From Goldman Sachs: "Allowing the sequester to hit would, in our view, have greater implications for growth than a short-lived government shutdown, but would not be as severe as a failure to raise the debt limit. Although Republicans in Congress generally support replacing the defense portion of the sequester with cuts in other areas, there is much less Republican support for delaying them without offsetting the increased spending that would result." And in bottom line terms: "Sequestration would reduce the level of spending authority by $85bn in fiscal year (FY) 2013 and $109bn for subsequent fiscal years through 2021. The actual effect on spending in calendar 2013 would be smaller--around $53bn, or 0.3% of GDP--since reductions in spending authority reduce actual spending with a lag. The reduction in spending would occur fairly quickly; the change would be concentrated in Q2 and particularly Q3 and could weigh on growth by 0.5pp to 1.0pp." In other words: payroll tax eliminates some 1.5% of 2013 GDP growth; on the other side the sequester cuts another 1%: that's a total of 2.5%. So: is the US now almost certainly looking at a recession when all the fiscal components to "growth" are eliminated? And what will the Fed do when it is already easing on "full blast" just to keep US growth barely above 0%?
With precisely one month left until the early bound of the debt ceiling crunch and a possible US government shut down and/or technical default, and with M.A.D. warnings from the president and treasury secretary doing nothing to precipitate a sense of urgency (which will not arrive until there is a 20% market drop, so far consistently delayed but which will eventually happen), here comes the most toothless of rating agencies, French Fitch which somehow kept its mouth shut over the past 18 months, when US debt rose by over $2.1 trillion and debt to GDP hit 103%, shaking a little stick furiously, no doubt under guidance by its corporate HoldCo owners: French Fimilac SA.
With Alcoa kicking off the earnings season with numbers there were in line and slightly better on the outlook (as usual), attention will largely shift to micro data and disappointing cash flows over the next two weeks, even as the countdown clock to the debt ceiling "drop dead" D-Day begins ticking with as little as 35 days left until debt ceiling extension measures are exhausted and creeping government shutdowns commence. There was little in terms of macro data from the US, even as a major datapoint out of Germany, November Industrial Production, missed expectations of a 1% rise, pushing higher by just 0.2% M/M (up from a -2.0% revised October print), once again proving that "hopes" (as shown by various confidence readings yesterday) of a boost to the European economy are wildly premature. This disappointing print comes a day ahead of the ECB conference tomorrow, when the governing council may or may not cut rates, although it is very much unlikely it will proceed with the former at a time when at least the narrative is one of improvement - pursuing even more easing will promptly dash "hopes" of a self-sustaining trough (forget improvement) for yet another quarter. Putting the German number in context, Greek Industrial Output slid 2.9% in November, down from a revised 5% rise, refuting in turn that this particular economy is anywhere near a trough.
Bank Of America On The "Trillion Dollar Tooth Fairy" Straight "From The Land Of Fiscal Make Believe"Submitted by Tyler Durden on 01/08/2013 20:47 -0400
A year ago, out of nowhere, the grotesque suggestion to "resolve" the US debt ceiling with a platinum dollar coin came, and like a bad dream, mercifully disappeared even as the debt ceiling negotiations dragged until the last minute, without this idea being remotely considered for implementation, for one simple reason: it is sheer political, monetary and financial lunacy. And yet there are those, supposedly intelligent people, who one year later, continue dragging this ridiculous farce, as a cheap parlor trick which is nothing but a transparent attempt for media trolling and exposure, which only distracts from America's unsustainable spending problem and does nothing to address the real crisis the US welfare state finds itself in. And while numerous respected people have taken the time to explain the stupidity of the trillion dollar coin, few have done so as an integral part of the statist mainstream for one simple reason - it might provide a loophole opportunity, however tiny, to perpetuate the broken American model even for a day or two, if "everyone is in on it." Luckily, that is no longer the case and as even Ethan Harris from Bank of America (a firm that would be significantly impaired if America was forced to suddenly live within its means), the whole idea is nothing more than "the latest bad idea" straight "from the land of fiscal make believe." We can only hope that this finally puts this whole farce to bed.
The debt limit was formally reached last week, and we expect the Treasury's ability to borrow to be exhausted by around March 1 (if not before) and while CDS are not flashing red, USA is at near 3-month wides. Like the previous debt limit debate in the summer of 2011, the debate seems likely to be messy, with resolution right around the deadline. That said, like the last debate we would expect the Treasury to prioritize payments if necessary, and Goldman does not believe holders of Treasury securities are at risk of missing interest or principal payments. The debt limit is only one of three upcoming fiscal issues, albeit the most important one. Congress also must address the spending cuts under sequestration, scheduled to take place March 1, and the expiration of temporary spending authority on March 27. While these are technically separate issues, it seems likely that they will be combined, perhaps into one package. This remains a 'very' recurring issue, given our government's spending habits and insistence on its solvency, as we laid out almost two years ago in great detail.
The main events of this week, monetary policy meetings at the BoE and the ECB on Thursday, are not expected to bring any meaningful changes. In both cases, banks are expected to keep rates on hold and to hold off on further unconventional policy measures. While significant economic slack still exists in the Euro area, and although the inflation picture has remained relatively benign, targeted non-standard policy measures are more likely than an interest rate cut. As financial conditions are already quite easy in the core countries, where the monetary transmission mechanism remains effective, the ECB’s first objective is to reverse the segmentation of the Euro area’s financial markets to ensure the pass-through of lower rates to the countries with the most need for further stimulus.
Having passed the 'easy-do-nothing' bill that created a 5% uplift in US equities, D.C. have left the most difficult set of issues for last: entitlement reform, which Republicans have said they will insist upon in return for raising the debt limit, and tax reform, which the President has said he will insist on in return for entitlement reform. The upshot is that reaching an agreement on the next debt limit increase could be at least as difficult as the last increase in August 2011. As Goldman notes, the next debate on the debt limit will be the fifth "showdown" on fiscal policy in the last two years. Adding further angst, in the summer of 2011 politicians had started the debate some three months prior to the real deadline. This time it appears that nothing serious will happen until the 11th hour as usual, meaning far more last minute volatility. However, one new twist to this now familiar routine may come from the rating agencies, which look likely to be more active in 2013 than they have been since 2011.
"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."
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.
It’s Not a Tax or Spending Problem … It’s a Devolution Into Lawlessness
The euro has been the strongest currency this week. At pixel time it is up about 1.2%. The Dow Jones Stoxx 600 made new 18-month highs earlier in the week before consolidating in the second half of the week. Bond markets were mostly lower, though Greece, for obvious reasons, Spain and Portugal were exceptions to the generalization.
Overnight the Shanghai Composite index rose 4.3%, marking its biggest advance since October 2009, supported by the latest HSBC flash manufacturing PMI which came in at 50.9 vs Exp. 50.8 (Prev. 50.5) – 14-month high, and with hopes for supportive policy direction to come out of this weekends central economic work conference where Chinese leaders will look to set next years GDP target and layout more information on policy for urbanisation. As such WTI crude has been trending higher since the Asia session testing around the USD 87.00 to the upside with close to a 1 USD gains ahead of the NYMEX pit open. In terms of Europe, bund volumes have been light as markets head closer toward the Christmas break with European manufacturing and service PMI’s having little sustained impact with Italian and Spanish 10yr government bond yield spreads over German bunds seen 2.5bps and 3.5bps tighter respectively. Elsewhere, in the FX market there has been talk of US names selling 1 week 25 delta risk reversals in positioning ahead of this weekend’s Japanese elections.
Economic Imperialism, The Highest Stage of Capitalism or Simply Modus Operandi In the Colonization Of Greece?Submitted by Reggie Middleton on 12/06/2012 10:50 -0400
It would appear that many are lookng at the Greek serial default debacle as a muppet wearing Goldman-tinted gold colored glasses. Here's a more realistic view, complete with the math to back it up!
Exactly as I promised at the beginning of the year, more haircuts for a country that will receive bailouts in the form of more unsustainable debt that will be defaulted on in the near future. It's simply math, yet so few seem to get it.
The Bank of England's Monetary Policy Committee meets Thursday. There is an overwhelming consensus in the market that there will be no action taken--no rate cut or resumption of the gilt purchase program (QE) that was completed last month.
More importantly, tomorrow the Chancellor of the Exchequer Osborne will make his Autumn Statement to parliament. He will have to tread a narrow line. Circumstances will force him to acknowledge that it is taking longer to recover from the financial crisis than the government had anticipated.