Wednesday, November 28, 2012 - If They Don't Jump, I Might Push Them

If They Don't Jump, I Might Push Them

by Sinclair Noe

DOW + 106 = 12,985
SPX + 10 = 1409
NAS + 23 = 2991
10 YR YLD - .03 = 1.62%
OIL - .52 = 86.66
GOLD – 22.00 = 1720.80
SILV - .28 = 33.87

I am getting so sick and tired of this fiscal cliff malarkey* (* a politically acceptable euphemism, according to the debates), that I would like to throw some politicians off a fiscal cliff; maybe we could toss in a few media types as well. Today, I hear that stocks moved higher because John Boehner, the Speaker of the House, said he was optimistic about not going over the cliff. Really? That's all it takes for stocks to post triple digit gains? Maybe tomorrow, Mr. Boehner can tell us he is both optimistic, and confident, and chipper, and slightly perky, and everything in his universe is copacetic; and the markets could celebrate with a monster rally.

I don't think this is the real motivation for market moves but it might be, but I don't think so. On Friday, President Obama will hit the road to promote his version of fiscal cliff avoidance. Business executives and others who’ve met with President Barack Obama in recent days describe a president who’s supremely confident that he’ll come out on top of a fiscal cliff deal; with Republicans bending to his will on tax increases for the wealthy and Democrats sucking up deep spending cuts.

You have to wonder about the austerity advice being offered by the very rich CEOs that have been visiting the White House. There are 9 CEOs, including a few defense contractors, a couple of airlines, a software firm, a telecom company, and a few bankers. They all suck on the government teet; several of the companies paid no corporate taxes despite profits; a few others received multi-billion dollar bailouts to keep their companies afloat when they almost melted down. The CEOs went to the White House with a concerted message: no more government handouts to the moochers; waste must be eliminated; cuts must be made; and by that they mean Social Security, Medicare, and Medicaid. They don't want cuts to their own corporate welfare; they just want to cut yours.

There is only one problem: the vast majority of Americans oppose cuts in Social Security, Medicare and Medicaid. That's a minor problem now, because the election is over; no invites to lunch at the White House.

By the way, Nassim Nicholas Taleb, the author of “The Black Swan”, was speaking at some event in London the other day, and he said bankers who take government bail- outs to stay afloat should be paid no more than the civil servants who saved their business. Individuals in positions of power, including those who work in the financial system, must be held accountable for their decisions and have more “skin in the game.” He also advocated clawing back bonuses of highly paid executives who contribute to the failure of a firm. Actually, it's happening.

The Financial Services Authority, the U.K. industry regulator, told bank executives in a letter last month that bonuses must reflect recent scandals, and that clawbacks should be sought from those involved. The EU is seeking to cut variable pay as part of politicians’ quest to make lenders more like utilities than private money-making machines. The bloc’s 27 member nations plan to implement rules on bank-capital requirements next year that include caps on bonus size relative to salary. Here in the US, we let the bankers keep whatever they can scrounge, and then they lunch with the president and advise him to cut the handouts.

Anyway, back to the cliff. If the GOP line against marginal rate increases somehow holds between now and the end of the year, when the fiscal cliff tax hikes and spending cuts begin to kick in, the president is confident he can use the bully pulpit of the second inaugural address and the State of the Union speech to blast Republicans as holding the American economy hostage to a narrow and outdated ideology.

Of course, the Republicans are finding it more difficult to hold the line; vague plans to limit tax breaks will soon die from lack of definition or from too much clarity. Today, Republican Oklahoma Congressman Tom Cole, said the GOP should agree to a quick deal that keeps the Bush era tax rates for 98 percent of taxpayers while letting the top two rates increase. Cole said doing so would not violate Grover Norquist’s no-new-taxes pledge signed by many Republicans because it would amount to approving a tax cut for most tax payers and simply doing nothing about the other rates, which were scheduled to expire under the legislation first pushed by Bush in 2001.

Of course, the easiest way for Republicans to keep their pledge to Grover is to do nothing; go over the cliff; allow the Bush Era Tax Cuts to expire, and then come back in and vote alongside Democrats for tax cuts on 98% of taxpayers.

The bottom line, for today at least, is that the president believes he will get his marginal rate increase, or at least an acceptable version; and Republicans will get some spending cuts and a commitment to broader entitlement and tax reform. The idea is the cliff is resolved just barely by year end or near enough; toss in a continued phase down of Emergency Unemployment Compensation, temporary extension of tax cuts; assume the payroll tax cut expires and new taxes under the Affordable Care Act are implemented. Total fiscal austerity under this scenario would be about $160 billion; the GDP would take a 1% hit. Don't forget that New York is asking for $40 billion in Hurricane disaster aid; New Jersey wants about $30 billion.

The fiscal cliff is a permanent part of the economy; even with harsh action, the deficit will grow. Widening the deficit is already baked in.

It almost seems a pre-ordained outcome to a manufactured crisis. The pre-election abyss between the two parties has narrowed to a little ditch. The final outcome will include austerity, which has been a horrid failure in Euro-land. Notice we haven't heard any post-election chatter about the necessity of creating more jobs. Austerity is more important than jobs. Got to get our financial ducks in a row and then we'll look at the labor market. Of course, those ducks won't ever line up until people have jobs, and demand increases.

Over in Euro-land, Greece was the recipient of a bailout deal earlier this week; the plan was met with some initial enthusiasm that anything had been accomplished; then people started to look at details.

The eurozone finance ministers and the IMF agreed to unlock loan tranches totaling $56 billion. Most of the funds are expected to be disbursed in December, with further payments in the first quarter of next year on condition that Greece continues to deliver on its austerity pledges under the bailout plan. The bailout comes in the form of fresh loans, extended loan maturities, lower interest rates on loans and allowing sovereign debt buyback on the market at discounted prices, thereby putting an end to speculation about Greece leaving the eurozone or defaulting. The problem was that Greece had too much debt and so they've replaced the old bad debt with new and improved debt.

And by new and improved we mean they buy some of their debt for what the market was paying, in other words, discounted, and then they extend the term without paying more. I know what you're thinking – that is a very clever way to pay down debt without paying down debt. These are all fake numbers both because the data is patchy and because they’re sort of not the point; the point is to return Greece to a sustainable path where it pays off all its debts, its borrowing costs come down, and in 45 years when the balloon payment comes due, well, somebody else can have that job. And because this new bailout package has delayed the reckoning, the Greeks can get back to improving their economy, which has been decimated by austerity, to the point that there are almost no jobs. So that's the deal for Greece. I don't make this stuff up, folks.

The Federal Reserve released its Beige Book today. Economic growth improved in October and early November, helped by a pickup in consumer spending and steady home sales. Hurricane Sandy slowed growth in the Northeast. Hiring increased in more than half of the districts. But manufacturing shrank or slowed in seven regions and was mixed in two others. The information collected by the regional banks and bound in a Beige cover, will be used as the basis for the Fed's policy discussion at the Dec. 11-12 meeting.

I also ran across this strange little bit of news from the Atlanta Fed; it seems banks are under attack, cyberattack. The Atlanta Fed writes:

“A real financial stability concern ... is the potential for malicious disruptions to the payments system in the form of broadly targeted cyberattacks. Just in the last few months, the United States has experienced an escalating incidence of distributed denial of service attacks aimed at our largest banks. The attacks came simultaneously or in rapid succession. They appear to have been executed by sophisticated, well-organized hacking groups who flood bank web servers with junk data, allowing the hackers to target certain web applications and disrupt online services. Nearly all the perpetrators are external to the targeted organizations, and they appear to be operating from all over the globe. Their motives are not always clear.

“Unlike other cybercrime activity, which aims to steal customer data for the purpose of unauthorized transactions, distributed denial of service attacks do not necessarily result in stolen data. Rather, the intent appears to be to disable essential systems of financial institutions and cause them financial loss and reputational damage.”

Almost seems redundant doesn't it?