Archive - Nov 7, 2012 - Story

This morning no one is marching in the streets, no coup is underway and the election process functioned. For that much at least; we give thanks. We will have twenty-fours hours of afterglow and self-congratulation and then we will return to a Democratic President with a Democratic Senate that will confront a Republican Congress and America’s fiscal cliff. The popular vote provides no mandate and the United States remains a deeply divided country. Just as our election on November 6 provided an end to a very long road so will the empty till of Athens and the severely declining revenues of Spain. Decisions will now have to be made. In both Greece and Spain it is a high stakes game of Risk where the “streets are alive” and not with “the sound of music.”

It was shaping up like the perfect overnight ramp following yesterday's Goldilocks election result... and then Mario Draghi opened his mouth.

• DRAGHI SAYS DEBT CRISIS STARTING TO HURT GERMAN ECONOMY
• DRAGHI SAYS GERMAN RATES LOWER THAN THEY WOULD BE OTHERWISE

And so finally, after months and months of explaining the fundamental dichotomy in Europe (see here), it is finally becoming transparent. And it is as follow: Germany, which is the economic dynamo of Europe, needs a weaker EURUSD to keep its export economy running. Period, end of Story. The problem is that the lower the EURUSD, the greater the implied and perceived EUR redenomination risk, which in turns send the periphery reeling, and will force first Spain, and then everyone else to eventually demand (not request) a bailout.

Presented without commentary.

• Obama Wins Re-election With Romney Defeated in Key States (Bloomberg, Reuters)
• Romney's last, greatest 'turnaround' falls short (Reuters)
• Control of Congress set to remain split (FT)
• Republicans to Hold Most Governor Offices Since 2000 (Bloomberg)
• Economic Unease Looms After Win (WSJ)
• Storm-lashed New York, New Jersey scramble as weather threatens (Reuters)
• Democrats Assured of Keeping U.S. Senate Majority (Bloomberg)
• Greece to vote on austerity, protests intensify (Reuters)
• France offers businesses €20bn tax break (FT) ... Wait, what?
• Putin Fires Defense Chief in Rare Move (WSJ)
• China premier Wen calls for deeper cooperation on disasters (China Daily)
• China wrestles over democratic reform (FT)
• Top-Performing Won Threatens to Hurt Korea Export Rebound (Bloomberg)

Congratulations on the four more years, Mr. President. To celebrate, Goldman starts by cutting the Q4 GDP forecast from 1.9% to 1.5% (and let's not forget that the same Goldman is predicting a 15% drop in the S&P in the next two months to get the Fiscal Cliff deadlock to break).

Obama has been reelected, the Senate remains in the hands of the democrats, while Congress is controlled by the GOP. Most importantly, the printer is firmly in the hands of Ben Bernanke. In other words, nothing has changed, as was largely expected all along. The worst case scenario - a protracted litigation, challenging the results of the election - has been avoided after Mitt Romney contested shortly before midnight, and as a result the immediate downward gap in risk following the election has been largely recouped overnight. More importantly, '4 more years' of the same monetary policy and no end to currency dilution have resulted in a nearly $50 jump in gold overnight with the metal in the $1720s this morning, because while the Fiscal Cliff remains hopelessly unresolved, and the baseline scenario that the market will need to tumble to shock politicians into waking up, remains (as does Goldman's 1250 year end S&P price target), the reality is that no matter what happens, Bernanke and crew will print and monetize the coming deluge of debt (which would also have been the case if Romney had won). And with total debt set to rise to $22+ trillion over the next 4 years, a deluge it will be. Most importantly, with Obama reelected, Europe is now "off the hook" and can finally rock the boat, which means Greece can take its rightful place at the front of the domino chain. Remember: the latest Greek austerity vote is today and voting (i.e. debating) has begun, and with vote results expected later today. It also means that the military festivities in the middle east, where the US now has 2 aircraft carriers and 2 marine assault groups, can resume.