Iran

With the market still hopeful of some deus ex resolution to the Fiscal Cliff will take place in the last few trading sessions of the year (one where the market itself will not have to be the catalyst for such a resolution, because once the selling starts in earnest, who knows if and when it stops, hence the loading up on prodigious amounts of puts), here is Iran out of left field, adding yet another known unknown to the inequality, announcing that it will begin six days of naval drills in the Straits of Hormuz on Friday. In other words a one year flashback deja vu, as Iran held a similar 10-day drill last December, when everyone was expecting an imminent escalation out of the endless Israel-Iran foreplay and was analyzing which were the new moon days allowing Israel unobstructed access to the greatest distraction of all - Iran's nuclear facility being moved under a mountain: a catalyst which Israel repeatedly said is the only reason to attack a weaponizing, nuclear Iran, and which took place some time in 2012. Now that the official window of opportunity is closed, will Israel tone back on the aggressive rhetoric? Hardly: after all that is precisely why the Syrian "outlet valve" has been put in play over the past 6 months.

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).

The markets, as most people reading this should now well know, no longer reflect in any way the true economic health of our country.  If one was to measure the financial “recovery” of this nation by the strength of global stocks alone, he would probably come to the conclusion that the collapse of 2008 was a mere hiccup in the overall success of the worldwide economic system.  However, electronically traded equities with little more to back their value than scraps of receipt paper and numbers on a screen have no bearing on what is going to happen to you, and to me, over the course of the coming year.  The stock market is a sideshow, a popcorn movie, a façade.  The real drama is going on behind the scenes and revealed in fundamentals that mainstream analysts no longer discuss...

What’s worse than unjust and ineffective laws like the failed War on Drugs and the failed sanctions on Iran? Unjust and ineffective laws that apply to ordinary folks, but not to banksters. Once a certain segment of society becomes protected from criminal liability, that society has travelled a long way down the road to feudalism, to a caste system, to serfdom.

Following on the heels of Byron Wien, Morgan Stanley's Surprises, and Saxo's Outrageous Predictions, Deutsche Bank's FX strategy team has created a who's who of 13 outliers for 2013. Quite frankly, given the extreme nature of monetary (and now fiscal) policy, asset allocation decisions, and bankers' and politicians' willingness to go into the media and lie directly to our faces, the comprehension of the possible (no matter how improbable) is far more important for risk management than the faith in the centrally-planned unreality our markets (and therefore ourselves) currently find themselves in. As they note, all too often, the tendency to not stray too far from a self-anchoring recent-history-extrapolated consensus (while apparently highly profitable for some for a microcosm of time) leads to unrecoverable drawdowns exactly when career-risk was the limiting factor. From Malaysian elections and EM bubbles bursting to Fed monetizing equities and South China Sea escalation, these outliers seem all to 'normal' in our brave new world.

• Obama, Boehner hold "frank" meeting amid "fiscal cliff" frustration (Reuters)
• Rice Ends Bid Amid Criticism (WSJ)
• EU summit delays crucial decisions (FT)
• EU moves to cap bank bonuses at 2 times annual salary (CBC)
• Europe Wins a Battle, but Not Yet the War (WSJ)
• Banks Spurn Europe Bond Rush Amid Central Bank Loan Largesse (BBG)
• German-French Sparring Over Euro Caps 2012 Crisis Fight (BBG)
• Fed begins stress tests on bank liquidity (FT)
• Draghi’s rallying cry for new EU powers (FT)
• EU Seeks Plan to Handle Failing Banks Amid Cost Concerns (BBG)
• Berlusconi says Monti has strong EU backing (FT)
• Abe Set for Japan Victory Faces 7-Month Window to Keep Hold (BBG)
• Japan's Abe would try to keep China ties calm-lawmakers (Reuters)

Turkey’s trade balance may turn on whether President Barack Obama vetoes more stringent sanctions against Iran after the U.S. Senate passed a measure targeting loopholes in gold exports to the Islamic Republic. Turkey’s gold trade with neighbouring Iran has helped shrink its trade deficit over the past year according to Bloomberg. Incredibly, precious metals accounted for about half of the almost $21 billion decline. That’s calmed investor concern over its current-account gap, and helped persuade Fitch Ratings to give Turkey its first investment-grade rating since 1994.  The U.S. Senate voted 94-0 on Nov. 30 to approve new sanctions against Iran, closing gaps from previous measures, including trade in precious metals. Obama, who opposes the move on the grounds it may undercut existing efforts to rein in the nation’s nuclear ambitions, signed an executive order in July restricting gold payments to Iranian state institutions. Turkey exported $11.9 billion of gold in the first 10 months of the year, according to the Ankara-based statistics agency’s website. A very large 85% of the shipments went to Iran and the United Arab Emirates. Iran is buying the gold with payments Turkey makes for natural gas it purchases in liras, Turkish Deputy Prime Minister Ali Babacan told a parliamentary committee in Ankara on Nov. 23.

In a sharp turn around from the open, Italian and Spanish 10yr government bond yield spreads over German bunds trade approx. 10bps tighter on the day, this follows several market events this morning that have lifted sentiment. Firstly from a fixed income perspective, both Spain and Greece managed to sell more in their respective t-bill auctions than analysts were expecting and thus has eased concerns ahead of longer dated issuance from Spain this Thursday. In terms of other trigger points for today's risk on tone the December headline reading in the German ZEW survey was positive for the first time since May 2012 coming in at an impressive 6.9 M/M from previous -15.7 with the ZEW economists adding that Germany will not face a recession. Finally, reports overnight have suggested that Italian PM Monti could be wooed by Centrist groups which means that if he wanted too the technocrat PM could stand for elections next year albeit under a different ticket. As such yesterday's concerns over the Italian political scene have abated and the FTSE MIB and the IBEX 35 are out performing the core EU bourses. Looking ahead highlights from the US include trade balance, wholesale inventories and a USD 32bln 3yr note auction, however, volumes and price action may remain light ahead of the key FOMC decision on Wednesday.

• Fed Seen Pumping Up Assets to $4 Trillion in New Buying (BBG)
• China New Loans Trail Forecasts in Sign of Slower Growth (BBG)
• U.S. "fiscal cliff" talks picking up pace (Reuters)
• Insider-Trading Probe Widens (WSJ)
• U.K.'s Top Banker Sees Currency Risk (Hilsenrath)
• Three Arrested in Libor Probe (WSJ)
• Nine hurt as gunmen fire at Cairo protesters (Reuters)
• Egyptian President Gives Army Police Powers Ahead of Vote (BBG)
• Pax Americana ‘winding down’, says US report (FT)
• Japan Polls Show LDP, Ally Set for Big Majority (DJ)
• HSBC to pay record $1.9 billion U.S. fine in money laundering case (Reuters)

In a perfect trifecta of disappointment, overnight we had reality reassert itself with a thud as first Japan reported weaker than expected GDP which contracted for a second consecutive quarter and which technically sent the country into yet another recession, merely the latest one in its 30+ year deflationary collapse. Which isn't about to get better: "Analysts expect another quarter of contraction in the final three months of this year due to sluggish exports to China, keeping the Bank of Japan under pressure to loosen monetary policy as early as this month." Of course, there is hope that the new, old PM, Abe will restore money trees and unicorns and get Japan to a 3% inflation target, without somehow destroying bank and insurance co balance sheets in the process, all of which are loaded to the gills with JGBs set to collapse should inflation truly return. Then after Japan, China reported miserable trade data, which flatly refuted all hopes of an economic pick up both in the mainland and across the world. Perhaps the reason China can not openly fudge its trade data, unlike its GDP, inflation, retail sales, industrial production and all those other indicators that none other than the incoming head of government Li Keqiang said are for "reference only" (a fact conveiently ignored when they are all going up, and duly noted when China is self-reportedly sliding) because other countries report the counterparty data and it is very easy to catch China lying in this particular case. And finally there was Europe...

Your comprehensive yet concise, one-stop summary of all the bullish and bearish events of the past week.

• MSM discovers window dressing: Fund Managers Lift Results With Timely Trading Sprees (WSJ)
• White House Unyielding on Debt Limit (WSJ)
• Obama, Boehner talk; Geithner prepared to go off "cliff" (Reuters)
• Republicans urged to resist tax rises (FT)
• China looms large over Japanese poll (FT)
• As predicted here two months ago, Greek Bond Buyback Leads S&P to Cut to Selective Default (BBG)
• Japan opposition LDP set to win solid election majority – polls (BBG), but...
• Japan Opposition LDP’s Main Ally Cautions Abe on BOJ Pressure (BBG)
• U.S. and Europe Tackle Russia Trade (WSJ)
• King Seen Maintaining QE as Osborne Extends Fiscal Squeeze (BBG)
• Syria pound fall suggests currency crisis (FT)
• Irish budget seeks extra €3.5bn (FT)
• U.K. Extends Cuts Due to Poor Outlook (WSJ)
• ECB Seen Refraining From Rate Cuts as Yields Sink on Bond Plan (BBG)

The 8 day mini war between Israel and Gaza has come and gone and any attempts at provoking a wider regional conflict, one involving Iran (if indeed this was the intention), have failed. Which means the fallback plan - Syria - is back in play. And sure enough, as both the most recent naval map update, which shows a US aircraft carrier and a big deck amphibious warfare ship, both of which house thousands of troops and numerous offensive aircraft, and an RT news flash, indicating that thousands of troops have amassed near the Syrian shore confirm, the time for a US invasion may be near. The alibi? "Chemical weapons" of mass or non-mass destruction. In other words the Iraq playbook all over again.

• LA port workers to return Wednesday (AP)
• Iran says extracts data from U.S. spy drone (Reuters)
• Obama to stress need to raise debt limit "without drama" (Reuters)
• Big Lots Chief Probed by SEC (WSJ)
• NATO missiles to be sent to Turkey, Syria clashes rage (Reuters)
• GOP Deficit Plan Irks Conservatives (WSJ)
• Japan Can End Deflation in Months, Shirakawa Professor Says (BBG) ... almost as good as Bernanke ending inflation in 15 minutes.
• Osborne Prepares to Breach Fiscal Rules Amid U.K. Growth Slump (BBG)
• Global Banking Under Siege as Regulators Guard National Interest (BBG)
• Freeport plans return to energy (FT)
• Serbian NATO envoy jumps to death at Brussels airport (Reuters)
• Tide Turns After a Flood of Chinese Listings (WSJ)
• Australian economy loses steam (FT)
• Euro Crisis Feeds Corruption as Greece Slides in Rankings (BBG)

• Two weeks ago here: The Latest Greek "Bailout" In A Nutshell: AAA-Rated Euro Countries To Fund Massive Hedge Fund Profits... and now on Bloomberg: "Hedge Funds Win as Europe Will Pay More for Greek Bonds" (BBG)
• Oracle sends shareholders cash as tax uncertainty looms (Reuters)
• GOP Makes Counteroffer In Cliff Talks (WSJ)
• Iran says captures U.S. drone in its airspace (Reuters)
• IMF drops opposition to capital controls (FT)
• Vogue Editor Wintour Said to Be Possible Appointee as U.K. Envoy (BBG)
• Juncker Stepping Down French Finance Minister to Head Euro Group? (Spiegel)
• Australia cuts rates to three-year low (FT)
• Europe’s banking union ambitions under strain (Reuters)
• EU Nations Eye New ECB Bank Supervisor Amid German Doubts (BBG)
• Frankfurt's Ambitions Get Cut Back (WSJ)
• House Republicans Propose $2.2 Trillion Fiscal-Cliff Plan (BBG)