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Old 01-01-2013, 10:39 AM   #1 (permalink)
 
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The Ultimate "Fiscal Cliff" Playbook


*Simit may wish to make this thread sticky since the fiscal cliff is a topic of great contention and the forum currently doesn't have a consolidated place for said topic.

This will be the space where I, and whoever else wishes to post directly related topics to the fiscal cliff, will post my personal updates and analyses as well as share content from third parties.

So we start of 2013 with a whimper behind close doors at the Capitol where lights burned late into dawn after the ball dropped in Times Square.


12/30/12 - 1/1/13:
Quote:
12/31 - Your Cliff-hanger & Cliff-plunger update on the Fiscal Cliff and political Snafu on Washington:

*Pardon any spelling/grammar errors as this was typed on a phone.

Happy 2013! You have woken up to an America that ha officially fallen off the proverbial once-in-a-lifetime precipice of tax increases and spending cuts. Make no mistake about it because like the roadrunner in the Acme cartoons we used to watch when we were kids, there is definitely some comical elements in the fiscal cliff; a lot of which have stemmed from within Congress itself and some more from press commentators. Some of you like me have been utterly irritated by the constant buzz around our ears by the Congressional negotiations and informal haggling by American politicians, journalists not withstanding.

The good news is that we have indeed gotten some respite from the relentless pontifications in the Capitol: The Senate today (approximately 0230 EST, 1/1/12) passed legislation with a 89-8 vote. The House will now be presented with the bill and would have to decide whether it wants to pass it (more on this later). This overnight development behind closed doors will certainty lead to a cleaner view of things per se, because we don't have to constantly guess what the next deal would be. So one hopes that this magical dew condensed during the wee hours of the New Year's morning will lead to a retroactive legislation remedying America's fiscal problems. I can assure you that things will not workout as the politicians would like to envisage, as it always has been.

As a result of the complications that have arisen from an initially straightforward issue of reducing budget deficits to what is now a multi-dimensional hydra posing a bevy of threats to the economy and financial markets, I think it would be timely to construct a simple micro-timeline (as updates to previously) of events that have happened and analysis of what is to come, plus the possible ramifications via the (broken) financial markets. Timings are approximate.


1800 EST, 12/30/12, Sunday: Senate Majority Leader Harry Reid announced that there had been no deal achieved on Sunday and discussions will resume the next morning at 1100 EST. Vice President Joe Biden continued trading paper with Senate Minority Leader Mitch McConnell through the night. Senator Reid passed negotiating responsibilities to Vice President Biden earlier that day after he failed to come up with counter offers on major issues. Sources reported that Biden and McConnell made some progress regarding the end-of-year tax deal, rekindling hopes that legislation would be passed by the Senate before midnight on New Year's Eve.


1100 EST, 12/31/12, Monday: Democrats and Republicans hold their respective caucuses to finalize terms and conditions of the fiscal deal. The WSJ reported that the Pentagon has prepared to place up to 800,000 Public Service civilian employees on several weeks of unpaid leave if a deal wasn't reached before midnight. It also reported that other similar agencies would follow suit. This comes after Congress passed a bill stipulating $110bn in annual cuts to federal discretionary spending (which encumbered defense spending)be carried out for 9 years (2011 to 2020). This is part of the so called Sequestration which Congress hasn't yet tackled; leaders have only been dealing with the tax side of the fiscal cliff.


1330 EST, 12/31/12, Monday: President Obama commences making his statement on the budget negotiations and was quoted to drum up optimism that a deal would eventually be struck because Congress was determined: “One thing we can count on with respect to this Congress is that if there's even one second left before you have to do what you're supposed to do (giggles heard), they will use that last second...” But didn't Congress had the virtue of time 2 months ago when the severity of the fiscal cliff started to become prescient? Also, a large majority of the Congressmen went on vacations just a week ago when the deadline was looming. So one beckons the question of who is to blame.

More from the President: “Today it appears that an agreement to prevent this New Year's tax hike is within sight, but it is not done... There are still issues left to resolve, but we're hopeful that Congress can get it done.”

Obama had to take a dab at self-publicity: “Keep in mind that just last month Republicans in Congress said they would never agree to raise tax rates on the wealthiest Americans. Obviously, the agreement that's currently being discussed would raise those rates and raise them permanently (applause heard).”

And his take on a politician's responsibility and his disappointment with Congress: “My preference would have been to solve all these problems in the context of a larger agreement, a bigger deal, a grand bargain. But with this Congress, that was obviously a little too much to hope for at this time.” It seems Congress has become a rusty engine; it has never been harder to agree on a single point, and political polarization is at record highs. For instance, it is the constitutional responsibility of the House to draft legislation concerning fiscal matters but when it failed to garner an internal general consensus, the Senate was left to undertake this responsibility while the House will become the fulcrum point in determining if the bill will become law. Another sign that the Government has become too big.


1445 EST, 12/31/12, Monday: President Obama issues a statement, denying that an agreement has been reached. This was promptly refuted by Senator McConnell, saying that the Senate was “very close to an agreement” on “all tax issues” and indicating that the Senate had the will to pass the tax relief portion of the bill and voting should commence shortly.


1710 EST, 12/31/12, Monday: After a few hours of eerie silence for the Senate, the newswires crackled to life, reporting that Democrats feared there was not enough support for the impending deal within the Senate and has requested for a meeting with Vice President and fellow Democrat Biden. It is not known if the meeting was actually held. What is known however is that several Democrats have recoiled rather grotesquely at Biden's compromise in which he “went too far to find common ground”, referring to the deviations he made versus President Obama's plan on taxes. A Democrat Aide was quoted as saying: “The caucus as a whole is not sold [because] we just don't have the votes for it.”


1800 EST, 12/31/12, Monday: The Senate announces that it will vote on the deal; vote results will be announced later.


2100 EST, 12/31/12, Monday: In what appears to be an unaccounted delay, a spokesperson for Senator Harry Reid said that the Senate will commence voting by 2230 EST with the White House affirming that a deal has been reached between Democrats and Republicans in the Senate.


0230 EST, 1/1/13, Tuesday: The Senate approves “fiscal cliff” legislation with a 89-8 vote. The dissenters consisted of 6 Republicans and 2 Democrats. This passage means that the bill will now travel down to the House where 435 voting members, consisting of 234 Reds and 201 Blues, will vote either on Tuesday or Wednesday. The Senate has reminded House members to be prepared for a vote in short notice earlier on Monday. Senator McConnell heaved a heavy sigh of relief but commented that “It shouldn't have taken this long to come to an agreement, and this shouldn't be the model for how we do things around here...” President Obama quipped, prompting House members to vote decisively: “While neither Democrats nor Republicans got everything they wanted, this agreement is the right thing to do for our country and the House should pass it without delay.”

The measure included the widely anticipated Bush-era tax cuts at a $400,000 threshold for individuals and $450,000 threshold for couples. Those outside these income brackets would be subjected to a 39.6% tax rate, the same level under President Bill Clinton, and up from the current 35%. Both thresholds were far above Obama's initial $250,000. Estate taxes would be raised from 35% to 40% on an unchanged $5mn threshold (said threshold will be adjusted for inflation annually). Capital gains and dividend tax rates will increase by some 33%, from 15% to 20%.

Spending cuts that amounted to $24bn for January and February will be deferred for the Pentagon and other domestic programs, giving Congress 2 more months to negotiate on a more comprehensive package that would also address the expenditure side of the fiscal equation (does this mean that the Pentagon won't have to temporarily layoff 800,000 of its civilian employees?). The permanent alternative minimum tax (AMT) will not be allowed to expand; the AMT affects around 28mn households and series to prevent tax evasion by the wealthy. Payroll taxes will be allows to rise by 2%; ending the payroll tax cuts previously enacted under Obama's fiscal stimulus. Long term unemployment insurance benefits will be extended for another year.

AP reported Obama to have said “if Republicans think that I will finish the job of deficit reduction through spending cuts alone — and you hear that sometimes coming from them... then they've got another thing coming. That's not how it's going to work at least as long as I'm president. I'm going to be president for the next four years...” Pretty atrocious for a person of his stature to say such a thing. Democrats will continue to be very hard willed regarding expenditures and it turns out that House Speaker John Boehner, a fellow hardcore Republican fanatic will not allow any bill to be passed if Democrats do not consent to major reductions in discretionary expenditures. There goes another long round of brinksmanship.


So a lot has been said but still, nothing has been materially altered because the bill hasn't passed the House. Pundits are speculating that the House will block this bill. Matters are very market from here because the more accommodating folks in the Senate and Obama himself are almost helpless in House matters. 435 voting members is sure harder to control than 100 members in the house. It isn't just Republicans who might oppose to the bill; Democrats themselves are highly likely to dissent because they have their self-interests at heart. These Congressmen aren't competing in the Presidential elections but they will be competing in the Primaries come 2014. State taxes are a very touch subject especially in the smaller states where the people generally hold a larger stake in the Statesman's political career than the party of the President himself. It doesn't seem like the odds are in the favor of this bill getting through the House and onto the street anytime soon.

As an anecdote, Jim Rogers said it best in a BBC Business interview yesterday. The well travelled market veteran based in Singapore told the interviewer that the fiscal cliff was a mere distraction in the scheme of larger things. I concur with him that as much as the politicians and press media would like people to believe that the fiscal cliff was a “tempest in a teapot” sort of event, the consequences of going over the cliff or an aversion would not mean a great deal in the long run.

InformedTrades founder Simit Patel also commented that he though the cliff would be “inconsequential”. People forget that in the long run, talking about decades, the real fundamental are the lynchpins of the economy and secular market trends because these things are not volatile when adjusted for long periods of time, through cyclical up and down turns. As I wrote previously, the $1.2trn impact of completely going over the cliff is spread out over a decade and it would only take about 14 months for the FED to conjure liquidity commensurate with that economic shortfall. $1.2trn also seems very insignificant to America's $16.4trn in outstanding federal debt.


Much more to follow in the next few days, weeks, and maybe even months. Meanwhile, enjoy your New Year's Day.

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Old 01-01-2013, 08:37 PM   #2 (permalink)
 
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Update as follows:

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1430 EST, 1/1/31, Tuesday:
After an overwhelming Senate majority vote on a bill to partially avert and extend America on its trajectory to fall over the fiscal cliff, House GOP have voiced deep antagonism over the bill which was presented to them hours after dawn broke on New Year's Day. House Democrats and the GOP have held their respective caucuses in the morning and early afternoon of Tuesday. A source reported that tensions were incredible high and somewhat distasteful in one of the GOP meetings held at 1300 EST in one of the basement rooms of the Capitol complex. Republicans were expected to meet again later in the afternoon to try come to an agreement. Jeopardizing the budget deal now would certainly spur public frustration and Congressional animosity, possibly even mooting the Senate's last minute resolve which came at the hard work of Biden and McConnell.

More specifically, Republican Spencer Baucus told newswires that the GOP generally agreed on the tax provisions of the bill but will likely write amendments into the bill and subsequently send it back to the Senate. Sources also confirmed that number 2 man House Majority Leader Eric Cantor, a Republican, opposed the bill in its “current form”. But to send an a bill back in an amended form to the Senate, the House, led by number 1 man Speaker John Boehner will need at least 217 votes. All this comes after Vice President Joe Biden and Senate Minority Leader Mitch McConnell engineered a bill over a marathon session of debates, negotiations and post-midnight meetings over Saturday, Sunday, and Monday. Speaker Boehner told Republicans in one of the afternoon meetings they could not afford to add “poison pills” to the legislation, referring to the spending cuts under the automatic Sequestration that has been postponed for another 2 months and $24bn. Obama has made it clear in a White House address yesterday that he will oppose any radical alterations to federal expenditures and that he would favor “smarter” ways to reduce the deficit. Politico reported that Boehner proposed spending cuts under Obama's budget to offset the $24bn delay to the Sequestration.

Financial blog ZeroHedge reported that Citi's Steven Englander pointed out thy there were 3 planetary scenarios over the House's decision on the Senate-passed bill, namely: A closed successful vote before 1800 EST in which the House passes the bill with no apparent disagreements; a protracted session of negotiations and impromptu meetings amongst Democrats and the GOP leading to a “A rancorous debate that extends into the night” where uncertainty will once again become prominent; or an outright rejection/passage with amendments, both which would put the Senate in spot between a rock (bipartisan impasse) and a hard place (market and public pressures, because America has after all technically gone over the cliff).

Senate sources said that Majority leader Harry Reid is reluctant in according any House-amended bill because the formalized deal was already on the margin and further changes were unlikely, if not politically impossible as of now. The purported reason for the GOP's antagonism towards the bill remains predicated on expenditures, something that Republicans have been harping on for a long while now. Republicans generally demand a Dollar of spending cuts for every Dollar of tax increases. So in this case, Republicans would likely demand about $500bn in spending cuts over 10 years, something that is deemed difficult but plausible. The CBO reported earlier today (around 1200 EST) that Obama's tax cuts would amount to an estimated $4trn budget deficit in the long run (although its projections have been largely farcical). Tuesday's early morning bill will bring $620bn in tax hike offsets while shaving off a mere $15bn in expenditures. Some Republicans have been irritated by this fact.


2000 EST, 1/1/14, Tuesday: Bloomberg reports that House Republicans have abandoned efforts to add spending cuts to the bill. Does this mean the bill will now garner more support from the GOP as previously thought? It is still not known as of now when the House will hold a vote; probabilities are that a vote will be held tomorrow as the Congressmen will not want to stay up late in Capitol Hill on New Year's Day.
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Old 01-02-2013, 05:24 AM   #3 (permalink)
 
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2300 EST, 1/1/13, Tuesday: Breaking and shocking news out of the House. In a late night vote, the House collectively passed the bill which the Senate passed 21 hours ago. 257 voted for the bill while 157 voted against; Democrats constituted the majority of the support (172 for vs. 16 against), while Republicans were much more antagonistic (85 for vs. 151 against). One can clearly see the favoritism Democrats have towards any tax hikes on the to the rich (now defined as those earning $400,000 and beyond). There was also some internal separation within the GOP itself: Majority Leader Eric Cantor, and Majority Whip Kevin McCarthy both opposed the bill while Speaker John Boehner, and Senator Paul Ryan (this was the man who debated fervently with Joe Biden during one of the Presidential Election debates) both voted for the bill.

The bill has now gone on to await Obama's signature signing it into law, which would be retroactive for a day. So it really is that close - one day, 23 hours to be precise. Turns out this 112th Congress did have a parachute and decided it was scared enough to pull the handle after free falling a few meters. Incredulous by all measures. We have to give it to them, now they have 2 more months to draft up a more comprehensive plan which will tackle the much more controversial expenditure programs of America.

President Obama mentioned that he will not have another debate with Congress on the Debt Ceiling which has already been violated in late December last year. It is widely agreed that the current bill that has been passed doesn't encompass the all important budgetary reforms including welfare entitlements which weigh heavily on America's burgeoning federal debt. These are currently considered the largest impediments preventing Congress from agreeing on a comprehensive deal to solve America's fiscal crisis. There is no easy way out.

The markets, especially equities have reacted bombastically (as at 0400 EST): ES futures up 2.41%!; 10s TSY +5bps; Gold +1.11%; Silver +1.54%; EurUsd +118pips; Brent/WTI +1.01%/0.95%. Massive risk on mode here, and we though this was already priced in? My friend was right, the markets are always risk hungry by default. We have to wait till Wall Street opens today to find out of this burst of ebullience will last. Are the bears (me included) who were hoping for a left-tailed market event wrong? It's hard to tell judging by how much gravity the fiscal cliff has accumulated.

Finally, a statement from Speaker John Boehner: “The federal government has a spending problem that has led to a $16 trillion national debt that threatens our country’s future. On the day after the election, I proposed that both parties work together to avert the fiscal cliff in a manner that would ensure 2013 is the year we finally enact entitlement reform and pro-growth tax reform to begin to solve our country’s debt problem. Now the focus turns to spending. The American people re-elected a Republican majority in the House, and we will use it in 2013 to hold the president accountable for the ‘balanced’ approach he promised, meaning significant spending cuts and reforms to the entitlement programs that are driving our country deeper and deeper into debt. Without meaningful reform of entitlements, real spending controls, and a fairer, cleaner tax code, our debt will continue to grow, and our economy will continue to stumble. Republicans stand for a stronger, more prosperous America, rich in opportunity and free of the debt that threatens our children’s future. On this New Year’s Day, we renew our commitment to that vision, humbled by the opportunity to serve.”
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Old 01-03-2013, 09:55 AM   #4 (permalink)
 
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Comments and analysis as follows:

*This comes a little late because I had an unexpectedly busy day and could not finish writing in time. So pardon the slight errors in the time lapses. As always, I beg your pardon on any spelling/grammar errors because this was typed on a phone.

Quote:
Not much has happened since both chambers passed the first of Obama's tax bill that has in short delayed the Sequestration for 60 days, allowed the Bush-era tax cuts for all individuals earning more than $400,000 per annum to lapse as per scheduled, and alters several other tax provisions. I haven't received news of Obama signing it into law yet but that is besides the question; give him some time, it will be signed in a few hours time. It's probably a good time to comment on the various not so good and some better platitudes that have since hit the newswires and global blogosphere.


First up, a technical review of the totally ebullient markets yesterday where the only thing that participants were fixate on was the partial aversion of the cliff. It was a broad risk on day. The S&P 500 was up a whopping 2.54%, the higher beta NASDAQ 100 and the Russell 2000 indices were up 3.07% and 2.83% respectively. The risk appetite mode wasn't just contained within America; EuroStoxx 500 was up 2.86%, the DAX 30, CAC 40, FTSE 100 indices were all up by more than 2% while peripheral Europe was up even more; IBEX 45 and SPMIB 40 indices up 3.43% and 3.81% respectively! Risk positions will most likely roll over into Asian trading the next day. The Yen continued to play as a risk funding avenue, weakening to 87.26 (as of 1930 EST). The EurUsd, which has been a proxy for broad risk is the latter quarter of 2012 remained more apprehensive and did not completely buy into the “good news”; it was trading at 1.3187 (as of 1930 EST). Bonds generally bought into the rally but not to the extent which equities did: the 2s10s30s TSY curve steepened a little with yields up 1bp, 8bps, and 9bps respectively; 10s Bunds, Gilts, and OATs were 13bps, 16bps, 9bps higher in yields respectively; while peripheral sovereigns outperforming, 10s BTPs (-21bps to 4 .99%) and Bonos (-22bps to 4.26%)! Consider how much thaw sovereign debt have rallied ever since the second half of 2012, 10s GGBs alone are trading at 11.28% when it was trading in the ballpark of 19.5% 6 months ago!

But probably the most stunning of all was the gargantuan plunge in spot VIX which fell a whopping 18.53% to 14.86 vols, the largest percentage drop on record and a 35% fall in the last 2 days as financial blog ZeroHedge reported in its daily market recap. One cannot start to fathom how much pain VIX longs suffered in the last trading session as equity volatility compression takes its toll on synthetic protection buyers. The volatility term structure flattened dramatically as traders have been unloading front end synthetic protection since last Friday (the last full trading day of 2012) and spreading exposures further out the curve. It seems the markets were trading on very heightened vol-returns reflexivity yesterday. This again highlights how such an overnight development involving Washington politics and all the associated saber-rattling cum tooth shaking has on the market's third convexities, namely volatility and correlations. We saw one of the most correlated rallies in a few months where everything from stocks to bonds to HY to commodities rallied in sync and continued to do so post the European close. Spot implied volatility for the Euro and Gold also fell by 9.48% and 6.61% respectively.

I should perhaps reiterate the structural extremes in positioning in the Yen funded risk on rally that has really been one of the key incognito drivers of broad equity risk going into Christmas week after Shinzo Abe was reflected as PM. NzdJpy continues to be very heavily long by large speculators while Yen shorts against the Dollar stands at near extreme levels. My friend told be that although these imbalances exists, one needs to be careful in positioning for a Yen correction because the sheer momentum of Yen selling might continue to subjugate any technical misalignments. But just bear in mind this trade is getting rather overcrowded and a short squeeze can happen at any time, probably catalyzed by a less dovish than expected statement from the BoJ or Abe himself.


Moving on the the various platitudes, early on Wednesday morning, Michael Feroli from JP Morgan published an article which puts some quantitative perspective in Congress's newly passed Obama tax bill. He states that the 39.6% personal income tax on individuals earning above $400,000 ($450,000 for couples) per announce would yield about $624bn in revenues over a decade, or just about 3.8% of current FY12 GDP. Back of the envelop calculations show that the upper income tax hikes alone will be a 0.342% drag to GDP, assuming a constant annualized growth rate of 2%. Feroli's estimates come in at a 0.2% drag which does seems a little too optimistic. The Congressional Budget Office (CBO) reported on Tuesday that there would be a $9.975trn deficit over the next decade under its “alternative fiscal scenario” projections; this means another $9.975 in federal debt, assuming the treasury fully funds the annually deficits which would stand at $997.5bn according to the CBO numbers and using simple arithmetic, and stands at $1.311trn (averaged over 10 years) if compounded with an annualized 2% GDP growth rate accompanied with 3% drift rate (considering debt to GDP now stands at 103.4%, as reported by TreasuryDirect earlier today). This equates to an average 7.2% annual budget gap, higher than the 6% forecasted by Feroli. Take these figures with more than a few pinches of salt because as with all estimates, they will be inaccurate but do serve well when trying tk gain some semblance of relativity in a sea of numbers. These are also pretty big numbers being thrown around, and it might actually be a case of undermining the economic impact the tax hikes have on output.

Continuing with Feroli on his estimates, he posits that there would be a 1% drag on 2013 GDP, but notes that this figure will increase as and when Congress passes additional bills that reign in more of spending. His current projections are: $309bn (lapse of Bush tax cuts); $125bn (expiration of the 2% payroll tax holiday); $30bn (unemployment insurance benefits); and $111bn (spending cuts under Obama's budget control act), all totaling $575bn and will be distributed over 10 years. Very congenial as of now, we'll see if he revises his projections higher.


Citi's Steven Englander also published a most excellent memo that details the various “loose ends” which are not so apparent on the surface and will indeed have a smaller immediate impact vs. the actual fiscal cliff when we came into 2013. He notes that some of these not so coveted possibilities will have implications on the Dollar and hence iris worth taking note. He begins with politics as usual, saliently: Timothy Geithner's indication that he wanted to step down as Treasury Secretary in early 2013, after the initial face of the fiscal cliff was averted, might not come to pass until March end because the deals haven't been completely sealed and there still exists a lot of uncertainty. There isn't much debate about whether Geithner will extend his term; most agree that he will leave in 1Q13. So who will supersede the man's role as the all important Secretary of the conduit which funds a profligate government which has spent its way into oblivion the past 4 years? Does it really matter? Because when the most powerful man in the world, the man who runs the world's most potent printing press ad heads the Citadel of global central bankers, Ben S. Bernanke has hinted at even more QE if fiscal cliff talks turn ugly and chaotic, the markets can rest assure of a positive 2013. Can't they?

Englander then moves on to House Speaker Boehner (voted for the bill) who might face competition for his top spot in Congress's lower chamber by House Majority Leader Eric Cantor (voted against the bill) and Senator Paul Ryan (voted for the bill). Congress will congregate on Wednesday (1/3/13) to vote for tr two top members of the House and Senate; John Boehner and Harry Reid. Definitely something to keep an eye out for.

The memo noted that the postponement of the Sequestration for 2 months (expires on 3/1/13) costing America $24bn will be the next big thing besides the debt ceiling. The $1.2trn minimum magnitude of the fiscal cliff is well known (that is if final bill negates all of the Sequestration which is not likely, next to impossible). Under Obama's Budget Control Act, Congress needs to decide by 3/27/13 what it intends to do to compensate for the outlays used to extend the March dateline which is currently barring almost all of the expenditure reductions. Englander writes that the amount should be around $15bn to $20bn.

Regarding the debt ceiling which has not been addressed (Obama himself said he would not engage in debates regarding that gnarly subject, at least not now), I quote Englander:
Quote:
“From what Geithner and the Treasury have said in public pronouncements, the US will bump up against the debt ceiling at some point around March 1. If tax collections are high in Q1 then the debt ceiling breach could be avoided for another 2-4 weeks, but it appears unlikely that the debt ceiling could be pushed beyond the end of March. On March 30 Congress must pass a budget or otherwise extend spending authority. This deadline results from Congress not having passed a budget for the fiscal year that begins in October. Without spending authority, the Executive Branch would in theory be forced to shut down the government.”
One of the most critical aspects of the American economy and its finances is that of corporate taxes. Corporate taxes have long been the bane of entrepreneurship, startup enterprises and MNCs starting production lines in America. Never has the issue of corporate taxes in America been under the limelight, especially after the finger point and blaming between China and America; a topic about China being a currency manipulator although it has already taken steps towards liberalizing the Yuan, and American businesses outsourcing production and other auxiliary chain production and services to China where labor policies are extremely lax or non existent in the rural areas and where there are no effective minimum wage floors imposed. Real wage in America have been stable to rising over the past 2 years while it is the same in China. However, as already highlighted by others and myself previously, one cannot merely look at real wages when diagnosing on an economy's labor competitiveness. Although real wages in both counties have risen, the ultra poor in America have actually gone a little richer thanks to unemployment benefits, SNAP food stamps, and other welfare amenities funded by Uncle Sam; juxtapose this spectrum of laborers in China and one finds that they have in fact gotten poorer and competition within the primary production lines remain incredibly tight there. It is a misnomer to say that there is competition between America and China (other Eastern development economies for that matter); there is no competition because workers are skilled in different areas and work different jobs (service based vs. manufacturing based). Hence in the lightning these issues, corporate taxes in America will be an area of hot debate and contention.

More from Englander:
Quote:
“Although it doesn't necessarily come with a deadline, another loose end from lawmakers is corporate tax reform. Both Republicans and Democrats have said repeatedly over the past year that it is a priority. In his speech promoting the latest compromise, Obama talked about doing a 'grand bargain' in pieces and talked about wanting another revenue increase to offset any additional spending cuts. Presumably the revenue piece is corporate tax reform, although the corporate tax reform Republicans are talking about is a 'territorial' system with lower marginal tax rates. This issue is likely to bring a major clash, that could occur in February and March or could conceivably be delayed. It is arguably the most critical issue for the USD in the long run. Existing tax law incentivizes US-based multinationals to produce and book profits abroad. Alterations to the law, depending how they shake out, could lead to greater incentives to produce in the US and therefore a smaller trade deficit and/or a wall of repatriation like the one that occurred during the HIA amnesty period in 2005. If something remarkable happens on this issue then we would have to immediately re-examine a bearish USD view for 2013, but if there is no major reform, the likelihood of a 'structural' USD rally is low.”

As for America's credit rating, Moody's Investor Service released an announcement earlier today nothing that in the medium term, more needs to be done with respect to lowering debt/GDP metrics and trimming the budget deficits. Moody's along with Fitch have the US rates at top tier Aaa while have the sovereign on negative outlook because Congress has not passed meaningful legislation directly aimed at tackling its widening budget gaps for much of 2012. Now that the fiscal cliff has been partially averted, the rating agencies wishes to see Congress tackle budgetary issues which will ultimately lead to an increase in America's statutory debt limit set at $16.4trn; this was supported by the IMF, saying that the debt limit needed to be raised “expeditiously”. Moody's also noted what many have been saying: the bill congress passed did nothing to significantly reduce the deficits. It stated that the tax revenues forgone whilst extending the tax cuts (taxes capped at 35%) for the middle and lower income spectrums, marginal tax receives gained by allowing the Bush-era tax cuts to lapse for those earning more than $400,000 would have been offset. “The rating agency expects that further fiscal measures are likely to be taken in coming months that would result in lower future budget deficits, which are necessary if the negative outlook on the government's bond rating is to be returned to stable” Moody's said in its statement.

Pundits do not generally believe that the 3 rating agencies would downgrade America's credit rating on the basis that Congress finds a comprehensive resolution before the key deadlines.

More from one of my precious updates:
Quote:
“Fitch was the last of the trio to downgrade America's long term outlook after the Super Committee failed to reach an agreement on late 2011, after the debt ceiling was hiked. All 3 rating agencies view a stable budget where Congress adheres to strict deficit reduction plans as imperatives for a downgrade restraint.

All but Fitch will likely not downgrade America’s credit rating if the economy falls over the fiscal cliff, noting that failure to work around the series of tax hikes as spending cuts would exacerbate fiscal policy uncertainty; place America back into a recession; and lead to a deterioration of solvency measures (i.e. Debt/GDP).

S&P remains the most upbeat about America's future, indicating that even if the debt ceiling debate turned disruptive and chaotic, it would neither call for a review nor a downgrade. Moody’s will likely place America under review but a downgrade is unlikely. Fitch remains pessimistic about America’s obnoxious state of finances and will probably downgrade it if we see another 2011 debt ceiling debate saga end in tatters.”

There was some very intriguing news about the Capitol and White House congenital relationship. If markets reverted to their means over time, it now seems that politics too regress to their constitutional means. It also reminds us that as much as the fiscal cliff involves economics and other agendas, politics remains the dominant factor. Remember how Congress was inverted during the debates? In very short chronograph, it all started with informal talks between President Obama and House Speaker John Boehner. They were actually gradually inching closer with their conditions on the various tax reform proposals but then Boehner dropped a bombshell named “Plan B” and all hell broke loose. On the day Plan B was supposed to be votes on by House members, the vote was canceled because there wasn't enough support (even in a Republican dominated chamber). Boehner had previously scheduled private face-to-face talks with Obama. The House has a fiduciary role to draft and pass legislation involving fiscal/budgetary matters. However, Congress was inverted in that it was the Senate that first passed the bill before and then the House went on to approve it in another vote. It seems, from what was reported by The Hill earlier on Wednesday, House Speaker John Boehner is about to radically change his Modus Operandi, and for that matter the House's way of doing things. In short, he will not hold any private meetings with the president, and the House will approve bills before the Senate does.

From The Hill:
Quote:
“Speaker John Boehner (R-Ohio) is signaling that at least one thing will change about his leadership during the 113th Congress: he’s telling Republicans he is done with private, one-on-one negotiations with President Obama.

During both 2011 and 2012, the Speaker spent weeks shuttling between the Capitol and the White House for meetings with the president in the hopes of striking a grand bargain on the deficit.

Those efforts ended in failure, leaving Boehner feeling burned by Obama and, at times, isolated within his conference.

In closed-door meetings since leaving the “fiscal cliff” talks two weeks ago, lawmakers and aides say the Speaker has indicated he is abandoning that approach for good and will return fully to the normal legislative process in 2013 — seeking to pass bills through the House that can then be adopted, amended or reconciled by the Senate.

"He is recommitting himself and the House to what we've done, which is working through regular order and letting the House work its will," an aide to the Speaker told The Hill.”
What this simply means is that Congress will become less flexible, less accommodative, much more archaic, and politicians will have to work much harder of they want to sell their plans and agendas. And because the debt ceiling will soon be the topic of default both in Washington and amongst the press, this very act by Boehner will rear its ugly side. Republicans generally demand spending cuts if the democrats wish for quid pro quo in raising the debt ceiling, or even removing it altogether and with it any remanent elements of checks and balances.

Whilst still on Boehner, it is perhaps appropriate to raise one last issue: Boehner scrapped a vote on a $60bn Sandy relief bill. Republican Governor Chris Christie of New Jersey (an area hit very badly during the superstorm) lamented “I called the Speaker four times last night (Tuesday, 1/2/13) after 11:20 and he did not take my calls.” One of the obvious reasons why the vote was called off in Tuesday's Congress session is that $60bn in outlays almost equals the marginal tax revenues siphoned from the rich; meaning a year of new revenue would be gone. Less overt are what was called lots of “pork” adding by other Governors (“two Republicans senators from Alabama, Mississippi, and Texas, and the one Republican senator from Louisiana”) whom wanted outlays to other weather-affected areas besides Sandy in 2012. This made the bill seem much heavier than it would have been (most notably $5.3bn to the Army Corps of engineers). Following Christie's rant on public television, Boehner and House Majority leader Eric Cantor issued a joint statement saying that the Sandy relief bill would be first on the agenda list of the 113th Congress which will be sworn in later on Wednesday.

Question: Why all the jawboning, why all that fuss, why baffle the markets will all this hogwash, when the Government can secretly turn to the almighty FED which itself is monetizing $85bn per month in assets in its own virtues cycle of free money vendor financing via treasury paper? Its simple really, in this game of confidence, the one who looses the market's trust looses first. As Bill Gross so eloquently pointed out in his 2013 prologue investment letter, all the talk is about can kicking and no one will ever publicly admit that. However, because we unfortunately live in a world infested with sophomoric make believe, all this matters and we have to bother.
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Old 01-03-2013, 10:00 AM   #5 (permalink)
 
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0010 EST, 3/1/12, Wednesday: President Obama has signed the Congress-passed bill into law.

From Bloomberg: “President Barack Obama signed the legislation that enacts a last-minute budget deal and averts income tax increases for most U.S. workers, marking an end to a yearlong impasse. The legislation was sent to the White House today and a copy was transmitted to Obama in Hawaii, where he’s vacationing with his family. The president’s signature was put on the legislation by an autopen signing machine in Washington.”

Wow, I didn't know Obama was on another vacation, maybe he paused it then resumed after the cliff was averted.
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Old 01-03-2013, 10:59 AM   #6 (permalink)
 
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Jared, where the hell have you been, Man!? Good to see you're still in the game...
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Old 01-04-2013, 12:55 PM   #7 (permalink)
 
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1200 EST, 3/1/13, Thursday: Not so much concerning issues of the fiscal cliff cum debt ceiling but Treasury Secretary Timothy Geithner announced on Thursday that he was going to step down before the deadline to raise America's debt ceiling is reached. Bloomberg reported that he plan to make is official departure before January's end. President Obama has previously persuaded him to stay but he has turned down those offers. On finding the next person for the job, White House Chief of Staff, Jack Lew remains the top contender as people related to the matter told Bloomberg news on condition of anonymity.

More from Bloomberg: “Because Lew’s experience in financial markets is thin, Obama may seek to name a Wall Street executive as deputy Treasury secretary, the people said. While Lew, 57, worked as a managing director for Citigroup from July 2006 until the end of 2008, he’s spent most of his career in government. He has served as director of the Office of Management and Budget for both Obama and President Bill Clinton. Prior to that, he was an aide to the late Tip O’Neill, former speaker of the U.S. House.”

So whoever is appointed as Treasury Secretary makes no difference because their agendas are mostly similar; which is something along the lines of plundering the poor and enriching the rich and keeping the status quo while blaming everyone else but the United States itself its own malaise. Short and sweet isn't it? Hence the Chinese proverb that if black touches white it will be black, and if white touches black it will still be black. Hire a Wall Street executive and he will act to benefit his previous employer; hire a Government official and he will do nothing but be commanded by those with the money and influence, which is incidentally also Wall Street.


1600 EST, 3/1/13, Thursday: Following the abruptness of version 1 of the new so called “fiscal cliff bill” signed into law by President Obama earlier on Thursday, the 113th Congress was officially seated on Thursday afternoon with Republican House Speaker John Boehner retaining his position, but not without pandemonium within the GOP. Capitol Hill was a lexicon of emotions as House and Senate members from both parties engaged in couthie gestures, small talks, handshakes, hugs and even kisses (the 113th Congress boasts the most number of Women: 20). There was also an animated sense of bipartisanship. Photos and videos show that the place was packed with family members and relatives of the Congressmen accompanied them. There were a couple of newly elected politicians and a few of them were greenhorns. Senators took their Oath of Office individually while House members recited the Oath in unison.

John Boehner gave a speech before the swearing sessions which some described as touching: “If you have come here to see your name in lights or to pass off some political victory as accomplishment, you have come to the wrong place. The door is behind you. If you have come here humbled by the opportunity to serve; if you have come here to be the determined voice of the people; if you have come here to carry the standard of leadership demanded not just by our constituents but by the times, then you have come to the right place.”

Republican John Boehner retained his position as Speaker of the House but not with unanimity; he got “only” 220 votes. Not all members of the GOP support him; 12 Republicans, 9 of which voted for others and 3 of which failed to vote or voted “present”.

For those interested in who the defectors were, here is the list: Jim Bridenstine (R-Oklahoma) voted for Majority Leader Eric Cantor; Steve Pearce (R-New Mexico) voted for Cantor; Paul Broun (R-Ga.) voted for Allen West; Louie Gohmert (R-Texax) voted for Allen West; Justin Amash (R-Michigan) voted for Raul Labrador; Tim Huelskamp (R-Kansas) voted for Jim Jordan; Walter Jones (R-N.C.) voted for former comptroller general David Walker; Raul Labrador (R-Idaho) did not vote; Mick Mulvaney (R-S.C.) did not vote; Ted Yoho (R-Fla.) voted for Cantor; Tom Massie (R-Ky.) voted for Justin Amash; Steve Stockman (R-Texas) voted “present”.

However, Boehner also had some strong supporters; one of whom is Steve LaTourette, former GOP member who retired on Thursday. LaTourette chastised the 12 House Republicans who didn't support Boehner by saying on CNN television “it was either nine or 12 who just left the reservation and don’t vote for the speaker. That vote is a no-brainer. It’s all about whether or not your party is going to control the agenda. What, these chuckleheads think that having Nancy Pelosi speaker of the House is better for the Republican Party? I don’t think so. So they really have to come to terms why are they here? If they’re just here to vote no — we can train a monkey to vote no.”

Boehner's image is generally believe to have been tarnished by his conflicts with the President over the fiscal cliff negotiations. Political analysts say that he has been vicariously scapegoated by GOP members and that has hurt his image and therefore has already impeded at his future bargaining power. Boehner said 2 days ago that he was not going to stand on a limb and take initiatives that are beyond what is constitutionally ordered. Having been deplored by several Republicans for not making enough effort to convince GOP members to vote to amend the recently passed bill, he will in the future adopt a more reserved demeanor when dealing with bipartisan issues.


1110 EST, 4/1/13, Friday: The House has approved Republican Chris Christie's (Governor of New Jersey) Sandy Aid bill totaling $9.7bn an hour before noon on Friday in a 354-67 vote (opposition was all from the GOP). The aid package will disburse some $9bn to the current 115,000 pending claims (140,000 filed this far; many are partially fulfilled) for flood insurance coverage and is just one of the series of disbursements under the proposed $60bn bill which yesterday came under intense controversy after House Speaker Boehner ended the last House session of the 112th Congress without discussing about the bill, infuriating the New Jersey Republicans. The Senate is expected to pass the partial aid package later in the afternoon.

The Sandy Aid bill falls under a larger scheme known as the National Flood Insurance Program which is administrated by the Federal Emergency Management Agency (FEMA) founded in 1968 to provide federal funded flood insurance coverage to homes. FEMA will run dry in about a week if Congress doesn't approve additional authority to replenish its coffers.

The House will vote on the residual $51bn in aid funds on 1/15/13 with the Senate set to vote on the week after next. Local counties in the worst Sandy-hit areas, North Carolina, Maine, New Jersey, New York, and Connecticut are awaiting Federal funding for their respective recovery efforts. However, a handful of conservatives are unhappy about the plan to vote on the remaining $51bn tranche all at once; they advocate granting aid funds in installments to ensure the money is used wisely and not squandered away. Some conservative purists are even suggesting that the Government should not be involved in flood insurance, and that Sandy's timeliness within the direct path of the fiscal cliff has put Washington in a predicament. They have threatened to oppose the bill during voting unless the $60bn is offset by reductions in expenditures elsewhere, meaning the allocation may change but the aggregate mustn't.

Protagonists on the other hand have brought up the swift passage of aid packages post Hurricane Katrina in 2006; where a $50bn bill was passed in just about 10 days, while it has been almost 2 months since the inception of Sandy. They however have conveniently forgot that the period leading up to Katrina and 2006 for that matter was a period of prolific economic growth, a booming housing and subprime mortgage market, and when the proverbial wealth-effect was at its highest ratio. Compare that to today and one might opine we are in a slump whereas they were in District 9 then. More than $2bn has been spent on relief efforts this far, but it seems politicians are demanding more, much more.

The implications of this seemingly tribal matter may actually mutate into something larger and more profound. Like the privatization of the insurance industry to lift the burden of natural disaster insurance coverages off the Governments creeping back, and on to the very rich insurers such as AIG (which itself was saved only by a $200bn bailout).

Let the platitudes continue...
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