the 2011 debt ceiling crisis, when he agreed to the doomsday Sequester device as a way to satisfy Republican calls for budget cuts equal to any increase in the ceiling.

Republican leadership certainly favors repealing Obamacare, having taken 40 fruitless votes to do so already. However, they fear the linkage of defunding it to a government shutdown. Speaker Boehner has let it be known he would like to buy time with some sort of continuing resolution to allow time to maneuver later in the fall when the debt ceiling issue is expected to come up again – maybe around Thanksgiving.

Turns out the government will run out of room to do its routine borrowing to finance its Congressionally-agreed deficit under its current budget just one month after Congress reconvenes.

It would be a misleading oversimplification to say that our national credit limit kicks in October 15. But because our national revenues from budgeted taxes and fees come in “lumpy” over the course of a fiscal year, we need to borrow operating funds to cover our not-so-lumpy bills as they come due.

Congress has already agreed that we must pay each of those bills, including Social Security, military pensions, Medicare, and principle and interest of U.S. Treasury securities, but has added a spurious debt ceiling law that purports to deny the government access to credit markets beyond a fixed amount that has no actual relationship to the debts we have incurred. Any corporate board of directors that imposed such a restraint on its executive officers would be successfully sued for malfeasance. But we’re stuck with this preposterous financial lunacy as a nation because it’s the law.

There is little the executive can do if the debt ceiling is reached other than what you or I would in our own financial dealings: prioritize our creditors and use whatever current revenues we have. Some in the House want to legislate that prioritization in advance, but that would be trying to make sense of insanity.

So Republican leadership plans to duck a government shutdown but kick the Obamacare issue over to late-year “leverage” on the debt ceiling issue. They’ll do this on the same theory that Obama will surely cave again as he did in the 2011 fiasco so as not to be the president who presides over the first U.S. default on its “full faith and credit.” But the president has drawn a red line against negotiating again on the debt ceiling extension.

So the financial markets could face both a government shutdown and a debt ceiling expiration just two weeks apart. And the Fed also has its own moment of truth the week of September 15 as well, as it decides whether to begin dialing back its purchases of mortgage-backed securities and Treasury bonds because the economy has been growing enough of late to survive a gradual, tapered withdrawal of such unconventional stimulus. Putting aside recent mixed-to-poor economic data, especially on the pace of housing recovery, can the Fed risk starting to taper in the face of a fiscal collapse like a shutdown and default at the same time, weeks before its next meeting?

While the events relating to Syria have spurred a modest flight to safety in US government debt, those trading waters are bound to be roiled in the coming weeks by the gathering clouds of shutdown and default. The Fed has the first chance to help avoid a market meltdown by postponing its tapering decision until the fiscal “hurricane watch” is lifted. Congress and the President have a chance to make the storm blow over by negotiating a budget deal (which would be consistent with Obama’s red line on direct debt ceiling negotiations) that satisfies enough Republicans to lift the debt ceiling separately.

Past experience with the TARP legislation and the “fiscal cliff” resolution just months ago shows that Congress doesn’t act these days until it feels the harshest winds – in this case, a stock market meltdown out of frustration with the lawmakers’ willingness to tempt fate by seeing what a few days of shutdown and default actually are like.

So, what could go wrong?

Squirrels.

Maybe not squirrels, we don't really know, but we do know the Nasdaq Stock Market had a brief outage, but the problem was resolved and trading was not affected. Nasdaq OMX, the parent company of the Nasdaq Stock Market, said the outage lasted six minutes – from 11:35 a.m. Eastern Daylight Time to 11:41 a.m. The outage is the latest technical difficulty to hit the exchange, which endured a three-hour trading outage on August 22. That outage was also blamed on the exchange's price quote disseminating system. Back in the late 90s the Nasdaq had a few power outages, blamed on squirrels chewing through cables. We don't have those problems anymore. Thanks to advances in technology we have new problems.

So, what could go wrong?

Well, we can't forget the banksters. The Federal Bureau of Investigation and prosecutors in Manhattan U.S. Attorney's office are conducting a criminal investigation into whether several employees of JPMorgan Chase tried to impede a regulatory investigation into alleged manipulation of power markets. It comes after a JPMorgan subsidiary agreed on July 30 to pay a $410 million penalty to settle a manipulation case brought by the Federal Energy Regulatory Commission.  investigators aim to determine whether individuals at JPMorgan - including three Houston-based employees - gave regulators all the information they needed to investigate JPMorgan's power market deals in California and the Midwest. Deliberately withholding information from investigators or lying during interviews conducted as part of an investigation is considered obstruction of justice, a criminal offense.

Will an attack on Syria make anything better? The case has not been made, not yet anyway. Appearing before a Senate panel yesterday and a House panel today, Secretary of State John Kerry and Defense Secretary Chuck Hagel struggled at times to frame a proposed military strike on Syria as tough enough to be worthwhile but limited enough to guarantee that the United States would not get dragged into another open-ended military commitment in the Middle East. Nonetheless, they assured lawmakers that the administration was not asking for congressional backing to “go to war,” as Kerry put it. I almost expected John Kerry from 1971 to walk into the hearing room and throw his medals at himself.

The human rights atrocities in Syria are real, and should be offensive and horrifying to anyone with a pulse. So the "do something, anything!" impulse isn't "liberal" or "conservative." And it isn't silly, stupid or war-mongering. It is simply a sign that you are human. What can be silly, stupid and war-mongering is to assume that the "do something, anything!" impulse is proof that one course of action - a military attack - is the only proper or humane thing to do.

The real question should be when it comes to military action, especially the kind publicly predicated on humanitarian concerns. The question is not whether you love or hate a particular dictator, because if that was the question, then the U.S. government has a lot to answer for in its alliances with many dictators. No, the question when it comes to wars of choice ostensibly waged in defense of human rights should be far more straightforward: namely, will military action result in a net increase or decrease in human suffering?

The question of U.S. military action against Syria becomes far more thorny because it is not at all clear that military action will make anything better - and that's putting it mildly. As McClatchy notes, military and geopolitical experts are telling us that the kind of military response being discussed by the Obama administration would be "symbolic and fall far short of eliminating Syria's chemical capabilities." Likewise, the Guardian's headline says it all: "Obama strike would not weaken Assad's military strength, experts warn." And Foreign Policy reports that one of the U.S. military planners who designed Syria strike blueprints "has serious misgivings" about the idea that bombing will improve anything. Even the president himself admits that "we cannot resolve the underlying conflict in Syria with our military."

Again, what is the goal? What is the objective.

Predicating military action exclusively on a chemical weapons "red line" doesn't only say to the world what the Obama administration suggests it does; more specifically, it doesn't just say that the use of such unconventional weapons is unacceptable. It also rather explicitly suggests that in the U.S. government's eyes, atrocities committed with regular old conventional weapons are fine, or at least not atrocious enough to warrant a military response. In other words, it seems to tell other dictators that as long as they kill and maim their own people with conventional armaments, they will remain on the acceptable side of the "red line" and therefore they don't risk a U.S. response.