US Treasury debt crisis is back

The US debt crisis is back. It is not yet official because we may still be a couple of weeks away but Treasury secretary Lew announced that there will only be about $ 50 billion in cash around mid-October so the debt limit of $16.7 trillion will have to be raised. A close watch of Treasury debt shows that the total debt outstanding has been stationary at just below the debt limit. The Treasury has been taking all means necessary to make sure that there is more time until a crisis, but it is coming. 

Both side of the debt crisis are fairly vocal on where they stand. The president says that he will not negotiate on this matter. Raise the limit so it will not be binding and I will give Congress nothing in return. His position is that the Congress is responsible for any fall-out from not increasing the limit. Republicans have stated that they are willing to increase the debt ceiling in return for cuts in spending. Cut the budget and slow the spending and the president will get his debt level increase. 

All this means is that as we move through September there will be more posturing and talk like what was seen in July 2011. The result was a budget deal that included the spending sequester which the government is now living under. The US has weathered sequestering since March without any major hardship, but the period before the deal was marked by higher market volatility. We should expect the same as we move to the deadline in mid-October. There is no hard and fast date but this should be the focus of the Fall. 

Lyndon Johnson - a special man

Just finished the third part of Robert Caro's biography of Lyndon Johnson. Once again I am amazed at this complex individual who reaches the prize of the presidency only through the assassination of JFK. Lyndon Johnson is someone who has tremendous capacity for good yet at the same time is not a person you would like. He is flawed yet has transformed America through the passage of key legislation for minorities. He shows singular focus to meet long-term goals, a dedication to his own success and the success of his ideals. Yet, he is petty, vain, and moody. Someone who craves attention and power, yet also fears failure. Still, when he is called upon to lead there was no equal. Caro again provides a rich portrait of a man of power who is only human.

Reading this great writer is always worth the time as he provides rich details on how power is exploited, as well as won and lost in Washington. No one writes better about the ups and down of those who are political power players.

Commodity gall of the week - JP Morgan and aluminum

A JP Morgan analyst reported that if there is a change in the LME rules for warehousing of aluminum, it could have a major impact on aluminum producer profits. The profits of 2/3rds of the producers may turn negative. 

JP Morgan and other banks are being investigated with regard to their use of LME warehouses. As owners of warehouses and members and owners of the LME, they control the rules of the game. The current rules of the LME make it very hard to take metals out of the warehouses; consequently, the available inventory is lower than what would be suggested by the warehouse numbers. The criticism is that this restriction of inventory costs aluminum users through the higher prices from less available supply. Of course, the producers are the beneficiaries of this lower inventory. So it is natural for the bank to tell the market that if the rules are changed, the producers will be harmed.

You change the rules and someone will be harmed. 

Is there a competitive oil market? - ask the Saudis

OPEC production is up based on increased barrels coming out of Saudi Arabia. Production is just under 10 mm barrels a day with an icnrease that will offset most of the recent Libyan shortfall. 

We have a crisis in the Middle East and the Saudis will increase the production to dampen any risk premium in the market. Saudi production is offsetting shortfalls in Libya and Nigeria, but more importantly, it is able to dampen the geopolitical risk premium. With issues in both Egypt and Syria, there is a good reason for an enhanced risk premium, but if supply flow is increased there can be inventory build that will offset any future disruption. Increase production even if not needed. Allow for inventory build before a crisis. Use inventory to dampen the shock. Cut production and allow inventory to move lower. Repeat if necessary.

This game has been played for decades and has saved the globe from a number of price shocks. The issue is always how long can this continue or what happens if there is a change in Saudi policy.  You cannot always bet on increased supply during a crisis.