Since the 2nd Liberty Act of 1917 birthed the debt ceiling, due to issues financing USA's entry into World War I, CNBC's Rick Santelli notes that there has been many documented 'violations'. However, as Rick so vociferously points out President Obama's comment yesterday on the debt limit and highlights the fact that "to have an unlimited amount of money to call upon is too much power power for one person. It's always in our country been about checks and balances but I think this administration just wants more checks and no balancing of the checkbook." Rick is right, of course, and the current diatribe from Geithner and Obama yesterday on the possible 'removal' of the debt limit beggars belief - and yet has become a negotiating point to be 'traded'. While some argue the premise of the debt limit for a reserve currency nation is nonsense, Santelli sums it perfectly in ten little words: "Debt Ceiling Is Not The Problem. Debt Is The Problem," adding the debt ceiling, as we have pointed out regularly, is an important (perhaps the most important) issue facing us currently (and inseparable from the supposed 'austerity' of the fiscal cliff - lower spending growth not lower spending).
The composite index has now regained its pre-financial crisis levels of 55.4. However, more important than the current level is the trend of the data since the peak in 2010. I have noted the previous peaks of data and while the index is volatile from one month to the next the declining trend of the data should be concerning to those paying attention. As we have stated in the past "economic change occurs at the margin" so the focus on a single data point can be very misleading. With estimates for Q4 GDP being ratcheted down sharply to roughly 1% from Q3's 2.7% annualized rate - it is very likely that the latest print in the ISM Composite index is likely the peak that we will see for several months. Doing more with less has now been the mantra of businesses since the financial crisis, and despite the $30+ trillion dollars thrown at the economy since that time, there has been little movement by businesses to become more aggressive.
Late last night S&P placed Greece into “Selective Default” again, raising the issues, once again, of the $90 billion in Greek derivatives, the Greek bank bonds guaranteed by the country and now at the ECB, some central banks and some commercial banks where some clause may get triggered, various clauses in repos, inter-bank lending contracts and guarantees by Athens of various corporate entities all potentially seeing triggers. In the meantime, because Americans hate to be left out of anything, we continue to behave like fools. The raising of the tax rate on the wealthy will operate the country for about eight days and it seems like the savants in Washington have forgotten that there are three hundred and forty-eight days left in the year. Secretary Geithner’s ,“We are prepared to go over the fiscal cliff,” has all of the dramatics of some bluff on World Wide Poker. The focus on redistribution of wealth is a secondary consideration when you cannot pay your bills. We propose that unhappy Americans unite, buy the Abaco islands from the Bahamas, they need the money, and begin our own island nation and let the 46.5 million on food stamps fend for themselves. We honestly feel that way some days as the idiocy in Washington D.C. seems to recognize no boundaries.
While trading during US hours is all about the Cliff On/Cliff Off debate, the rest of the world is simple: the overnight session begins (and largely ends) with whether or not China has done another reverse repo (if yes, then PBOC will not lower rates, and inject unsterilized billions into the market) and whether the Shanghai Composite is up or down. Last night, after jumping by 3% the session before, it was down 0.13% to 2029. Was this it for the great Chinese "bottom?" Japan may or may not figure in the equations, although with the 10 Year future just hitting a record overnight, it is amusing to see how the bond complex is indicating record deflation just in time for the market to anticipate a surge in inflation. Ah, the joys of frontrunning central planning's monetization of government bonds. And then we move on to Europe, which is a whole new level of basket case-ness...
The use of economic pain to expand governmental control of a nation is not a new concept. It has been a tool successfully used many times in history. The reality that "taxing the wealthy" does not increase revenue or promote economic growth is lost on the 80% of Americans that are economically uninformed and are just struggling to maintain their current standard of living. The path over the "fiscal cliff" is bad for the economy, the average American family and the stock market. However, for the White House, going over the "cliff" is the next move in this elaborate game of chess which will clear the path towards completing Obama's long term objectives of complete socialization of the American economy.
"The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies... That is money that we have borrowed from the Social Security trust fund, borrowed from China and Japan, borrowed from American taxpayers. This rising debt is a hidden domestic enemy, robbing our cities and States of critical investments in infrastructure like bridges, ports, and levees; robbing our families and our children of critical investments in education and health care reform; robbing our seniors of the retirement and health security they have counted on. Every dollar we pay in interest is a dollar that is not going to investment in America’s priorities."
As the Fiscal Cliff discussions get progressively more acrimonious, more people are being reminded that the new and improved $16.4 trillion debt ceiling, which the US will breach in a few days, is just as important, and just as much at an impasse. Which is why the Treasury just opined on the issue, by openly supporting the "McConnell Provision" and in doing so may have made any future Cliff/Ceiling discussions more difficult as the US has effectively invoked the nuclear option, aka a Presidential Veto to effectively elimiante the debt ceiling, something which will antagonize the GOP to such an extent any potential Fiscal Cliff deal may become unfeasible. The market is hardly happy that the already record polarity in Congress is about to get even worse as a result of this hardline stance, and just took another big leg lower.
UPDATE: GBP at lows of day - moar QE?
UK's Chancellor of the Exchequer George Osborne delivered his Autumn 'Budget' Statement this morning and, as Citi notes, while he signaled that the struggling still-AAA nation is on course to achieve its cyclically-adjusted surplus on a rolling five-year horizon; the government now expects that net public debt/GDP ratio will start falling only in 2016/17 - a year later than originally planned. Mr Osborne attributed the softening in the debt/GDP target to growth underperformance in the UK and the Eurozone; leaving Moody's decision in early 2013 on the AAA rating still in jeopardy (the rating agency put the UK on negative watch and warned the coalition government to refrain from abandoning its ambitious fiscal austerity targets). GDP forecasts have been lowered, with a 0.1% contraction now seen this year (from a +0.8% forecast in the March budget). The 2013 and 2014 forecasts are also lowered to 1.2% and 2.0%, from 2.0% and 2.7% respectively. For now, cable (GBPUSD) has rallied back off knee-jerk reaction lows to around unchanged.
I’m going to lay out everything you need to know about the fiscal cliff negotiations. After reading this, you can ignore all of the media’s coverage of this topic as well as various politicians’ announcements pertaining to this subject.
Forget the Fiscal Cliff: it is merely a much needed economic distraction for the next 3-4 months (distracting from what? Why Europe of course). Yes, it will be resolved, and yes taxes will go up, and yes, debates over it will most likely be carried over into 2013 and nothing will be compromised until the ultimate debt ceiling deadline (because it is really a Fiscal Cliff-Debt Ceiling package deal) is hit some time in March 2013, but eventually one or both parties will cave, right after the market plunges to put it all into the proper perspective as it did around the time of TARP and the August 2011 debt ceiling debate, and a resolution will materialize. The bigger issue has nothing to do with the Fiscal Cliff, which is indeed a sideshow. The bigger issue, as Art Cashin explains, has everything to do with a secular decline in the US economy, where a 1% growth rate will soon be the "New Killing It", where millions more (in part-time workers) will soon be let go, and where businesses no longer generate the cash flows needed to stay open. Art Cashin explains.
Europe may be fixed for the next week or two (until someone once again figures out that by manipulating the market, the ECB is merely making it easier for peripheral governments to do nothing to fix their unprecedented intra-Eurozone imbalances, as has been the case all along with the only strategy Europe has deployed to date namely kicking the can), but that doesn't mean all event and newsflow ends. Here is what to expect out of the insolvent continent as it attempts to put a very volatile (and violent) 2012 to bed with just one more month. Of particular note: €123 billion in Euro coupon payments in the month of December, which serves as a timely reminder that in 2013 European banks better be ready to buy up the record gross and net issuance of their sovereigns with gusto, or else Europe may promptly become "unfixed" all over again.
The recent release of the ISM Manufacturing index continues to point to signs of a slowing economy. This (49.5) reading, which is what is reported by the bulk of the mainstream media, is fairly meaningless. Remember, economic change happens at the margins. Since the PMI is more of a "sentiment" index (it is a diffusion index that measures positive versus negative sentiment on various areas from employment to production to inventories) it is a better used as a gauge about what businesses will likely do in the future based on their current assessment of conditions. The importance of the change in sentiment is lost on most economists who have never actually owned a business. However, it is clear that the fiscal cliff, the recent storm, and the continuing Eurozone saga are continuing to erode business sentiment. This erosion in sentiment in turn affects economically sensitive actions such as production, employment and investment.
And so the US debt ceiling of $16.394 trillion is now just $64 billion away.
Today's "trading", in a repeat of what has become a daily routine, can be summarized as follows: flashing red headline about Fiscal Cliff hope/optimism/constructiveness out of a member of Congress who bought SPY calls in advance of statement: market soars; flashing red headlines about the inverse of Fiscal Cliff hope/optimism/constructiveness out a member of Congress who bought SPY puts in advance of statement: market plunges. Everything else is noise, as is said hope/expectations/constructiveness too since it is increasingly likely nothing will happen until the debt ceiling hike deadline in March, but stop hunts must take place in a market which nobody even pretends is driven by fundamental newsflow. Such as the bevy of PMIs released last night, the key of which was the China HSBC PMI as reported previously, which beat expectations by the smallest of possible increments, at 50.5, but rising to expansion territory and the highest in 13 months, which sent the EURUSD spiking and has kept it in the 1.3030 range for the duration of the overnight session. Sadly, those on the ground in China hardly felt the number was a bullish as EURUSD trading algos around the world, sending the Shanghai Composite to a fresh post-2008 low, closing down over 1% at 1,960. But let's just ignore this inconvenient datapoint shall we?
The personal income and spending report Friday morning left a lot to be desired for those expecting a stronger economic environment soon. However, the report fell well in line with what we have been expecting over the past several months as the drag on real wages and incomes have weighed on the consumer; and with personal consumption making up more the 70% of the economy, changes to employment, incomes or credit has an immediate and significant impact to growth. When it comes to the economy, and particularly the ongoing recession watch that has nearly become a sporting event, it is real (inflation adjusted) incomes that matter. In the most recent report we see that real personal incomes declined for the month from $11,546 to $11,532 billion for the month reflecting a -.12 change. Economic expansion since the last recession has been hovering around a flat line for the past seven months. The next couple of months will be very telling about the strength of the underlying economy. The manufacturing data continues to point to further economic weakness, hiring plans have deteriorated and the main drivers of economic growth have all stagnated. While we can hope to get lucky that things will work out for the best - "hope" rarely works out as an investment strategy.