Say Hi To Hillary; The Evil Queen in 2016

Say Hi to Hillary

Markets this morning have moved on from worrying about the US government shutdown to displaying acute anxiety about the prospect of a default on the payment of treasury coupons. This would be a very bad thing which is exactly why it won’t happen.

Bill Gross of PIMCO described a default, were it to happen, as being “unimaginable”, as it would have “catastrophic,” consequences on U.S. borrowing costs, and would trigger a “complex series of events worldwide” that would ripple through global financial markets. The T Bill repayment is due on the 17th which should be met but the payment on the 24th is when life gets interesting. Merrill Lynch suggest that the only way for the Federal government to operate on a balanced budget basis, with no debt ceiling increase, is for an immediate 20% cut in spending; that’s 4% off US GDP in a heartbeat with a consequent hit on capex / hiring / confidence that will extend far beyond the US. Gross though is right, it won’t happen. The 800lb gorilla in the kitchen that no one wants to talk about is the $250tr derivatives market. Just a small glitch in the Tea Party’s plan to throw a stick in Obama’s spokes.  What do we think would happen there if the US didn’t make its interest payments on its bonds? We can start with derivative documentation risk, VaR model risk, clearing system risk, (Fedwire doesn't allow defaulted securities to flow) and collateral and repo market risk. Overlay on this the domino effect across asset classes and the leverage involved in derivatives and you have a clear and present systemic threat to all financial markets.

Therefore, the fringe Tea Party Tin Foil Hat Loons will, at some point, experience some cross-town rendition and will most probably will be dragged into a dark room by some really big guys, read the riot act and water boarded until they sign. Principle won't be allowed to get in the way of the survival of capitalism. In the meantime, they've virtually guaranteed a Democrat win at the next US election so say Hi to Hillary, (and that’s going to put the Falklands back on the front page).