While some saw the clip of the lady implying 'victory for Obama means phones for everyone' as perhaps exaggerated out-of-context right-wing propaganda - as that would be preposterous right? - it appears San Francisco took it a little more serious. As SFGate reports, the California Public Utilities Commission is expected to approve (within a couple of weeks) a plan to offer homeless and other poor people in California 'virtually free cell phones and service'. The plan is funded through the federal LifeLine program and is designed to enable these individuals to 'keep in touch with family, potential employers and others crucial to improving their lives'. "This is great - it is transformative for homeless and low-income people," said San Francisco's head of homeless initiatives, adding that, fundamentally, to be in the mainstream of our society you have to have a phone." Setting up the program in California has been no easy task, officials said. "I would prefer it to be free..." said Dufty, and said he would explore other funding sources. Perhaps worth remembering the cost of kidding ourselves once again.
The CBO has outlined a number of options for balancing the budget (full paper below). From 'Increases In Tax Revenue' to 'Cuts to Annually Appropriated Spending' and 'Cuts to Benefits or Entitlements', it's all here in a handy Do-It-Yourself Interactive Deficit-Reduction Plan tool from WSJ. All 'compromises' welcome...
The infamous debunker of most-things-classically-economic was recently asked to brief Congress on the fiscal cliff, and how the downturn of 1937 could be a foretaste of what will happen if the Cliff comes to pass. The paper, slides, and presentation - designed to be simple enough for Dennis Kucinich and his colleagues in Congress to comprehend - provide another glimpse as Steve Keen argues that an attempt by the government to reduce its debt now may trigger a renewed bout of deleveraging by the private sector - and this is what appeared to happen in 1937, when confidence that the worst of the Depression was over led to the government reducing its deficit. Private sector deleveraging, which had stopped in 1934-35, began once more and unemployment rapidly rose from about 10 to almost 20 percent. The main danger with the Fiscal Cliff is therefore not what the reduction of government spending will do on its own, but that it might trigger a renewed bout of deleveraging from the $40 trillion overhang of private debt that Keen calls the "Rock of Damocles".
It must be pointed out that gold is certainly no longer the bargain it was at the lows over a decade ago (at which time Warren Buffett undoubtedly hated it just as much as today). This is by no means akin to saying that there is no longer a bull market in force though. What seems however extremely unlikely to us is that the long term bull market is anywhere near to being over. After all, the people in charge of fiscal and monetary policy all over the globe are applying their 'tried and true' recipe to the perceived economic ills of the world in ever bigger gobs of 'more of the same'. Until that changes – and we feel pretty sure that the only thing that can usher in profound change on that score is a crisis of such proportions that the ability of said authorities to keep things under control by employing this recipe is simply overwhelmed – there is no reason not to hold gold in order to insure oneself against their depredations.
Some have argued that a fiscal-cliff-impacted US economy would enter a recession as hard as Manny Pacquiao hit the canvas on Saturday night but for most of the nation it seems the fiscal cliff is of secondary importance... Will Pacquiao-Marquez 5 coincide with Debt-Ceiling II?
These three letters - C.A.B. - might just be the Dis-Humor story of the day. NPR reports that more than 200 schools across California are coming to the shocking realization that the upfront cash they needed so badly came at quite a price. These 'Capital Appreciation Bonds' are unlike normal bonds (requiring regular coupon payments and principal repayment); instead they provide the 'lent' money upfront and defer all interest and repayment to some magical faery land time in the future (by which time the interest accrued has grown exponentially as the interest accrues on the rising 'principal plus previously accrued interest'). Brilliant - as the Guinness chaps might say. So California schools are now undertaking PayDay or loan-shark style loans defending the idiocy of super-short-term thinking with such statements as "Why would you leave $25 million on the table?" referring to the upfront cash that one Treasurer was able to get his hands on - with clearly no comprehension of the financial instrument's massive convexity. California State Treasurer Bill Lockyer said "It's the school district equivalent of a payday loan or a balloon payment that you might obligate yourself for, so you don't pay for, maybe, 20 years - and suddenly you have a spike... It's so irresponsible."
Behold the fund-tastic four: Ireland, Greece, Spain and... the US? These are the four countries that in the past four years have accumulated the greatest deficit as a % of GDP (and yes, at just under 50%, the US is worse than Spain whose cumulative deficit has been over 40% of GDP), which in turn they have had to fund with what else: new debt.
In many countries around the world the main equity market has a dividend yield above its 10 year bond yield and in many cases its average IG credit yield. Although this isn't the first time that such an outcome has been seen through history, at a minimum it's reversing what has been a 50-year-plus trend where equity dividends were below bond yields. Currently, the US, UK, Germany, and France all have equity dividend yields above their 10 year govvie. However, before the world and their pet snake Sebastian decide this is the buying opportunity of a lifetime, a little more context shows that this was the normal from the start of the 20th century to around the end of World War II. In fact - if we replace government bond yields with corporate bond yields the picture appears to be a huge mean-reversion back to pre-World-War II relative valuations (where dividend yields were consistently higher than corporate bond yields). As Deutsche's Jim Reid notes though - it is more likely that it might be that fixed income and equities are both expensive as central banks have artificially elevated prices in everything in an attempt to keep the financial system solvent - and furthermore this is not the time for epic asset allocation switches.
In a move that we can only presume is to provide more room in their book for some GM Fleet purchases or Twinkie benefits, the US Treasury just announced (via Bloomberg):
- *TREASURY ANNOUNCES OFFERING FOR ALL OF ITS REMAINING AIG SHRS
- *TREASURY SAYS IT WILL CONTINUE TO HOLD WARRANTS FOR AIG COMMON
AIG's share price is sliding (-3.5% AH) - surprise - as the decision to liquidate 234 million shares (10x the recent daily average) into such a highly liquid market will, we are sure, be spun as nothing but positive (and a great success for Geithner et al.). Of course, unwinding the even more illiquid warrants was not on the cards. Interesting timing following the sale of AIG's ILFC unit so close behind to the Chinese.
UPDATE: In the last few seconds of trading ES jumped 3 points on Buffet comments about Dimon for Treasury and WSJ chatter about Fiscal Cliff progress (ES +4.25pts on day)
We have officially run out of expletives to describe the volumelessness of the equity trading markets. Today's S&P futures volume was dismal - among the lowest volume days of the year (even including holidays and half-days). Today's range was relatively narrow and while risk-assets in general were highly correlated, there was noise and the liquidity was simply not there. AAPL continued its VWAP-based slide - holding NASDAQ back overall - but with MCD's gains accounting for around half of the Dow's gains on the day (and the S&P getting lifted with every VWAP-driven jerk lower in AAPL), it seems the 'buying' interest was largely absent. Treasury yields ended lower, VIX higher (though well off its highs of the day), high-yield credit practically unchanged, and the USD very modestly lower providing just enough impetus to keep the S&P green on the day (and the month +0.15%). The Industrials and Transports have recoupled at +1.2% on the month while the NASDAQ languishes -0.77% since 11/30. Oil was probably the mover of the day with WTI -0.3% - notably awry of the +0.5% gains in Silver and Oil and +1.1% in Copper. Financials lagged and Materials led as the day came to a quiet end around VWAP with the machines well and truly in charge.
The man who singlehandedly fought the administration over the idea of converting Fannie and Freddie into the latest taxpayer-funded handout machine, FHFA head Ed DeMarco, and refused to write down Fannie and Freddie home loans in yet another Geithner-conceived debt forgiveness scheme, whose cost like any other non-free lunch will simply end being footed again by yet more taxpayers (what little is left of them), appears to have lost the war, and with the second coming of Obama appears set to be replaced as head of the FHFA. The WSJ reports that "The White House has begun preparations to nominate a new director to lead the agency that oversees Fannie Mae and Freddie Mac as soon as early next year, according to people familiar with the discussions. This would pave the way for President Barack Obama to fill what has become one of the most important economic policy positions in Washington." And so the impetus for as many as possible to default on their mortgage in a wholesale scramble to obtain debt forgiveness, will soon take the nation by storm, while the contingent liability will be transferred to those who still believe that taking out debt should be a prudent activity and one that takes into account future cash flows. In other words, the solvent middle class - those who were prudent stupid enough to save when they should have simply be doing what the government does and spend like a drunken sailor, preferably on credit, will soon be punished once more. And like it. Because according to the new broke normal "it's only fair."
A week ago, Mark Carney was announced as the BoE’s next Governor amid much fanfare. This week, Japan’s election could herald a new more aggressive approach from the BoJ. 2013 will then see speculation mount about Bernanke’s successor and also likely see the operation of the ECB landmark OMT program. It will also mark the 100 years of the Fed and probably much reflection on their impact on the US/Global financial system. So, as Deutsche's Jim Reid notes, central banks will remain in the spotlight for 2013. However whilst their actions to date have certainly minimized the tail-risk post-GFC, they have yet to lift real GDP above their 2007/2008 peak in most countries and virtually every developed economy is operating well below what is perceived to be trend growth. QE would have been seen as highly unorthodox four years ago - and unique for most central banks stretching back through their history. However fast forward to today, that old unorthodoxy has become the new orthodoxy. But what have the world’s central banks got left to offer a world that at some point might be hungry for more? as the world economy peers into the future and sees a growing threat of a recurring recessions and below target inflation, radical monetary policy may become increasingly appealing as elected politicians stuck in gridlock turn to (relatively) politically unconstrained central bankers to save them from their failings and get their economies racing again. For better or for worse.
It seems that there are more than just tin-foil-hat-wearing fringe blogs that have decided to take up the truthiness hunt as CNBC's Rick Santelli exposes the 'fibbing' in statistics that has become more than mainstream thinking. From the 35% 'untruth' of the Clinton-era tax cuts and wage rates (with no explcit wealth assessment and a total ignorance of inflation) to the 75% 'untruth' of the millionaires-and-billionaires tax when it's really on salaries opver $250k; Santelli's blood pressure reaches mercurial levels as he exclaims that Middle Class America should pay attention: How do we expect honesty in negotiation when they're fibbing about truths to such an extent, "all they're after isn't fixing the economy, it's your bucks!" A refreshing three-minute glimpse of reality on a quiet day...
"They say this is not massive money printing, but first they are wrong; and second, monetary authorities in the United States did not see the crash coming and the unsoundness of the financial system. In fact, right up until the crash they were saying that nothing like what happened could ever happen... This monetary policy, $3 trillion of bond buying in the United States, $3 trillion in Europe and another $2.5 trillion to $3 trillion in Japan, is unprecedented. ... If and when people lose confidence in paper money because of repeated bouts of quantitative easing and zero-percent interest rates—it could happen suddenly and in a ferocious manner in the commodity markets, in gold, possibly in real estate—interest rates could go up at the long end by hundreds of basis points in a very short time. I’m quite concerned as a money manager that we have to manage money, not just for the boundaries of what’s in front of our faces—maybe we’ll have a little tax increase or not, the fiscal cliff, or the stock market might go up or down 10% or 15%—but for a basic shift. The thing that scares me most is significant inflation, which could destroy our society."
One thing that has undergone hyperinflation in recent years is the length of financial regulations. Big, messy legislation leaves legal loopholes that clever and highly-paid lawyers and (non-) compliance officers can cut through. Bigger and more extensive regulation can make a system less well-regulated. We propose that this is what the big banks will use Dodd-Frank to accomplish. We predict that the regulatory hyperinflation will make the financial industry and the wider economy much more fragile.