Archive - 2013

Presented with little comment (via Bloomberg):

• *HOUSE REPUBLICANS ABANDON EFFORT TO ADD SPENDING CUTS TO BILL

It appears everyone grows tired of the pantomime, even the main actors. Well that was fun while it lasted...

UPDATE: Sure enough - *COLE SAYS MAJORITY OF REPUBLICANS TO VOTE FOR SENATE BILL ... and the market is rallying

Following Monday's fiscal-cliff-gasm in markets in the US, the Australian stock market is the first indication of the post-cliff on-again-off-again reaction to the reality that is a stymied House and stubborn Senate. Some are noting the fact that it is 'up' as a signal of confidence - however, given its 'catch-up' nature, it is actually signalling considerably less confidence than US stocks showed at their close. Why is this important? Because all that matters is the market...

"Everyone knows once the markets open tomorrow our courage drops in direct proportion to the market fall," said one Republican lawmaker

Of course, this could all change based on the next flashing red headline.

"Are the key governments and their leaders able to maintain confidence in this fragile system?" "Are 'they' going to do the 'right' things?"

Ironically, the very success of stock market manipulation only thins the market of legitimate participants and thus increases the probability that risk that has been suppressed for years will erupt uncontrollably. That the stock market is manipulated is no longer in question. One explicit goal in the Fed's zero-interest rate policy (ZIRP) is to drive capital into risk assets such as stocks. That is a first-order, transparent policy of manipulation, i.e. a centrally managed policy aimed at managing markets to meet a key central-planning goal: creating an illusion of prosperity via an elevated stock market and the resultant "wealth effect" for the 10% who own enough stocks to matter. Indirect manipulation is hidden from public view lest the rigging of the market taint the perception that a rising market is "proof" that Federal Reserve and Administration policies are "succeeding." Indirect manipulation is achieved via Federal Reserve quantitative easing operations, unlimited liquidity and lines of credit to fund bank speculations and masked buying of market futures. This multilevel manipulation creates a Boolean either/or for any Bear market: either it is a planned "panic" that profits the banks or a systemic failure of the orchestrated campaign of market manipulation.

From 9/11 on, Gold and the world's central bank balance sheets were as correlated as over-consumption and a hangover (and linked just as causally we suggest). Then a funny thing happened in 2008 - gold slid as the central banks went extreme. Of course, as this divergence occurred, the world's stock markets imploded almost as if the central banks knew their status quo was about to go entirely pear-shaped. From 2008 until November of 2011 (when the world's central banks began their coordinated ease-fest) the correlation went limit up once again. Since then, Gold and CB largesse once again decoupled as liquidity is flushed around the world's markets to suspend reality just a little longer. While this divergence is not as extreme as in 2008, something is afoot.

We can’t predict the future – if it was actually possible fortune tellers would all win the lottery.  They don’t, we can’t and we aren’t going to try to.  However, we can analyze what has happened in the past, weed through the noise of the present and try to discern the possible outcomes of the future. For every almost every positive tailwind there is an opposing headwind, and in the coming year, the political and economic decisions domestically, and globally, will define the coming landscape.

UPDATE: *LATOURETTE SAYS CANTOR WON'T SUPPORT BILL 'IN CURRENT FORM'

It seems all is not going according to plan in D.C.. Perhaps it was the $4 Trillion deficit rampage the CBO just scored, or that the Republicans awoke from their slumber but as House meetings end, it appears Citi's worst case scenario is about to take place - the bill is going back to the Senate with spending cut amendments. As Politico notes, amending the bill would throw into serious flux the carefully negotiated agreement between Senate Minority leader Mitch McConnell and Vice President Joe Biden. While headlines noted the possibility, Rep Spencer Baucus (via Robert Costa) just confirmed the deal will "go back to the Senate."

• *BACHUS SAYS HOUSE REPUBLICANS 'THERE' ON TAX PROVISIONS
• *BACHUS SAYS HOUSE MAY SEND BILL BACK WITH SPENDING CUTS ADDED

One thing is clear, Politico adds: there is serious disdain among House Republicans for what the Senate did in the middle of the night. Retiring Rep. Steve LaTourette of Ohio asked House Republicans why the House would “heed the votes of sleep deprived octogenarians,” according to a source in the meeting.

US Vice President Biden and Senate Minority leader McConnell brokered an agreement that was approved by the Senate that seems to avoid the full fiscal cliff.  It now is before the House of Representatives.  

While the Jan 1 deadline is passed, the more significant one, we had argued was Jan 3, when a new Congress is sworn in.  A failure by the 112th Congress to finalize the legislation would mean that process would have to begin anew with the 113th Congress. 

After what is likely to be intense though short debate, the House of Representatives can either approve the same exact bill the Senate approved, which be the quickest resolution.  It can seek to amend the bill, in which case it must return to the Senate for their approval.  The process could be cumbersome and require reconciliation and would risk the Jan 3 deadline.  Alternatively, a majority of the House could fail to ratify the Senate bill, in which case, it will be up the next Congress to claw back from the other side of the cliff.

Two things:

First - it is no longer the "Bush (temporary) tax cut" - it is now the "Obama (permanent) tax cut", with a loophole for the 1%ers (whose big picture "impact" we showed previously)

Second - according to the just released scoring by the CBO, the total impact to the US budget deficit of said permanent tax cuts, will be a $4 trillion increase in the deficit over the next decade. In reality, due to the CBO's perpetual optimistic bias, this number will likely be orders of magnitude lower than what it ends up being.

Maybe the US can just increase the taxes on the uber wealthy some more, and pray that unlike Obelix, they have never heard of Belgium.

...That would be the far more important cliff to America's middle class, the "Welfare Cliff" as a result of which the country's workers, especially those that fall in Obama's middle class sweet spot -  those tens of millions earning between $30,000 and $70,000, are perfectly agnostic if they make $29,000 or $69,000 as their net income and benefits amount to one and the same. Because being "aspirational and upwardly mobile" is so 1999, especially in a nation where it is more important to drag down the rich, than to become them. But hey - just toss this one too in the bin of perverted statist disincentives, along with all those other unintended consequences of central planning and a governmental power grab, not the least of which is the misallocation of trillions to satisfy immediate shareholder demands such as dividends and buybacks in a ZIRP world, instead of actually reinvesting in capital, growth, and hiring of workers: those things that capitalism, at least on paper, used to be all about.

Presented with little comment except to rhetorically ask (Tom Lee) - where's the value?

Banzai7 Institute presents the essential charts for hallucinating precisely WTF happened in 2012...and more

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...