Wednesday, December 11, 2013 - Let's Make A Deal

Let's Make A Deal

by Sinclair Noe

DOW – 129 = 15,843
SPX – 20 = 1782
NAS -56 = 4003
10 YR YLD + .05 = 2.84%
OIL -1.09 = 97.42
GOLD – 9.70 = 1253.30
SILV - .13 = 20.40

We have a deal. Bipartisan budget negotiators, led by senator Patty Murray for the Democrats and House Republican Paul Ryan, announced last night that they have reached a deal to settle the federal budget for two years, and avert a possible government shutdown. We have a deal; it's just not a done deal. There is pressure from both the left and right, as Democrats sought to negotiate a further deal on unemployment benefits and Republicans fended off attacks from conservative pressure groups.

House Speaker John Boehner lashed out at right wing groups such as the Heritage Foundation, claiming they were criticizing the compromise deal before they even knew what was in it. Meanwhile, some Democrats lashed out at the $1 trillion deal because it did not include an extension of long term unemployment benefits for some 2.1 million out of work workers.

Republican leaders will likely have to rely on House Minority leader Nancy Pelosi to deliver sufficient Democratic votes to counter any rebellion among their Tea Party wing, which gives the minority leader a rare moment of leverage. So far, Republicans have not ruled out allowing a separate vote to extend long-term unemployment benefits, but signal they too want more concessions from Democrats first. There is also opposition from Republicans in the Senate, who are less able to block the budget's passage, but are under pressure from a renewed wave of primary challenges by Tea Party candidates in the 2014 midterms.

The framework includes $85 billion in spending cuts and non-tax revenue from new fees to replace the mandatory budget cuts and supply a modest amount of deficit reduction. As drafted, the bill would reverse $63 billion in across-the-board spending cuts scheduled to take effect in the current budget year and the next one, easing a crunch on programs as diverse as environmental protection and the Pentagon.

It would offset the higher spending with $85 billion in savings over a decade from higher fees and relatively modest curtailments on government benefit programs.

Nearly a third of the total savings would come nearly a decade from now, in 2022 and 2023, partly from extending a current 2 percent cut in payments to Medicare providers. Also, future federal workers would pay more toward their own retirement, fees would rise on air travelers and corporations would pay more to the government agency that guarantees their pension programs.

With the increased spending to begin immediately and much of the savings delayed, Congressional Budget Office estimates showed the deal would push deficits higher than currently projected in the current year and each of the next two. The CBO said red ink would rise by about $23 billion in this 2014 fiscal year, $18 billion in the next year and about $4 billion in the one after that.

Though congressional negotiators may have reached an agreement over the federal budget, they may not have may not have figured out how they will get it passed. Still, the fallout from the government shutdown in October wasn't difficult to understand. Americans are sick and tired of the dysfunction in Washington, and another shutdown, or even the threat of another shutdown is unacceptable. There could be a vote on the deal as early as tomorrow.

On Wall Street, good news is bad news. The idea that Washington might actually be able to pass a budget raised the expectations that the Federal Reserve might be able to scale back it's quantitative easing stimulus plan. Indeed, the big question is not whether the Fed will taper, but when. The FOMC meets next week, and the Fed policymakers will likely debate how best to communicate their plan. It's still unlikely they will actually start tapering now; that would be a little shocking, but they might indicate they are going to do it in the near future, with the caveat that taper proceeds absent some exogenous catastrophe. So, expect some clarification on the thresholds for taper and interest rates.

Across the globe, central banks have resorted to forward guidance on interest rates in the wake of the financial crisis to convince markets they are serious about supporting recovery in the world's top economies for a long time to come. So, even as the Fed is likely to offer a more solid opinion on taper, they will likely offer a more precise outlook for maintaining Zero Interest Rate Policy. In a Reuters poll conducted this week, 32 economists said they expect the central bank to wait until March, while 22 looked for a move in January. Only 12 expected a move next week.

The "better than expected" figures in the latest employment data were far below the level of job creation needed to put unemployed Americans back to work on any kind of reasonable schedule. It was even below the average monthly job creation during most of the 1990s. The jobs picture is still far worse than many people would have you believe. The current unemployment rate doesn't include the workers who have become discouraged and left the workforce, and workforce participation rates remain at historic lows. The jobs numbers don't include the underemployed who are working part-time and prefer to work full-time. The ratio of job seekers to available jobs remains discouragingly high. There are no jobs for nearly two out of every three job seekers, no matter how hard they look.

The employment picture for the long-term jobless remains dismal. And many of those people were left out in the cold under the budget deal announced last night. They will fall off the roles, and basically become invisible for economic data purposes. Of course, they aren't really invisible; they're still there. But maybe there isn't anything the Fed policymakers can do to achieve maximum employment. Maybe a taper is an admission, a clear and honest communication that Fed policy is impotent in its dual mandate, and maybe the time has come to amend the Fed's tools so that all that money they've been dropping out of helicopters falls somewhere else besides Wall Street, maybe they can toss a little bit over Main Street.

Jamie Dimon, the CEO of JPMorgan was speaking at an investor conference in New York today. Dimon said he was thankful congressional leaders had reached a budget deal and was "less worried" about the impact of an eventual scaling back of the Federal Reserve's market-friendly stimulus measures. Dimon said the budget agreement was good for business confidence and that he would send thank you cards to congressional leaders. That makes me a bit more nervous about the deal.

Dimon said business demand for loans should rise to more normal levels as confidence rises, and demand for investment banking services in 2014 would be stronger than many people expect; and higher interest rates that would come with a Fed tapering would be good for the bank. He also said public attention to investigations of the bank by regulators and law enforcers was "really, really painful." Ahhh, maybe he should stop breaking the law, and then he wouldn't have all that painful attention.

Time magazine named Pope Francis its Person of the Year, crediting him with shifting the message of the Catholic Church while capturing the imagination of millions of people who had become disillusioned with the Vatican. This is the third time the magazine has chosen a pope as its Person of the Year. Time gave that honor to Pope John Paul II in 1994 and to Pope John XXIII in 1963.

Pope Francis, who, as archbishop of Buenos Aires was known as the slum cardinal for his visits to the poor and penchant for subway travel - beat former U.S. National Security Agency contractor Edward Snowden and gay rights activist Edith Windsor for the award.

The new pope's style is characterized by frugality. He shunned the spacious papal apartment in the Vatican's Apostolic Palace to live in a small suite in a Vatican guest house, and he prefers a Ford Focus to the traditional pope's Mercedes. In September, Francis gave a groundbreaking and frank interview, in which he said the Vatican must shake off an obsession with teachings on abortion, contraception and homosexuality, and become more merciful. And in July, Francis told reporters he was not in a position to judge homosexuals who are of good will and in search of God, marking a break from his predecessor, Benedict, who said homosexuality was an intrinsic disorder.

And a couple of weeks ago he published his apostolic exhortation, The Joy of the Gospel, which has gained attention for what some are calling an attack on capitalism, but is more precisely an attack on unbridled financial speculation and runaway greed. Which may actually be an attack on capitalism, but he did it without using the actual word “capitalism”.

Rather he made an impassioned plea for society and government to protect the vulnerable from the predations of the greedy, to include everyone in this prosperity, not by taking from the rich to give to the poor but by making sure they have a role to play. His call to reject the “idolatry of money and the dictatorship of an impersonal economy lacking a truly human purpose” are lessons we've heard for a couple of thousand years, and that ancient economic wisdom is as valid today as it was 2014 years ago.