Archive - Dec 2012

Another Banzai7 holiday tradition...

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...

"With the slightest disturbance, the dream is going to collapse."--Inception

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.

It will be natural to sing the praises of our elected leadership after they have hammered out their deal to raise taxes in order to avert the crisis.  To recall that raising taxes is ever always the solution will be just as easy as to forget to honor the unsung heroes of the fiscal cliff - the software people that maintain America's payroll systems.

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).

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...

Maybe I should get a Nobel, that, or maybe PK shouldn't have one…..

Econophile's take on the 7 most important economic events of 2012 and why they will impact 2013 and beyond. This is not what the MSM will tell you.

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.

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.

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...

You truly have to be mentally challenged if you follow the gold/silver market action and cannot appreciate something is very amiss, as per the confused Mitsui gold people, as brought to your attention the other day.

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.