The 'deal' didn't surprise CNBC's Rick Santelli as he notes the administration did the "easy thing" once again. However, he does think the coming battle in 6-8 weeks regarding the debt ceiling will be surprising to many and believes "there has to be an endgame to insanity." Rick's rightly cynical perspective on the euphoric opening gap today in stocks and bonds (and questioning the veracity of manipulated 'market' prices) appears as frustrating to him as "watching politicians all slap each other on the back while the country slips into a Grecian like formula."
It seems our premonition of Europe's year-end desperate need for Euros to prop up their ailing and illiquid books has indeed come to an end. EURUSD is heartily disagreeing with US equity exuberance and, more importantly, the all-important carry driver EURJPY is pointing to a decided risk-off aspect as Europe closes its first trading day of the year.
For those bored with watching how much higher Getco and Citadel's algos can take the market on a resolution that is adverse for the US economy, that cuts consumer spending and cash flow, that does not address the real issue: government drunken sailor spending, and that means America will now labor for the next two months without being able to incur one additional dollar in net debt courtesy of breaching the debt ceiling on the last day of 2012 - in other words your typical kick-the-can-for-two-more-months non deal, we have good news: Jim Grant of Grant's Interest Rate Observer has released a compilation of his best articles from the past year for free to anyone who still cares about what actually may be happening in the US economy, besides the obvious - endless fiscal and monetary stimuli from both the Fed and Congress, which like, any lunch, are never free, even if the final invoice may take a while to arrive.
The fundamental Keynesian project is that the Central State and Central Bank should manage market forces whenever the market turns down. In other words, the market only "works" when everything is expanding: credit, profits, GDP and employment. Once any of those turn down, the State and Central Bank "should" intervene to force the market back into "growth." The sharper the downturn, the greater the State/Central Bank intervention. This accounts for the martial analogies of State/CB responses: "bazookas," "nuclear option," etc., as the market is overwhelmed with ever greater fiscal/monetary firepower. After basically voiding the market's ability to price risk and assets, the Keynesians believe the market will naturally resume pricing risk and assets at "acceptable to Central Planning" levels once fiscal and monetary stimulus is dialed back. Keynesian policy is to punish capital accumulation and reward leveraged debt expansion. Rather than enforce the market's discipline and transparent pricing of risk, debt and assets, Keynesians have explicitly set out to re-inflate destructive, massively unproductive credit bubbles. The entire Keynesian Project, however, has numerous blindspots.
The first two economic indicators of 2013 are in and are a beat and a miss. The beat was in the December ISM Manufacturing printed at 50.7, higher than the 50.5 expected, and up from November's 49.5. This is happening even as 7 of the 18 manufacturing industries in December report growth while 9 reported contraction: go figure. Looking at the component data, New Orders remained flat at 50.3. The index was driven higher by Backlog of Orders +7.5, Exports +4.5, Supplier Deliveries +4.4, Employment +4.3, and Prices + 3.0. The declines were in Inventories and Production, down -2.0 and -1.1 respectively. The miss was in November Construction Spending, which printed at -0.3%, down from a downward revised October 0.7% (from 1.4%), and well below expectations of a 0.6% print: this was the biggest miss in 10 months, and the first negative print in 10 months, which however will likely be blamed on Sandy.
JPM's Michael Feroli, who already quantified the impact of the 2% payroll tax cut expiration at $125 billion, has estimated the impact of the Fiscal Cliff on the US economy for 2012. The verdict: 1%. This is just on the Obama tax [cut|hike]. If and when any spending cuts are actually announced or enacted, this number will only go up, as will apparently the market.
As we wondered out loud yesterday, many have questioned the disconnect between increasingly burgeoning central bank balance sheets and money printing and the range-bound trading in Gold. It seems the first real hint of why is peeking through as the Economic Times reports the Indian government are growing increasingly concerned at the rate of gold imports. As the India Finance minister stated: "Demand for gold must be moderated... We may be left with no choice but to make it more expensive to import gold. The matter is under government consideration." Gold imports are playing a major part in India's record high current-account deficit (at $20.2bn for the period April to September), down 30.3% YoY thanks to a doubling of the customs duty on standard gold bars (to 4%). It seems the Indian powers-that-be are learning from their US and European leaders that if something is happening in a free-market that threatens the status quo even modestly - crush it with regulation and centrally-planned control. As the article goes on to note, currently, the government is also making efforts to channelise investor money into equities and other financial instruments to reduce demand for the yellow metal.
"The scaled-down deal passed in the Senate addressed the fiscal cliff but did nothing to address longer term fiscal health of the nation. This puts the US rating at risk for a downgrade. However, credit rating agencies may decide to wait and see what emerges from the subsequent talks. There is an implicit new cliff at the end of February related to the sequester and to the expected exhaustion of extraordinary measures related to the debt ceiling. This date is expected to be used by Republicans as leverage for spending cuts. President Obama has already signaled that a new round of spending cuts – those related to the sequester as well as entitlement spending – will have to be matched by additional revenue increases. Therefore entitlement and tax reform are likely to be at the center of discussions over the next two months."
A week ago, on December 26, when Whitney Tilson announced he was piggybacking on the Einhorn-Ackman Herbalife trade, we asked if a short squeeze was imminent "as Tilson jumps on the Herbalife bandwagon." The stock was trading in the mid-$20s. This morning it will open just shy of $35, a 30% gain in one week, which more or less answers our rhetorical question. As a reminder, the Herbalife as a "ponzi scheme" thesis has been around since 2009 (check valueinvestorclub.com, not to be confused with the aforementioned Tilson's VIC) and anyone who assumes this is a valuation catalyst is very much wrong. Which is why the recent surge in the stock may just be the beginning: as was reported late last week, Short Interest in the stock has soared ever since HLF came to the forefront of newsflow to a whopping 26.22 million shares, an increase of 5 million shares short in the past week alone, and amounting to 24% short interest of the total % of shares outstanding.
Curious how Europe's insolvent peripheral countries, where the government is increasingly the only source of demand (if not funding), have managed to avoid falling into a primary budget deficit abyss? Simple: instead of paying their outstanding bills, Europe's insolvent nations are simply not paying them. And with the entire European bond market now a central bank controlled policy mechanism, meaning there are no longer any checks and balances to keep governments honest, there is no pressure on said countries to actually pay. Hopefully those companies on the other end of these unpaid invoices have as generous a benefactor as the ECB to fund their now persistent and growing undercapitalization.
- Senate-Passed Deal Means Higher Tax on 77% of Households (BBG)
- Bipartisan House Backs Tax Deal Vote as Next Fight Looms (BBG)
- Fresh stand-off looms after US cliff deal (FT)
- Congress Deal Averting Tax Increase Curbs Risk to States (BBG)
- How Colombian drug traffickers used HSBC to launder money (Reuters)
- Danes Face New Reality in Struggle to End Crisis, PM Says (BBG)
- Ban on demanding Facebook passwords among new 2013 state laws (Reuters)
- Oil Climbs to Three-Month High as U.S. House Passes Budget Bill (BBG)
- Cameron seeks bold steps from G8 leaders (FT)
- China to outstrip Europe car production (FT)
- North Korea Picks Stronger Economy, South Ties as Top 2013 Tasks (BBG)
And so after much pomp and posturing over the past 48 hours, much of which will likely reshape the layout of the GOP in both chambers, both the Senate and the House passed the first concurrent tax hike and permanent tax cuts in about two decades. The net result of this will be a roughly 1% drag on GDP, even as the US budget deficit increases relative to the CBO's old baseline, and the beneficial impact from the tax hikes offsets roughly two weeks of spending. In other words, while addressing the tax part of the equation, politicians delayed the spending part of the problem for exactly 60 days by punting on the expiration of the sequester, or the government spending cuts. They also delayed addressing the debt ceiling, perhaps the most integral part of the Fiscal Cliff, which has now been breached and which as of this moment means the US can't incur one additional dollar in additional debt. So looking forward it means the US now has about 4 separate cliffs: the debt ceiling cliff in February/March, the sequester cliff in March, the farm bill cliff in September and the expiration of jobless benefits on December.But that's all in the future, and it will all be a function of just how quickly the GOP rolls over to once again confirm that when it comes to the stock market, America has just one political party. The party of up at all costs, which in turn is manifested right now in the first futures print of the New Year, with both the S&P and the DJIA futures up nearly 2%, and with the E-Mini up some 50 points, or half a turn of S&P multiple expansion in two trading sessions: a nice rally to show just who Washington truly works for.
Moments ago, Boehner voted to enact "Obama's tax cuts", which is the new de facto Bush tax cuts (which expired yesterday), and which will raise the budget deficit over the next decade by $4 trillion, yet which at the same time paradoxically also hiked taxes on nearly three quarters of Americans with an emphasis on the wealthiest 1%. Now, Boehner also issues a statement to advise his constituency just what issue he will cave on next: spending.