It’s Tuesday night and the prospects are looking increasingly dim for a political solution for the politically driven risk of a US Treasury default. The credit rating agency Fitch earlier today “placed the United States of America’s (U.S.) ‘AAA’ Long-term foreign and local currency Issuer Default Ratings (IDRs) on Rating Watch Negative (RWN),” the firm announced this afternoon. “The prolonged negotiations over raising the debt ceiling (following the episode in August 2011) risks undermining confidence in the role of the U.S. dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the U.S. This ‘faith’ is a key reason why the U.S. ‘AAA’ rating can tolerate a substantially higher level of public debt than other ‘AAA’ sovereigns.”
Welcome To A New Era Of (Permanent?) Political Chaos
The Senate is reportedly making progress in crafting a political solution that will reopen the government and raise the debt ceiling. But it’s becoming clear that any solution will be a temporary fix until next round of a potential shutdown and default return. It seems that we’ve entered a new world order where extreme political chaos is standard operating procedure. The price tag for this distressing change will include greater uncertainty and even temporary bouts of blindness on matters of analyzing the economy and pricing assets.
An Evening Of Macro & Markets Via R
Are you interested in R? R, of course, is the statistical software environment that’s becoming the standard for number crunching the world over. For the uninitiated, think of R as Excel on steroids, offering greater flexibility and power to analyze, well, just about anything (if you can tap into the numbers). Even better, R is free and it’s supported by a global army of users and programmers, including some of the smartest economists and statisticians on the planet who write “packages” for this software platform. In any case, if you’re near Iselin, NJ (roughly a 40-minute drive from New York City) next Tuesday, October 22, you’re welcome to attend the New Jersey R meeting at 7 pm at the Hilton Woodbridge (120 Wood Avenue South, Iselin, NJ), where I’ll be giving a brief presentation on macro and markets from the perspective of using R to investigate the finer points of the business cycle and investing. There are three other presentations scheduled too and so the evening should be quite interesting. The event is free, but please confirm your attendance in advance via email:
newjerseyR@mango-solutions.com
You can find more information here:
www.newjerseyr.org/
www.meetup.com/NewJerseyR/
Political Experiments On A $17 Trillion Economy
Another week and still no sign of a resolution to the political stalemate in Washington that’s kept the federal government partially shuttered. This is also the week that faces a Treasury default on Thursday, when the government reportedly will run out of money to pay its bills if Congress doesn’t raise the debt ceiling. The question is what happens on October 17 and beyond if the federal government can no longer borrow? The immediate result is that spending would be limited to cash on hand and incoming tax revenue. The big mystery is how such an event would impact the markets, the financial system, and the economy? No one really knows, but we may soon find out.
Book Bits | 10.12.13
● The Why Axis: Hidden Motives and the Undiscovered Economics of Everyday Life
By Uri Gneezy and John List
Review via Publishers Weekly
Gneezy and List, economists at U.C. San Diego and the University of Chicago, respectively, specialize in ingenious “field experiments” that elucidate the workings of social psychology and decision making: from a ball-tossing game that exposes the social pressures that make women shy away from competition, to role-playing skits that tease out the subtleties of discrimination at car dealerships. There are some less-groundbreaking findings—men, it seems, give more money to door-to-door fundraisers if they are attractive females—but also many counterintuitive insights: it’s possible to boost sales of a wine by raising its price; increase charitable giving by letting prospects opt out of solicitations; and even raise profits by letting customers pay whatever they want for a product. Writing in the Freakonomics vein of breezy pop-econ (Steven Levitt provides the foreword), Gneezy and List assert that “self-interest lies at the root of human motivation,” but it’s a self-interest broadly conceived to include the “warm glow” of philanthropic sacrifice and readily influenced by the unobtrusive policy nudges they suggest.
Pick Your Risk Factors… Carefully
Meb Faber reminds us that a buy-and-hold strategy is the first cousin to market-cap weighting. In fact, if you wait long enough, the two become virtually identical sans intervention. The problem, of course, as Faber notes, is that buy-and-hold/cap-weighting increasingly favors overvalued assets and, by implication, underweights assets that are trading at relatively inexpensive valuations, which presumably are linked with superior expected returns. “That, to me, is the biggest failing of buy and hold,” he writes. “It ignores common sense.”
Default Lines
There’s still no political agreement to avert a Treasury default and so the possibility, however remote, is inching closer. What are the risks? Well, the floor is wide open for discussion–no one’s really sure where we’re headed because we’re in uncharted waters when it comes to Treasury defaults. Sort of. Donald Marron at the Tax Policy Center writes: “Actually, the United States Has Defaulted” by way of a brief, limited episode of default in 1979 on some T-bills. Meantime, what are your biggest concerns for the crisis du jour? Unsure? Not to worry as pundits have assembled an abundance of doomsday scenarios. Should you be worried? Yes. Why? Well, consider what our so-called leaders have produced so far–an unnecessary and entirely avoidable crisis that puts the US economy at risk. How much confidence should we have for expecting enlightened leadership to suddenly return in the days ahead? When you’re in the back seat of a car with a drunk driver who’s managed to avoid running off the road so far, it’s wise to reserve judgment on the outcome of the trip. As for pondering the worst-case scenarios, here’s my short list for thinking about the future if the unthinkable becomes reality:
Jobless Claims Surge On The Blowback From The Backlog
Talk about a reversal of fortunes! Last week’s filings for new jobless claims soared 66,000 to a seasonally adjusted 374,000, which is the highest weekly total since March, according to a division of the Labor Department that’s still publishing economic reports. A substantial slice of the increase is reportedly due to playing catch-up with the data in the wake of a computer glitch that affected updates in several states. According to Bloomberg, “The issues in California accounted for about half the jump in applications last week and the dismissal of non-federal employees after Congress failed to compromise on a budget accounted for about another 15,000, a Labor Department spokesman said as the data was released to the press.”
US Retail Sales: September 2013 Preview
Tomorrow’s retail sales report for September will be postponed due to the government shutdown. When (if?) this update is published, US retail sales are expected to rise 0.3%, according to The Capital Spectator’s average econometric forecast. Keep in mind that this forecast is impaired because it doesn’t reflect an update of the R-2 model (see definition below), which relies in part on the latest payrolls data to project retail sales. Unfortunately, the September employment report from the government is still a mystery due to the budget impasse in Congress. Using the available numbers, the Capital Spectator’s average forecast of a 0.3% rise for September retail sales represents a slight rise from the previously reported 0.2% gain in August. Meanwhile, the Capital Spectator’s average projection for September is above several consensus forecasts based on recent surveys of economists.
The Wide, Wide World Of Bond ETFs
Bonds are in the news these days, and not necessarily for bullish reasons. Between the threat of rising interest rates and the possibility of a Treasury default in the US, the notion of fixed-income as a safe haven is under pressure. But while it’s tempting to lump all bonds into one category, the reality (as usual in the capital markets) is far more nuanced. Indeed, if someone gives you their view on the “bond market,” your first question should be: Which one?