Some cracks in the sidewalk

Paul Krugman is crapping in his pants. Some cut and pastes from his blog(s) today. (Link and Link)

Boehner’s reply was as vile and dishonest as you might have expected.

If the government is forced to slash spending when the money runs out. — We’ll be doing a 1937 squared.

I hope and pray that Obama’s lawyers discover that the 14th amendment solution is valid after all. Because otherwise we’ll be looking at very dire things, even if the markets stay calm.

It sounds to me that PK wants the markets to crash. (He’s ‘praying’ for a lawyer to find a loophole?) Maybe he thinks a 1,000 point DOW drop would get those “vile and dishonest” Republicans to cave in.

The fact is that the market’s collective response to the possibility of a US default has been extremely muted.

Ten-year treasuries are not showing any signs of stress. The current yield of 2.95% is significantly lower than just five months ago.

Stocks are doing just fine. The S&P is 5% higher than a month ago. We are back to the levels seen in May.

I don’t see any significant stress in the Muni market either. MUB (index) is just a tad off recent highs.

How are these results possible? Easy.  

The Smart Money on Wall Street is 99.5% convinced there will be a deal.

I’ve never been so sure about that “smart money’ thing, (having spent a lot of time there) but I agree with this thinking. There will be a deal and there won’t be a default. But the deal that is going to be struck is going to stink. It will put the issue of default back on the table in less than eight months.

This reality will push the hand of Standard and Poor’s. They have said that the political will of the country to tackle tough problems was central to their decision to put the USA on their watch list. The US will fail on this if there is a short-term patch on the debt limit. S&P will have to follow through. They will drop the US by year end (or they have no balls).

Krugman is not looking in the right places for evidence of the stress that is building. Some places I see as signs of problems:

-Gold is reacting.

-The safe havens of Swiss Francs and Yen are being sought after.

The Swissie is about to break an important barrier. By the end of the week a lousy 80 Centimes will buy a Dollar. The Yen is not at a record, but it might as well be. We are at the panic levels of March 2011 and way back in 1994.

-Some stocks like AAPL are trading as if they are safe havens. (That’s crazy!)

-The most significant evidence of trouble brewing is an issue that I do not have a chart to show you. It is something that is not (now) being reflected in the markets.

I stay in touch with a number of folks who push money for a living. I am repeatedly hearing that there is stress in the funding market. There is plenty of liquidity and the cost is zero, but financing to fund assets (positions) is drying up. It’s becoming increasingly difficult to finance large liabilities. Where funding is available, it’s only for very short maturities. These issues are showing up in the repo market, euro dollar deposit market, money market funds, swaps markets and interbank lending.


I’m very concerned that the "smart" money on Wall Street is positioned very poorly for what is coming. We are setting ourselves up for a big disappointment. It’s as if the Street is set up for a Non Farm Payroll of +600,000 and we get a -200,000 print. The reaction will be swift and bloody.

Cash is definitely Trash these days. This investor is long as much cash as I can. I’m convinced that big volatility is in front of us. Being cash rich gives me a chance to play in markets where values are being presented.

I may miss out on what could be a soft landing and a happy ending. I never did believe in fairy tales.


Update:
In the hour and a half since I wrote this the President has came out with a threat of a veto. That would be an immediate default and downgrade. Like I said, I’m worried about that “smart money” thinking. Also, the USDCHF broke the 80 barrier. Gulp!