Archive - Dec 2012

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With the foundation of our economy now one of gluttony and excess (at all costs), the significance of the slowdown in consumer spending in the latest GDP data cannot be underestimated. As Bloomberg Briefs notes, real consumer spending fell 0.3% in October, and is only 1.3% above year-ago levels - the US economy has a propensity to slip into recession any time the 12-month pace of real consumer spending falls below 2.0%. Their so-called ‘Fab Five’ indicators of discretionary spending took a notable turn for the worse in October. Dining out fell 0.4% MoM in October and is only +1.5% YoY – its slowest pace since April 2010. Spending on cosmetics and perfumes fell 0.04% in October, continuing the negative trend from its peak registered in the summer of 2011. Spending on women’s and girls’ clothing slumped 1.8% in October, following a 0.1% decline in September. Casino gambling fell 1.6% in October, while spending on jewelry and watches fell 0.1% in the same month. All-in-all, the consumer's balance-sheet-recession continues...

Amidst all the "fiscal cliff" talk of raising tax rates, few dare to ask: have tax revenues topped out? How could tax revenues decline as rates go up? Easy: people modify their behavior in response to whatever incentives and disincentives are present. Make mortgage interest deductible and people will rack up huge mortgages. Reduce the yield on savings to near-zero (thank you, Federal Reserve) and people will save less. Raise tax rates and people will lower their income or move to low-tax locales. As the saying has it, "Money goes where it is treated well." Supporters of higher rates tout studies that find upper-income taxpayers shrug off higher rates, staying put in high-tax states: Do High Taxes Chase Out The Rich? and Superrich stay put in high-tax states like California. On the other side of the ledger is this study from Britain: Two-thirds of millionaires left Britain to avoid 50% tax rate. Which view is correct? Both, as a result of different dynamics. There are at least four separate dynamics in play.

Yesterday we noted that India was preparing to send its Navy into the South China Sea - defending its mineral rights from China's increasingly vociferous presence. The Philippines also expressed concern. Today, it's Vietnam's turn as Reuters reports the nation is condemning China's "serious violation of sovereignty" as Chinese boats sabotaged Vietnamese State oil and gas company - PetroVietnam's operations (by severing a seismic cable). The actions stem from China's 'belief' that two Vietnamese-owned archipelagos (Spratly and Paracel Islands) are theirs. While China (who oppose unilateral oil and gas development in disputed waters) argued somewhat comically that "Chinese fishing boats were operating normally," the Vietnamese saw it as "blatant violation of Vietnamese waters," and are deploying marine police and a border force to stop foreign vessels. As one analyst noted, "It's going to lead to friction."

With AAPL -2% and stocks at the lows of the day, we wonder whether Obama has bought puts or calls today... President Obama sits down with Bloomberg White House correspondent Julianna Goldman at the White House today for his first television interview since the election to discuss the fiscal cliff - now just four weeks away.

*OBAMA SAYS NO FISCAL CLIFF DEAL `WITHOUT TAXES ON THE RICH'

Live stream below

Time for flashbacks to nearly two years ago, when the first Egyptian revolution, with great assistance from the various governmental liberating agencies of the "developed world", led to a democratic regime, so democratic, the ruler lasted all of 5 months before declaring himself temporary dictator. The reason: following yet more riots, this time resulting in a siege of the presidential palace, and in which protesters breached the presidential palace cordon, Reuters reports that Mursi, aka Morsillini, who granted himself "temporary" supreme commander (read dictator) powers with a unilateral decree on November 22, has now left the building... the presidential palace that is. This will surely embolden the protesters even more, and may well get the military in play once again. One wonders just which regime the US will support this time around, and what happens if control over the Suez Canal can not be maintained following what is increasingly shaping as a counterrevolution.

When people become desperate or hope-less, two things tend to coalesce; 1) they become easily led by charismatic leaders (no matter how crazy the ideas would appear previously), and 2) they resort to actions deemed previously un-possible. Putting a roof over your family's head, feeding your kids (or yourself), or buying the next iPad can drive people to these acts of desperation. Greece's homelessness rate has risen 25% since 2009 (with 20,000 living on the streets of Athens) and over 30% are at risk of poverty (with Ireland close behind). Suicide rates had risen by 40% in the first half of 2010 (and Greece was still relatively low). HIV infections from injecting drug-users has surged 20-fold in two years! And while crime rates remain among the lowest in Western Europe, robberies have surged since 2005 and prison populations (per capita) are on the rise - though, thankfully not as bad as in the US (yet). With sovereign bond spreads at multi-month lows, stocks at multi-month highs, and Barroso et al. claiming victory at every opportunity, perhaps some internal (Farage-like) reflection on the social depression they have enabled is required as the Bank of Greece warned the nation’s social cohesion is under threat.

During the its first term, the Obama Administration thus far has proven itself in favor of increased Government control and Central Planning. That is, the general trend throughout the last four years has been towards greater nationalization of industries (first finance, then automakers and now healthcare and insurance), as well as greater reliance on our Central Bank to maintain our finances.

The Great Depression brought about the Keynesian Revolution, complete with new analytical tools and economic programs that have been relied upon for decades. In dampening each successive downturn, authorities accumulated increasingly larger deficits and brought about a debt supercycle that lasted in excess of half a century. The efficacy of these tools and programs has slowly been eroded over the years as the accumulation of policy actions has reduced the flexibility to deal with crises as we reach budget constraints and stretch the Fed’s balance sheet beyond anything previously imagined. Some have referred to this as reaching the Keynesian endpoint. Keynes would barely recognize where we now find ourselves. In this ultra loose policy environment we are limited by our Keynesian toolkit. Without a new economic paradigm, the deleterious consequences of the current misguided policies are a foregone conclusion.

A snapshot of (quite amusing) "New Normal" dealmaking in the insolvent continent.

Exactly as I promised at the beginning of the year, more haircuts for a country that will receive bailouts in the form of more unsustainable debt that will be defaulted on in the near future. It's simply math, yet so few seem to get it.

This is the only chart the retail investor needs to remember when bombarded day after day by the media with regard to how 'cheap' stocks are...

Forget the Fiscal Cliff: it is merely a much needed economic distraction for the next 3-4 months (distracting from what? Why Europe of course). Yes, it will be resolved, and yes taxes will go up, and yes, debates over it will most likely be carried over into 2013 and nothing will be compromised until the ultimate debt ceiling deadline (because it is really a Fiscal Cliff-Debt Ceiling package deal) is hit some time in March 2013, but eventually one or both parties will cave, right after the market plunges to put it all into the proper perspective as it did around the time of TARP and the August 2011 debt ceiling debate, and a resolution will materialize. The bigger issue has nothing to do with the Fiscal Cliff, which is indeed a sideshow. The bigger issue, as Art Cashin explains, has everything to do with a secular decline in the US economy, where a 1% growth rate will soon be the "New Killing It", where millions more (in part-time workers) will soon be let go, and where businesses no longer generate the cash flows needed to stay open. Art Cashin explains.

Europe may be fixed for the next week or two (until someone once again figures out that by manipulating the market, the ECB is merely making it easier for peripheral governments to do nothing to fix their unprecedented intra-Eurozone imbalances, as has been the case all along with the only strategy Europe has deployed to date namely kicking the can), but that doesn't mean all event and newsflow ends. Here is what to expect out of the insolvent continent as it attempts to put a very volatile (and violent) 2012 to bed with just one more month. Of particular note: €123 billion in Euro coupon payments in the month of December, which serves as a timely reminder that in 2013 European banks better be ready to buy up the record gross and net issuance of their sovereigns with gusto, or else Europe may promptly become "unfixed" all over again.