NEW$ & VIEW$ (24 DECEMBER 2012)

Gift with a bow  MERRY CHRISTMAS  Gift with a bow

Obama Seeks Bare-Bones Budget to Avoid Cliff

Mr. Obama told reporters he was seeking quick action on a compromise bill that would extend current tax rates for middle income taxpayers and extend an expiring program of unemployment benefits.

But he acknowledged that time likely wouldn’t allow agreement before year’s end on a broader deal to avoid the fiscal cliff that Mr. Obama and House Speaker John Boehner had been working on until those talks collapsed earlier this week. (…)

The move apparently postpones until next year the broad effort to set up a process to overhaul the tax code and to rein in spending for Medicare and other entitlement programs, in favor of focusing only on the most immediate fiscal deadlines at year’s end. That narrower focus marks a setback for the president’s ambitions, and it remains unclear if it would garner Republican support.

Greg Valliere, chief political strategist for the Potomac Research Group, wrote to his clients (via Barron’s):

“This is the most incompetent, gridlocked Congress in our lifetime—and to complicate matters we have a president who doesn’t negotiate well and is not personally popular in either party. This could be a very long slog.”

The WSJ’s Stephen Moore tells us what went wrong with Boehner’s Plan B last week (my emphasis):

What went wrong? Two things. First, enough conservatives decided that to vote for a plan that would have prevented taxes from rising for 99 percent of Americans would be a tax increase on the other one percent. Groups like Heritage Action and others said Plan B was a vote for a tax hike and they urged a “no” vote. This was a debatable proposition, but it hurt Mr. Boehner with conservatives.

There was wide disagreement among strategists on whether Plan B was technically a tax hike. Conservatives from Grover Norquist to Larry Kudlow to Arthur Laffer and others had endorsed the Boehner plan. Rep. Tom McClintock of California, a staunch conservative, argued that “if 50 people are drowning and you save 49 of them, you aren’t responsible for the one who does drown.” But there was a critical mass of Republicans who said they would never vote for a tax increase, period. Rep. Jim Jordan of Ohio, the head of the Republican Study Committee, came out against the plan, and that carried weight with undecideds.

The second problem for Mr. Boehner is that he lost the trust of many in the GOP caucus with his purge of conservatives from key committees several weeks ago.

Boehner made concessions, acceptable to many hardliners, that neither his party nor Obama cared about. Everybody is now trashing on the Speaker but nobody is offering any way out of the mess. In fact, everybody is now painted into his own corner.

Ronald Reagan could not have been more right:

Government is not the solution to our problem. Government is the

Meanwhile, in the real world…

Cliff Would Strike Low Incomes Hard

(…) in terms of percentage of tax increases, low- and moderate-income taxpayers will face the biggest burden—an often overlooked part of the budget debate that’s now getting attention as the year-end deadline nears.

Households earning $10,000 to $20,000 would see a large increase in their overall federal tax burdens, from an average of $68 to $605. The blow would be especially harsh for married couples and households with children. (…)

A household that makes between $10,000 and $20,000 in income and has a child would get a $2,761 payment from the Internal Revenue Service under current rules, thanks to various tax breaks and credits. After the cliff, that would be cut by $1,324, or about half.

Married couples earning $20,000 to $30,000 today would get an average $15 payment from the IRS under current rules. In January, they would owe an average $1,408 to the IRS, because several of those breaks would be narrowed or eliminated. (…)

But, don’t you worry:

With little more than a week to find a solution, Democrats and Republicans are focusing on the real-world impacts of the fiscal cliff and seeking to shift blame for it. Confused smile

Crying face  Number of the Week: Without Unemployment Extension, Millions to Lose Benefits The expiration of nearly all federal emergency unemployment programs, which now provide benefits to 2.1 million job seekers, appears imminent.

Unlike past deadlines, this one is a hard stop — benefits won’t roll off gradually but rather will expire all at once overnight. That has economic implications that go beyond the impact on the recipients themselves. The average EUC beneficiary receives about $284 a week, making the program the equivalent of a $2.4 billion monthly stimulus.Credit Suisse estimates that allowing the program to expire would be enough to shave two tenths of a percentage point off GDP growth next year.


Aside from the dismal political scene, last week saw many positive economic news.

While GDP was higher sharply higher in Q3 – the boost came from areas that suggest the real economy remains weak.  This was further shown by only a modest increase in real final sales.    

He shows how government spending contributed positively in Q3…


…something we all know will not last (chart from Gluskin Sheff).

Here’s an Economic Policy Institute chart revealing the negative impact governments have had on employment:

If it were not of governments (and politicians), we’d be in good shape:

Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to +0.10 in November from –0.64 in October. Two of the four broad categories of indicators that make up the index increased from October, but only the production and income category made a positive contribution to the index in November. The index’s three-month moving average, CFNAI-MA3, increased from –0.59 in October to –0.20 in November—its ninth consecutive reading below zero.

Production-related indicators contributed +0.41 to the CFNAI in November, up from –0.54 in October. This increase largely reflects the recovery of industrial production from the effects of Hurricane Sandy.

Doug Short writes:

The next chart highlights the -0.70 level and the value of the CFNAI-MA3 at the start of the seven recession that during the timeframe of this indicator. The 1973-75 event was an outlier because of the rapid rise of inflation following the 1973 Oil Embargo. As for the other six, we see that all but one started when the CFNAI-MA3 was above the -0.70 level.

Click to View

Personal income grew 0.6% last month following an unrevised 0.1% October uptick. The gain was the strongest since February and lifted the y/y increase to an improved 4.1%. A strong 0.6% rise (3.7% y/y) in wage & salary income provided lift to income last month. Disposable income rose a similar 0.6% (4.0% y/y) and adjusted for the decline in prices, take home pay rose 0.8% (2.5% y/y).

Improved earnings were all it took to power the dollar value of personal consumption expenditures. An expected 0.4% (3.5% y/y) rise followed a revised 0.1% October slip, initially reported as -0.2%. Adjusted for lower prices, spending jumped 0.6% (2.1% y/y), the largest monthly gain since August 2009. Strength in new vehicles purchases, up 5.6% (10.7% y/y), as well as a 0.9% increase (3.9% y/y) in furniture & durable household equipment powered the overall rise.

As growth in income outpaced the rise in spending, the personal savings rate rose to 3.6% from 3.4% in October. For the last year, the rate moved roughly sideways.

Doug Short adds:

Adjusted for inflation, per-capita disposable incomes have been struggling for the past two years and are currently at about the level first achieved in November of 2007. Most of 2011 saw a slow decline in incomes, a trend that began reversing in November of last year. Modest income growth continued for eight consecutive months. However, the trend reversed in August, and incomes slumped for three months. But the November data has shown a surprisingly strong reversal to the upside.

Click to View

But there’s more than income, there’s deleveraging:

U.S. households spent 10.6% of their after-tax income on debt payments in the third quarter of the year, the lowest level since 1983, according to recently released Federal Reserve data. Add in other required payments that aren’t classified as debt—such as rent and auto leases—and the figure rises to 15.7%, also near a 30-year low.


The release of the “Philly Fed” survey came in much stronger than expectations rising from a -10.7 in November to 8.1 in December.  Most all of the internals for both current and future activity were higher as the region came back online post-hurricane Sandy as was expected.

The chart above shows the survey as reported and smoothed with a 6-month average.  While the report was stronger for the current month the trend of the overall data has been decidedly weaker.  We have similar surges in the data before, as seen in the recent report, which fade in the months ahead.  

Pointing up  Last, but not least: Durable goods orders jump

Durable goods orders excluding transportation were up 1.6% (0.4% y/y), a third consecutive steady increase that followed 1.9% in October and 1.7% in September. Several industries had good gains in November. Primary metals were up 2.4% for a second consecutive month, and fabricated metal products firmed to a 1.9% increase from 0.7% in October. Orders for nonelectrical machinery rose 3.3% following October’s 3.4% rise, and electrical equipment and appliances followed their 5.6% October rise with another 1.8% in November. Other sectors were less vigorous, as computer and electronic products barely moved, just +0.1% after 2.2% in October, and all other durable goods industries reported a second successive erosion of 0.1%. Nondefense capital goods orders fell 2.8% in November, but this represented the combination of the fall in nondefense aircraft and a nice rise of 2.7% in all other nondefense capital goods orders.

The important number is on the fifth line of this Haver Analytics table: non-def capex ex aircraft +5.9% in the last 2 months!


RBC Capital had flagged this turnaround in capex with this December 14 chart…


…which now looks like this with last week’s numbers (chart from Business Insider):


RBC Capital reminds us that we have had 15 months of synchronized easing in  the world:

image54% of the world‟s Non-manufacturing PMI data is showing improvement, 61% of the world‟s Manufacturing PMI data has risen and the OECD‟s aggregate leading economic index, which typically turns
ahead of global GDP growth by ~6 months, is up smartly over the past half year.

These positive economic inflections are most likely linked to the synchronized and powerful monetary easing program that has been in place for the past 14 months. Typically, economic growth accelerates anytime from 12-18 months after the beginning of a rate cutting campaign and we are now smack-dab in the middle of that historic window.

Goldman’s Jan Hatzius sums up everybody’s frustrations:

The key challenge for economic forecasters in 2013 is to weigh the relative importance of the positive impulse from the improvement in the private sector versus the increasing drag from the dysfunction and fiscal retrenchment in the public sector. Never has this been clearer than in the past week.

Following Speaker Boehner’s failure to corral enough Republican votes for his “Plan B” on Thursday, the risk of greater fiscal restraint and greater policy uncertainty has increased. This could involve a temporary move “over the cliff” or a stop-gap measure that extends lower- and middle-income tax cuts and potentially unemployment benefits, but fails to defuse both the automatic federal spending cuts and the debt ceiling.

Punch  The Fed can help, up to a point:

Push for Cheaper Credit Hits Wall The Fed’s intensified campaign to push mortgage rates lower has hit a wall, in part because a shift in the lending landscape has made some banks unable, or unwilling, to pass along cheaper credit.

(…) While current rates are the lowest in generations, some economists argue that they should be even lower—perhaps 2.8% based on the historical relationship between mortgage rates and yields on mortgage-backed securities. The economists posit that banks are keeping the rates artificially high, boosting profits and depriving the economy of the full benefit of the Federal Reserve’s efforts.

No bank-by-bank survey on the matter has been conducted. But some lenders say they are simply making a fair rate of return on a business that has much higher fixed costs than it used to. “We have a different cost structure now,” said Stewart Larsen, who runs the mortgage banking division of Bank of the West.

Lenders profit on the gap, or spread, between their cost of obtaining money and the rate they charge when lending it out. Before the financial crisis, this spread averaged around 0.5 percentage point and widened to about 1 percentage point in the years after 2008. In October, after the Fed embarked on a new round of mortgage bond purchases, the spread leapt to 1.6 points and currently is hovering around 1.3 points.

There are numerous, and complex, reasons for the difference. More volume, for example, is moving through an industry that has shrunk significantly. At the same time, banks today are scrutinizing property appraisals and loan files more closely—requiring reams of documentation of borrowers’ assets, to guard against the cost that they will be forced to buy back any defaulted mortgages from Fannie and Freddie. That means fewer underwriters are spending more time on every loan. (…)

Lightning  Dutch Housing Slump Continues

Prices of existing homes fell by an annual 6.8% in November, national statistics agency CBS said on Friday. (…) Since the peak of 2008, house prices in the Netherlands have tumbled more than 16%, according to CBS.

The country’s jobless rate rose to 7% in November, hitting a 10-year high, and consumer sentiment is again nearing a historic low, CBS said on Thursday.


Recent stats from China were decidedly on the upside. Most November data were positive and December’s flash indicators (HSBC and MNI) were both strong. CEBM Research’s own Industrial Expectations Index has risen for three consecutive months, supporting the positive trends in the official NBS PMI and the flash indicators.


ISI’s China survey has also hooked up during the past 3 weeks.

No political clouds there and a P/E of 11 times trailing earnings.



Taiwan Industrial-Output Growth Accelerates to a Nine-Month High

Production climbed 5.85 percent from a year earlier, compared with a revised 4.84 percent in October, the Ministry of Economic Affairs said in Taipei today.

Export orders increased at the second-highest pace in 2012 in November, and the government predicts gross domestic product growth of more than 3 percent next year.

Money  Pressure Grows on Asian Central Banks  Demands on Asian central banks to be more aggressive are heating up in the face of the global economic downturn and amid political leadership changes, raising questions about the banks’ ability to remain independent.

Malaysia and the Philippines are due to go the polls in the first half of next year, Australia by the end of 2013 and India and Indonesia in 2014.

Global Currency Tensions Rise  Japan’s Abe said the country must defend itself against attempts by other governments to devalue their currencies by ensuring the yen weakens as well.

[image]Mr. Abe on Sunday called on Japan’s central bank to resist what he described as moves by the U.S. and Europe to cheapen their currencies and noted that a yen level of around ¥90 to the dollar—it was at ¥84.38 in early Asian trading Monday, down from ¥84.26 late Friday—would support the profit of Japanese exporters. (…)

Mr. King, in an interview this month, said, “I do think 2013 could be a challenging year in which we will, in fact, see a number of countries trying to push down their exchange rates. That does lead to concerns.”

Japan’s Abe issues ultimatum to BoJ  Bring in 2% inflation goal or we will, says PM-to-be



Annoyed  Americans Miss $200 Billion Abandoning Stocks

Americans have missed out on almost $200 billion of stock gains as they drained money from the market in the past four years, haunted by the financial crisis.

Assets in equity mutual, exchange-traded and closed-end funds increased about 85 percent to $5.6 trillion since the bull market began in March 2009, trailing the Standard & Poor’s 500 Index’s 94 percent advance, according to data compiled by Bloomberg and Morningstar Inc.

The big financial repression:

With ten-year US Treasury notes yielding 1.6% and inflation running at 2.2%, note holders are guaranteed a loss of at least six-tenths of a percent – and that’s before taxes. Add in Uncle Sam’s take, and 10-year T-note holders are taking “real” hits of up to 35% in purchasing power for any
bond held outside tax-deferred plans. This means portfolios laden with supposedly “safe” 10-year Treasury debt risk are going bankrupt gradually.

Meanwhile, the world’s central banks are doing all they can to make sure inflation rises well above today’s 2.2% rate. Led by the Fed, they have flooded the global financial system with US$11 trillion in new money since 2007 and show no signs of slowing down. They will either get the inflation they desire or bankrupt the global financial system trying. In mid-December, Ben Bernanke and Company announced plans to buy US$45 billion in long-term US Treasury debt per month with money virtually created out of thin air, bloating the Fed’s already unwieldy balance sheet to monstrous proportions.


One thought on “NEW$ & VIEW$ (24 DECEMBER 2012)

  1. Ronnie implanted one of the most destructive memes ever in the American mind, that government is the problem. we will always have government. the solution is government that works. read Stockman, or Bruce Bartlett. shame on you for propagating that simplistic and destructive notion. what we need is government that works! starve the beast was then, this is now. but the nostalgia for a pseudo solution that was really a cover for irresposible credit creation is touching.


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