Notes From Underground: Let’s Give Them Something To Talk About … Driving Over The Cliff

The world awaits a resolution from the fog of U.S. budget battles. The negotiating table was left in a further haze by Secretary Geithner’s comments. In no uncertain terms, the point man for the Obama administration made it “clear” that the White House will let the economy go over the proverbial cliff if tax rates are not increased on the nation’s wealthiest two percent. It is not a good negotiating tactic to back your opponent into a corner from which there is no escape. Immediately after the Geithner comments to CNBC’S Steve Liesman, legislative Republicans responded in a very negative fashion. If the negotiations are mere theater  then let the economy feel the brunt of mandated austerity and the STOCK MARKET BE DAMNED. Best economic and budgetary policy cannot be made solely for the sake of saving the equity markets. Bad fiscal policy destroys wealth and jobs anyway so it may be better to push an economic downturn to finally get everybody focused on a genuine long-term reform.

This game of budgetary roulette has been going on for the last 35 years and very little has been gained on the path to fiscal sanity. The Washington plutocrats have been subject to the fear of disappointing the STOCK MARKET but in the words of the fictional Inspector Harry Callahan: “Did I fire five shots or six, for in this confusion I don’t know.” Well, it may well be the time to find out. If the Treasury Secretary wants to ride over the cliff, well, let’s go and maybe find what lies beyond. As Bonnie Raitt would say: Let’s give them something to talk about.

***Today the RBNZ held the Official Cash Rate (OCR) steady at 2.5% as expected. The statement from the NZ central bank said, “The global outlook remains soft but appears less threatening than was the case earlier in the year. The risk of severe near-term deterioration in the euro area has decreased and the Chinese economic indicators have been more positive recently. However, uncertainty around the U.S. fiscal position is constraining U.S. growth.” Governor Graeme Wheeler is watching the European credit markets as an indicator of Euro stress so that helps us clarify our own thoughts.

The Chinese situation is seen as stable by the “neighbors” so unlike the Aussies, who earlier in the week so the need to lower interest rates, the Kiwis did not seem as concerned by the effect of China on the NZ economy. The U.S. has all the world’s central banks concerned, but not enough for the Kiwis to lower rates. In fact the market deemed the statement to be moderately hawkish as the RBNZ will seek to continue to maintain inflation at 2%. The NZ dollar rallied after the statement and even with the U.S. budget issues, both the Aussie and NZ currencies have been strong this week–right in line with the recent copper action. The fiscal cliff is creating the breakdown of the risk on/risk off correlations.

***Tomorrow the Bank of England and the European Central Bank will announce their interest rate intentions. The market is anticipating no change from either bank. President Draghi is satisfied that the European debt markets have stabilized and the rally in Italian and Spanish 10-years have bought the ECB leader some respite. The yield curves are quiet and have settled into a very nice range and the two-year notes for Spain, Ireland, Italy have all been very stable. Enjoy the quiet, Mario, and let Mr. Geithner and Bernanke have the limelight. The BOE may be of greater interest tomorrow after today’s Autumn Budget Statement to Parliament by George Osborne. The present U.K. Government has been feeling the heat as the British economy has performed badly because of the Osborne austerity budget of 2010.

***Hat Tip to RF for citing an important article on German banks. In the New York Times, an article by Jack Ewing details how 10 large German banks have loans of more than $120 billion outstanding to the global shipping industry. The article, “Global Shipping Industry’s Troubles Are Threat For Biggest German Banks,” is important because of the recent German efforts to block a European-wide bank supervisor. It has been known for many years that the German Landesbanks, and, of course, Deutsche Bank have very problematic leverage ratios. It seems that the Germans do not want “outsiders” putting any new pressures on German banks to raise capital to shore up their balance sheets.

The word of increased exposure to a highly leveraged global shipping industry suffering under the trouble of too much debt with excess capacity, resulting in increasing losses, will give the critics of German austerity new fodder. The Bundesbank and Jens Weidmann may undergo a severe round of Schadenfreude from the debt plagued Peripheries. HMMMM, seems like those suffering under German mandated fiscal austerity  will now be given “Something to Talk About.”

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