Friday, November 30, 2012 - We're All Just Muppets Living in a Fairy World

We're All Just Muppets Living in a Fairy World

by Sinclair Noe

DOW + 3 = 13,025
SPX +0.23 = 1416
NAS – 1 = 3010
10 YR YLD - .01 = 1.61%
OIL + .88 = 88.95
GOLD – 10.60 = 1716.20
SILV - .85 – 33.54

October 31 Closing Numbers:      

DOW                                                13096
SPX                                                 1412
NAS                                                 2977
10 YR YLD                                      1.69%

OIL                                                   88.51
GOLD                                              1721.20
SILV                                                 32.36

So for all the talk about the fiscal cliff, the election, Hurricane Sandy, The Euro-Debt Crisis, the unrest in the Middle East; for all that and more, the markets gave a big yawn in the month of November.

So, yesterday afternoon the House Republicans told reporters that the White House plan to avert the fiscal cliff was nothing more than a “joke”, an “insult”, and a “complete break from reality.” Mitch McConnell said he “burst into laughter. John Boehner said: “It was not a serious proposal.”  The plan, or the opening salvo from the White House calls for $1.6 trillion in tax increases spread out over ten years, $50 billion in additional stimulus spending, and $400 billion in spending cuts over ten years, plus an extension of the 2 percentage point payroll tax deduction or something comparable to it, and a permanent extension on the debt ceiling.

Meanwhile, the Republican plan is, well, it's still something of a mystery but we know they want cuts to entitlement programs, and no they're not referring to the corporate welfare programs that allow $1.5 trillion in corporate profits to be booked offshore, or the other corporate welfare loopholes. No, the Republicans are kinda-sorta arguing for the Ryan Budget, with its deep cuts to entitlements and other spending, and with a zero percent chance of getting through the Senate, just as the Obama plan has a zero percent chance of getting through the House. We are still in the initial phase of negotiating; it's all about tactics, not final numbers.

And so President Obama hit the road today to rustle support for his side. He traveled to Pennsylvania to make the case that Congress should immediately extend the Bush-era tax cuts on income under $250,000 per year. He went to a toy manufacturer in Hatfield, PA, the obvious graphic being that his plan will mean a tax break for most, that the companies depend on consumer spending, and that the extension of the tax cut will help keep the company making toys and employing workers; everybody gets a Merry Christmas, and toys under the tree.

Adding to the discussion today, a New York Times article that says most Americans in 2010 paid far less in total taxes — federal, state and local — than they would have paid 30 years ago. The combination of all income taxes, sales taxes and property taxes took a smaller share of their income than it took from households with the same inflation-adjusted income in 1980.

Households earning more than $200,000 benefited from the largest percentage declines in total taxation as a share of income. Middle-income households benefited, too. More than 85 percent of households with earnings above $25,000 paid less in total taxes than comparable households in 1980.

Lower-income households, however, saved little or nothing. Many pay no federal income taxes, but they do pay a range of other levies, like federal payroll taxes, state sales taxes and local property taxes. Only about half of taxpaying households with incomes below $25,000 paid less in 2010.

The analysis shows that the overall burden of taxation declined as a share of income in the 1980s, rose to a new peak in the 1990s and fell again in the 2000s. Tax rates at most income levels were lower in 2010 than at any point during the 1980s.

This week the Euro-Union, and specifically Germany's parliament approved a debt restructuring plan that essentially allowed Greece to hit the pause button on its debt. It didn't resolve the Greeks debt problem and it didn't create a plan for rebuilding the Greek economy, but it kicked the can down the road. The Euro-zone's crisis is far from over. Today, European Central Bank President Mario Draghi said Euro-zone members must tighten budgets and form a banking union to leave behind the “fairy world” that allowed problems to grow.

Draghi's call for reform was echoed by International Monetary Fund chief Christine Lagarde, who said implementing a banking union with powers to supervise all banks in the Euro-zone should be the currency bloc's top priority. The economic data from the EU today was bleak. Another 173,000 people joined the ranks of the jobless in October, and German retail sales and French consumer spending dropped more than expected.

And the Greek deal is looking like it might not hold together, as banks and pension funds balk at fresh losses, raising fears that the package could unravel before a deadline in mid-December.The International Monetary Fund said it would not disburse funds under its part of the EU-IMF package unless the euro-zone delivers on a bond "buy-back" scheme, which is supposed to cut Greece’s burden by 10% of GDP. The dispute comes as Moody’s said the EU-IMF deal to unlock $56 billion in bail-out payments to Athens merely papers over cracks and does little to alleviate Greece’s "extreme economic and social fragility". Moody's says: "We believe that the country’s debt burden remains unsustainable."

Leaked documents have already cast serious doubts on that Greece can reach its debt reduction target, much to the irritation of the IMF, which fears that its own credibility is being damaged by the continued fudge over figures that appear to be extracted out of thin air and have repeatedly proved wide of the mark over the past two years.

There is mounting irritation among the Asian and Latin American members of the IMF Board - as well as the US - at the failure of the Europeans to deploy their full wealth to clean up an internal EMU problem. It is a long way away from the permanent fix that the IMF had been insisting upon. It is just one more big kick of the can down the road. And so, Draghi is calling for a banking union to leave behind the fairy world.

Sometimes this economic stuff makes sense, sometimes it doesn't.

The Chinese government would like to develop Shanghai into a major gold trading center; to that end, beginning Monday, they will allow over-the-counter gold trading between banks for the first time. The introduction of interbank trading is intended to develop China into a liquid market such as London, and demonstrates the government’s readiness to open the market to greater participation by international banks. Chinese banks already play a significant role in determining international gold prices, so the move will have a limited impact on prices.

China offers a massive gold market, albeit one that is tightly controlled. The country is the world’s biggest gold producer and ranked as the No. 2 gold consumer in the third quarter of this year. It has official gold reserves of 1,054 metric tons, the world’s sixth-largest. But gold exports are banned and only a handful of banks hold import licenses.

Until now, member banks have been able to trade physical gold between themselves on the Shanghai Gold Exchange, but the absence of an over-the-counter market restricted them from becoming market makers in gold. In an over-the-counter market, transactions are quoted and conducted between parties on a principal-to-principal basis rather than being traded through a broker on an exchange.

So, you're looking around for a nice place to invest these days. Where do you go? Subprime mortgage indexes have rebounded substantially – one is up 39% already this year. Goldman Sachs is telling its clients to invest in some of the ABX subprime mortgage indexes that it helped create back before the crisis. What could go wrong? Wait a minute, you say, aren't those the same subprime garbage Goldman Sachs bet against? Well, yes, but they paid a $550 million dollar fine for selling toxic collateral debt obligations and then betting against their own clients; and $550 million is a big fine, it's a couple of days work for Goldman. I know what you're thinking; these guys are still the same Muppet milking masters of the universe they used to be; they would sell their own grandmother to Somali pirates if they held credit default swaps on her. And its not like they had to admit wrongdoing, so they can just go back to the same old, same old. Everything is cool now.