Archive - Jan 1, 2013

The return of inflation, in official Japanese liberal newspeak, will make the economy less sickly even if the strategy "has risks". One of these is war with China, if only as a (Japanese) crowd pleaser, and another is selling off Japan's over-one-trillion dollar holding of US Federal debt at exactly the right psychological moment to implode the US economy, already teetering on the brink of its fiscal cliff. Japan's endgame flirt with Neoliberal mindwarp, what we can call the "slogan based economy", has brought about a situation where War and Circuses is surely on the Japanese political agenda, along with Japan's threats to sabotage the global economy. The inventors of kamikaze suicide war now have an Old Guard of political deciders who are prepared to pilot the economy straight into the ground, while bleating about "national pride".

Scenarios:

1. A close vote before 6PM – Asian markets open up, catching up to the Monday S&P move; S&P futures probably have priced in most of the benefit of the fiscal cliff resolution. EUR CAD, and AUD have a bit of catching up to do with the S&P, but there should be little drama
2. A rancorous debate that extends into the night – again the key will be whether the votes are there, however, reluctantly, but if it looks as if support is waning we will see sharp moves in markets. With brinkmanship the new normal, the sell-off will be partial on the view that a last minute rabbit will be pulled from a hat.
3. Amendments or rejection – markets will sell off sharply.  If it turns out that the House can’t vote ‘yes’ on an acceptable, yet inelegant fix, the confidence that has emerged in 11th hour fixes will dissipate and tail risk scenarios will shift into baseline outcomes. This would be USDJPY negative,  but risk-correlated currencies now price in 80-90% probably of a successful fix in our view, so the downside pressures will be large.

One of those occasions when one picture really does speak a thousands words...

We greet the new year with an America that has a Fiscal Cliff deal. Actually no, it doesn't - not even close. What it does have is an agreement, so far only at the Senate level which voted a little after 2 AM eastern in an 89-8 vote (Nays from Democrats Bennet, Cardin, Harkin, and Republicans - Lee, Paul, Grassley, Rubio  and Shelby), to delay the all-important spending side of the Fiscal Cliff "deal" which "can is kicked" in the form of a 60 day extension to the sequester, to be taken up "eventually", but hopefully not on day 59 at the 11th hour, the same as fate of the all important US debt ceiling, which remains in limbo, and which now effectively prohibits America from incurring any new gross debt as the $16.4 trillion debt ceiling was breached yesterday... What did happen last night was merely the legislating of the inevitable tax hike on the 1%, which was assured the night Obama won the presidential election, something not even the most rabid Norquist pledge signatories had hope of avoiding. This was the first income tax hike in nearly two decades. A tax hike which, regardless of how it is spun, will result in a drag in consumption. It was also the brand new definition of rich, with the "$250,000" income threshold now left in the dust, and $400,000 for individuals ($450,000 for joint filers) taking its place. Who knew that New Normal would also bring us the New Rich definition. What is generally known is that the Senate bill boils down to the folllowing: $620 billion in tax hikes over the next decade offset by $15 billion in spending cuts now. Hardly "fair and balanced." Anyone who, therefore, thinks this bill is a slam dunk in the House is a brave gambling man.