Yen

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.

The relatively calm foreign exchange market and equity market in Asia ended abruptly in Europe. It is difficult to find the culprit, other than position squaring in thin markets, but the euro has come off a cent, dragging the franc. The MSCI Asia Pacific Index gained more than 0.5%, while European bourses are broadly lower, with the Dow Jones Stoxcx 600 off 0.3% near midday in London, led by utilities and financials. Fixed income markets are subdued. Italy's bond auction was adequately received, especially holiday conditions. There have been a few developments to note. First Japan's data was disappointing and this can only bolster the new government's attempt to stimulate the economy both monetarily and fiscally. Worker cash earnings fell a whopping 1.1% in November, nearly three times larger than the consensus. This may have been a factor behind the poor retail sales, which were flat. The consensus had expected a 0.4% increase. Weak incomes and domestic demand may have, in turn, weighed on output. In November, industrial production fell 1.7%, more than three times the decline expected.

More exiting than Christmas!

It was only a matter of time before Japan's criminal lying about the radioactive exposure in the aftermath of the Fukushima catastrophe caught up with it. What is surprising is that those holding Japan accountable are not its citizens but eight US sailors who have just filed a suit against semi-nationalized energy operator TEPCO - the company which repeatedly ignored internal warnings about the ability of the Fukushima NPP to withstand an earthquake/tsunami -  seeking $110 million in damages. As Kyodo reports: "Eight U.S. sailors have filed a damages suit against Tokyo Electric Power Co., claiming they were exposed to radiation and face health threats as the utility did not provide appropriate information about the Fukushima nuclear disaster while they engaged in rescue operations on board an aircraft carrier, U.S. media reported."

• U.S. Family of Mao’s General Assimilates, Votes for Obama (Bloomberg)
• Iron ore prices hit eight-month high (FT)... four months after plunging and crushing iron ore miners
• Obama seeks 60 Senate votes for cliff deal (MarketWatch)
• Need. Moar. InfinitQEeee: Japan PM adviser urges unlimited BOJ easing, higher price goal (Reuters)
• Yen Touches 16-Month Low Versus Euro Before Japan CPI (BBG)
• China consumers driving economic rebound (Reuters) - ot just year end window dressing to accompany the new Politburo
• Rajaratnam agrees to pay $1.5 million disgorgement in SEC case (Reuters)
• France should review 2013 deficit target with EU partners (Reuters)
• Monti-led poll alliance takes shape (FT)
• Bersani wants growth-oriented Europe (FT)

While the market will look with some last trace of hope to Obama's return from Hawaii to D.C. today, the reality is that even the mainstream media, which had so far gotten everything about the cliff spectacularly wrong (proving that sample polling and actual "predicting" are two very different things), is waking up and smelling the coffee. As Politico reports, "nearly all the major players in the fiscal cliff negotiations are starting to agree on one thing: A deal is virtually impossible before the New Year. Unlike the bank bailout in 2008, the tax deal in 2010 and the debt ceiling in 2011, the Senate almost certainly won’t swoop in and help sidestep a potential economic calamity, senior officials in both parties predicted on Wednesday. Hopes of a grand-bargain — to shave trillions of dollars off the deficit by cutting entitlement programs and raising revenue — are shattered. House Republicans already failed to pass their “Plan B” proposal. And now aides and senators say the White House’s smaller, fall-back plan floated last week is a non-starter among Republicans in Senate — much less the House. On top of that, the Treasury Department announced Wednesday that the nation would hit the debt limit on Dec. 31, and would then have to take “extraordinary measures” to avoid exhausting the government’s borrowing limit in the New Year."

The main feature in the foreign exchange market continues to be the yen’s weakness. This weakness, based on expectations that the new Japanese government will succeed in driving the dollar to JPY90 with a combination of more aggressive monetary and fiscal policy (“Abenomics), is offering support to the other currencies. The yen sales are a combination of momentum and carry strategies. There are two other forces in the market as well. First, the market is anticipating a further reduction in tail risks in Europe. Of course the large moves away from the abyss this year are clearly the doing of the ECB with its long-term repos and offer of (conditional) outright purchases.

As a start, identify the trends. 

• Grand Bargain Shrinks as Congress Nearing U.S. Budget Deadline (BBG)
• Budget Talks Cloud Outlook (WSJ)
• Obama to cut vacation short to deal with fiscal crisis (Reuters)
• Stop-gap fix most likely outcome of "fiscal cliff" talks (Reuters)
• Aso Named Japan’s Next Finance Chief as Abe Primes Fiscal Pump (BBG)
• Aluminum Glut No Bar to Gains as Barclays Says Sell (BBG)
• Morsi signs controversial charter into law  (FT)
• Children, many ill, would be victims of Russia ban on U.S. adoption (Reuters)
• Turkey Central Bank Unveils New Tool to Limit Bank Debt Risk (BBG)
• Refi Program Expansion Eyed (WSJ)
• India Joins Indonesia Facing Heightened Policy Dilemma (BBG)

The market grudgingly comes back to work today, overdosed on caffeine and other alkaloid derivatives, a day when traditionally everyone calls in sick, as absolutely nothing has been resolved over the Fiscal Cliff with just 3 real trading sessions left in the year. And the likelihood that no real trading will take place is very high as both the House and Obama are still out of town, although the latter will take a late night AF-1 trip back to D.C. to rekindle rumors of an imminent 11th hour deal. It is increasingly looking as though the E-bay market, when all real trading take places  at 3:59:59 pm, will manifest itself at the calendar level too, with either a market surge or plunge in what appears to be the last trading day of the year. One can only hope if the news is negative that it has a hard limit like the ES limit down plunge last Thursday.

Bloomberg's William Cohan released a provocative piece last night, headlined by the even more provocative "UBS Libor Manipulation Deserves the Death Penalty." We can only assume that Cohan is being metaphorical - after all, despite the rare occasional recent criminal charge no one has still gone to prison for the biggest coordinated manipulation of a benchmark fixed income market for years: something previously relegated to the fringes of crackpot conspiracy theories - after all, so many people were in on it, how can they possibly all keep their mouths shut - you know, the usual excuse against massive conspiracy theories, at least until they become conspiracy fact. Yet one wonders: will current and future ongoing market manipulations ever cease when there is no real deterrent: after all spending a few years in jail is certainly worth a few million in ill-gotten proceeds, even assuming the termination of a career in finance. Is Cohan being rhetorical? Or has the time for some true vigilante justice finally come? Because in a world increasingly best portrayed by the 2009 movie "The International" where one has to "go outside" a captured legal system to get real justice, is vigilantism eventually coming to every town near you, once the money illusion ends? And a bigger question - is this the main preemptive reason for the gun control push seen so vividly in recent days and months?

2013, which is still a week away, is already off to a 'crazy pills' bang. Because while the bulk of the politipunditry is shocked, shocked, that it was dead wrong about the Cliff outcome which is now set to ram the country front and center on January 1, the most amusement appears to be emanating from the land of the rising sun, where the brand new PM just issued an ultimatum to the central bank, which can be summarized as follows: stop being independent, or we will change the laws and take away your independence.

• This is signal, the rest is noise: Russia's Putin set for stand-off with EU on Syria, energy (Reuters)
• Boehner's Budget 'Plan B' Collapses (WSJ)
• Boehner has few options in "fiscal cliff" mess (Reuters)
• Maya "end of days" fever reaches climax in Mexico (Reuters)
• Monti Praised by Merkel Favored Less by Taxed Italians (BusinessWeek)
• China probes Yum Brands' KFC over safety of chicken productsa (Reuters)
• Looting in Aregentina: 400 Border Guard officials deployed to Bariloche over looting (BAH)
• Regulatory 'Whale' Hunt Advances - Comptroller Expected to Take Formal Action Regarding JPM's Trading Fiasco (WSJ) - but no punishment
• U.K. Banks Seen Sacrificing Lending to Meet BOE Demand (Bloomberg)
• US banks face rise in bad loans cover (FT)
• Daily Gun Slaughter in U.S. Obscured by Newtown Rampage (BBG)
• China Restricts Bond Sales by Risker Companies (BBG)