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Sequester Fester, No Cliff

Marc To Market's picture





 

The political paralysis means that the $1.2 trillion in spending cuts are set to go into effect with an $85 bln in cuts during the remainder of the current fiscal year.  Assuming that ever dollar cut in spending reduces GDP by a dollar, the sequester will shave US growth by around 0.5% this year.              

However, the way households will be impacted will be a function of their reliance on the federal government: The greater the reliance the greater the impact.  The spending cuts seem rather arbitrary, though evenly divided between defense and civilian activities.

                                                 

A recent Pew poll founds that less than 1 in 5 Americans understand how they will be personally impacted by the sequester.  This warns of the risk of some negative surprises.  It may mean more than simply frustrations with longer lines at the airport security, for example.

                             

The sequester itself is a bit of a farce in the sense that it was never intended to be enacted.  It was purposely designed to be absurd to give the political class incentive to find an alternative.  Yet what appears to have happened is that the players (the President, Democrats in Congress and Republicans in Congress) did their political calculus and have concluded that the sequester is preferable to the other realistic alternatives.

The polls show that American people will blame the Republicans more than the Democrats.  Obama has insisted that the spending cuts should be coupled with new measures to raise revenue and the Republicans do not think greater concessions will help them.

What does it mean for investors?  The US stock market is at 5 year highs.  It has indeed climbed a wall of worry.  What has been lifting the stock market does not seem to be the traditional macro-fundamentals of valuation but liquidity.

As Fed Chairman Bernanke made clear in his testimony this week, QE3+ will continue.  The sequester and the new anxiety in Europe seems reinforce his commitment to continued monetary stimulus.    Ironically, the $85 bln in spending cuts this fiscal year is the amount of monthly long-term asset purchases by the Federal Reserve.                         

The US 10-year yield has generally trended higher since late last July when ECB President Draghi upped the ante to reduce the extreme tails risks in Europe.  This reduced the need for safe haven.  US Treasuries, along side other core bonds and safe havens (such as the yen and Swiss franc), weakened.

However, twice in recent weeks the 10-year yield rose above 2% only to be rejected.  The down shift in US growth, the commitment to continue QE3+, and the anxiety in the aftermath of the Italian election has seen US yields ease off. The dividend yield of the S&P 500 is about 2.15%.                               

For its part, the dollar's performance since QE3+ was announced in mid-Sept is open to interpretation.  As Orson Welles once remarked, "If you want a happy ending, that depends of course, on where you stop your story."   From mid-Sept to the eve of the sequester, the net change in the dollar is not quite what one would expected if one assumes that the foreign exchange market has been driven by QE3+.

The euro is up 1.5%, the yen is off 15.6% and sterling is off 5.8%.  The Canadian dollar is off 5%. Looking at other important US trading partners, the Mexican peso is up almost 2% and the Chinese yuan has gained about 1.7%.    

Our sense is neither  QE nor the sequester is the main driver of the dollar's exchange rate.  The fact that the passive tightening in the euro area is not as great as feared and that Italian voters became the first to seemingly reject the Brussels-German led austerity in Europe (arguably the 2012 was similar rejection of a hair shirt regime by American voters) did much to lift the US dollar against the euro.  Meanwhile the aggressive monetary and fiscal stimulus the new Japanese government promised and the reduced need for a safe have in Q4 12 and earlier this year, helped lift the dollar against the yen.

 


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Thu, 02/28/2013 - 14:06 | Link to Comment Dewey Cheatum Howe
Dewey Cheatum Howe's picture

Only one major cut is needed, the last billion is peanuts to cut after this to meet sequester. Just one welfare program needs to be cut and I am not talking about Social Security, Medicare, Medicaid or even obamacare.

This whole thing is nothing more than political kabuki theater for the absurd.

http://www.bloomberg.com/news/2013-02-20/why-should-taxpayers-give-big-b...

Why Should Taxpayers Give Big Banks $83 Billion a Year?

That is it folks, but of course they will take it out on the taxpayers to make them suffer.

Thu, 02/28/2013 - 13:50 | Link to Comment Praetorian Guard
Praetorian Guard's picture

I know this is off topic, but what is the forcast for copper futures and or mines for this year and the next several? Thanks.

Thu, 02/28/2013 - 15:44 | Link to Comment Fuh Querada
Fuh Querada's picture

The analysts and commentators warning about a market peak could indeed be correct. Perhaps a major top is in place.They could be wrong as well.
The market could be presenting a bear trap. If support levels hold, or are temporarily breached…the market may move higher. Any true breaching of the support level may indicate a significant correction.Plug your ass and watch the charts.

Thu, 02/28/2013 - 13:58 | Link to Comment suteibu
suteibu's picture

Well, if the government stops minting the penny, that would eliminate some of the copper demand and...oh, wait, they don't make pennies out of copper any more.  Never mind.

Thu, 02/28/2013 - 15:04 | Link to Comment TPTB_r_TBTF
TPTB_r_TBTF's picture

 

 

  • I say, up nominally, down really
Thu, 02/28/2013 - 13:18 | Link to Comment Praetorian Guard
Praetorian Guard's picture

DC is a mess... I do not think they represent the people anymore... sad day... what is up with the hard on for taxing millionaires and closing loop holes??? Why do you need to punish those who worked hard and are successfull???

Thu, 02/28/2013 - 13:36 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Define "successful", let's take a case-by-case look at the innovation and products/services of real value that your millionaires/billionaires list includes.  Hank Paulson has billions, yet I would hardly consider him a successful person and in fact I would say that he extracted a rather nice sum by holding a gun to the head of your reprentatives.

No matter, real fucking consequences for bad behavior will return whether we like it or not.  Hedge accordingly.

Thu, 02/28/2013 - 13:51 | Link to Comment wonderatitall
wonderatitall's picture

held a gun to our head? much like our black racists and welfare lovers eh. vote for his majesty or we riot.  whoever makes something will have it taken away. end the blue state fascist dick tater ship

Thu, 02/28/2013 - 14:25 | Link to Comment LawsofPhysics
LawsofPhysics's picture

How quickly the sheep forget.  Good ol hank most definitely went to congress and demanded that TARP/TALF be passed or there would be "tanks in the street".

There isn't two parties, there is only one, for the banks and financial sector, by the banks and financial sector.  You stupid motherfucking sheep.

Thu, 02/28/2013 - 13:50 | Link to Comment Praetorian Guard
Praetorian Guard's picture

I was referring to business owners, people who have built up their "empire" through hard work, not day trading or inheritance...

Thu, 02/28/2013 - 14:32 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Why inheritance?  Are you saying that we shouldn't be allowed to work hard and provide for our children?  What if the only thing I want to leave my children is a succesful agricultural business?  I have never understood this logic.  The children of hard-working people who save should be punished?  seems like that would promote bad behavior, oh wait, that's right, according to your real owners, saving (especially in PMs) is bad.

Thu, 02/28/2013 - 15:00 | Link to Comment Orly
Orly's picture

They wouild fit under the "Parasite" category would be my guess.

 

Thu, 02/28/2013 - 14:03 | Link to Comment Orly
Orly's picture

Day trading isn't hard work?

Wow.  I knew I shouldn't have gotten in that short line.  Where did I miss the boat?

:/

Thu, 02/28/2013 - 14:06 | Link to Comment Praetorian Guard
Praetorian Guard's picture

It is not, in the sense that you create nothing - just a bunch of money shuffling and parasites...

Thu, 02/28/2013 - 14:23 | Link to Comment Orly
Orly's picture

Excuse me but if it weren't for me "creating nothing" and being a "parasite," all of this money flow that you need to build your Empire of Widget Factories wouldn't exist.

Then what?  Am I Unca Scrooge McDuck sitting there counting my gold coins?  No.  That money gets spent.  Locally.  So I take money out of the pocket of a North Korean bank and put it to work in Texas.

I am sorry you're so high and mighty, Mr. Empire Builder, but we all have a role to play.  I regret you find my ilk so distasteful but guess what?  That's your problem.

And if you think it doesn't take years of study and hard work, up late, late nights while you're sleeping in your down comforter and I have splinters on my butt from wearing a chair so thin that my eyeballs bleed, then I have news for you.  You're wrong.

So...

So there!

Thu, 02/28/2013 - 12:39 | Link to Comment fredquimby
fredquimby's picture

The Sequester? Is that the cousin of The Equalizer or something?

 

 

Thu, 02/28/2013 - 14:50 | Link to Comment TerminalDebt
TerminalDebt's picture

It's easier than calling it "the living a little less beyond your means"

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