"Capitalists seem almost uninterested in Capitalism" is how Clayton Christensen describes the paradox of our recovery-less recovery. In an excellent NYTimes Op-ed, the father of the Innovator's Dilemma comments that "America today is in a macroeconomic paradox that we might call the capitalist’s dilemma." Business and investors are drowning in Fed-sponsored liquidity (theoretically, capital fuels capitalism) but are endowed with what he calls the Doctrine of New Finance - where short-termist profitability guides entrepreneurs away from investments that can create real economic growth. We are trying to solve the wrong problem. Our approach to higher education is exacerbating our problems. There is a solution, it's complicated, but Christensen offers three ideas to seed the discussion.
Few charts capture as effectively the shift in foreign demand for US Treasurys over the past 4 years, or under the Obama administration, as the following two, courtesy of the latest TBAC Q4 refunding presentation. They are quite self-explanatory.
There are few practical limits on presidential power. This is a key dynamic in the failed presidencies of G.W. Bush and Barack Obama. If you're not familiar with the term The Imperial Presidency, you soon will be. Presidents before G.W. Bush and Obama managed to perform their duties with a handful of Executive Orders--five per term seemed about average. President Bush issued 160 in his first term while President Obama has so far issued 139. The implicit claim by defenders of essentially unlimited presidential power is that these broad powers are needed to run the American Empire. No Establishment figure would dare openly state that the U.S. operates a military, diplomatic, financial and commercial Empire, but that is nonetheless the case being made to justify the Imperial Presidency: an Empire requires an Imperial President with broad powers to act not just in the domestic economy and society but anywhere in the world. What we need is not a new president but a new presidency. Unfortunately neither candidate has expressed any interest in limiting the powers of the Imperial Presidency.
Presented without comment - adding anything to this concise summation of the state of the union is superfluous...
Gross: Whew! It’s over. To the victor belongs the spoils of political power but to the US voter only continuing frustration will accrue.
— PIMCO (@PIMCO) November 6, 2012
We have discussed in detail the potential ramifications of a 'close' vote (here, here, and here), and only yesterday UBS Art Cashin opined on the potential for an 'embarrassing victory'. Today, the wizened market participant turns the rhetoric dial to 11 (and rightly so) as he warns "pray it's not close" for fear of the polarization of the populace that could occur. If Florida 2000 was a horror, a close election this year could present six or seven Floridas.
Forget Florida. This election it is all about Ohio: without Ohio, Romney's winning chances plummet (as can be observed at the following interactive chart), even if one ignores history which is that since 1862 no Republican has won the presidency without winning Ohio. This is a fact well-known to the Obama administration, which explains why the incumbent has spent so much time in the ravaged state, where he has spent so much time ruminating on the the Ohio "unemployment rate miracle." Sure enough, in September, the Ohio unemployment dipped to 7.0%, the lowest since September 2008! On the surface, a tremendous metric and great improvement for a state that would have certainly been firmly in the pro-GOP camp had Obama not been able to hammer on this statistic time and time again. Yet, as always, the unemployment rate is only part of the story. The bigger question is whether or not another data set is being fudged to make the Ohio jobs situation appear better than it is in real life. The answer is, predictably, yes.
Ahead of today's presidential and congressional elections, Goldman provides some brief thoughts on various election-night (and beyond) events. From a viewer's guide to the poll-closing times to a discussion of the apparent 'closeness' of the race and post-election market performance, they note that equity performance post 'tight' races has been better than in elections where the winner is more clear-cut. This election has a twist though in that it will be immediately followed by debate on the fiscal cliff, and thus resolution of the election will reduce, but not eliminate policy uncertainty.
The GDP of Nicaragua: $6.4 billion; the cost of the US presidential election to the two candidates: $6 billion, or $20 in petty cash per every US man, woman and child. Some things Wall Street (with Diebold's help) can buy (because no matter which candidate is left standing after the recount and the legal challenge to the SCOTUS, Wall Street again wins). For everything else, there's BernankeCard.
Less than impressive macro data from the Eurozone failed to depress investor sentiment and as such, equity markets in Europe traded higher as market participants looked forward to US elections. Heading into the North American open, all ten equity sectors are seen in the green, with technology and financial stocks leading the pack. Still, despite the choppy price action and lack of progress on the much desired Spanish bailout, peripheral bond yield spreads are tighter, with SP/GE and IT/GE tighter by c. 6bps. EUR/USD failed to break below 1.2750 barrier level earlier in the session and since then stages an impressive recovery, partly helped by weaker macro data from the UK.
- Obama-Romney: Breaking the Tie (BBG)
- Fiscal cliff looms over campaign climax (FT)
- Tough Calls on Deficit Await the Winner (WSJ)
- Election Likely to Leave Housing Unmoved (WSJ)
- Regulator Investigating Rochdale Trading (WSJ)
- Greeks Plan Strikes On Eve of Votes (WSJ)
- China Communists consider internal democratic reform (Reuters)
- Wen urges Asia-Europe co-op to promote world economy (China Daily)
- Italy Said to Reject Bad Bank That May Boost Ties to Sovereign (BBG)
- IMF warning adds to French economy fears (FT)
- Europe, Central Bank Spar Over Athens Aid (WSJ)
- Unlimited Lending May Help Weaken the Yen, BOJ Official Says (BBG)
- PBOC Official Says U.S. Election Won’t Impact Yuan Level (BBG) - Just the USD level to which it is pegged
Today it is all about the elections. It is not about last night's relatively surprising RBA decision to not cut rates (on an attempt to create a reflexive feedback loop when it said that China has bottomed; it hasn't, and the RBA will be forced into another "surprising" rate cut as it did previously). It is also not about Europe missing its Service PMI estimate (just like the US), with the composite printing at 45.7 on expectations of a 45.8 print (with both core countries - Germany and France - missing badly, at 48.4 and 44.6 on expectations of 49.3 and 46.2, respectively). It is not about reports that the EU believes Spain's GDP will again contract more than expected (it will, and certainly without any reports or beliefs). It is not about Greece selling €1.3 billion in 26-week bills even as, according to ANA, its striking power workers have taken 5 power plants online just as winter approaches. It is not about Jean-Claude Juncker telling the truth for once, and saying that Europe is still in crisis, and is facing the viability of the Euro (after saying weeks ago that the Euro is unshakable) and that some countries aren't facing up to their responsibilities. It most certainly isn't about German factory orders finally collapsing as the country is no longer able to delay its slide into full-blown recession, with a September decline of 3.3% on expectations of a modest drop of -0.5%, from the previous decline of 0.8% (the German ministry said that a weak Eurozone and lack of global growth are taking its toll; they will continue taking its toll for years and decades longer). No. It is all about the US elections, with the peak frenzy starting as soon as polls officially close at 8 pm. Everything else is noise.
Having made clear in Part 1 the various policy leanings, uncertainty, and potential reform headlines, we delve a little deeper into the specifics of what the systemic and idiosyncratic implications might be. In two simple tables, Goldman lays out the top-down asset-class perspectives as 'new' China addresses its systemic issues and then looks at how China's equities (and by implication global equity indices) can meaningfully re-rate with a background of economic sustainability concerns as reforms impact various sectors more or less. As Goldman concludes: "Cyclical adjustments can help to restore confidence, but investors will likely be unwilling to meaningfully re-rate the market until more concrete progress is made on the reform front…but reforms may not be good for all sectors."
The imminent once-in-a-decade leadership handover in China will likely be one of the most important if not the most important leadership changes in the world this year and beyond in Goldman Sachs' opinion. Not only because it has the potential to mark a shift in policy direction in what has become a global economic giant, but also, as they note, because it comes at a time of substantial economic and social uncertainty in the country, with the economic future of China and the legitimacy of its current power structure potentially at stake. On the eve of this important transition, understanding this somewhat complex power structure, the composition and policy leanings of the likely new leadership, and the potential new policy priorities and reforms ahead is critical.
While Chinese government and consumer debt can be whatever China wants it to be (and when it isn't, any discharged and non-performing debt is merely masked over with more debt: China doesn't have $3 trillion in foreign reserves for nothing) corporate debt, in keeping with Western-style reporting requirements, is far more difficult to obfuscate and falsify in recent years. It is here that we get the first glimpse of the true sheer extent of the Chinese credit bubble, which as the chart below shows, is already the largest in the entire world.