Unemployment Benefits

Scenarios:

1. A close vote before 6PM – Asian markets open up, catching up to the Monday S&P move; S&P futures probably have priced in most of the benefit of the fiscal cliff resolution. EUR CAD, and AUD have a bit of catching up to do with the S&P, but there should be little drama
2. A rancorous debate that extends into the night – again the key will be whether the votes are there, however, reluctantly, but if it looks as if support is waning we will see sharp moves in markets. With brinkmanship the new normal, the sell-off will be partial on the view that a last minute rabbit will be pulled from a hat.
3. Amendments or rejection – markets will sell off sharply.  If it turns out that the House can’t vote ‘yes’ on an acceptable, yet inelegant fix, the confidence that has emerged in 11th hour fixes will dissipate and tail risk scenarios will shift into baseline outcomes. This would be USDJPY negative,  but risk-correlated currencies now price in 80-90% probably of a successful fix in our view, so the downside pressures will be large.

With just 3 hours left in the trading day, why not up the stakes a little in the soap opera and take it straight to the star character:

• OBAMA MAKING STATEMENT ON BUDGET TALKS AT 1:30 P.M.

What will he disclose? Perhaps this, from the AP...

Time is running out. The cliff negotiations have devolved into two unpalatable options: (1) extend just the middle income tax cuts and extended unemployment benefits and allow about two-thirds of the cliff to happen, or (2) go over the cliff in the entirety. In BofAML's view, given the short time frame and legislative hurdles, the latter appears much more likely. Stock market vigilantes have replaced bond vigilantes as the potential good, bad, and ugly scenarios are devoured flashing red headline by flashing red headline. They, like us, believe that going over the cliff is not a benign “slope” as some suggest. Rather, it accelerates the already-building damage to the economy and markets. The latest evidence is the plunge in consumer confidence. Indeed, this could mark the beginning of the rotation in the uncertainty shock from businesses to consumers. Going over the cliff has many secondary, largely ignored, negative impacts, including tax changes that could damage the housing recovery, as well as negatively impact education and alternative energy, among many others.

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.

Surprise! As we all wait on tenterhooks for tomorrow's messianic 'Meet the Press' appearance, The Hill reports that a Senate aid with knowledge of the talks said late Saturday afternoon there is "no major progress." The rare weekend negotiations continue with the sticking point still taxes - which will come as no surprise to any who read/listened to Ron Paul's clear analysis of the idiocy taking place - but differences on other issues, including spending cuts, linger. Reid has scheduled a Democratic caucus meeting for Sunday afternoon to give his colleagues a chance to weigh in on a potential deal. McConnell has said he would do the same. "I believe such a proposal could pass both houses with bipartisan majorities – as long as these leaders allow it to come to a vote," Obama said in his weekly address. "If they still want to vote no, and let this tax hike hit the middle class, that’s their prerogative – but they should let everyone vote. That’s the way this is supposed to work." If the Senate passes the legislation, it would then force the House to take up the bill on the eve of the looming deadline - leaving the 'blame' at the foot of Boehner's Republicans should they not support it. The games continue... but in the meantime, consider what the debate would have looked like (literally) if Elizabeth Hasleth was still in the Senate.

The beginning of the year has traditionally been a time of optimism when we all look forward to the exciting things that are going to happen over the next 12 months. Unfortunately, there are a whole bunch of things about 2013 that we already know are going to stink. Taxes are going to go up, good paying jobs will continue to leave the country, small businesses will continue to be destroyed, the number of Americans living in poverty will continue to soar, our infrastructure will continue to decay, global food supplies will likely continue to dwindle and the U.S. national debt will continue to explode. Our politicians continue to pursue the same policies that got us into this mess, and yet they continue to expect things to magically turn around. But that is not the way that things work in the real world. Bad decisions lead to bad outcomes. Sticking our heads in the sand and pretending that everything will be “okay” somehow is not going to help anyone.

We would expect the ingredients of the speech to be a pinch of self-denigration mixed with 6 fluid ounces of 'millionaires-and-billionaires', and a quart of "it's the other guys' fault." This coming from the man who precisely a week ago announced he would propose a "scaled down" plan, which today turned out was a complete lie: some leadership. Nevertheless. it will be interesting to see how his 'new' plan, same as the 'old' plan, is different from the 'new new' plan-to-come as he pushes the Senate to propose a 'new new new' deal that will really be a 'skinny irrelevant' deal - no doubt heralded by all asunder as a 'grand new' deal. Though it appears we should have no fear as McConnell and Reid are working on it and McConnell is "hopeful and optimistic." Farce!

Presenting Dave Collum's now ubiquitous and all-encompassing annual review of markets and much, much more. From Baptists, Bankers, and Bootleggers to Capitalism, Corporate Debt, Government Corruption, and the Constitution, Dave provides a one-stop-shop summary of everything relevant this year (and how it will affect next year and beyond).

I attempt to craft something that has a chance of working.

Europe may be fixed for the next week or two (until someone once again figures out that by manipulating the market, the ECB is merely making it easier for peripheral governments to do nothing to fix their unprecedented intra-Eurozone imbalances, as has been the case all along with the only strategy Europe has deployed to date namely kicking the can), but that doesn't mean all event and newsflow ends. Here is what to expect out of the insolvent continent as it attempts to put a very volatile (and violent) 2012 to bed with just one more month. Of particular note: €123 billion in Euro coupon payments in the month of December, which serves as a timely reminder that in 2013 European banks better be ready to buy up the record gross and net issuance of their sovereigns with gusto, or else Europe may promptly become "unfixed" all over again.

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.

Everyone loses:

• HOSTESS JUDGE APPROVES MOTION TO WIND DOWN COMPANY
  
• HOSTESS WINS APPROVAL TO CLOSE AND BEGIN SELLING ASSETS

Next up: the Twinkie economy.

Thomson Reuters GFMS has published research that says they project silver prices to rise 38% in 2013 from current levels, as a sluggish global economy increases safe haven demand. The bullish silver GFMS forecast was published on the Silver Institute website yesterday and is unusual as the GFMS have been quiet bearish on silver in recent years despite rising prices. Philip Klapwijk of GFMS said that “a rebound in investment demand stemming from continuing loose monetary policies is expected to drive silver prices towards and possibly over $50 during 2013.”  Spot silver has risen over 17% this year overtaking gold’s 10% gain, and paving the way for its third consecutive rise in four years. "Strong investment demand, higher gold prices on the back of monetary easing, rising inflation expectations and the persistence of ultra-low interest rates," are among the factors that will lure buyers to the safety of silver,” said Philip Klapwijk of GFMS. "We are thinking prices will trend higher next year. I'm not convinced that we are going to $50. I think we will definitely see $40 to $45 prices."

It’s a safe assumption to make that the reelection of Barack Hussein Obama to the office of the United States Presidency will be talked about for decades to come. Like Franklin Roosevelt, Abraham Lincoln, and other “transformative” presidents before him, Obama will be praised for keeping the country together in the midst of economic difficulty. The lavishing has already begun with prominent voices on the left like Paul Krugman declaring the “new America” has made Obama their champion. Like most of what passes for accepted history, this is downright propaganda. The country as a whole wasn’t frightened over sudden change by throwing out the incumbent. It wasn’t a declaration of a new, more diverse America. There is a rational explanation for the President’s reelection which doesn’t invoke a deep or complex meaning. The only way to explain the outcome is in the simplest and direct prose: the moochers prevailed.

A month ago every single bank was delighted when Bernanke proudly announced QEternity. What they did not realize is that by doing so, and by "getting to work" as Chuck Schumer had previously requested of the Chairsatan, Congress suddenly has no impetus to do anything over the fiscal cliff, i.e., to lose face with the electorate by compromising over difficult fiscal issues, because, guess what, Bernanke is on top of it. After all look at the market - no risk is allowed ever again. Because since the Fed is now in charge the market, and of fiscal policy, why bother with protection or Plan B. The banks, however, know better, and know that without hundreds of billions in continued stimulus from D.C., the musical chairs game is about to end and the market will implode. Which is why the warnings of Mutual Assured Destruction (M.A.D.) were only a matter of time. Sure enough, here comes JPM with the first of many official GDP revisions (don't worry - JPM's Mike Feroli will promptly revise everything much higher if a fiscal cliff deal is done... some time in March long after the S&P has tumbled by 20% in a replay of August 2011), in which he sees the fiscal cliff now reducing 2013 GDP growth by 1%, up from the previous estimate of 0.5%, and specifically sees Q1 and Q2 GDP of 1.0% and 1.5%. And it's all downhill from there...