Last night , Prime Minister Noda decided to call for new elections in Japan and that automatically ends this session of the DIET. The elections will take place in a month and the present unpopularity of the DPJ means that the LDP is the favorite. It seems that Noda was willing to call elections on the promise that the new parliament would work toward some type of election reform. Hopefully some of the readers of NFU will help fill in the specifics about the issues of election reform. The YEN was sold off on the news of Parliament’s dissolution because the present strength of the YEN and its negative impact on Japanese manufacturing is certain to be an issue. The LDP’s leader, Shinzo Abe, has been very vocal about the BOJ/MOF doing more to raise inflation in the Japanese economy and to be more aggressive in efforts to weaken the YEN. While the YEN weakened, the NIKKEI index held its overnight gains even as the S&Ps, DOW and NASDAQ were knocked lower following President Obama’s press conference.
Even tonight, the Nikkei is moving higher which MAY be indicative of the markets believing that the Japanese authorities may get serious in their repeated efforts to weaken the Yen. The technicals have yet to assert any strong view but as always we need to be vigilant about any sea-change in the long-established correlation in the realm of RISK ON/RISK OFF. Today, the S&Ps closed down almost 1.5% while the YEN weakened by 1.5% and the EURO closed higher. One day doth not a trend make but the market action seems to alert us to a possible breakdown of the RORO algorithm.
***The U.S. stock markets had been a positive performer but fell dramatically after the Obama press conference. I actually thought the president was very reasoned and while I may have disagreed with some of his answers, I thought his views on the fiscal cliff and taxation were well-reasoned. The most measured response was on a question about global warning. The answer was sound and the president let it be known that any short-term solutions to climate change wouldn’t be pushed for if it impacted negatively on job growth. Jobs would be priority one and anything that put pressure on U.S. global competitiveness would not be enacted. Obama: “I think the American people right now have been so focused and will continue to be focused on our economy and jobs and growth that, you know, if the message is somehow we’re going to ignore jobs and growth simply to address climate change, I don’t think anybody’s going to go for that. I WON’T GO FOR THAT.” When searching for a healthy compromise it is important to find the nuggets of conciliation. President Obama knows he need to reach across the aisle because he is right. The Republican-controlled House can hold the “fiscal cliff” hostage.
If Boehner calculates that an economy in recession will weigh more upon the Democrats in 2014, he has added weight in trying to secure the strongest deal possible from a Republican perspective. The president and other Democrats may yell about the PUBLIC WILL, but America is a REPUBLIC–not a democracy–with well-defined separation of powers and a system of checks and balances. The President will push his agenda hard–as he should–and get the best deal for his supporters that he can. But Boehner’s job is to assure a measured compromise. Mr.Speaker, give the president his defense cuts and let the real positive forces of compromise be unleashed. Defense cuts will shock the president into believing that prudence may actually be prevailing in the minds of those who wave the flag of fiscal sanity.
***Today, a BLOOMBERG NEWS ARTICLE, “Hollande Rebuffs critics, Asks to Be Judged in 5 Years on Jobs,” offered undeniable proof that French President Hollande reads NOTES FROM UNDERGROUND. The funny things that French politicians say … no wonder Jerry Lewis is a national idol. Five years, Mr. Hollande, is an eternity in the present European milieu. As French unemployment rises do you think the socialist party supporters are going to give you more time? The Germans are already questioning the French desire to adhere to promises of EU demanded austerity. As the ADVERSE FEEDBACK LOOP set in motion by fiscal austerity drives unemployment higher, how much time do you really have? President Hollande, though, maintains that the markets have deemed him to be doing a positive job. He knows that his policies since coming to office are effective because the BOND MARKETS HAVE TOLD HIM (stop laughing).
The Bloomberg article quotes Hollande: “The spread between French and German 10-year debt is about 72 basis points, down from more than 200 basis points a year ago and 143 basis points when [Hollande] took office in mid-may. We’ve reduced the spreads by almost 40%. Those asking what our position is with Germany should take note.” So I warn: If the President of France is monitoring the spreads between French and German debt, then who are we to disagree? Hey, President Hollande: Are you sure that ECB President Draghi didn’t have any impact on the price of French debt? Ah, the joie de vivre.