"The scaled-down deal passed in the Senate addressed the fiscal cliff but did nothing to address longer term fiscal health of the nation. This puts the US rating at risk for a downgrade. However, credit rating agencies may decide to wait and see what emerges from the subsequent talks. There is an implicit new cliff at the end of February related to the sequester and to the expected exhaustion of extraordinary measures related to the debt ceiling. This date is expected to be used by Republicans as leverage for spending cuts. President Obama has already signaled that a new round of spending cuts – those related to the sequester as well as entitlement spending – will have to be matched by additional revenue increases. Therefore entitlement and tax reform are likely to be at the center of discussions over the next two months."
And so after much pomp and posturing over the past 48 hours, much of which will likely reshape the layout of the GOP in both chambers, both the Senate and the House passed the first concurrent tax hike and permanent tax cuts in about two decades. The net result of this will be a roughly 1% drag on GDP, even as the US budget deficit increases relative to the CBO's old baseline, and the beneficial impact from the tax hikes offsets roughly two weeks of spending. In other words, while addressing the tax part of the equation, politicians delayed the spending part of the problem for exactly 60 days by punting on the expiration of the sequester, or the government spending cuts. They also delayed addressing the debt ceiling, perhaps the most integral part of the Fiscal Cliff, which has now been breached and which as of this moment means the US can't incur one additional dollar in additional debt. So looking forward it means the US now has about 4 separate cliffs: the debt ceiling cliff in February/March, the sequester cliff in March, the farm bill cliff in September and the expiration of jobless benefits on December.But that's all in the future, and it will all be a function of just how quickly the GOP rolls over to once again confirm that when it comes to the stock market, America has just one political party. The party of up at all costs, which in turn is manifested right now in the first futures print of the New Year, with both the S&P and the DJIA futures up nearly 2%, and with the E-Mini up some 50 points, or half a turn of S&P multiple expansion in two trading sessions: a nice rally to show just who Washington truly works for.
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.
- 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
- 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.
- 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.
On The New Definition Of "Rich", A $620 Billion Tax Hike Offset By $15 Billion In Spending Cuts, And Much MoreSubmitted by Tyler Durden on 01/01/2013 10:49 -0400
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.
Well, we appear to be nearing a mini 'delay' deal of some sort. The agglomeration of headlines continues with Senate deals on and off, Biden proclaiming victory yet Senate Democrats are said not have consented (yet).
- *WHITE HOUSE SAID TO REACH BUDGET DEAL WITH REPUBLICANS
- *SENATE FISCAL CLIFF VOTE POSSIBLE BY 10:30 P.M.: REID SPOKESMAN
- *SENATE DEMOCRATS SAID NOT TO HAVE CONSENTED TO DEAL
State of the idiocy appears to be: The 2-month sequester delay: cuts would come half from defense & half-non-defense. 2 month window to give all sides time for bigger deal. No debt ceiling resolution. Tax rises for 400/450k, Cap Gains/Dividend up to 20%, small rise in estate tax and restrictions on personal tax deductions. Simple - as we have said for a while - assuming this passes seamlessly, this is nothing but a can-kicking delay to the 'extraordinary' debt ceiling date - two words - Stop.Gap. And in two months, it's not just the sequester but the debt ceiling too. Enjoy your night.
S&P 500 futures staged a 3% rally off their overnight lows - taking them back to 3-day highs as headline after headline triggered another round of stop-runs. VIX compression led the way as hedges were pushed off to March and higher levels enabled better exits above Friday's plunge VWAP levels. The year ends with the Dow beating Gold for the first time in nine years (just). The USD fell 0.5% on the year (and the JPY -12.8%!!). European stocks beat US stocks (EuroStoxx50 almost doubling the Dow's performance). US Treasuries and US stocks both rallied. Financials gained 26% on the year. The Treasury curve flattened with the front-end selling off modestly and the belly rallying 10-15bps. VIX was unchanged from the start of the year at the open today - but thanks to the epic compression and steepening we have fallen back (VIX lower on the year). Of course, today's epic ramp really dislocated from risk-asset reality as soon as Bonds closed...
As we forecast back in November, it is now official that the House will not vote on any deal out of the Senate, assuming there is one, later today, which means America will officially slide off the Fiscal Cliff. And now cue everyone being very hopeful and optimistic a deal will get done momentarily, if not sooner, in 2013. Of course, we all know just how far optimism takes America's dysfunctional Congress. The biggest irony in all of this is that the only winners today were the much hated "1%"-ers, whose taxes may or may not go up, who just got to book major year end profits on this last minute ramp. The remainder of America's population can quietly look forward to 2013 with "hope" and "optimism" that in 2013 Congress will finally stop being dysfunctional. Good luck. Oh, and before we forget, America just breached its debt ceiling: now the pillaging of various government retirement funds begins.
No, it isn't the first time Obama has spoken on the Fiscal Cliff, and more importantly, the debt ceiling, which no matter what happens today appears set to remain unresolved as part of today's 60 day stopgap deal, if indeed one materializes. It won't be the last. There will be, however, much hope, optimism, and scapegoating, as always.
The crowds are slowly starting to fill up Times Square, and despite the imminent countdown to New Year’s, Washington still has not conjured up a resolution to avoid the fiscal cliff. Over the prior two months we have leveraged game theory, Venn diagrams, option “greeks,” and basic investor psychology as tools to decipher the ultimate path of the crisis and subsequent market reaction. Alas, regardless of all the analysis we and countless others have supplied; the short, intermediate, and long term prospects for stocks rest exclusively on headlines. More poignantly, the fate of the U.S. economy, global equities, and net incomes for hundreds of millions now depend upon the decision making of a group so small, its numbers can be counted with one hand.
With just 3 hours left in the trading day, why not up the stakes a little in the soap opera and take it straight to the star character:
- OBAMA MAKING STATEMENT ON BUDGET TALKS AT 1:30 P.M.
What will he disclose? Perhaps this, from the AP...
Time is running out. The cliff negotiations have devolved into two unpalatable options: (1) extend just the middle income tax cuts and extended unemployment benefits and allow about two-thirds of the cliff to happen, or (2) go over the cliff in the entirety. In BofAML's view, given the short time frame and legislative hurdles, the latter appears much more likely. Stock market vigilantes have replaced bond vigilantes as the potential good, bad, and ugly scenarios are devoured flashing red headline by flashing red headline. They, like us, believe that going over the cliff is not a benign “slope” as some suggest. Rather, it accelerates the already-building damage to the economy and markets. The latest evidence is the plunge in consumer confidence. Indeed, this could mark the beginning of the rotation in the uncertainty shock from businesses to consumers. Going over the cliff has many secondary, largely ignored, negative impacts, including tax changes that could damage the housing recovery, as well as negatively impact education and alternative energy, among many others.
It's the last trading day of the year, nothing has been resolved on the Cliff, the perpetually wrong media has now decided to change its tune and is spin the Wile E. Coyote plunge as a "good thing" (just as we expected), Congress is nowhere, the Senate failed to reach any resolution last night and is resuming the "negotiations" farce at the bright and early hour of 11 am, and yet somehow, in spite of everything, the strong bid under the futures refuses to go away (thank you Kevin Henry). This despite what is becoming clear to even this broken market (InTrade odds of a debt ceiling deal by the end of today are still a substantial 2.3%) that there will likely be no deal until some time in February or March when the debt ceiling extensions expire by which point the only question is how deep the US recession will be. And still everyone will be shocked, shocked, when nothing is done today either. Why? Because the market continues to price in an outcome which demands that it crash for it to be achieved. That so few grasp this is frankly, disturbing. Also, everything else is perfectly enjoyable theatrical noise. And just to keep the excitement factor really high, most rates and FX markets close early today, with rates and FX futures markets close at 1pm New York time while cash bond trading at 2pm.
The divergence between consumers and producers within the real economy that has stumped economists for the better part of 2012 can, at least in part, be attributed to the Fiscal Cliff; but the anticipatory effects of the Fiscal Cliff on the United States of America evidently began with American politicians, and probably for the worse, that is where it will end. The division that has plagued Washington has grown starker in recent years, and the divergence between consumers and producers as a result of divided leadership stands as a testament to the irresponsibility of those sent to Washington D.C. to serve their country. These divergences cannot last forever, and depending on the events of the next couple weeks, the United States is due for a reversion to the mean. The direction of that reversion - either production up to meet consumption or consumption down to meet production and confirm a recession within the United States - is wholly on the shoulders of the politicians in Washington D.C.
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.