Click here for this week’s Market Shadows Newsletter (11/12/12)
“In war, there are no unwounded soldiers.”
Event Horizons: Bailouts, Cliffs and a Country Divided
Traders aren’t liking the uncertainty of standing at the edge of a precipice, in the latest episode of the political saga Spend, Borrow, Tax.
The Big Fat Greek Bailout
The Greek Parliament voted to adopt the nation’s 2013 proposed budget, including the steep austerity cuts required for Greece to receive the next installment of its much needed bailout.
The Greek people are furious about the multiple rounds of belt-tightening, with cuts to their pensions and pay. Greece has seen its unemployment soar to more than 25%. The country’s two largest trade unions urged members to protest the cuts and new plans to eliminate thousands of public sector jobs. As many as 70,000 people demonstrated, throwing Molotov cocktails and shouting anti-austerity slogans while police fought back with tear gas outside the parliament in Athens. (Greek Parliament takes up ‘bailout’ budget, Greece battles to avert €5bn default)
The budget will save 13.5 billion euros over the next two years, raise the retirement age from 65 to 67, and cut pensions by 5% to 15%. It will also reduce salaries in the public sector by as much as 30%, eliminate bonuses, and change labor laws.
While Parliament approved the budget, members of the Troika (the European Union, the European Central Bank and the International Monetary Fund) haven’t agreed on the release of the money.
On Monday, the Financial Times reported,
Greece is battling to raise funds to avoid defaulting on a €5bn debt repayment this week as international lenders remained deadlocked over how to reduce its overall debt even as Athens won parliamentary approval for its 2013 austerity budget.
The country’s debt management office has announced plans to cover the €5bn debt through a treasury bill auction on Tuesday, but Greek banks expected to buy the issue can only raise about €3.5bn of collateral acceptable to the European Central Bank, according to two senior Athens bankers…
The ECB has not given permission for Greece to maintain a temporary €17bn ceiling for T-bill issuance due to be reduced this month to €12bn, leaving the country without a financial safety net while it waits for a much-delayed €31.5bn aid payment from international lenders. (Greece battles to avert €5bn default)
Once Upon A Fiscal Cliff
Fast Money reported,
Two of the most influential market prognosticators today — Pimco’s Bill Gross and Goldman Sachs’s Jim O’Neill — both warned clients over the weekend of the perils of the coming “fiscal cliff,” when tax increases and spending cuts kick in at the end of the year.
‘U.S. fiscal cliff (is) deeper than advertised,’ said Gross, whose firm oversees $1.9 trillion, in a tweet. ‘It’s a Grand Canyon. Washington will defer entitlement cuts & raise revenues only marginally.’
O’Neill, chairman of Goldman Sachs Asset Management, warned clients in a note that market momentum was quickly turning down on fears of policy gridlock. (‘Fiscal Cliff’ Mess Is a ‘Grand Canyon': Bill Gross)
We predict a lot of handwringing and theatrics. Our politicians will strut and fret their hour upon the stage and then be heard no more, until the next time. Classic case of “a tale told by an idiot, full of sound and fury, signifying nothing.” (Macbeth)
The opening positions of the actors in the fiscal cliff scam appear intractable and also to be much ado about nothing. The impact ($42 bn) of allowing expiration of the Bush tax cuts on those making over $250k is a spit in the ocean in comparison to the $3.6 trillion the government spends each year…
Of course my theory all along is that this is a pretend game that carries out a facade that there are actually ‘two parties’ in Congress who are standing on some principles. That is not the case, so as this Kabuki Theater gets played out, remember the ultimate goal is to protect the looting interests of the kleptocratic oligarchs who really call the shots. Already, reference to a “small package”, or a “down payment” on a “deal” is becoming common.
Even if there is no final resolution during Congress’s lame duck session, there will be an eventual compromise that leaves no one happy. Then another debt ceiling drama will ensue.
The “cliff” consists of a series of tax and expenditure measures which have already been legislated to take effect on 1 January 2013, and which taken together would tighten fiscal policy by $502 billion in 2013, and $682 billion in 2014 (3.9 per cent of GDP). Legislation has to be amended if this is not going to take place, which is why both parties have the ability to block progress. Unless the House Republicans agree on a compromise with the Senate Democrats, and the President, this fiscal package will be automatically triggered. Furthermore, the federal debt ceiling needs to be increased in the next couple of months, which also gives the House Republicans the kind of blocking power they used in July 2011. (Anatomy of the US fiscal cliff)
As 2012 comes to an end, and the country fractures more deeply along party lines, consider these words:
The mood of the country continues to blacken. A simmering anger boils beneath the surface of an everyday façade of normalcy. The middle class majority is being squeezed in a vice, with the rich powerful plutocrats on Wall Street and in Washington DC stealing their hard earned net worth through financial scams, the gutting of our industrial base and a tax system designed to benefit those who write the laws on one side and the parasitic willfully ignorant underclass that is sustained only through the extraction of taxes from the working middle class on the other side. Our society has become a hunger games tournament, with the few benefitting while the many scramble to survive. The stench of class warfare is in the air. The generational resentment and rage is palatable as the Millenial generation has taken on a trillion dollars of student loan debt at the behest of the Federal government, Wall Street and older generations, only to graduate into a jobless economy. The generational contract has been broken, as the older generations will not or cannot leave the workforce due to their own financial missteps. Younger generations are being denied entry level positions, even as the older generations expect them to fund their retirements and healthcare. This presidential election will only exacerbate the anger, disappointment, bitterness and fury among the populace, no matter who wins. ~ Strauss & Howe, 1997.
We hope that change will happen on the other side.
Last time, Obama lifted up the base with his message of hope and change; this time the base lifted up Obama, with the hope he will change. He has not led the Obama army to leverage power, so now the army is leading Obama.
Market-Moving Forces around the Globe
US Equities: Bespoke Investments showed that the market is very oversold, setting up at least for a potential bounce. “The S&P 500’s second consecutive 1%+ decline has put the index 2.5 standard deviations below its 50-day moving average, which is well into extreme oversold territory. As of the close, 29% of the stocks in the S&P 500 were above their 50-days. At the lows this summer, this reading got into the single digits.”
China: Data out of China recently showed an improving industrial output which rose 9.6% in October (9.4% forecasted, up from September’s 9.2% gain). Retail sales were up 14.5% for the month compared to a year earlier. Fixed-asset investment — a measure of spending on construction, plant equipment and other projects — grew 20.7% year-on-year in the first 10 months of the year. Inflation figures showed the consumer price index rising 1.7% during the month from a year earlier.
China’s corporate debt as a percentage of GDP is concerning. Goldman Sachs noted that “the rapid rise of corporate leverage to 130% of GDP in 2011 – one of the highest corporate leverage ratios in the world – is concerning. This high leverage is the result of substantial investment in the manufacturing sector since 2008, leading to over-capacity in many sectors such as solar energy, steel and ship building. It is therefore critical for the new leadership to pursue reforms that not only support the private sector, but also consumption more broadly, in order to utilize this capacity; the alternative would likely prove negative for sectors, banks, and ultimately, the economy.”
Source: Zero Hedge
It is difficult to fully know the China story, as its reporting is not trusted by many economists.
Britain: Britain is warning other EU countries that it will block a single eurozone banking supervisor unless those outside the system gain more safeguards. London expressed growing frustration that its demands are being ignored (more here). This could have profound impacts on Germany and the EU’s actions going forward.
France: Welcome to the Recession. The Bank of France said it expects its home country (the EU’s second largest economy) to slip into recession as 2012 ends. GDP will shrink 0.1% in the third quarter, and the central bank expects it to move lower in the fourth quarter.
“It’s not looking good,” said Nicolas Bouzou at economics consultancy Asteres. “There’s a real inconsistency in the government’s policies. They’re creating a recession, and the growth-boosting policies will only come in afterwards.”
Michel Martinez, an economist at Societe Generale bank, said the government would have to respond to the downturn even if it was likely to be much milder than in Spain or Italy. “It’s a political choice,” he said. “They’re going to find themselves with two options. Either they forget about more budget tightening and miss the budget target, which risks damaging France’s image with markets, or they correct the budget.” (France slides towards recession)
Germany: Economic growth in the EU’s largest economy, Germany, will likely weaken during the fourth quarter and the first part of 2013 as firms postpone investments. Economic data this past week showed that the private sector is contracting, industrial orders are tumbling, output is dropping and exports are sliding at the fastest pace since late last year. Demand among Germany’s crisis-struck euro zone trading partners continues to weaken. (German Growth Set to Slow as Euro Zone Crisis Hits Home)