President Obama

• Obama Signs Bill Enacting Budget Deal to Avert Most Tax Hikes (BBG)
• GOP Leaders Take Political Risk With Deal (WSJ)
• Basel Becomes Babel as Conflicting Rules Undermine Safety (BBG)
• Portugal Faces Divisions Over Austerity Measures (WSJ)
• The Fiscal Cliff Deal and the Damage Done (BBG)
• Cliff deal threatens second term agenda (FT)
• Deposits stable in euro zone periphery in November (Reuters)
• Fresh Budget Fights Brewing (WSJ)
• China Poised for 2013 Rebound as Debt Risks Rise for Xi (BBG)
• Who's Afraid of Italian Elections?  (WSJ)
• China services growth adds to economic revival hopes (Reuters)
• Asian Economies Show Signs of Strength (WSJ)
• Japan’s Aso Targets Myanmar Markets Amid China Rivalry (Bloomberg)

Though the banking elite are now increasingly being exposed for their criminal activities against humanity in their theft of citizens’ wealth, rarely is another one of their greatest transgressions, their theft of citizens’ minds and the process by which they target and transform young adults into docile, obedient creatures through institutional academia, ever discussed.

Earlier today, in what can only be summarized as an epic meltdown, NJ governor Chris Christie proceeded with an even more epic rant against House speaker John Boehner, in narrow terms, and House Republicans in broader, for killing the $60 billion Sandy Assistance bill, whose funding would have offset one full year of the just legislated tax hikes on the rich which would add $62 billion annually to the Treasury (or alternatively would have been unfundable for the next 2 months while the US struggles to pay its mandatory bills courtesy of having breached the debt ceiling). Alternatively, all Americans could just agree to accept less welfare and entitlement benefits to show their solidarity for New Jersey and fund the recovery of the Tristate area by a "shared sacrifice" instead of going the default route and demanding even more deficit spending - something that would naturally saddle the next generation with even more pain, not the current, far more entitled one - but in this country that is an absolutely ludicrous proposition. Below is a clip of the entire Christie performance which is a must see for sheer indignation entertainment value alone.

The fiscal cliff deal appears to be a done deal and markets have reacted accordingly (although President Obama is apparently awaiting a photo-op later today to sign it). However, the deal leaves a large number of loose ends that ensure high drama for the next two months on the US fiscal front. The immediate impact of all the loose ends and deadlines may be smaller than the Dec 31 fiscal cliff, but all of these loose ends are important and could lead to short-term price action. Several of them are very important for the long run USD outlook as well.

"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."

• Senate-Passed Deal Means Higher Tax on 77% of Households (BBG)
• Bipartisan House Backs Tax Deal Vote as Next Fight Looms (BBG)
• Fresh stand-off looms after US cliff deal (FT)
• Congress Deal Averting Tax Increase Curbs Risk to States (BBG)
• How Colombian drug traffickers used HSBC to launder money (Reuters)
• Danes Face New Reality in Struggle to End Crisis, PM Says (BBG)
• Ban on demanding Facebook passwords among new 2013 state laws (Reuters)
• Oil Climbs to Three-Month High as U.S. House Passes Budget Bill (BBG)
• Cameron seeks bold steps from G8 leaders (FT)
• China to outstrip Europe car production (FT)
• North Korea Picks Stronger Economy, South Ties as Top 2013 Tasks (BBG)

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.

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.

• Japan PM Abe wants to replace landmark war apology (Reuters) - to summarize Abe's strategy: crush the JPY even as China is alienated so much not a single Japanese export goes to Beijing. Brilliant
• Unthinkable Cuts Almost a Reality (WSJ)
• Signs of Negative Economic Impact Growing (WSJ)
• Carlyle Agrees to Buy Duff & Phelps for $665.5 Million (BBG)
• Greek retail sales slump deepens in October, recession bites (Reuters)
• Congress Dysfunction as Deadline Arrives Poses 2013 Risks (BBG)
• For Euro, All Eyes Are on Central Bank's Actions (WSJ)
• France Seeks New Path to High Tax (WSJ)
• Japan Rebuke to G-20 Nations May Signal Moves to Weaken Yen (BBG)
• Portugal braced for ‘fiscal earthquake’ (FT)
• Monti's reform path faces test beyond Italy elections (Reuters)
• South Korea’s Inflation Slows Even as Economy Gaining Momentum (WSJ)
• China factory sector strongest since May 2011 (Reuters)

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.

If earlier media speculation that the cliff debate was seeing some progress would have sent stocks higher (assuming it was not a Sunday), the speaker's just released response to Obama's Meet The Press appearance would have deflated all hope of any progress. Remember: all is fair in political circus and Beltway theater.

When it comes to US austerity, a very sensitive topic as framed best by the "spending cuts" portion in the Fiscal Cliff debate, the ideas range from the surreal to the outright idiotic: as an example in the most recent Obama proposal spending would be "reduced" in the form of $290 billion in interest savings - not an actual spending reduction, but a hope and a prayer that because rates are lower, the government will "save" money with rates continuing to be lower (something which immediately causes a #Ref! explosion for anyone not using government math), $130 billion in savings that would come from once again rejiggering the definition of 'inflation', as well as "savings" from not funding extra defense spending because the US is not engaged in a pro forma war. Like we said: surreal and idiotic, or in other words, no actual real cuts to spending. Yet even as the nation is gripped by the melodrama of fake spending cuts offset by the threat to tax millionaires more (all of whom will merely find more creative and effective ways to hide their wealth and income offshore), spending increases are all too real, such as last night's order by Obama's just issued an executive order to end the pay freeze for federal employees, which is the equivalent of a wage increase. A truly deserved rise in wages for a job well done by the most dysfunctional Congress America has ever seen.

The problem with democracy. 

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.