Budget Deficit

If trying to explain why S&P futures are up another 9 points to 1417, and are now 25 ticks from the Monday night lows, there are so many catalysts: perhaps it was the European September unemployment rate rising to a new record of 11.6%, (Italy unemployment is now 10.8% up from 10.6% but it still has a way to go until it hits Spain's 25%) even as Consumer prices kept inflation at a steady 2.5% rate, or that French producer prices rose more than expected even as spending missed expectations, or that Spanish housing permits collapsed by 37.2% in August from July, or that Greek retail sales plunged by 7.2% Y/Y and the Greek 2013 economic outlook was cut in the latest budget with the budget deficit now seen at 5.2% from 4.2% before and that Greece now sees 189.1% debt/GDP in 2013 up from 175.6% in 2012, or that Japan just cut its economic outlook last night after its manufacturing PMI came at 46.9, the lowest since 2009 excluding Fukushima, or that UK consumer confidence printed -30, vs -28 last and the lowest since April, or that Taiwan slashed its 2012 GDP forecast from 1.66% to 1.05%, or that nothing has been resolved on the Greek labor reforms or the now two month overdue Troika bailout, or that insolvent Spain has still not requested a bailout, or that virtually every company that has reported revenues in the last two "dark days" missed expectations, or that US Mortgage applications tumbled 6% for its fourth straight weekly decline (government refi index down 5.5%, mortgage apps down 4.8%), or of course that Hurricane Sandy will cut both Q4 GDP and corporate profits (not to mention sales). Truly, there are so many reasons why the S&P has now soared since Apple announced the termination of its two key executives on Monday afternoon, one doesn't know where to start (and don't you dare say "window dressing"). Perhaps Kevin Henry would, but sadly his Bloomberg status is now "gray"...

With the stock markets of the "developed world" in limbo for the second straight day and leaderless as New York is paralyzed, and the US was set to be closed for a second straight day, and with futures tumbling to their lowest level in over 2 months overnight, it was time for the East to step up. And step up it did! First, it was China's turn, which while still refusing to ease outright, conducted a massive 395 billion yuan reverse repo - this operation is the biggest on record, according to Bloomberg data going back to 2004, which in turn sent China's seven-day Repo rate plunging the most since January. And because this whopping injection would prove to be promptly internalized, a few short hours later Japan followed with nothing less than QE9! Just around 2 am eastern, the BOJ announced the 9th installment in its neverending monetary farce, when it said it would proceed to monetize an additional Y11 trillion in assets. From BusinessWeek: "The BOJ expanded its asset-purchase program by 11 trillion yen ($138 billion) to 66 trillion yen, the central bank said after a policy meeting today. The range of forecasts in a Bloomberg survey was from 10 trillion yen to 20 trillion yen." Of course, in this bizarro world in which intervention is the only thing left, the latest Japanese QE had an immediate and opposite effect of that planned, sending the USDJPY lower the second it was announced, as the amount announced was disappointing to most who had expected even more easing, and the halflife was for the first time in recorded monetary intervention history, absolute zero! But at least this failed intervention for Japan, helped America, sending ES from 1393, a full 13 ticks higher, where they are now. And so the epic defense of 1400 (and 1.2900 in EURUSD) continues for a 5th straight day!

Well, my fellow Slope-a-Dopes, I've been hearing a lot about the dreaded "Fiscal Cliff" for quite some time now.  So I decided to take a flying frog freelance free fall leap into the woefully written word abyss, to see if I could sort out for myself, when and how we would experience the coming sensational supersonic splat. 

Looking back, it seems like only yesterday that the world's realized, "out of the blue" that Europe was, gasp, insovlent. Alas, as the following terrific "walk through memory lane" interactive infographic from the Guardian reveals, it has now been well over three years and counting, with everything starting with this October 2009 article in the FT, "Greece vows action to cut budget deficit" in which then-PM G-Pap revealed a massive hole in the Greek official economic data and that its budget deficit would be double what was previously forecast. The rest is history, and now Greece is a shell, with unemployment off the charts, its finances and economy in shambles, and the whole country serving as a passthru funding vehicle for Europe to keep its own banks, and the ECB, solvent.

Easy come, easier go. After yesterday's last hour ramp driven by a MarketWatch article that said absolutely nothing new about the Fed's monetization plans and an AAPL surge which saw the firm add $22 billion in market cap in one day (or more than the market cap of CBS Corp) sent stocks green, the overnight session has taken it all away and then some, with futures now trading roughly 12 ticks lower or at yesterday's lowest levels. The catalyst is, once again, Spain where Moody's downgraded five Spanish regions including Catalonia after the market close (for the reason, see our piece from the weekend "Spanish Regional Bailout Fund Runs Out Of Money"), coupled with news from Confidencial that Spain's budget deficit will overshoot the EU target of 6.3% and hit at least 7.3%, driven by a €10.5 billion deficit in the social security system, trashing the promises from last month's Spain's "reform" package, and as BNP said (confirming what we warned weeks ago), making the conditionality hurdle suddenly that much higher for Spain. And just as the world was getting comfortable that Spain will get away with using the OMP with virtually no conditions. The cherry on top came from France where the business conditions index slid to a 3 year low on expectations a trough had been put in place. The result is a tumble in the EURUSD to below the 1.3000 barrier, dragging stock futures, commodities, and of course Europe with it, sending the Spanish bond curve yield higher, and generally giving a very sour mood to the day as traders walk in.

Readers may recall that Ron Paul once surprised everyone with a seemingly very elegant proposal to bring the debt ceiling wrangle to a close. If you're all so worried about the federal deficit and the debt ceiling, so Paul asked, then why doesn't the treasury simply cancel the treasury bonds held by the Fed? After all, the Fed is a government organization as well, so it could well be argued that the government literally owes the money to itself. He even introduced a bill which if adopted, would have led to the cancellation of $1.6 trillion in federal debt held by the Fed. Of course the proposal was not really meant to be taken serious: rather, it was meant to highlight the absurdities of the modern-day monetary system. In a way, we would actually not necessarily be entirely inimical to the idea, for similar reasons Ron Paul had in mind:  it would no doubt speed up the inevitable demise of the fiat money system. Control can be lost, and it usually happens only after a considerable period of time during which their interventions appear to have no ill effects if looked at only superficially: “Thus we learn….to be ignorant of political economy is to allow ourselves to be dazzled by the immediate effect of a phenomenon."

For those who are curious why Tim Geithner has been invisible in the past 2 months, the answer is he has been manning the phones like a true patriot, and making sure nobody dares to rock the European boat ahead of the US election (as was already disclosed), in this case exemplified by Moody's just released announcement that the rating agency will not downgrade Spain to junk, soaring debt, collapsing GDP and laughable unemployment rate notwithstanding (unless of course the ECB fails in its mission to scare all shorts from approaching within 10 miles of an SPGB, and Spain loses private market access again, in which case Moody's would proceed with a "multiple notch downgrade"). At least not until the US election that is. After that... well, with the fiscal cliff, debt ceiling, Greece vs Troika, etc, etc, buy VIX.

Let’s step away from the noise for a moment and look at the big picture. This isn’t about doom and gloom, or fear, but objective facts. Undoubtedly, the Western hierarchy dominated by the United States is in a completely unsustainable situation. Across the West, national governments have obligations they simply cannot meet—both to their citizens and their creditors. Once again, this is not the first time history has seen such conditions. In our own lifetimes, we’ve seen the collapse of the Soviet Empire, the tragi-comical hyperinflation in Zimbabwe, and the unraveling of Argentina’s millennial crisis. Plus we can study what happened when empires from the past collapsed. The conditions are nearly identical. Is our civilization so different that we are immune to the consequences?
However, one of the things that we see frequently in history is that this transition occurs gradually, then very rapidly.

We are now five years into the Great Fiat Money Endgame and our freedom is increasingly under attack from the state, liberty’s eternal enemy. It is true that by any realistic measure most states today are heading for bankruptcy. But it would be wrong to assume that ‘austerity’ policies must now lead to a diminishing of government influence and a shrinking of state power. The opposite is true: the state asserts itself more forcefully in the economy, and the political class feels licensed by the crisis to abandon whatever restraint it may have adhered to in the past. Ever more prices in financial markets are manipulated by the central banks, either directly or indirectly; and through legislation, regulation, and taxation the state takes more control of the employment of scarce means. An anti-wealth rhetoric is seeping back into political discourse everywhere and is setting the stage for more confiscation of wealth and income in the future. This will end badly.

Just how much havoc does living within one’s means wreak?

• U.S. Military Is Sent to Jordan to Help With Crisis in Syria (NYT)
• IMF Weighing New Loans for Europe (WSJ)
• Romney Targets Obama Voters (WSJ)
• China’s Central Banker Won’t Attend IMF Meeting Amid Island Spat (Bloomberg)
• Japan Calls China PBOC Chief Skipping IMF Meeting ‘Regrettable’ (Bloomberg)
• German media bristles at hostile Greek reception for Merkel (Reuters)
• The End Might Be Near for Opel (Spiegel)
• IMF sounds alarm on Japanese banks (FT)
• Cash Tap Stays Dry for EU Banks (WSJ)
• Goldman in Push On Volcker Limits (WSJ)
• IMF Vinals: Further Policy Efforts Needed to Gain Lasting Stability (WSJ)
• King signals inflation not primary focus (FT)

While we have grown 'used' to hearing of protests in several European peripheral nations, South Africa has turned the anti-austerity protest amplifier to 11 in recent days. From the Lonmin massacre and subsequent wage increase to the truck-drivers' strike and Amplats firing of 12,000 workers , Reuters is reporting that South Africa's local government worker's union has now said it will join a nationwide strike amid the labor unrest in the mining sector. Demanding 'market-related salaries' this strike would bring the South African economy to its knees - at a time of rising deficit concerns. Critically, this has dramatic repercussions. Since firing people is no longer an option as "Those who are dismissed will make sure that there will be no operations operating and that will cause a massacre just like at Marikana," some companies will be forced out of business (reducing supply) or suffer significant margin compression on cost increases leaving commodity producers struggling - which will inevitably mean prices for end-users will rise (slowing end-user demand or crushing their margins). It seems the South African labor unions found the M.A.D. card.

The president is about to speak in Keene, CA, just off Bakersfield, where he will announce the establishment of the Cesar Chavez national monument. That at least is the official topic. What everyone is curious about is if Obama will bring up the topic that is on every Californian's mind today: gas prices that have never been higher.  Find out shortly if the recent gas price breakout is once again the work of evil, evil speculators, some of whom may not even have a printing press, or if the market's discounting of $1 trillion in new Treasury monetizations by the Fed, or roughly half the budget deficit through 2014 has anything to do with it. Also, certainly keep an eye on RBOB and various energy margin hike after the close. After all, Obama is not known as the margin hiker-in-chief for nothing.

Now that the ESM has been officially inaugurated, to much pomp and fanfare out of Europe this morning, many are wondering not so much where the full debt backstop funding of the instrument will come from (it is clear that in a closed-loop Ponzi system, any joint and severally liable instrument will need to get funding from its joint and severally liable members), as much as where the equity "paid-in" capital will originate, since in Europe all but the AAA-rated countries are insolvent, and current recipients of equity-level bailouts from the "core." As a reminder, as part of the ESM's synthetic structure, the 17 member countries have to fund €80 billion of paid-in capital (i.e. equity buffer) which in turn serves as a 11.4% first loss backstop for the remainder of the €620 billion callable capital (we have described the CDO-like nature of the ESM before on many occasions in the past). The irony of a country like Greece precommiting to a €19.7 billion capital call, or Spain to €83.3 billion, or Italy to €125.4 billion, is simply beyond commentary. Obviously by the time the situation gets to the point where the Greek subscription of €20 billion is the marginal European rescue cash, it will be game over. The hope is that it never gets to that point. There is, however, some capital that inevitably has to be funded, which even if nominal, may prove to be a headache for the "subscriber" countries. The payment schedule of that capital "invoicing" has been transformed from the original ESM document, and instead of 5 equal pro rata annual payments has been accelerated to a 40%, 40%, 20% schedule. And more importantly, "The first two instalments (€32 billion) will be paid in within 15 days of ESM inauguration." In other words, October 23 is the deadline by which an already cash-strapped Spain, has to pay-in the 40% of its €9.5 billion, or €3.8 billion, contribution, or else.

• No Joy on Wall Street as Biggest Banks Earn $63 Billion (Bloomberg)
• And more good news: IMF’s Blanchard Says Crisis Will Last a Decade (Reuters)
• Hobbit Returns to Find Middle Earth Has Become Expensive (Bloomberg)
• Freddie's Foreclosure Plan Hits Roadblock (WSJ)
• Who will buy the FT? Pearson CEO Scardino Will Step Down as Fallon Takes Over (BBG)
• Jeremy Lin Said to Be in Talks With Harvard on Licensing Deal (Bloomberg)
• Jon Weil tears apart the NYAG "prosecution" - Eric Schneiderman Will Have to Do Better Than This (BBG)
• Portugal Offers to Exchange Bonds as It Seeks Debt Market Access (Bloomberg)
• Is unlimited growth a thing of the past? (FT-Martin Wolf)
• European Bank Capital Results Overtaken by Tougher Global Rules (Bloomberg)
• China’s Slowdown Reverberates as ADB Cuts Forecasts (Bloomberg)
• Tokyo has no plan to extend currency swap deal with Seoul (Reuters)