US debt ceiling, unsustainable stimulus and income squeeze to smash markets says Chris Mayer

Posted on 05 September 2013 with no comments from readers

By mid-October US stocks will be dropping like a stone predicts market maven Chris Mayer, author of Capital & Crisis one of the world’s top selling financial newsletters this week.

He’s not talking about Fed tapering and an end to money printing either. Mr. Mayer has three US factors in his sights that will trigger a big sell-off.

All his points are concerned with one big decision of the US government, which is the debt ceiling. It also indirectly hints that the Central Treasury is in urgent need of a measure to prevent yet another showdown, which even the Bitcoin Code cannot mine out. Those who have amassed Treasury Bonds, it is time for an action.

Debt ceiling

First, the new US Treasury Secretary has reported that its ‘extraordinary measures’ to avoid hitting the debt ceiling will be ‘exhausted in the middle of October’. That means another headline hitting battle to raise the debt ceiling. Stocks tumbled the last time around.

Secondly, according to John Williams at Shadow Government Statistics, the Federal Reserve has bought 110 per cent of the US Treasury’s net bond issuance this year. As Mr. Mayer explains: ‘Meaning, the Federal Reserve Bank has bought every new dollar of debt issued and then some. What, no one else wants to bid?

‘By mid-October the Federal Reserve’s purchases should be approaching 140 per cent, by Williams’ calculations. This is clearly absurd and can’t go on forever. (If for no other reason than the Fed will eventually own the entire federal debt market. As it stands now, it owns about a third of it!) When it ends, interest rates will likely rise.’

Falling incomes

Third, adds Mr. Meyer, ‘median US household income is a government number that’s harder to fudge than the usual suspects like unemployment or GDP. And it’s been in a terminal funk for three years, far worse than during the ‘official’ recession from 2007-09.’ See this graph:

So the chickens are finally coming home to roost. The problem is that these issues are hardly in isolation. There’s another Middle East war pending in Syria with higher oil prices on the agenda. There’s a second Asian Financial Crisis in progress led by India and China. Southern Europe is in a depression. Japan is on the brink of disaster.

How low will stocks go? That’s the question to be asking, not how much higher will they fly.