Barclays

The JPY dropped 1.3% against the USD this week for a greater-than-6% drop since its late-September highs as it appears the market is content pricing Abe's dream of a higher inflation-expectation through the currency devaluation route (and not - for now - through nominal bond yields - implicitly signaling 'real' deflationary expectations). In a 'normal' environment, Barclays quantified the impact of a 1ppt shift in inflation expectations from 1% to 2% will create a 'permanent inflation tax' of around 18% (which will be shared between JPY and JGB channels). However, as we discussed in detail in March (and Kyle Bass confirmed and extended recently), the current 'Rubicon-crossing' nature of Japan's trade balance and debt-load (interest-expense-constraint) mean things could become highly unstable and contagious in a hurry. When the upside of your policy plans is an 18% loss of global purchasing power, we hope Abe knows what he is doing (but suspect not).

• Boehner comments show tough road ahead for "fiscal cliff" talks (Reuters)
• Argentina angry at hedge fund court win (FT)
• EU Spars Over Budget as Chiefs See Possible Deadlock (Bloomberg)
• Merkel doubts budget deal possible this week, more talks needed (Reuters)
• Greek deal hopes lift market mood (FT)
• Greek Rescue Deal Faltering Cut in Rescue-Loan Rate (Bloomberg)
• Japan's Abe Pushes Stimulus (WSJ) - Unpossible: a Keynesian in Japan demanding stimulus? Say it isn't so. 
• Authorities Tried to Flip Trader in Insider Case (WSJ)

• More QE could distort rather than deliver (FT)
• Soros Buying Gold as Record Prices Seen on Stimulus (BBG)
• EU Leaders Face Greek Aid Gap in Brinkmanship With IMF (BBG)
• Weak data point to bigger economic drag from Sandy (Reuters)
• Shirakawa Pushes Back With Criticism of Abe Unlimited Easing (BBG) But... but... Bernanke??
• French Downgrade Widens Gulf With Germany as Talks Loom (BBG)
• Japanese Poll Shows LDP Advantage Ahead of Election (WSJ)
• BOJ in the Balance as Next Government Picks Top Posts (BBG)
• Exchanges Get Closer Inspection (WSJ)
• Greece edges closer to €44bn bailout (FT)
• Japan Government to Spend 1 Trillion Yen on Next Stimulus (BBG)
• China’s Richest Woman Divorces Husband, Fortune Declines (BBG)

• Israel Ready to Invade Gaza If Cease-Fire Efforts Fail (Bloomberg)
• Petraeus: A Phony Hero for a Phony War (NYT)
• IMF'S Lagarde says Greek deal should be "rooted in reality" (Reuters) "rooted" or "roofied"? And where was it until now?
• ECB's Asmussen says Greece to need aid beyond 2014 (AP)
• EU makes budget plans without (FT)
• Japanese Poll Shows LDP Advantage Ahead of Election (WSJ)
• Shanghai Composite Dips Below, Regains 2,000 Level (Bloomberg)
• Bond investor takes big punt on Ireland (FT)
• Noda defends BoJ’s independence (FT) Indewhatnow?
• Inaba Says BOJ Could Ease More If Government Reins in Debt (Bloomberg) Actually it's the other way around
• Miles Says Bank of England Can Do More If U.K. Slump Persists (Bloomberg) So much for the end of QE
• US tax breaks worth $150bn face axe (FT)

• Israel Mobilizes Troops as Hostilities Escalate (WSJ)
• FHA Sets Stage for Taxpayer Subsidy With 2012 Deficit (Bloomberg)
• On eve of fiscal cliff talks, positions harden (Reuters)
• Japan PM Noda contradicts challenger Abe on BOJ (Reuters)
• Regulators cut JPMorgan's ability to trade power (Reuters)
• EU Should Reach Agreement on Greek Aid Next Week, Grilli Says (BBG)
• Moscovici rejects talk of French crisis (FT)
• Egypt Urges Push for Gaza Peace as Rockets Hit Israel (BBG)
• Leading Japan politicians draw election battle lines (Reuters)
• Fed Push to Tie Zero-Rate to Economic Goals Faces Doubts (BBG)
• China’s commerce minister voted out in rare congress snub (Reuters)
• China’s new leaders could have reform thrust upon them (Reuters)
• Both Sides of Gaza Border Brace for Further Conflict (WSJ)
• Fed Sees Hurdles in Housing Rebound (Hilsenrath)
• The Complete 2012 Business Schools Ranking (Bloomberg)

One of the most commonly cited 'bullish' memes for stocks is the so-called Fed Model (or Equity Risk Premium) or more simply - the fact that earnings yields are not catching up to Treasury yields (i.e. why put your money in government bonds at such low rates when there is a smorgasbord of yummy equities with 'attractive' dividend yields). There are three key problems with this perspective: 1) No concept of 'risk' is imbibed in this return-based differential (as we have discussed before here and here); 2) Longer-term historical context is critical (as we discussed here - must read); and most importantly 3) Financial Repression breaks the 'Fed Model'. As Barclays shows in the following three charts (and we pointed out recently) normalization of the equity risk premium will not occur until Financial Repression ends. Brings a whole new meaning to 'Don't Fight The Fed' eh?

• Wal-Mart misses topline expectations: Revenue $113.93bn, Exp $114.89bn, Sees full year EPS $4.88-$4.93, Exp. $4.94, Unveils new FCPA allegations; Stock down nearly 4%
• China chooses conservative new leaders (FT)
• Eurozone falls back into recession (FT)
• Moody’s to Assess U.K.’s Aaa Rating in 2013 Amid Slowing Economy (Bloomberg)
• Another bailout is imminent: FHA Nears Need for Taxpayer Funds (WSJ)
• Hamas chief vows to keep up "resistance" after Jaabari killed (Reuters)
• Obama calls for rich to pay more, keep middle-class cuts (Reuters)
• Obama Undecided on FBI's Petraeus Probe (WSJ)
• Battle lines drawn over “growth revenue” in fiscal cliff talks (Reuters)
• Rajoy’s Path to Bailout Clears as EU Endorses Austerity (Bloomberg)
• Zhou Seen Leaving PBOC as China Picks New Economic Chiefs (Bloomberg)
• Russia warns of tough response to U.S. human rights bill (Reuters)
• Japan Opposition Leader Ups Pressure on Central Bank (WSJ)
• Zhou Seen Leaving PBOC as China Picks New Economic Chiefs (Bloomberg)

China needs to add to its gold reserves to ensure national economic and financial safety, promote yuan globalization and as a hedge against foreign- reserve risks, Gao Wei, an official from the Department of International Economic Affairs of Ministry of Foreign Affairs, writes in a commentary in the China Securities Journal today which was reported on by Bloomberg. China’s gold reserve is “too small”, Gao said and while gold prices are currently near record highs, China can build its reserves by buying low and selling high amid the short-term volatility, Gao wrote. The People’s Bank of China is accumulating significant volumes of gold under the radar of many less informed market participants which is bullish. The Chinese government is secretive about its gold diversification and buying and does not disclose gold purchases to the IMF. Therefore, there has been no official update to their holdings since the barely reported upon announcement four years ago that Chinese gold reserves had risen from just over 500 tonnes to over 1,000 tonnes.

In a shining example of the law of unintended consequences, when 2012 started Wall Street bankers had expected that all it would take for bonuses to surge and offset 2011's deplorable comp, is another round of QE. Well, QE came and went, not only in the US, but virtually everywhere else, and sure enough the market traded up to new 5 year highs (and just why of all time highs as well), yet something was not going according to plan: bank revenues. Another side-effect of the Fed buying the long end is everyone piling in and frontrunning Bernanke in the 10-30 Year segment, flattening the curve, and making Net Interest Margin profitability a thing of the past. The result has been a year in which despite stocks rising, banker pay is set to tumble even more (for those lucky enough to still even have a job that is, which for UBS and Nomura means about 80% of the employees a year ago) with traders of cash equities and derivatives set to see another 20% drop in comp from 2011 according to Options Group. The end result: 2012 all in comp will be half of what it was in 2007. Say goodbye to the Master of the Universe - they will now have to settle for a galaxy or two at most.

• The Bild is now a source for EURUSD stop hunts: Germany eyes 'bundled' loan payment to Greece-paper (Reuters, Bloomberg)
• Congress comes back Tuesday to confront “fiscal cliff.”  (Reuters)
• Gen. John Allen ensnared in Petraeus scandal (Politico)
• FBI Agent in Petraeus Case Under Scrutiny (WSJ)
• Comcast's NBCUniversal unit lays off 500 employees (Reuters)
• University Fees Stoke U.K. Inflation (WSJ)
• Consumers Closing Wallets in Japan Add to Noda’s Woes (Bloomberg)
• John McAfee Wanted for Murder... and explaining bathsalt anal suppositories (Gizmodo)
• Europe Gives Greece 2 More Years to Reach Deficit Targets (Bloomberg)
• Where Spain Is Worse Than Greece (WSJ)
• Microsoft's Windows unit head, once a possible CEO, exits (Reuters)
• Glitch stops NYSE trading in 216 companies (FT)
• Large European Banks Stash Cash (WSJ)
• The death of San Bernardino: How a vicious circle of self-interest sank California city (Reuters)
• Apple stores most productive US shops (FT)
• Treasuries See U.S. Falling Over Cliff as Yields Converge (Bloomberg)
• Bra-Bodysuits Make H&M One Hit Wonder as Zara Prospers (Bloomberg)

• Jefferies to be bought by Ian Cumming's Leucadia in an all-stock deal for $3.59 billion or about $17/share (WSJ)
• FBI Scrutinized on Petraeus (WSJ)
• Identity of second woman emerges in Petraeus' downfall (Reuters)
• SEC staffers used government computers for personal use (Reuters)
• Japan edges towards fifth recession in 15 years  (FT)
• Europe Finance Chiefs Seek Greek Pact as Economy Gloom Grows (BBG)
• Americans Say Europe Lesson Means Act Now as Austerity Will Fail (BBG) - of course it would be great if Europe had ever implemented austerity...
• Greece battles to avert €5bn default  (FT)
• You don't bail out the US government for nothing: No Individual Charges In Probe of J.P. Morgan (WSJ)
• Israel Warns of Painful Response to Fire From Gaza, Syria (BBG)
• Greece's far-right party goes on the offensive (Reuters)
• Don’t fear fiscal cliff, says Democrat  (FT)
• Apple Settles HTC Patent Suits Shifting From Jobs’ War (BBG)
• Man Set on Fire in Argentina Over Debt (EFE)
• Iraq cancels $4.2-billion weapons deal with Russia over corruption concerns (Globe and Mail)
• An Honest Guy on Wall Street (Bloomberg)

There are plenty of analogs for market and economic behavior currently echoing the past - some scary, some terrifying, and some hopeful. Barclays found two interestingly similar election-bound relationships to the current environment but with very different outcomes: Harry Truman's successful 'Fair Deal' 1948 campaign and Jimmy Carter's unsuccessful 1980 re-election effort. In both cases business confidence and capital spending were soft during the election year - just like the current economy; but due to a monetary policy mistake (raising the reserve requirement) Truman III's world slumped into a recession. Unfortunately the current market traded as if this was hope-ridden 1980, but it turns out we could be headed for 'Truman's 3rd term' (evident in the charts below). Clearly, Barclays believes, the risk is a policy mistake – this time fiscal – which could drive another capital spending bust and a shallow recession.

Barclays' Barry Knapp has joined the growing crowd of 'sub-1400 year-end S&P 500 target' realists among sell-side equity strategists. With Morgan Stanley's Adam Parker at 1167 and Goldman's David Kostin at 1250, Knapp just reduced his target to 1325 as he notes "the election scenario that unfolded was the one with the most risk, the status quo outcome." In a brief but densely packed interview on Bloomberg TV (the likes of which we suspect we will not see on CNBC), Knapp summarizes his non-rose-colored-glasses view: "In the longer term, while U.S. growth ... remains constrained by policy uncertainty and balance sheet deleveraging. Financial repression has limited the Fed’s effectiveness... We believe a period of significant equity market valuation improvement can’t begin until the Fed initiates the exit strategy process, which is unlikely to occur until Federal government debt sustainability is addressed." From lame-duck impotence to tax-selling pressures, Knapp nails our new reality and explains, as we have been saying, that the only solution lies in a market-forced move: "We suspect, absent a market correction large enough to force compromise, the two sides will not agree on the starting point for tax rates." Must Watch...

Just out from Bloomberg:

• RBS, UBS TRADERS SAID TO FACE ARREST WITHIN MONTH IN LIBOR CASE

Note the word "traders" - not CEOs, not COOs, not General Counsels, not Managers, not Supervisors... Traders. Because remember: it was a scheming 28-year old Frenchman that was the mastermind behind Goldman's CDO fraud for years. Nobody else. Just him. That said, we are looking forward to the latest minimum prison reality TV show: "How Many Cigarettes* For A Bollinger?"

In what may be the most disturbing news of the day, moments ago the BOE announced it is halting its own version of QE3, and capping the asset purchase program at £375 billion after "some policy makers questioned its effectiveness in supporting a recovery that remains lackluster." Could it be that even that peculiar Homo Sapiens subspecies known as "economist" is starting to realize that when applying the same "remedy" time after time to absolutely no avail, and where even the market no longer responds to unlimited injections of liquidity, then perhaps it is time to end said "remedy" altogether? And how long until the voodoo shamans in the dark lit room at Marriner Eccles follow through? Sadly, if Japan, and its 9 (so far) rounds of easing, is any indication, we have a lot more pain to go before what has been glaringly obvious to every hotdog vendor and shoeshine boy is also understood by Economics Nobel prize winners.