Borrow US, Borrow

No glass ceiling for the US, it seems. We will know on 02nd Aug, if the lawmakers in the US raise their debt ceiling so that they can continue to borrow more to pay off their servicing due pertaining to their extant debt obligations! The credit card issued to the US is massively revolving its credit with exporting countries providing angular momentum for these revolutions by lapping up US paper. The exporting countries (most of them on this side of the Prime Meridian) obviously want to hold down their currencies from appreciating, but considering inflation and its political impact, they may not be able to go the full way. Maybe the US will be able to cleave the rating agencies and have at least one of them desist from swinging the axe of ratings downgrade.

So the coming week is going to get very exciting. The S&P 500 is sitting on its 200DMA. Whatever you believe, or whether you believe in nothing at all – you have to brace yourself for some tight action around this point. People look at such chart positions and either line up for a bounce (from the 200 day DMA line) or short-sell and expect a cut through the line. Since a majority do it, it becomes a very important psychological level.

Meanwhile, the credit default swaps markets are certainly pricing for a US default. Actually, may not be for a default as much as for a marked decrease in the credit worthiness of the nation. Now who holds US debt in what proportion? These guys must sure be a worried lot. And so are we all since the whole thing is one giant messy spider’s web. In our desi markets there are quite a few companies whose stocks are either rising up to touch their 200 DMAs or  have dropped down to kiss that emotional line. With interest rates going up in India, and loads of shareholdings of promoters being pledged to banks for favourable short-term loan rates, I’d rather bet on the market drowsiness to continue. Let’s see. Like Jaspal Bhatti, who once in a television serial, made a comedy that won an award for being the best tragedy (or vice versa), I hope that my logic and thoughts continue to be contrarian indicators! 😉

No disclaimer here.

US Default?

China notes that the United States is “playing with fire” if it agrees to default on its debt. Quite unwittingly and a bit reluctantly this will most definitely force countries like China to try to prop up the USD by purchasing more and more of the defaulted treasuries as they get dumped (mostly by US domestic holders of such treasuries). What a debt trap! China seems to have invested as much as 70% of its $3 trillion foreign currency reserves in US Treasuries! The posture taken by the Chinese is all about their concern that the money that they have invested in US Treasuries is safe, the reality is that the US wouldn’t care as much even if a “technical default” causes a fall in the USD. But countries exporting to USA would get killed – therefore in order to protect their exports, countries such as China, Brazil, even India, might be prompted to buy more to help hold down their currencies from appreciating.

The picture on the right shows the distribution of the lenders to the US Government. The main worry of the US would be that such a technical default would likely cause a ratings downgrade which would in-turn increase funding costs; raise interest rates; depress house prices and slide the economy back into a recession. And of course crash stock markets and shoot up gold. US benchmark 10 year Treasury yields are already hovering near their historic lows of 3%. Now, just what trigger would these notes need to start yielding higher again? A massive sell-off?

Assorted articles on the internet (I’ve pulled most of the ideas for this post from Reuters) seem to be placing the chances of a US default at near zero and many people are obviously dismissing the idea as ludicrous – but stop and think about what would happen if this really plays out like this. We’d know by mid August when some chunk of treasuries are up for redemption and payments. The chart on the top (click to enlarge) shows the US debt levels and the corresponding increasing in its debt ceiling levels. Now, the US Government cannot borrow more than its debt ceiling level and since it breached that level in May 2011, the Senate needs to vote in an increase of the debt ceiling. The reason why people are calling for a “technical default” is that a delay in voting for raising the debt ceiling may give time for economic forces to play themselves out and things to settle and solutions to emerge. Like a cooling off period. Before upping the ceiling. Most certainly it sounds like the political opponents of President Obama trying to generate real bad press and image for him by making the US Government “default technically” and then coming in to the rescue by voting to support the resolution to up the ceiling. That may be why the Treasury Secretary and the Fed people are saying that the results to the world economy will be disastrous if the US defaults.

While the idea of the US defaulting does indeed appear crazy, nitpickers are therefore qualifying a “technical default” as being a different situation as compared to a real “failure to pay” kind of an event. The latter is catastrophic. The former is more like a pause that people do when enjoying a lavish luncheon buffet. They pause for breath, beam at their table-mates and reach out for their wine or water to catch their breath. Continuous eating, while supplying loads of calories, can be quite tiring. It also makes you a glutton. Take a look at this chart that I’ve sourced from Reuters (US online edition). How long can someone keep eating and eating and eating?

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