- Obama, Boehner hold "frank" meeting amid "fiscal cliff" frustration (Reuters)
- Rice Ends Bid Amid Criticism (WSJ)
- EU summit delays crucial decisions (FT)
- EU moves to cap bank bonuses at 2 times annual salary (CBC)
- Europe Wins a Battle, but Not Yet the War (WSJ)
- Banks Spurn Europe Bond Rush Amid Central Bank Loan Largesse (BBG)
- German-French Sparring Over Euro Caps 2012 Crisis Fight (BBG)
- Fed begins stress tests on bank liquidity (FT)
- Draghi’s rallying cry for new EU powers (FT)
- EU Seeks Plan to Handle Failing Banks Amid Cost Concerns (BBG)
- Berlusconi says Monti has strong EU backing (FT)
- Abe Set for Japan Victory Faces 7-Month Window to Keep Hold (BBG)
- Japan's Abe would try to keep China ties calm-lawmakers (Reuters)
Who knows? I might even become an EE'er. This joke is on me.
- Bernanke Wields New Tools to Reduce Unemployment Rate (BBG)
- Home Seizures Rise as Banks Adjust to Foreclosure Flow (BBG)
- EU Backs Release Of Greek Aid (WSJ)
- Democrats Confident They Have 'Cliff' Leverage (WSJ)
- Americans Back Obama Tax-Rate Increase Tied to Entitlement Cuts (BBG)
- Goldman flexes tentacles: Treasury open to Carney radicalism (FT)
- Launch Fuels Asia Security Concerns (WSJ)
- BOJ’s Unlimited Loan Program Seen Open to Use by Hedge Funds (BBG) - there are Japanese hedge funds?
- Abe Set to Face Manufacturing Gloom as Japan Contracts (BBG)
- US and UN condemn N Korea rocket launch (Guardian)
- Eurozone agrees common bank supervisor (FT)
- Berlusconi Adds to Italy Turmoil by Signaling He’d Step Aside (BBG)
Yesterday's trading was a balance between Italy fears and fiscal cliff hopes-fears-and-hopes-again. While UBS' Art Cashin notes that on the bright side, this will all be over on December 21st when the Mayans predicted the end of the world, he also details what is perhaps even more fearsome - not-the-end-of-the-world as, in his words, demographics, destiny, and the fiscal cliff loom very large not just for the next few weeks but heading out over the next decade as baby boomers retire. As Cashin so wisely points out: "Somewhat lost in the posturing is the fact that the Fiscal Cliff was put in place to force Washington to address the exploding government debt problem. That problem is greatly exacerbated by the rapidly changing demographics in this country. If you fast forward 20 years until all the boomers are retired government debt (taking into account unfunded liabilities) soars to $202 trillion. Perhaps worth remembering that "The real problem is that regardless of the resolution it will not solve anything. We have passed the point of no return. We cannot mathematically solve this debt problem. We can only slow its progression."
If two people are dying from liver disease, one 25, the other 65, and there’s only one liver available for transplant, the old one dies.
The Political Foundation of the status quo in America is based on a Grand Bargain of Complicity between the top 25% who pay approximately 90% of the taxes, and the bottom 50% who draw on the benefits that come from government. James Madison in the "Federalist Papers" outlined this complicity in the "Tyranny of the Majority". What is becoming painfully evident is that the political elite in America have falsely over-promised on the entitlements that can be delivered, which is now surfacing in the political turmoil of the Fiscal Cliff negotiations and has the potential to quickly lead towards a constitutional crisis. The frayng of our social compact or Grand Bargain and much more discussed in this excellent clip.
Following the passage of ObamaCare, several of the smartest people I know claimed that the bill was actually written by and for the drug and insurance companies rather than “the people” as Obama had claimed. In recent days it has emerged that Liz Fowler, who is said to have been one of the key architects of ObamaCare, is doing what any good revolving door crony capitalist would do. She is moving to the private sector to receive her payoff. Revolving door on Wall Street. Check. Revolving door at the Pentagon. Check. Revolving door in Healthcare. Check mate. Welcome to America. Check your freedom at the door.
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...
If you want to send a roomful of 100 wealth managers into an icy chill, have Russell Napier address them. Napier’s presentation, “Deflation in an Age of Fiat Currency,” is thought-provoking, and the precise polar opposite of investing as usual. US stock markets aren’t cheap, not by a long chalk. Napier, like us, favors the 10-year cyclically adjusted price / earnings ratio, or CAPE, as the best metric to assess the affordability of the market. At around 21, the US market’s CAPE is near the top end of its historic range. The S&P 500 stock index currently trades at a level of around 1400. Napier believes it will reach its bear market nadir at around 450, driven by a loss of faith in US Treasury bonds, and in the dollar, by foreigners.
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.
There is little detail (more to come) but Boehner's office has just released his rebuttal to Obama's so-called 'un-serious' offer. These numbers do not appear like any change - just as Obama's was no change - so much for compromise. It seems politicians now have zero-beta for the algos - who have given up now the month-end is over...
- *BOEHNER DESCRIBES WHITE HOUSE PLAN LAST WEEK AS `LA-LA LAND'
- *BOEHNER SAYS HE'S OFFERING `CREDIBLE PLAN' ON FISCAL CLIFF
- *BOEHNER SAYS PLAN DESERVES `SERIOUS CONSIDERATION' BY OBAMA
- *HOUSE REPUBLICANS PROPOSE $1.4 TRILLION IN SPENDING CUTS
- *REPUBLICAN PLAN INCLUDES $800 BILLION IN NEW REVENUE
Full letter below
The Fiscal Cliff is the name given for the 2013 increase of Federal Government taxes and budget cuts. The Bush-era tax cuts expire and the 2013 "Budget Control Act" kicks in, among other budget cuts & new taxes. The Fiscal Cliff is set to reduce the 2013 US Government budget deficit by roughly half; will remove $607 Billion from economy (GDP), resulting in 4% drop, pushing it back into recession; it can NOT be avoided. It must happen to fix the budget deficit; any delay must be paid for later; it will NOT reduce the US debt, only slow down the growth. The Fiscal Cliff's (new taxes and budget cuts) size and impact are visualized below in physical $100 bills.
Markets sold off earlier today when Boehner commented that "no substantive progress had been made" in the last two weeks, only to recover quite rapidly. The 'rejection' is now in full context as the WSJ has just reported the terms have not changed (or compromised) at all since we first discussed them two weeks ago. A $1.6tn tax increase (upfront), $50 billion economic stimulus, and most importantly (we suspect guided by the miscreant hand of Geithner) the removal of the need for congressional approval to raise the debt ceiling. Overnight futures are down 5-6 points pushing towards Boehner's intraday lows. This should throw a little light on exactly where the negotiations stand (nowhere) and how willing each party is to change and bring hope to the table for compromise (not at all). With DC this far apart still, the game for the next few weeks is not to solve the fiscal cliff but to avoid getting the blame for the cliff-dive.
Three visualizations describe the breakdown of PSMs--previously successful models: S-Curves, Supernovas and Rising Wedges. A successful model traps those within it; escape becomes impossible. We see the immense power of previously successful models. Straying from the previously successful trajectory looks needlessly risky, even as the trajectory has rolled over and is heading for unpleasant impact. Anyone who questions the previously successful model (PSM) is suppressed, fired or sent to Siberia as a "threat" to the enterprise's success. Anyone who realizes the Titanic will inevitably sink and abandons ship leaves behind all their sunk capital: they leave with the figurative clothes on their back.
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.