President Obama

There was some confusion as to why yesterday various Eurozone consumer confidence indices posted a surprising jump and beat expectations virtually across the board: turns out Europeans had an advance warning of today's horrendous economic data among which we learned that Eurozone October unemployment just hit a record 11.7%, up 0.1% from September (we are trying to get data if the Eurozone is gaming its unemployment number the way the US does by collapsing its labor participation rate), with Italy unemployment surging to 11.1% from 10.8%, on expectations of a 10.9% print, French consumer spending in October was down 0.2%, compared to an unchanged reading in September, but far more troubling was that German retail sales imploded at a rate of 2.8%, the biggest monthly collapse in 4 years, and worse than even the most bearish forecast. Do we hear "Sandy's fault."

Doug Casey often gets letters from angry readers who accuse him of hating America, disloyalty, and perhaps even treason. The truth is that he loves the idea that was America. It's the United State it has become for which he has nothing but contempt. Where to begin? ...the US Constitution was essentially a coup; the delegates to what we now call the Constitutional Convention were not empowered to replace the existing government – only to improve upon the Articles of Confederation between the then-independent states. The framers of the Constitution drafted it with the notion of a national government already in place, but calmed fears of loss of state sovereignty by calling the new government the "United States of America" – a verbal sleight of hand that worked for over half a century. Then the southern states decided to exercise what these words imply, their right to leave the union... and as the government becomes more powerful, it's completely predictable that everything – including the justice system – will become ever more politicized... As great as a US citizen's risk is in the marketplace these days, the greatest single risk to their wealth and health is the government.

Generally bullish, sitting back and enjoying the show while it lasts.

• As this has been priced in since September 13, it should come as no surprise to anyone: Fed Stimulus Likely in 2013 (Hilsenrath)
• Bowles Says Fiscal Cliff Deal Unlikely by End of Year (Bloomberg)
• Argentina debt repayment order frozen (FT)
• Obama Is Flexible on Highest Tax Rates (WSJ)... not really
• Geithner deployed for fiscal cliff talks (FT)
• Audit firms Deloitte and KPMG sued in HP's Autonomy acquisition (Reuters)
• Euro-Zone Budget Proposal Is Unveiled (WSJ)
• EU Nations Clash on Thresholds for Direct ECB Oversight (Bloomberg)
• LDP leader Abe: BOJ must ease until inflation hits 3 percent (Reuters)
• SNB’s Jordan Says High Swiss Franc Burdens Many Companies (Bloomberg)
• EU to launch free trade negotiations with Japan: EU officials (Reuters)

Have you ever wondered what the typical Chinese gold investor thinks about our Western ideas of gold? We read month after month about demand hitting record after record in their country – how do they view our buying habits? Since 2007, China's demand for gold has risen 27% per year. Its share of global demand doubled in the same time frame, from 10% to 21%. And this occurred while prices were rising. Americans are buying precious metals, no doubt. But let's put the differences into perspective.

The schizophrenia in US equity markets (and by correlation all risk markets) is nowhere better highlighted than the last 24 hours of 2% swings in the S&P 500 on nothing more than boiler-plate comments from DC. However, as BofAML's Ethan Harris notes, "the year-end fiscal challenges in the US are more like an 'obstacle course' than a 'cliff' - politicians must navigate about 10 major policy decisions before year-end." We continue to expect a messy multistage deal on the cliff - with some wishy-washy  partial deal late December and more complete resolution (as it will be called) late Spring. We agree with BoFAML's view that until then, we suggest that investors fade the likely “press fakes” of an imminent deal, and brace for downside volatility. It seems to us that the negotiations remains stuck at square one.

Consumer Confidence up to a level not seen since February 2008—a level that caused people to tear their hair out at the time

CME Group declared a force majeure at one of its New York precious metals depositories yesterday, run by bullion dealer and major coin dealer Manfra, Tordella and Brooks (MTB), due to “operational limitations” posed by Hurricane Sandy. MTB has “operational limitations” following Hurricane Sandy and can’t load gold bullion, platinum bullion or palladium bullion, CME Group Inc., the parent of the Comex and New York Mercantile Exchange, said today in a statement. MTB must provide holders with metal at Brinks Inc. in New York to meet current outstanding warrants in relevant delivery periods with compensation for costs, Chicago-based CME said. The CME said that MTB will not be able to deliver metal as the lower Manhattan company deals with "operational limitations" almost a month after the arrival of Hurricane Sandy. MTB is one of five depositories licensed to deliver gold against CME's benchmark 100-troy ounce gold contract, held 29,276 troy ounces of gold and 33,000 troy ounces of palladium as of Nov. 23, according to data from CME subsidiary Comex. In a notice to customers on Monday, CME declared force majeure for the facility, a contract clause that frees parties from liability due to an event outside of their control.

Watching Barack Obama and Mitt Romney duel in the presidential campaign should have convinced the spectators that we live in an age of illusionists. Few of the assertions and conjectures thrown around have been subjected to what the political chattering classes deem to be the indignity of factual verification. This brings us to the sharp pencil people in the Obama administration, specifically the OMB. They claim to know what the relative size of the federal government will be in 2016, at the end of President Obama’s term. According to the OMB’s plans, the federal government, as a percent of GDP should be 22.5%. That’s a 1.8 percentage point drop from the current level. Given that President Obama’s first term recorded a record growth in the relative size of the federal government, and that the President campaigned on a platform of more big government, it is doubtful that he will come close to meeting his own OMB forecasts, in his second term. Yes, the illusionists, not the President’s sharp pencil people, will probably carry the day. What will make the President’s task even more onerous is money – as in the money supply. Thanks to Basel III, the U.S. money supply isn’t the only one creating growth headwinds. Europe faces significant money supply deficiencies. Will Asia continue to be the world’s locomotive? We will have to wait and see. At present, though, one thing is certain – an age of illusionists has arrived.

If the US Dollar was not the world’s reserve currency and US Treasury IOUs were not the world’s preferred holding of reserves behind their own currencies and financial systems, the Treasury’s debt limit would have been done away with a long time ago. But the US Dollar IS the world’s reserve currency so the debt of the US government IS the underpinnings of the global financial system. That being the case, the system stands or falls on the continuing perception that Treasury debt paper is a viable form of “reserve” and that the debt of the US government will NEVER become “unsustainable”. An announcement by the US government that it was getting rid of any “limits” to its debt-generating capacity would put that perception at risk - quite possibly at grave risk. That is the reason why the debt limit remains - even though it has not been an impediment to ever increasing Treasury indebtedness for well over half a century. It is easy to laugh at the seeming absurdity of a Treasury “debt limit” and many people do. Take it away, however, and the fiction that sovereign debt is “sustainable” - let alone any “confidence” in its eventual repayment - would be MUCH harder to maintain. Absurdities abound in history, and the more abject the absurdity, the more tenacious it tends to be. Today, a US Treasury debt “limit” is a very necessary absurdity.

Western culture is presently defined by many things; one of which being an instilled sense of extreme jaundice toward wealth. Before the twentieth century and the ascendance of the all-intrusive state, sumptuous living was typically seen as something to aspire to. No doubt Karl Marx would beam with pleasure in seeing how the contemporary bourgeoisie is regarded with hateful suspicion. His plan of crippling class warfare is slowly taking hold. This isn’t for the reasons Marx envisioned however. The so-called “people” have been indoctrinated to see wealth as something to take by government force. A great deal of this can be attributed to the government granting of privilege to the well-connected. As long as the state exists, there will be a class of people who use political means to acquire vast swaths of riches. Coercive egalitarianism based on ill feelings of Schadenfreud is a cancer. There is no conceivable benefit in everyone being equal. There is only one moral social system and that is free, unadulterated capitalism which gives everyone the chance to improve their own standing. Anything less represents the triumph of the idiotic masses over good sense.

Despite the hope of the last day or two, policymakers remain, we suggest, as far apart as they ever have, with 'no news' simply that. An oversold bounce does not a fiscal cliff fix, and as BofAML's Michael Hanson suggests in his 'brief history of brinksmanship': "one lesson from the recent past is that market reaction has been an important mechanism to reaching compromise and forcing action." Unfortunately, he adds, as we have been quite vociferous about, that "history also shows that the equity markets have to sell off sharply before policy makers listen to the 'stock market vigilantes'." With some politicians still thinking going over the cliff might be their best strategy, it could once again take a sharp market sell-off to focus the minds of the negotiating parties. If we actually manage to go over the cliff, even if only for a brief period of time, a repeat of the TARP sell-off seems only too probable.

Austerity is coming our way, it's just a matter in what manner and by how much, and whether it becomes an orderly or disorderly process. The fiscal cliff is really a bit of a ruse in that respect, but the key here is that years of fiscal profligacy is coming to an end and the Fed at this point, having used its bazookas, is now down to firecrackers. The economic outlook as such is completely muddled and along with that the prospect for any turnaround in corporate earnings... Once we get past the Fiscal Cliff we will confront the inherent inability of the Democrats and the GOP to embark on any grand bargain to blaze the trail for true fiscal reforms. The U.S. has not had a rewrite of its tax code since 1986, which was the year Microsoft went public and a decade prior to Al Gore's invention of the Internet. The tax system is massively inefficient and leads to a gross misallocation of resources that impedes economic progress — rewarding conspicuous consumption at the expense of savings and investment. It is the lingering uncertainty over the road to meaningful fiscal reform that is really the mot cause of the angst — the fiscal cliff is really a side show because who doesn't know that we are going to have a Khrushchev moment?

Those looking for fundamental newsflow and/or facts to justify the latest bout of overnight risk exuberance will not find it. To be sure, among the few economic indicators reported overnight in the Thanksgiving shortened week, European construction output for September tumbled -1.4% from August, after rising 0.6% previously. How long until Europe copycats the latest US foreclosure sequestration, "demand pull" gimmick and gives hedge funds risk free loans to buy up housing (aka REO-to-Rent)? More importantly, and confirming that Spain is far, far from a positive inflection point, Spanish bad loans rose to a new record high of 10.7%. This was the the highest level since the records began in 1962. The total value of these loans was €182.2 billion ($233 billion) in September, according to the Bank of Spain (more on this shortly). The relentless rise indicates that the Spanish bad bank rescue fund will be woefully insufficient and will need to be raised again and again. So while there was nothing in the facts to make investors happy, traders looked to hope and prayer, instead pushing risk higher on the much overplayed Friday "news" that politicians are willing to compromise in the cliff (which as we reported was merely a market ramping publicity stunt by Nancy Pelosi et al), and that Greece may be saved at tomorrow's Eurogroup meeting, for the third time. That this will be difficult is an understatement, with the Dutch finance minister saying no final decisions on Greece should be expected, and his German counterpart adding that a Greek debt writeoff is "inconceivable." In other words, even hoping for hope is a stretch, but the market is doing it nonetheless.

The recent market sell-off has not been about the re-election of President Obama but rather the repositioning of assets by professional investors in anticipation of three key events coming between now and the end of this year - the "fiscal cliff", the debt ceiling and the expiration of the Transaction Account Guarantee (TAG).  Each of these events have different impacts on the economy and the financial markets - but the one thing that they have in common is that they will all be battle grounds between a divided House and Senate.  While there has been a plethora of articles, and media coverage, about the upcoming standoff between the two parties - little has been written to cover the details of exactly what will be impacted and why it is so important to the financial markets and economy. We remain hopeful that our elected leaders will allow cooler heads to prevail and that they will begin to work towards solutions that alleviate some of the risks of economic contraction while setting forth logical plans for fiscal reform.  However, while we are hopeful of such progress, "hope" is not an investment strategy to manage portfolios by.  If we are right things are likely to get worse before a resolution is reached - but maybe that is why the "investment professionals" have already been heading for the exits.