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Cliffbiter

It's the last trading day of the year, nothing has been resolved on the Cliff, the perpetually wrong media has now decided to change its tune and is spin the Wile E. Coyote plunge as a "good thing" (just as we expected), Congress is nowhere, the Senate failed to reach any resolution last night and is resuming the "negotiations" farce at the bright and early hour of 11 am, and yet somehow, in spite of everything, the strong bid under the futures refuses to go away (thank you Kevin Henry). This despite what is becoming clear to even this broken market (InTrade odds of a debt ceiling deal by the end of today are still a substantial 2.3%) that there will likely be no deal until some time in February or March when the debt ceiling extensions expire by which point the only question is how deep the US recession will be. And still everyone will be shocked, shocked, when nothing is done today either. Why? Because the market continues to price in an outcome which demands that it crash for it to be achieved. That so few grasp this is frankly, disturbing. Also, everything else is perfectly enjoyable theatrical noise. And just to keep the excitement factor really high, most rates and FX markets close early today, with rates and FX futures markets close at 1pm New York time while cash bond trading at 2pm.



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China PMI Surges To 19-Month High - US (And Chinese) Equities Sigh

There was a time when the US was the cleanest dirty shirt; it seems now, given the US equity futures' (total lack of) reaction to tonight's 19-month-high surge in the ever-trustworthy over-invested mal-allocated Chinese PMI that for once, all that matters is domestic issues. HSBC's China PMI surged to 51.5, its highest since May 2011 and the Shanghai Composite is even shrugging it off as new export orders fell slightly (but of course all that matters is the top-line); and not wanting to burst anyone's bubble but - a majority of survey respondents (nearly 85%) reported no change in the level of outstanding business, employment levels also remained broadly similar in December, with nearly 92% of panelists noting no change to workforce numbers. But apart from that, the drop in inventories (and jump in input prices) apparently was enough to jerk this idiotic barometer of whatever it is to something that purports to show the best manufacturing growth in 19 months. It seems clear that our Chinese 'friends' at the PBoC are telegraphing that we are on our own - there will be no easing from them in this environment - Trade accordingly...



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Guest Post: Fiscal Cliff Contingencies

The divergence between consumers and producers within the real economy that has stumped economists for the better part of 2012 can, at least in part, be attributed to the Fiscal Cliff; but the anticipatory effects of the Fiscal Cliff on the United States of America evidently began with American politicians, and probably for the worse, that is where it will end. The division that has plagued Washington has grown starker in recent years, and the divergence between consumers and producers as a result of divided leadership stands as a testament to the irresponsibility of those sent to Washington D.C. to serve their country. These divergences cannot last forever, and depending on the events of the next couple weeks, the United States is due for a reversion to the mean. The direction of that reversion - either production up to meet consumption or consumption down to meet production and confirm a recession within the United States - is wholly on the shoulders of the politicians in Washington D.C.



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Market Opens Near Friday's Lows As Senate Gives Up (Early) For The Night

UPDATE: ES scrambled up to Flash-Crash lows at 1391.5

No Deal; No Deal. The updates came thick and fast and almost entirely full of nothing until Harry Reid called a halt to proceedings:

  • *REID SAYS SENATE WILL RESUME WORK AT 11 A.M. TOMORROW
  • *REID SAYS `THERE'S STILL TIME LEFT' TO REACH BUDGET AGREEMENT

S&P 500 Futures Open at Friday's lows amid higher than average volume but is modestly off the lows as an initial push (ES +4). EURUSD is 8 pips higher (in a purely algo-oriented lift as it was completely oblivious into Friday's close).



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Dick Durbin "Hard To Get To An Agreement Tonight"

It's not even 6 pm yet (futures open time) and all that early optimistic momentum hard procured by splinter GOP Senators, is slowly but surely, being extinguished. Enter Dick Durbin, the second ranking Senate democrat: 

  • Even if budget agreement to avoid fiscal cliff is reached today, it would be tough to “put it together this evening,” Sen. Dick Durbin, D-Ill., tells CNN.
  • If deal reached, more likely to be made final tomorrow, he says
  • Original terms of budget deal present “problem”
  • Hopeful “common ground” can be reached

So let's set the ground rules for tonight's drinking game...



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The Fiscal Policy Q&A, Timeline, And Market Scenarios

Talks on the fiscal cliff have resumed, but as of this writing there is not yet an agreement. The current negotiations focus on the income threshold under which tax cuts should be extended, among other topics. As we have noted, the sides seem as far apart as ever, and as Goldman notes, while it is still possible that an agreement will be reached by year end, a retroactive deal in January looks more likely. The eventual resolution still looks likely to be a scaled down agreement that addresses only the policy changes scheduled for year-end and omits other issues, such as an increase in the debt limit or longer-term fiscal reforms. The greatest area of uncertainty is whether the spending cuts scheduled under the sequester will be addressed. The fiscal policy timeline below shows how we are rapidly approaching the more ominous debt ceiling debate and Goldman's Q&A asks and answers provides context for where we are from both an economic and ratings agency impact basis.



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Guest Post: The Keynesian Legacy Unravels

Keynesian economists believe, regardless of logic and data, that economies can be managed from the top down. In their world, economies are little different than machines. Change some inputs here, speed them up over there, add some lubrication, etc. and the machine will respond in the fashion desired. Output can be “managed” to whatever level needed purely by adjusting the parts of the machine. Austrian economists on the other hand do not see a machine. They see millions of individuals all making decisions to improve their own lives. The price system provides the coordination among these separate pieces, performing a function no human, supercomputer or government could ever accomplish. For Austrians, economics is a bottom up approach. To effect change, you must change the incentives and disincentives that individual decision makers are afforded. “Those who cannot remember the past, are condemned to repeat it.” George Santayana. Ideology is powerful, capable of masking unpleasant facts. Whether we recognize it or not, we are all slaves to ideology.



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InTrade Odds Of Deal By December 31 Plunge To 2.2%

While EURUSD is flat, there is one market open (free of manipulation - perhaps) that offers some insights into traders' perceptions of reality - however 'cautiously', 'modestly', 'surreally' optimistic the powers that be proclaim. InTrade's "debt ceiling by Dec. 31st" odds have plunged to around 2%. A week ago, when we continued to urge readers to short the contract, it was at 10% (and at 30% when we initialy said on Novermber 13th no deal would occur) - even as everyone and their pet rabbit was convinced a deal was going to be cobbled together. The 'debt ceiling' odds are implicitly the 'fiscal cliff' odds given Harry Reid's insistence of the 'bundling' to remove every possible point of leverage from the Republicans:

We would be somewhat foolish to work out something on stopping us from going over the cliff and then a month or six weeks later Republicans pull the same game they did before and say, 'We're not going to do anything — unless this happens, we're not going to agree to increasing the debt ceiling,’ ” Reid said.

 

I agree with the president, it has to be a package deal,” he added.

At around 2% odds, this still seems like money good for shorts...

  



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Reid "Unable To Come Up With Counteroffer... Apart On Some Pretty Big Issues", Hands Over Negotiations To Biden

The second update of the day is here, and this one is far less jovial and optimistic than that coming from the seemingly quite cluless Lindsey Graham:

  • REID SAYS HAVE BEEN UNABLE TO COME UP WITH COUNTEROFFER
  • REID SAYS `WE'RE APART ON SOME PRETTY BIG ISSUES'
  • REID SAYS `I WISH THEM WELL' REGARDING MCCONNELL-BIDEN TALKS
  • MCCONNELL SAYS HE CALLED BIDEN TO TRY TO `JUMP START' TALKS

Nothing like the fate of the nation in the hands of Joe Biden, who may or may not still be laughing.



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2012 Greatest Hits: Presenting The Most Popular Posts Of The Past Year

For the fourth year in a row we continue our tradition of summarizing what you, our readers, found to be the most relevant, exciting, and actionable news of the year, determined simply by the number of page views. Those first eager for a brief stroll down memory lane of prior years can do so at their leisure, by going back in time to where the top articles of 2009, 2010 and 2011 are recapped. With that out of the way, here is what readers found to be the most popular posts of the past 365 days..



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Boehner Responds To Obama: "Stop Blaming And Lead"

If earlier media speculation that the cliff debate was seeing some progress would have sent stocks higher (assuming it was not a Sunday), the speaker's just released response to Obama's Meet The Press appearance would have deflated all hope of any progress. Remember: all is fair in political circus and Beltway theater.



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Obama's Meet The Press Interview

More GOP-bashing, more scapegoating, more "we need to raise taxes to cover a few days of spending" (and pray America's rich have never heard of Belgium), more hope and optimism, in other words more of the same, yet nothing on the last minute executive order hiking Federal spending, nothing on the myth of what really constitutes the spending "cuts", or why it is all really all about preserving the lie of a fair and efficient market: as if more than 10% of the US population actually cares where the DJIA closed on Friday. The full Obama Meet the Press interview below.



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Cliff Rumors Start Early As Lindsey Graham Says "Obama Has Won"

As largely expected, Sunday would be a day marked by rumors, anti-rumors, denials, counter-denials, and much more groundless speculation if zero facts, however without an open market reacting to every single headline like a collocated stung dog. Sure enough, in the first such rumor of the day, we just had Republican Senator - a long time opponent of the Norquist tax pledge - Lindsey Graham, pushing for his agenda in the same way that the Greek finance ministry would unleash perfectly wrong rumors to the FT and Reuters, who said on Sunday that chances for a small "fiscal Cliff" deal in the next 48 hours were "exceedingly good" and that President Barack Obama had won: i.e., taking an opinion and making it fact - something seen so often in the European negotiating tactics. "I think people don't want to go over the cliff if we can avoid it," Graham said on Fox News Sunday. Of course, how Graham views the world, and how potentially filibustering Senators do, not to mention the majority of Congress do, is a totally separate matter.



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Stephen Roach On Why Abe's Aggression Won't Save Japan

The politicization of central banking continues unabated. The resurrection of Shinzo Abe and Japan’s Liberal Democratic Party – pillars of the political system that has left the Japanese economy mired in two lost decades and counting – is just the latest case in point. He argued that a timid BOJ should learn from its more aggressive counterparts, the US Federal Reserve and the European Central Bank. But will it work? Unfortunately, it appears that Japan has forgotten many of its own lessons – especially the BOJ’s disappointing experience with zero interest rates and QE in the early 2000’s. Not only is QE’s ability to jumpstart crisis-torn, balance-sheet-constrained economies limited; it also runs the important risk of blurring the distinction between monetary and fiscal policy. Massive liquidity injections carried out by the world’s major central banks – the Fed, the ECB, and the BOJ – are neither achieving traction in their respective real economies, nor facilitating balance-sheet repair and structural change. That leaves a huge sum of excess liquidity sloshing around in global asset markets. Where it goes, the next crisis is inevitably doomed to follow.

 



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48 Hours Away From The Cliff: "No [Major] Progress"

Surprise! As we all wait on tenterhooks for tomorrow's messianic 'Meet the Press' appearance, The Hill reports that a Senate aid with knowledge of the talks said late Saturday afternoon there is "no major progress." The rare weekend negotiations continue with the sticking point still taxes - which will come as no surprise to any who read/listened to Ron Paul's clear analysis of the idiocy taking place - but differences on other issues, including spending cuts, linger. Reid has scheduled a Democratic caucus meeting for Sunday afternoon to give his colleagues a chance to weigh in on a potential deal. McConnell has said he would do the same. "I believe such a proposal could pass both houses with bipartisan majorities – as long as these leaders allow it to come to a vote," Obama said in his weekly address. "If they still want to vote no, and let this tax hike hit the middle class, that’s their prerogative – but they should let everyone vote. That’s the way this is supposed to work." If the Senate passes the legislation, it would then force the House to take up the bill on the eve of the looming deadline - leaving the 'blame' at the foot of Boehner's Republicans should they not support it. The games continue... but in the meantime, consider what the debate would have looked like (literally) if Elizabeth Hasleth was still in the Senate.



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