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.
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.
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...
Reid "Unable To Come Up With Counteroffer... Apart On Some Pretty Big Issues", Hands Over Negotiations To BidenSubmitted by Tyler Durden on 12/30/2012 14:20 -0500
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.
As largely expected, Sunday would be a day marked by rumors, anti-rumors, denials, counter-denials, and much more groundless speculation if zero facts, however without an open market reacting to every single headline like a collocated stung dog. Sure enough, in the first such rumor of the day, we just had Republican Senator - a long time opponent of the Norquist tax pledge - Lindsey Graham, pushing for his agenda in the same way that the Greek finance ministry would unleash perfectly wrong rumors to the FT and Reuters, who said on Sunday that chances for a small "fiscal Cliff" deal in the next 48 hours were "exceedingly good" and that President Barack Obama had won: i.e., taking an opinion and making it fact - something seen so often in the European negotiating tactics. "I think people don't want to go over the cliff if we can avoid it," Graham said on Fox News Sunday. Of course, how Graham views the world, and how potentially filibustering Senators do, not to mention the majority of Congress do, is a totally separate matter.
Surprise! As we all wait on tenterhooks for tomorrow's messianic 'Meet the Press' appearance, The Hill reports that a Senate aid with knowledge of the talks said late Saturday afternoon there is "no major progress." The rare weekend negotiations continue with the sticking point still taxes - which will come as no surprise to any who read/listened to Ron Paul's clear analysis of the idiocy taking place - but differences on other issues, including spending cuts, linger. Reid has scheduled a Democratic caucus meeting for Sunday afternoon to give his colleagues a chance to weigh in on a potential deal. McConnell has said he would do the same. "I believe such a proposal could pass both houses with bipartisan majorities – as long as these leaders allow it to come to a vote," Obama said in his weekly address. "If they still want to vote no, and let this tax hike hit the middle class, that’s their prerogative – but they should let everyone vote. That’s the way this is supposed to work." If the Senate passes the legislation, it would then force the House to take up the bill on the eve of the looming deadline - leaving the 'blame' at the foot of Boehner's Republicans should they not support it. The games continue... but in the meantime, consider what the debate would have looked like (literally) if Elizabeth Hasleth was still in the Senate.
The holiday week saw the dollar consolidate against most of the major currencies. The yen was the main exception as its losses were extended under the aggressive signals coming from the new Japanese government.
At the end of the week, the other key consideration, the US fiscal cliff made its presence felt. The recent pattern remained intact. News that gives the participants a sense that the cliff may be averted encourages risk taking, which means in the foreign exchange market, the sale of dollars and yen.
News that makes participants more fearful that the political dysfunction failed to avert the cliff and send the world's largest economy into recession, generally see the dollar and yen recover. This is what happened in very thin markets just ahead of the weekend as Obama's ling last ditch negotiating stance seemed to reflect a retreat from his earlier compromises.
For the first time since May, the S&P 500 has fallen for 5 days in a row. VIX has very much heralded the fact that investors were not as bullish as media-types would like to believe - as we have vociferously noted - and today's jump in the VIX pushes it to six-month highs over 22.5%. The S&P 500 futures ended the day-session at the week's lows testing down just shy of last week's flash-crash lows. Meanwhile, while equities slumped catching down to Treasury yields, commodities were relatively flat as was the USD; it seems that the excess longs in equities relative to the rest are unwinding - a different picture than what was seen during last Summer's debt ceiling debate.
The U.S. federal deficit is now exceeding $1 trillion dollars every year —up from $161 billion in 2007, the last year before the financial crisis. Spending is up some $1 trillion, as outlays for Social Security, Medicare, Medicaid and other entitlements have increased by an amount equal to the entire 2013 military budget – a budget which may again surpass the combined military expenditure of every other nation in the world. U.S. unfunded liabilities are now estimated at between $50 trillion and $100 trillion and by the end of the decade (in less than just 7 years), runaway entitlement spending will require shutting down the military or crippling many other vital domestic spending programs to head off massive deficits that will likely lead to a dollar crisis and significant inflation. No matter what deal is eventually agreed, whether before or after the new year, it will at best nibble at the edges of the trillion dollar annual deficits that are being piled up. While all the focus has been on the so called U.S. ‘fiscal cliff’, amnesia has taken hold and many market participants have forgotten about the far from resolved Eurozone debt crisis – not to mention looming debt crisis in the UK and Japan.
We could say that news is actually relevant or matters in this "market" but we would be lying, just as we would be lying if we said that this market has not become so utterly predictable, with yesterday's late day market surge - on yet another ridiculous catalyst - visible from so far away, it was almost painful to watch it take place in real time. Sure enough, futures are now sliding back, and giving back much of yesterday's gains - but don't worry, in a day full of even more meetings and flashing red headlines, at least some combination of carefully phrased MSM words will set off today's algo-driven buying frenzy, guaranteeing yet another "retail investor" decides they have had it with this farcical "free market" casino for ever.
More exiting than Christmas!
A month ago, we showed something disturbing: the weekly increase in savings deposits held at Commercial banks soared by a record $132 billion, more than the comparable surge during the Lehman Failure, the First Debt Ceiling Fiasco (not to be confused with the upcoming second one), and the First Greek Insolvency. And while there were certainly macro factors behind the move which usually indicates a spike in risk-aversion (and at least in the old days was accompanied by a plunge in stocks), a large reason for the surge was the unexpected rotation of some $70 billion in savings deposits at Thrift institutions leading to a combined increase in Savings accounts of some $60 billion. Moments ago the Fed released its weekly H.6 update where we find that while the relentless increase in savings accounts at commercial banks has continued, rising by another $70 billion in the past week, this time there was no offsetting drop in Savings deposits at Thrift Institutions, which also increased by $10.0 billion. The end result: an increase of $79.3 billion in total saving deposits at both commercial banks and thrifts, or an amount that is only the third largest weekly jump ever following the $102 billion surge following Lehman and the $92.4 billion rotation into savings following the first US debt ceiling debacle and US downgrade in August 2011.
Those who read our article on this topic at this time last week should already know the answer to this rhetorical question. Everyone else may be a little surprised to learn that at a time when every Primary Dealer's sales desk has been pushing what little is left of gullible investors into stocks because the "Great rotation out of bonds and into stocks is our Top trade of 2013" (source: [every sellside strategist]), just as these seem poised to tumble in a recreation of the August 2011 debt ceiling fiasco (as we have been warning for months), their holdings of these same boring old Treasurys once again rose in the latest week ending December 19, increasing by another $10 billion, and hit a fresh all time gross high of $146 billion. Judging by what is increasingly a rotation out of stocks and into bonds, the smart money - correction the only money remaining - appears positioned correctly once again.
Remember: always do what they do, not what they say.
Arguing semantics over cuts here, taxes there, "we are close", etc. misses the entire premise of the entire political debacle that is now replaying in Washington. The simple fact of the matter is that our politicians will not cross the aisle, will not compromise, will not 'come together', will not 'rise above', will not 'think of the children' - until the market (that critical arbiter of everything that appears relevant to the elites) forces their hand. The following three charts should help clarify that for all market savants.