Beruflich Dokumente
Kultur Dokumente
Page 1
places that could and should have been left open. To barricade them was a petty, punitive act with the most venal of political motives. It is one thing to disagree on budgets and process and the constitutional order of things. I know that many of my readers are very passionate about which side the bulk of the blame belongs to. But I come down on both sides with almost equal frustration. I understand the American political process and know some of the history of how business gets done in Washington, but some things are just beyond the pale. I would say to our "leaders," cultivate some perspective and get a grip. And since we're getting all the nitty-gritty on federal sausage-making today, I just had to toss in a note from the incomparable, indomitable Joan McCullough, who dredges up for us an esoteric but not irrelevant gem called the Feed and Forage Act of 1861. I will let Joan explain, as only she can. I get to spend the next three days at the Barefoot Ranch, partaking of an intensive economic/investment festival (calling it a conference simply misses the energy in the room). All hosted Texas-style by Kyle Bass. His connectivity is astounding: the people gathered represent some of the finest thinking anywhere and he has managed to get them in one room. Some of the names are old friends to this letter (Lacy Hunt, Niall Ferguson, Anatole Kaletski, Jon Sundt, Mark Yusko, Larry Lindsey, and David Zervos), and others are names that ride under the radar, yet run some of the best trading funds in the world. I cant tell you how excited I am to be allowed in the room. I will report back this weekend on what I learn. And now I'm off to try to figure out where the world is going, eat a lot of BBQ and chuckwagon food, and just have some fun. Life can be so good at times. Your forever amazed at the US political process analyst,
Page 2
Fishing Pal and Global Interdependence Center colleague Mike Drury has correctly identified the change in pressure points. Having suffered political heat, Republicans and Democrats have found ways to shift the intensity of the budget fight. The non-game game continues as we are moving to the debt limit fight where the Republicans perceive themselves as holding a stronger advantage. Theyre wrong. Obama does not run for re-election. They do. So do the Democrats, and this is all a game of finger-pointing in order to have the voters find fault with the other guy in next years elections. What a country! said the comedian Yakov Smirnoff. Talk about an understatement. The United States is the worlds largest debtor (almost $17 trillion), and the US dollar is the worlds reserve currency. Actual default on the payment of interest and principal is an unthinkable course of action. Tom Donlan of Barrons writes that the US must borrow about $700 billion over the next year just to keep doing everything it did last year. He then adds that it must borrow more than $5 trillion in the next 10 years and more than $14 trillion over the next 25 years." These projections do not include rising inflation, higher interest rates, slower GDP growth, longer life expectancy, and new spending programs. Default and cascading consequences are not factored into the Donlan estimate. If we actually do fail to pay on our Treasury debt, those future years' borrowing numbers will become much larger. US market agents focus on the US Treasury interest rates and see them trending lower since the crisis evolved. They do not often consider how the market is pricing US default risk. Most of us are US-centric and focused only on the yield. Global investors think differently. We can gauge their view by examining the pricing of the credit default swap (CDS) of the US. It is denominated in euros and trades outside the US, with major market making in London. Foreigners view the US interest rate as the yield they will receive, less the cost they incur by insuring that the US does not default. That is what the CDS is about. Its price is rising and has surged up sharply over the last two weeks. It spiked again today. Foreigners do not like what they see in Washington any more than we do. That is why they use insurance and hope they do not need it. Note that the US CDS market is not as liquid as other CDS markets, so reference prices have to be taken with a grain of salt. That said, they are certainly up from where they were before these political shenanigans started. They are a warning sign. Will Washington even take notice? Another indicator of default risk is the spike in yields on the very short-term Treasury bill. It was trading to yield a pittance of 3 or 4 basis points. It spiked as high as 20 basis points before falling back to a trading range in the 12-13 level. That was last week. Assurances by politicians that they will not let the US default have had only limited effect. So what is an investor to do? If you actually believe that the US will default, then you need to prepare for a catastrophic event. Markets could experience another TARP moment like they did about 5 years ago. In our view the US will not default. It has an absolute ability to pay. This is a political fight, not an economic one. The credit of the US is not the same as Detroits or economically risky like Puerto Ricos. The country is not dismembering like Argentina or unable to support budgets like Greece. Comparisons between the US and these others are not valid.
Outside the Box is a free weekly economic e-letter by best-selling author and renowned financial expert, John Mauldin. You can learn more and get your free subscription by visiting www.mauldineconomics.com
Page 3
That said, the US could run out of cash by November if it cannot legally borrow. We do not fully understand the October 17 date. But we do see November 1 looming as a massive entitlement payment date and we do have November 15 as a key date for substantial payments on US Treasury bonds and notes. No increased debt limit means the government would have to choose who gets paid and who is deferred. The failure to authorize borrowing would cause an immediate budgetary reduction of roughly 4% of GDP. That is an annualized rate. That is also a massive and abrupt shift. Our citizens will not like the fallout. We would encounter a replay of the recent airport-slowdown reaction with much greater intensity. Our politicians know this, so they may play the brinkmanship game, but in the end they will not permit default. Thats our view. They never have defaulted in more than two centuries of American history. That said; the risk is higher than zero even though it is quite small. We do not expect default. But we recognize that some lunatics are driving the nations policy decisions and some of them are willing to experience a default. We elected them. Lets not forget that. In economic terms, the budget battle and debt-limit showdown, with all the political shenanigans either side can muster, will be a setback in broad-based GDP (gross domestic product) accounting terms. Since this setback takes place in the middle of a quarter, there will likely be a recovery once matters are resolved. And we know that the clock is ticking, so they must be resolved. By the middle of next year, a historian might look back at data for the fourth quarter of 2013 and conclude that very little happened. Meanwhile, the profit share out of the US GDP remains very high. That profit share translates into earnings momentum and reflects itself in the valuation of stocks. Stocks are neither cheap nor rich. They are sort of in the middle ground. The Fed (Federal Reserve) is more worried about the real economy than it is about the price of the stock market. It knows that the real economy has suffered a setback because of the political brinksmanship of Congress and the White House. That means any tapering will come slowly and tepidly. We expect the tapering issue to continue to surface at the Fed. Tapering, when it takes place, will be staged in incremental steps over a period of 1 year, 18 months, or even 2 years. Tapering from $80 billion to zero at a pace of $5 billion per meeting would take 2 years, given the Feds schedule of 8 meetings a year. Such an announcement would be well received by market agents. The Fed could reserve the ability to change the path at any time and would likely do so, but it would also start on a path of gradualism that would be calming to markets. Will they? "Only the Shadow knows." The Shadow may know the outcome of the debt limit and budget fight, too, but he aint tellin'. It is this simple: We either default, and our politicians do lasting damage to our country. Or we dont, and markets resume a trend higher, and we go on in our unique American political way. We will know soon. Im betting on the latter. Right now we are holding a cash reserve and deploying it in periods of weakness.
Outside the Box is a free weekly economic e-letter by best-selling author and renowned financial expert, John Mauldin. You can learn more and get your free subscription by visiting www.mauldineconomics.com
Page 4
Page 5
and the POTUS, while the Democrats and POTUS would say that the House Republicans did not appropriate the funds to make payments. It is not clear who wins the public relations battle, but thus far the Republicans' marketing team seems to have been schooled by the old marketing team that helped roll out "New Coke" in the 80s. A fracture in the Republican Party seems like a highly likely outcome. But sentiment could also turn sharply on the POTUS. The fact is that both political parties are violating the spirit of Section 4. It is a disgusting display of partisanship that our Constitution has outlawed. Senators Benjamin Wade and Jacob Howard are surely rolling over in their graves. Of course, that does not mean that we cannot see this illegal, immoral and powerful activity enter the marketplace. If blowing up markets and blaming the opposition is the path to short term political success, it has to be at least priced into asset prices. That is why we are seeing some modest drops in risk asset prices and some more serious dislocations in the front end of the Treasury curve. That said, I remain convinced that there is a less than 1 percent chance the POTUS pulls the nuclear trigger and instructs a politically motivated and entirely unnecessary Treasury default. And further, if he does the unthinkable, there is less than 0.001 percent probability the Fed will go through with it. The Fed will not be seen as the entity that pulled the trigger on a default of Constitutionally mandated outlays. As with so much of our global financial and political system, the Fed remains the ultimate backstop. So as everyone sits around thinking about how to profit from Constitutionally outlawed action by our highly partisan legislative and executive branches of government, remember there is at least one adult in the room that can (and will) put a stop to the madness if we go down the highly unlikely path to default. Good luck trading.
Outside the Box is a free weekly economic e-letter by best-selling author and renowned financial expert, John Mauldin. You can learn more and get your free subscription by visiting www.mauldineconomics.com
Page 6
Heres the problem with that: The Feed and Forage Act of 1861 turns the federal budget world on its head. The standard procurement process is for obligations to be incurred by a federal department or agency only after an appropriation is enacted. ... Source:http://www.foreffectivegov.org/files/budget/feedandforageact.pdf See the deal here? The Feed and Forage Act of 1861 is viewed as an emergency gig. And so it allows the executive branch to run up a tab in emergency situations only ... before the appropriation has been voted in by Congress. Who is supposed to control our purse strings. Can you make any case into an emergency? Absolutely. Think back now to the Exchange Stabilization Fund. Opened by Roosevelt to stabilize the buck. Rubin raided it. To stabilize those massive US funds who got caught in Mexican debt with their pants down. Wise guy that he is, he cited stabilization of the Peso which, in turn, would stabilize the dollar. And bingo, nobody said boo about this abuse. Allow me to digress for clarity. Lucius Wilmerding, Jr. wrote a book back in 1943 called The Spending Power: A History of the Efforts of Congress to Control Expenditures. In that book, he coined a phrase known as coercive deficiency. This is perfect. Because it means that the executive branch goes out and makes a deal. For which there has been no appropriation yet agreed by Congress. But once Congress gets backed to the wall by this brazen tack, they cave and vote the appropriation positively, having been coerced/embarrassed by the executive branch.
Outside the Box is a free weekly economic e-letter by best-selling author and renowned financial expert, John Mauldin. You can learn more and get your free subscription by visiting www.mauldineconomics.com
Page 7
Copyright 2013 John Mauldin. All Rights Reserved. Share Your Thoughts on This Article
Like Outside the Box? Then we think you'll love Johns premium product, Over My Shoulder. Each week John Mauldin sends his Over My Shoulder subscribers the most interesting items that he personally cherry picks from the dozens of books, reports, and articles he reads each week as part of his research. Learn more about Over My Shoulder
Outside the Box is a free weekly economic e-letter by best-selling author and renowned financial expert, John Mauldin. You can learn more and get your free subscription by visiting http://www.mauldineconomics.com. Please write to subscribers@mauldineconomics.com to inform us of any reproductions, including when and where copy will be reproduced. You must keep the letter intact, from introduction to disclaimers. If you would like to quote brief portions only, please reference http://www.mauldineconomics.com. To subscribe to John Mauldin's e-letter, please click here: http://www.mauldineconomics.com/subscribe/ To change your email address, please click here: http://www.mauldineconomics.com/change-address If you would ALSO like changes applied to the Mauldin Circle e-letter, please include your old and new email address along with a note requesting the change for both e-letters and send your request to compliance@2000wave.com. To unsubscribe, please refer to the bottom of the email. Outside the Box and JohnMauldin.com is not an offering for any investment. It represents only the opinions of John Mauldin and those that he interviews. Any views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with, Mauldin's other firms. John Mauldin is the Chairman of Mauldin Economics, LLC. He also is the President of Millennium Wave Advisors, LLC (MWA) which is an investment advisory firm registered with multiple states, President and registered representative of Millennium Wave Securities, LLC, (MWS) member FINRA, SIPC. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB) and NFA Member. Millennium Wave Investments is a dba of MWA LLC and MWS LLC. This message may contain information that is confidential or privileged and is intended only for the individual or entity named above and does not constitute an offer for or advice about any alternative investment product. Such advice can only be made when accompanied by a prospectus or similar offering document. Past performance is not indicative of future performance. Please make sure to review important disclosures at the end of each article. Mauldin companies may have a marketing relationship with products and services mentioned in this letter for a fee. Note: Joining the Mauldin Circle is not an offering for any investment. It represents only the opinions of John Mauldin and Millennium Wave Investments. It is intended solely for investors who have registered with Millennium Wave Investments and its partners at www.MauldinCircle.com or directly related websites. The Mauldin Circle may send out material that is provided on a confidential basis, and subscribers to the Mauldin Circle are not to send this letter to anyone other than their professional investment counselors. Investors should discuss any investment with their personal investment counsel. John Mauldin is the President of Millennium Wave Advisors, LLC (MWA), which is an investment advisory firm registered with multiple states. John Mauldin is a registered representative of Millennium Wave
Outside the Box is a free weekly economic e-letter by best-selling author and renowned financial expert, John Mauldin. You can learn more and get your free subscription by visiting www.mauldineconomics.com
Page 8
Securities, LLC, (MWS), an FINRA registered broker-dealer. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB). Millennium Wave Investments is a dba of MWA LLC and MWS LLC. Millennium Wave Investments cooperates in the consulting on and marketing of private and non-private investment offerings with other independent firms such as Altegris Investments; Capital Management Group; Absolute Return Partners, LLP; Fynn Capital; Nicola Wealth Management; and Plexus Asset Management. Investment offerings recommended by Mauldin may pay a portion of their fees to these independent firms, who will share 1/3 of those fees with MWS and thus with Mauldin. Any views expressed herein are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest with any CTA, fund, or program mentioned here or elsewhere. Before seeking any advisor's services or making an investment in a fund, investors must read and examine thoroughly the respective disclosure document or offering memorandum. Since these firms and Mauldin receive fees from the funds they recommend/market, they only recommend/market products with which they have been able to negotiate fee arrangements. PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. John Mauldin and/or the staffs may or may not have investments in any funds cited above as well as economic interest. John Mauldin can be reached at 800-829-7273.
Outside the Box is a free weekly economic e-letter by best-selling author and renowned financial expert, John Mauldin. You can learn more and get your free subscription by visiting www.mauldineconomics.com
Page 9