The schizophrenia in US equity markets (and by correlation all risk markets) is nowhere better highlighted than the last 24 hours of 2% swings in the S&P 500 on nothing more than boiler-plate comments from DC. However, as BofAML's Ethan Harris notes, "the year-end fiscal challenges in the US are more like an 'obstacle course' than a 'cliff' - politicians must navigate about 10 major policy decisions before year-end." We continue to expect a messy multistage deal on the cliff - with some wishy-washy partial deal late December and more complete resolution (as it will be called) late Spring. We agree with BoFAML's view that until then, we suggest that investors fade the likely “press fakes” of an imminent deal, and brace for downside volatility. It seems to us that the negotiations remains stuck at square one.
Harry Reid’s publicly displayed dismay at the lack of progress in the fiscal cliff negotiations finally injected a dose of realism into the process after investors threw caution to the wind and seized on the optimism offered by the Senate Majority Leader and Speaker Boehner on November 16. We view yesterday’s sound bite as more negative than the aforementioned statement on the White House Lawn, for we now sit 11 days closer to the New Year’s deadline. Despite this asymmetry, equities suffered only moderate losses giving up just a modicum of the gains from last week. The relative lack of a response to the comments seem puzzling given the price action from the prior several days; however with month end looming, enough buyers kept stocks from selling off violently. My November 13 “Missive” outlined a game theory exercise that suggests this rancor will continue until very late into December and/or the capital markets dislocate thereby ensuring either a falling over the cliff or a band aid solution to avoid the crisis temporarily. Both parties unfortunately may assume that by agreeing to postpone the tough decisions, they will have prevented a rout in equities; however, the August, 2011 precedent of raising the debt ceiling out of desperation hints otherwise.
It seems like it was only 24 hours ago that Europe bailed out Greece for the third time and everything was "fixed", with a resultant desperate attempt to validate this by pushing the EURUSD above 1.3000. Sadly, as always happens, Europe, and especially Greece, refuses to be fixed, because as we will not tire of saying: you can't fix debt with i) more debt, ii) hockeystick projections or iii) soothing words of platitude and an outright bankruptcy, just like that which Argentina is about to undergo, will be needed. If that means the end of the EUR and the delusion that the Eurozone is a viable monument to the egos of a few technocratic career politicians, so be it. As a result, this time around the halflife of the latest bailout was precisely zero, as was that of the latest Japanese QE episode, as the entire world is now habituated to the lies emanating from Europe, and demands details, which in turn are sorely lacking, especially as relates to the question of just where will Greece get the money desperately needed to fund the Greek bond buyback. But at least Kathimerini was kind enough to advise readers that said buyback must take place by December 7 in time for the euroarea finmins to approve the payment of the next Greek loan tranche at the December 13 meeting, something which will likely not happen, especially if Germany's SPD party delays the vote on the Greek bailout until the end of December as was reported yesterday. We can't wait to learn the details of the buyback package, which will come in the "next few days" per ANA, and especially where the buyback money will come from, especially with the FT reporting that various European countries will already lose money next year on the latest Greek bailout.
By now there is likely not a single individual who is not aware of the impending "fiscal cliff" and the economic impact that it represents. Obama, and the Democratic controlled Senate, have already lined up on raising taxes on the "rich" while the Republican controlled House has firmly asserted that they are amenable to closing tax loopholes in conjunction with spending cuts. The two sides could not currently be farther apart from reaching a deal - yet, as Yoda would say: "Reach a deal we must." The Democrats have given no indication that they will compromise on any front and that tax hikes are all that is available for discussion. Likewise, the stance by the Republicans is just as firm as they stand behind their pledge of no tax increases. However, in the end, it will be the Republican led house that will again define "insanity" by repeating the same mistakes of their past - 'Caving'. In the next few days as the "fiscal cliff" draws nearer that media pressure from the White House will intensify to a fevered pitch with threats of economic recession due to Republican's unwillingness to compromise. This is the same tactic that was used during the debt ceiling debate in 2011 and until the politicians realize that slower economic growth is the "short term pain" required to establish the stable economic foundation from which "long term gains" may be achieved, the Republicans (in this case) will repeat the same 'caving' errors and expect a different outcome.
CME Group declared a force majeure at one of its New York precious metals depositories yesterday, run by bullion dealer and major coin dealer Manfra, Tordella and Brooks (MTB), due to “operational limitations” posed by Hurricane Sandy. MTB has “operational limitations” following Hurricane Sandy and can’t load gold bullion, platinum bullion or palladium bullion, CME Group Inc., the parent of the Comex and New York Mercantile Exchange, said today in a statement. MTB must provide holders with metal at Brinks Inc. in New York to meet current outstanding warrants in relevant delivery periods with compensation for costs, Chicago-based CME said. The CME said that MTB will not be able to deliver metal as the lower Manhattan company deals with "operational limitations" almost a month after the arrival of Hurricane Sandy. MTB is one of five depositories licensed to deliver gold against CME's benchmark 100-troy ounce gold contract, held 29,276 troy ounces of gold and 33,000 troy ounces of palladium as of Nov. 23, according to data from CME subsidiary Comex. In a notice to customers on Monday, CME declared force majeure for the facility, a contract clause that frees parties from liability due to an event outside of their control.
If the US Dollar was not the world’s reserve currency and US Treasury IOUs were not the world’s preferred holding of reserves behind their own currencies and financial systems, the Treasury’s debt limit would have been done away with a long time ago. But the US Dollar IS the world’s reserve currency so the debt of the US government IS the underpinnings of the global financial system. That being the case, the system stands or falls on the continuing perception that Treasury debt paper is a viable form of “reserve” and that the debt of the US government will NEVER become “unsustainable”. An announcement by the US government that it was getting rid of any “limits” to its debt-generating capacity would put that perception at risk - quite possibly at grave risk. That is the reason why the debt limit remains - even though it has not been an impediment to ever increasing Treasury indebtedness for well over half a century. It is easy to laugh at the seeming absurdity of a Treasury “debt limit” and many people do. Take it away, however, and the fiction that sovereign debt is “sustainable” - let alone any “confidence” in its eventual repayment - would be MUCH harder to maintain. Absurdities abound in history, and the more abject the absurdity, the more tenacious it tends to be. Today, a US Treasury debt “limit” is a very necessary absurdity.
On the basis of a joint press conference following a one-hour chat, the S&P 500 is up over 2.5%; it seems there is little doubt that the fiscal cliff is front-and-center in people's minds. And yet, positioning is far from biased towards negativity and sentiment remains positive - the 'they will fix it; they have to, right?' meme is everywhere. As Morgan Stanley notes, however, a smooth resolution requires some of the same public officials who created the cliff to cooperate to avoid it. As far as hope of a short-term solution, Obama's Burma trip aside, Speaker Boehner has already indicated that it would be inappropriate to pass comprehensive legislation in the Lame Duck session, given that more than 100 current members of the House will not be returning next year; and as for any actual substantive change: the sequence most talked about is patch (stop-gap legislation) and promise (ten-year budget reduction), followed by a plan. In that regard, politicians’ solution to the 2012 fiscal cliff will be to create another one in 2013. Thus, only a portion of the uncertainty about policy will be resolved by the patch and promise, as much could go wrong with the plan.
Ever since late March, we have said that the only realistic resolution to the Fiscal Cliff standoff (and the just as relevant latest and greatest debt ceiling hike due weeks from today as well), driven by a congress that has hit peak party-line polarity and which the recent election loss only made even more acute, would be a market mandated "resolution" (read sell off) whose only purpose is to crack the gridlock as representatives are flooded with phonecalls from angry constituents who now, and always, will be far more concerned about the value of their 401(k) than any ideological split. By that we mean an identical replica of what happened in the summer of 2011 when the market had to tumble 17% before the debt ceiling "compromise" was finally reached. This also explains why with just 6 weeks of trading in 2012 left, Goldman still forecasts a slide to its 2012 year end target (which it has kept constant since late 2011) of 1250. So while a resolution will almost certainly come, it will not be until the very last moment. As GS summarizes, "Bush income tax cuts was not resolved until December 17th, 2010. Last year’s decision to extend payroll tax cuts was not finalized until December 23rd, 2011. The current challenge is significantly more complex. Divergent views on tax policy, defense spending, and entitlements need to be resolved in a short lame-duck session of Congress." And while the market may or may not jump after there is an actual resolution, don't expect any real buying ahead of a compromise, as any uptick in the DJIA (the Beltway has still not heard of the S&P500 apparently) will immediately lessen the impetus for a deal. In fact, if the following chart from Goldman is correct, and if we are indeed to relive a replay of the summer of 2011, watch out below, especially since true wholesale liquidation across the hedge fund space has yet to occur.
There are many questions on the minds of weary precious metals investors after enduring the volatile yet range-bound price action of gold and silver over the past year:
- Have the fundamentals for owning gold & silver changed over the past year? No
- What are they? currency devaluation/crisis, supply-chain risk, ore grade depletion
- How should retail investors own gold? Mostly physical metal, some quality mining majors (avoid the indices), and ETFs only for trading
- Is gold in a bubble? No
- Could gold get re-monetized? Quite possibly
- Where is gold flowing? From the West to the East. At some point, capital controls will be put in place
Jeff Clark and Chris Martenson believe everyone should have exposure to gold and silver as a defense for preserving the purchasing power of their weath. The key question is: how much exposure?
The recent market sell-off has not been about the re-election of President Obama but rather the repositioning of assets by professional investors in anticipation of three key events coming between now and the end of this year - the "fiscal cliff", the debt ceiling and the expiration of the Transaction Account Guarantee (TAG). Each of these events have different impacts on the economy and the financial markets - but the one thing that they have in common is that they will all be battle grounds between a divided House and Senate. While there has been a plethora of articles, and media coverage, about the upcoming standoff between the two parties - little has been written to cover the details of exactly what will be impacted and why it is so important to the financial markets and economy. We remain hopeful that our elected leaders will allow cooler heads to prevail and that they will begin to work towards solutions that alleviate some of the risks of economic contraction while setting forth logical plans for fiscal reform. However, while we are hopeful of such progress, "hope" is not an investment strategy to manage portfolios by. If we are right things are likely to get worse before a resolution is reached - but maybe that is why the "investment professionals" have already been heading for the exits.
In the past it has been the bond market whose vigilantes had rampaged across the fields to keep policymakers honest - but something has changed with the Fed's boot on the bond market. As BofAML notes, when the Fed was too soft on inflation or the fiscal deficit was out of control, interest rates spiked higher. In our view, this has changed and today the stock market is the disciplining force for Washington. We have argued this perspective for a while - that nothing will be done until we get a stock market crash - but the press will continue to make molehills out of mountains it seems as BofAML adds, the most obvious lesson of the last week is that when Washington approaches a policy impasse, the financial press tends to signal a resolution of the crisis many times before it happens. Don’t believe it. After elections there is always conciliatory talk: no one wants to be seen as a sore loser or a gloating winner. The risk remains huge and the four hurdles to a grand bargain seem to be getting larger - no matter what the press wants us to think - investors should look past reassuring rhetoric and focus on the underlying reality.
You've probably noticed the cookie-cutter format of most financial media "news": a few key "buzz words" (fiscal cliff, Bush tax cuts, etc.) are inserted into conventional contexts, and this is passed off as either "reporting" or "commentary" depending on the number of pundits sourced. Correspondent Frank M. kindly passed along a template that is "officially deny its existence" secret within the mainstream media. With this template, you could launch your own financial media channel, ready to compete with the big boys. Heck, you could hire some cheap overseas labor to make a few Skype calls to "the usual suspects," for-hire academics, hedge fund gurus, etc. and actually attribute the fluff to a real person.
Great timing. The ubiquitous post-European close trend-reversal was extended by some 'nothing' comments from Boehner that every media outlet is inferring means everything's fixed and compromise is close. Boehner says talks with Obama were constructive. Outlined a framework with Obama; Will accept revenue if spending cuts. It's not - what did we expect him to say?AAPL jumped up to VWAP and S&P 500 futures coincidentally reached overnight highs/stops. Now let's see if anyone really believes...
In his farewell address to Congress yesterday, Ron Paul blasted the dangers of what he called 'Economic Ignorance'. He's dead right. Around the world, economic ignorance abounds. And perhaps nowhere is this more obvious today than in the senseless prattling over the US 'Fiscal Cliff'. US government spending falls into three categories: Discretionary, Mandatory, and Interest on Debt. The only thing Congress has a say over is Discretionary Spending. But here's the problem - the US fiscal situation is so untenable that the government fails to collect enough tax revenue to cover mandatory spending and debt interest alone. This means that they could cut the ENTIRE discretionary budget and still be in the hole by $251 billion. This is why the Fiscal Cliff is irrelevant. Increasing taxes won't increase their total tax revenue. Politicians have tried this for decades. It doesn't work. Bottom line-- the Fiscal Cliff doesn't matter. The US passed the point of no return a long time ago.