Financial Crisis Act II: Greece vs Debt Ceiling

Hmm… we’re either onto something with our new financial crisis thesis… or way, way off the mark: Both Barack Obama and Ben Bernanke issued warnings of their own yesterday. Seriously.

“We could actually have a reprise of a financial crisis,” the president told Ann Curry on the Today show. Mr. Bernanke warned Congress that “severe disruptions in financial markets and the payments system” are possible.

How often do we agree with these two guys? Well, rarely, would be the kind way to say it. It wrankles our contrarian bones… but we’re not ready to revoke our thesis.

We’ve been trying to isolate a catalyst for the new crisis since May 31. We’ve identified a few potential triggers. But the one Obama and Bernanke cited is decidedly not on our list. They both pointed to the Aug. 2 debt-ceiling deadline.

As serious as the amount of the debt is, the taffy pull in Washington over the debt ceiling is political theater. And as theater goes, it has all the snafus of Spider-Man on Broadway, with none of the entertainment value.

If the debt ceiling were a truly serious matter, the bond vigilantes would have shown up in droves already. Instead, they’ve been in severe retreat for more than two months now. The yield on a two-year Treasury note sank this morning to a record low of 0.3%.

One all-too-obvious catalyst we identified for the next financial crisis is simmering down a bit today. The streets in Greece are calmer, but the financial situation there is actually more dire.

The prime minister is revamping his cabinet in an effort to force tax increases and spending cuts through parliament. If they don’t pass, Greece doesn’t get its next bailout and defaults next month.

Greece’s probability of default — pegged at a staggering 74% only two days ago in the credit default swap market — is up to nearly 79% today.

Not surprisingly, hot money is fleeing the euro, which is down to $1.413 this morning. The dollar index, which broke below 74 only 10 days ago, is back to 75.8.

The yield on a 10-year Treasury note, while not setting records like the 2-year, is still a rock-bottom 2.95%.

As hot money flees to the dollar and Treasuries, gold and silver aren’t suffering too badly. The spot price of gold is hanging in there at $1,528, while silver stands at $35.63.

Addison Wiggin,
For The Daily Reckoning