Memo to the Arab World: Good news and bad news with the re-election of Barack Obama to the White House. The good news is that a victory by the Republican candidate Mitt Romney would have given Israel and its current leadership a free hand at continuing a policy of arrogance that will lead the region towards greater mayhem. On the other hand, with Obama in the Oval Office, don’t expect anything drastically different to happen in the Middle East in so far as US involvement goes. And if Obama’s acceptance speech is anything to judge by, where his only mention of anything related to foreign affairs was a reference to "freeing ourselves from foreign oil," it seems obvious that the Obama administration will want to focus on solving domestic issues. At the end of the day these are issues that matters most to the average American who would rather not have to worry about the Middle East and terrorism – that is until they come knocking at our doors as they did on September 11, 2001.
Against the backdrop of a tepid US recovery, Eurozone recession and stuttering growth across emerging markets, investors are beginning to focus on how the 'status quo' outcome impacts the odds of cliff-avoidance; which after all, if there is one thing economists agree on, it is that a US and global recession will ensue if the legislated tax increases and spending cuts worth roughly 3.5% of US GDP take effect next year. UBS believes that if the US economy dips into recession, operating earnings -which are near peak levels - could easily plunge by a fifth. Risk premia would climb, particularly because the US and the world have run out of policies that could lift their economies out of recession. Those factors point to significant downside risk (at least 30%) for global equity markets if the US falls off the 'cliff'. Yet the S&P500 remains within a few percentage points of its cyclical highs. Accordingly, as we have previously concluded, investors assign a very low probability to the ‘cliff’ and a 2013 US recession, which UBS finds 'darn surprising' that this much faith in common sense prevailing in Washington amidst such divisive politics. But for all the attention the ‘cliff’ deserves, UBS notes the fundamental challenge for the US (and many other countries) is to address fiscal stability as a long-term necessity, not a short-term fix.
There was one election outcome yesterday that few noticed, judging by mainstream media. We are referring to Colorado’s Amendment 64, which regulates marijuana in a similar manner to alcohol. It is basically full legalization of pot for adults over 21. It’s interesting that the two states to legalize marijuana both voted for Obama in this election. Will he now betray all these faithful voters? Based on his first term performance, you can count on it. Your move Mr. Holder.
Credit markets have been bleeding wider recently but based on Credit Suisse's 'Risk Appetite Index', they remain high in Euphoria territory in the US. This is worryingly crowded on its own but the key point that they note is the divergence between US exuberance and the rest-of-the-world's far less sanguine view of credit. The risk-appetite spread between the two has been this wide two times before in recent years - July/August 2011 (which saw a major sell-off - debt ceiling) and April/May 2010 (another major sell-off - end of QE and flash-crash). As we noted earlier, equity market valuations are very much pinned to risky credit now and so this indicator is yet another canary-in-the-coalmine...
Just in case someone thought Greece would voluntarily vote to cut out the funding - any funding - of free money from the ECB, via ELA or otherwise, regardless if only 10% of said money actually makes it into Greek society, we have some bad news: the Greek parliament once again voted to impose austerity upon itself. This includes numerous Yay votes by deputes who had said previously they would vote against the measure.
- SAMARAS HAS VOTES FOR GREEK AUSTERITY BILL
- FINAL VOTE: 153 FOR, 128 AGAINST, 18 ABSTAIN
- PASOK EXPEL 6 MEMBERS; ND EXPELS 1 MEMBER FOR VOTING AGAINST PARTY LINE
And yes, this time will certainly be different unlike all those other times. Or maybe not. In the meantime, the rioting, and daily strikes by everyone, most certainly the tax collectors, will continue indefinitely, until even more spending has to be cut to match the decline in revenues, and so on, until finally the singularity of no more revenues and no more spending is hit.
The US government will be bankrupt after another four years of the same Obama we had for the past four. Fitch as much as confirmed this when it suggested a downgrade is coming. TrimTabs' Charles Biderman takes us succinctly through the painful math of just what has happened in the last four years: since Obama has been president after-tax take-home pay for everyone who pays taxes is still down by about 5% nominally and more than 10% after inflation. Dismissing GDP as anything but a misguided and misused spreadsheet output, the bombastic Biderman is concerned - and rightly so - as he sums up: "My guess is that Mr. Obama and his close buddies have no idea what they are doing, or else they would not be doing what they have been doing. The most dangerous are those people who think they are smarter than they are."
As the Romney bounce was removed last night, German (and European) growth is lowered, AAPL's dominance is questioned, and the 'fiscal cliff' (oh yeah that) comes into focus, is it any wonder equity markets dumped today. Depending on which index you looked at, equities fell the most in a year (or a month) with the Dow and Nasdaq closing below their 200DMA. Gold and Bonds outperformed and S&P futures plunged further after-hours closing below its 100DMA for the first time in over 3 months (as VIX closed at 19% - its highest in 3 months)
It is not going to be a new government that necessarily ushers in a whole new era of growth, prosperity and confidence. Even under the revered Ronald Reagan, the period of secular growth and bull market activity took two years to unfold — it didn't happen right away. It took the inflationary excesses to be wrung out of the system and concrete signs that the executive and legislative branches could work together to usher in true fiscal reform — and to get blue Democrats on board with reduced top marginal tax rates. Hope isn't generally a very useful strategy, but there is reason to be hopeful nonetheless. The critical issue is going to be how we get Washington to move back to the middle where it belongs. This requires bipartisanship which in turn requires leadership. Reagan's whole eight-year tenure in the 1980s occurred with the House being in Democrat hands the whole way through. Bill Clinton's second term coincided with both the House and Senate controlled by the Republicans.
It can be done!
With this in mind, the best that can happen is a Reaganesque and Clintonesque return to compromise on the road to fiscal reform. It will be painful. We all know it will be painful.
Lots of reading between the lines and inference we are sure... standard political protocol surely means he will toe the line on TV... or will he?
Following one of the highest monthly jumps in consumer credit in August, the September data showed that following the drop in household savings to a multi-year low, consumers naturally retrenched, and had no choice but to pay down debt. As the just released G.19 confirmed, in September, households once again reduced their credit card debt, which declined by $2.9 billion to $852 billion. This was the fourth such decline in six months, confirming that at the discretionary level where banks have supervision over borrowings, the consumer is still nowhere near willing to relever. Where, there was leverage, a lot of it, was once again in the government sector, which funded $13.8 billion of the total $14.6 billion rise in NSA credit, and where non-revolving credit: read loans for Government Motors, at least those that have not been record channel stuffed (as reported previously) and Federal Student Loans, which are now over $1 trillion, rose by $14.3 billion in one month. Of course, the difference between revolving and non-revolving credit is that while banks expect the former to be paid off eventually, Uncle Sam has no such illusions on any low APR debt it hands out to anyone who asks for it (and if the proceeds from student loans are used to purchase iPads, so be it).
The U.S. Presidential race is now behind us. And this morning the world woke up and realized that all the issues the election postponed now lie before us. It's becoming increasingly clear the way our leaders will "address" these challenges will be to throw increasing gobs of our citizens' current and future wealth at them. Until, of course, that simply doesn't work anymore...
With Federal debt growing at the rate of $40,000 a second - not all that far from what a typical family earns in a year; with a debilitating dependency on the state all too elevated; and with any number of restraints to peace and progress not only unresolved, but utterly unresolvable under present conditions, is it any wonder that our nation has become entirely stagnant. As Sean Corrigan of Diapason Commodities notes in this simple chart - real net private product per capita has been dead for more than a decade - mirroring its poor showing during the inflationary disaster of forty years ago. Given the four-more-years of Bernanke, to expect a radical turnaround under such conditions (of monetary policy largesse and experimentation) would be to display as much naivety about the prospects for 'change' as did so many bien pensants four short years ago.
UPDATE: Minutes after we brought attention to this farce, VIX Futures and Options Re-Opened...
CBOE's VIX Futures and Options have been halted since 1337ET.
Because in our day and age of highly "sophisticated, precise and computerized" trading, just what stock market crash can take place without a critical component of the market breaking...
John Williams, president of the San Francisco Fed, yet another noted dove, thinks nothing can go wrong by printing gobs of money. There is no inflation, and there never will be. They have the 'tools' to avert it. Never mind the explosion of the money supply over the past four years – it is all good. Have no fear though, as Williams notes: "Once it comes time to exit its super-easy monetary policy, the Fed will target a 'soft landing,'" The hubris of these guys is jaw-dropping. We are struck by the continued refusal by Fed officials to even think for a second about the long range effects of their policies. In the meantime, money printing continues to undermine the economy. Wealth cannot be generated by increasing the money supply – all that can be achieved by this is an ephemeral improvement in the 'data' even while scarce capital continues to be malinvested and consumed.
A stock sell off is usually a healthy, cathartic thing: one sells, pockets the proceeds, books a loss, and comes back to fight another day. The big problem, however, is when speculators and traders are already massively overleveraged, and not only don't have a positive Net Worth (defined as Free Credit Cash Account and Credit Balances in Margin Accounts less Margin Debt) but their Margin Debt is so high it commences a toxic loop of selling merely to fund margin calls which usually start popping up in the last hour of trading (and when trading desks put their phones straight to VM), leading to more forced selling, more margin calls, and so on. And therein lies the rub: according to the most recent NYSE margin debt data, the market complacency recently hit such high levels, that speculators virtually went all in, but solely in their margin accounts without holding any cash buffer to pay for potential margin calls. As can be seen on the table below, Margin Debt as of 9/30 hit $315 billion: a jump of $30 billion from the prior month, and the highest since March 2011, just before the market tanked. And confirming that there is simply no cash on hand to pay for margin calls when they start pouring in after today's massive sell off, is the total Net Worth, which in September was the lowest since April. Because with record complacency, and the Fed guaranteeing no further shocks are possible, who needs to hold cash? Today, we will find out: just as soon as the margin calls start coming around around 3PM Eastern...