Notes From Underground

Yes, the U.S. Presidential election is finally here. After the POLITICAL-INFO COMPLEX has spent the $6 billion on various political campaigns, we are left wondering why anyone would contribute money to feed the monster and prolong our agony. I know the answer and the “road to political hell is not paved with good intentions.” There are so many polls predicting a very tight race that I care not for the popular predictions. As an investor/trader I am much more concerned about the outliers. First, the most significant result would be for the Democrats to retake the house. The 2010 Republicans claiming the majority in the House by such a wide margin was not predicted. If the Democrats were to undo 2010 it would mean a landslide victory for President Obama as well as the continued control of the Senate. The triple crown for the Democrats would be a negative for the markets as there would be no movement on the “fiscal cliff” as the Democratic leadership would be empowered with a mandate.

Again, this is certainly an outlier but it would by definition have the greatest market impact. Second, the other outlier result would be Romney winning and the Republicans taking the Senate. The Republicans have shown that they are not a responsible enough group to control the Executive and Congress and seem to govern best in a split-party government. Romney seems to work best with divided government for it would be a mistake for him to battle the antagonistic forces within his own party if they controlled both HOUSES. The “fiscal cliff” looms large over the economy and partisan bravado is not the answer. Even the G-20 members meeting in Mexico today felt the urge to issue a warning to the U.S. that its needs to resolve the looming fiscal problem sooner rather than later. Beware the outliers: The rest is commentary.

The theme of Europe for the last three years has been “kicking the can down the road.” This worn out phrase is merely a nicety for … “you are full of shit, you liars.” Another phrase is extend and pretend, but at the end of the day it is all about lying. The concept of AUSTERITY in a shrinking economy is certain to create “ADVERSE FEEDBACK LOOPS,” which result in larger budget shortfalls as the economy shrinks. Pretending, or lying about a different outcome just makes the political backlash against Brussels and other Euro elites that much more probable. Richard Koo has an article in today’s Financial Times elegantly explaining the power of a balance sheet recession. While the article is titled, “Explain the Disease to U.S. Citizens,” it is certainly directed at the policy makers in Europe. By the continued deceptions practiced by European leaders the impact of  “adverse feedback loops” continue to damage the economies of the peripheries and threaten the political stability of the states.

In data released today, Spanish jobless claims increased by another 128,000. In another piece of negative European news, there’s an FT piece by Hugh Carnegy, “IMF warning Adds to French Economy Fears.” The article quotes the IMF release: “France risks falling behind crisis-hit Italy and Spain if it does not reform its economy… It could become more serious if the French economy does not adapt at the same pace as its principal commercial parties, notably Italy and Spain, which after Germany, are engaged in profound reforms of their labor and service markets.” This IMF critique is very dangerous for President Hollande, who is trying to take a very aggressive posture towards German-enforced fiscal austerity.

French weakness is going to embolden the Germans that want a fiscal union first and bailouts second. The question for France is going to be if a socialist president has the stones to take on the labor unions and begin enacting real reforms. The markets have given the French sovereign debt markets the benefit of the doubt but if the yields on French debt begin to rise, the EU road for can kicking will come to an abrupt halt. The German group led by Bundesbank President Jens Weidmann has been presented with an early Christmas gift.

***Tonight the Reserve Bank of Australia will release its interest rate decision at 9:30 CST. The market has a high probability of a 25 basis point CUT priced in–down to 3% from 3.25%. The recent data out of the Australian economy has improved but with the Aussie dollar back above the 200 DAY M.A. the RBA certainly has room to cut. The Aussie 2/10 yield curve is a modestly flat 53 BIPS so this is another reason the RBA can move the rate down. The overnight rate to the 10-YEAR  is presently inverted, so again,”room to move.”

If the RBA holds the rate at 3.25%, look for the Aussie to rally on all the cross rates. As usual, the accompanying RBA statement is worth paying attention to because Governor Stevens is an astute observer of the global scene. The Chinese political transition may not be quite as smooth as long predicted so let us see if the Aussies err on the side of caution and cut rates for fear of Chinese political instability.

Tags: austerity, Bundesbank, democrats, Europe, fiscal cliff, France, G-20, Hollande, House, IMF, Jens Weidmann, RBA, Republicans, Senate, U.S. election

This entry was posted on November 5, 2012 at 7:21 pm and is filed under Europe, RBA, United States. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.