Tag Archive | "December 31"

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US Progresses, Euro Soars

A number of economic reports showed a positive trend for the recovering US economy while actions from the ECB raised the euro above the 1.35USD benchmark. The Labor Department reported that initial claims for unemployment last week rose by 38,000 to 368,000. This figure comes on the heels of a week where new claims were at their lowest level in five years. This figure was slightly above analyst’s projections but well within a range to suggest the paper-thin recovery had momentum.

Employment has been robust in January with 160,000 new jobs already filled. The total for December was 155,000.

Perhaps the most interesting and positive fact is the increase in personal income on December. The Commerce Department reported that personal income rose by 2.6 percent in December. This figure far surpassed the projected 0.8 percent gain.

However, much of this gain may be attributable to advance payments made by US corporations prior to December 31, the end of the tax year when Tax policy was unclear. Consumer spending fell just short of expectations rising by 0.2 percent.

Importantly, planned layoffs declined in December. This is the first decline in four months. December job cuts totaled 32,556, a sharp decline from November’s 57,081 job cuts, a 41 percent improvement.

Euro Continues Surge Against Dollar

The euro continued an impressive upward trend against the dollar as the European Central Bank (ECB) said that 137 billion euros would be repaid to the bank on the earliest due date. These payments are in the bank’s three-year loan program.

President Mario Draghi’s aggressive three-year loan program is credited with stabilizing the banking and credit crisis in the euro zone. The ECB will announce its second payment date on Friday. This will allow banks to properly assess their capital needs and liquidity.

The move to repay suggests that the borrowing banks have stabilized and that they have sufficient liquidity to meet their operating costs. The repayment is likely to be interpreted as an endorsement for higher interest rate, a consideration the ECB will likely determined after the next tranche.

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The Financial Cliff

The pressure is on in Washington. With President Obama returning to office and signs that some Republicans understand that the party’s ultra-conservative mindset does not resonate with the majority of Americans, it would seem the stage is set for meaningful solutions about the country’s bludgeoning debt. Congress will either follow the Obama lead or the country will fall off the fiscal cliff on December 31. 2012.

Given the erratic record of the Republican House, Americans are edgy about the possibility of a solution to a dilemma that could sink the economy. There is no historical support to think that Congress can coordinate a long-term solution to this pressing problem and place the country’s best interests ahead of their personal own politics.

The House of Representatives will once again attempt to hold Americans hostage, but this time they are negotiating with a President who will not be running for another term and who is committed to represent the middle class, or what is left of it. Analysts have suggested that a temporary debt reduction plan might be implemented but this would be the ultimate kick the can strategy. Americans expect meaningful action.

Three Wings of Fiscal Cliff

The fiscal cliff includes three main components. The temporary payroll tax reduction, the expiration of the Bush Tax cuts and $600 billion in spending cuts are in place to activate on the last day of the year. If negotiations about a remedy are not successful, every American taxpayer will have a heavier burden next year. This will dramatically cut back on consumer spending and severely hurt the Gross Domestic Product (GDP).

The payroll tax reduction has helped many Americans survive the recession and timid recovery. This reduction will most definitely expire.

The $600 billion cuts will cause loss of jobs and send shock waves through the economy. If a debt reduction plan is not in place by December 31, the defense department will suffer the biggest cutbacks.

Bigger Package Needed

As important as avoiding the fiscal cliff is, the country needs a substantial debt reduction plan. The most viable framework for a meaningful debt reduction initiative is the Simpson-Bowles, $4.6 trillion plan. While Simpson-Bowles is an aggressive approach to reduce the deficit, the country needs an even deeper plan.

Americans are exhausted with the dysfunction that has come to symbolize Washington. At a time when the US needs a balanced approach to reduce the debt, the Republican based Grover Norquist Pledge which opposes all legislation with a tax increase, could be the biggest fly in the ointment.

Two other flies in the ointment are Republican Vice Presidential candidate Paul Ryan, whose fiscal approach probably cost Mitt Romney the Presidency and Republican leader of the House, Eric Cantor. Cantor and Ryan have signed the pledge and cannot be relied upon to have any meaningful input in the negotiations. Frankly, the country would be better off if these two thugs were not re-elected.

The only hope to get a substantial deficit reduction plan in place lies with moderate Republicans, a dying breed in Washington. There are signs that the Senate is agreeable to a plan that crosses the aisle. The Congressional Budget Office reports that if a remedy for the fiscal cliff is not resolved, the economy will shrink by 0.5 percent during 2013. More importantly it is very possible that 5 million or more jobs will be lost in 2013, an outcome that apparently is acceptable to Cantor and Ryan. The country will find itself in a deeper recession than the previous recession.

David Cote, CEO of Honeywell explained the intense need for cooperation and action. “If the last debt ceiling discussion was playing with fire, this time they’re playing with nitroglycerin. If they go off the cliff, I think it would spark a recession that’s a lot bigger than economists think. Some think it would just be a small fire. I think it could turn into a conflagration.”

On Wednesday, President Obama met with a number of CEOs. Many of these CEOs are unsympathetic to the gridlock in Congress. Several major corporations have said they are hoarding cash and unwilling to invest in the US in the current political and economic climate. That possibility is another consequence of the fiscal cliff. Some of the country’s biggest corporations will invest in enterprises in other countries.

When the Bush Tax Cuts were introduced as a temporary tax reduction plan. They have been renewed every year since. The President ran on a platform of increasing the tax rate for workers who earn $250,000 or more. Ryan and Cantor are vehemently opposed to this approach despite the fact that many of the country’s wealthiest individuals have said they were amenable to the proposal.

Republicans favor changing the deductions, such as the interest paid on mortgages and other changes to add revenue. At a time when the country desperately needs positive news on the housing crisis, eliminating the deduction for interest would cripple the housing market further.

Just as Republicans did during the election, they continue to step on themselves. MSNBC reported that 60 percent of persons interviewed in exit polls favored tax increases for the nation’s wealthy. It is time for Congress to put their differences aside and negotiate in good faith for a long-term solution.

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The Fiscal Cliff Countdown Starts Now

An election weary US private sector has had little time to rest before Republicans and Democrats prepare to launch negotiations about the pending Fiscal Cliff on December 31, 2012. Just two days after the election was decided, the airwaves are filled with pending negotiations between the House’s Republican leader, John Boehner, and the President.

The real question is whether voices of reason will prevail or whether the gridlock that has consumed Washington for the past two years will be put aside in favor of the people’s best interests. Republicans immediately asserted that Obama’s election win was not a mandate but the Republican Party is under attack and a failure to bring about a meaningful deficit reduction plan will be viewed with disfavor by big business, the US citizenry and the international community. None of these entities wants a band-aid.

Grand Bargain, Not a Band-Aid

If a “kick the can initiative” is agreed upon, Republicans will be blamed. If a plan that touched the surface or kicks the issue down the road is implemented, it will be Republicans that pay their dues in 2012 elections.

Americans realize that the time to pay for the sins of the past is now. That means across the board cuts, balanced by revenue increases. American business wants a package that dwarfs Simpson-Bowles and really goes after the deficit in a meaningful way.

There will be tax increases. There will be changes to Medicare, Social Security and Medicaid. The sequestered cuts to be implemented January 1, 2013 will be pushed aside in favor of a broader program.

Republicans hold the majority in the House but the American public has spoken and the House cannot be trusted to implement a positive change. Democrats had 23 seats at risk in the last election and to the surprise of Republicans actually gained seats.

Will The Tea Party Grow Up?

On Thursday, Boehner was more conciliatory than at any time in the past. Whether his voice has support of the Tea Party is another problem. However, President Obama has the backing of the US people and is not running for office in three years. This is a stronger leader than when Boehner and Senate Republican Leader McConnell said two years ago that they would dedicate themselves to making sure that the President was not re-elected.

Yet, in Washington there is a sense that both parties and all three wings of government are tiptoeing on egg shells. It is critical that there negotiations get off to a positive start. This can soothe investors and the business climate or a negative first impression can unnerve US business and international markets.

President Obama has been clear that the goal is not a small initiative. The President wants a “grand bargain” and it is doubtful he will settle for anything less. One important undertaking is expected to be revisions to the US tax code. This can have big implications for progress.

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Politics and Money Dominate Historic Week

US Politics, The Fiscal Cliff and Euro Debt

In a week that will not be soon forgotten, the United States will elect its President for the next four years. Voters will also fill Senate seats for the next six years and fill House seats for the next two years. The 2012 elections will not only shape the US but also shape  the globe. Regardless who the next President of the US is, the need for a functional Congress may be off greater import.

Last year, Congress achieved the dubious distinction of officially achieving a 10 percent job satisfaction report from US citizens. Even more than the Presidential race, it is the composition and mindset of Congress that will determine how the US and the global economy trends in the next two years. After the past two years, most Americans would just as soon throw out the entire Congress and start anew. If the same gridlock exists after the election, the US and the world could soon be in an insurmountable fiscal position.

Speculation is that there is not the political will in Washington to seriously address the impending Fiscal Cliff, that convergence of events on December 31st that will see the Bush Tax Cuts expire, the payroll tax reduction expire and a series of heavy budget cuts paralyze the US and the globe biggest consumer. If no action is taken, the US will lose about 6,000,000 jobs early next year.

Of equal importance is that the US credit rating will be lowered and the nation’s debt will not adequately be addressed. The country’s top CEOs have united in a call for a significant and far-reaching deficit reduction initiative along the lines of the $4.6 trillion Simpson Bowles Deficit Reduction Plan. If the Democrats do not give on reforms to social programs and the Republicans do not get away from the Norquist Pledge, which Romney signed and which his Vice Presidential running mate endorses wholeheartedly, the best outcome will be a short-term fix to the Fiscal Cliff.

Whether Americans realize it or not, such an outcome is not acceptable. The deficit and budget need to be addressed with serious people with serious, non-partisan solutions. The country must be prepared to pay the price for two unfunded wars, a crisis on Wall Street, two poorly administered governments and the worst Congress in US history.

Americans have been swamped with more than $2 billion of marketing spent by just the Presidential candidates, not to speak of untold billions spent on local and Congressional races. The US is sick and the doctor is out to lunch.

The Presidential election is billed as a battle between a financial wizard (Romney) and the champion of the middle class (Obama). Romney has changed positions so many times during the course of the campaign that nobody really knows his intentions, except that he has signed the Norquist Pledge which he will need to disavow if the country is to move forward. Obama has been battered for four years of a struggling economy that has been further hampered by Congressional Republicans that cast the interests of constituents aside in favor of opposing the President at every turn.

The campaign has been exhausting for candidates and the American public. A lackluster turnout at the polls will favor Romney. In all likelihood, Republicans will remain the majority in the House and Democrats will hold a narrow edge in the Senate. Unfortunately, the US may have reached a point where one party must control the three wings of government to get anything done. Half the country will be disappointed by the outcome of the Presidential election.

The G20

This has been a contentious and frustrated G20 summit this weekend in Mexico City. The world is losing patience with both the euro zone debt crisis and the US Fiscal Cliff. If there is one thing that all G20 nations agree with, it is that the time for action has come and gone. Both the euro zone and the US have acted irresponsibly in addressing their debt. The December 31st cliff is the immediate concern but new requests by Greece and a fragile Spanish economy and others could lead to the dissolution of the euro zone.

The US Congress will soon have to add more debt. Euro zone finance ministers are in gridlock, much like the US with Germany steering the region its way while weaker economies resist. The gridlock in the US and in Europe have unmistakable similarities; the chief one being that politics prevent progress. This is a critical week across the globe. The results of this election will either take the US consumer out of the game or add hope to a world that needs a strong US economy.

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The Dollar in 2010

I thought it would be fitting to follow up my last post (Forex in 2009: A Year in Review), with one that looked forward. And what better way to do that then by squarely examining the US Dollar, which is still the undisputed heavyweight champion of forex markets, and from which most other forex trends can be ascertained and comprehended.

December (I know I said I wouldn’t look backwards, but come on, a little context is necessary here…) was the best month for the Dollar in 2009. From December 1 to December 31, it rose 4.7% against the Euro and 7% against the Yen, as part of an overall 4.8% appreciation against a basket of the world’s six other major currencies. “The dollar rally which has taken place in December is significant in that it has brought an end to the powerful downtrend which had been in place since March following the Fed’s decision to begin quantitative easing,” summarizes one analyst. As a result of the Dollar’s strong turnaround in December (and the forgotten fact that it actually appreciated in the beginning of last year), the broadly weighted Dollar Index finished 2009 down a modest 4%.

Dollar index 2009

Analysts summarized this turnaround using a few main paradigms. The first was that logic had returned to the forex markets, such that the negative correlation between equities (which serve as a broad proxy for risk sensitivity) and the Dollar had broken down [See earlier post: “Logic” Returns to the Forex Markets, Benefiting the Dollar]. As a result, good economic news was once again good for the Dollar. The second interpretation was a direct contradiction of the first, and argued that the Dubai debt bomb, coupled with credit scares in Europe, had in fact increased risk aversion, and reinforced the notion that the Dollar is still a safe haven [Edward Hugh mentioned this in my interview of him]. The third theory represents a slight twist on the first one- that concern over Fed interest rate hikes will shift interest rate differentials and cause the Dollar carry trade to break down. Technical analysts, meanwhile, argue that the Dollar had been oversold, and that the year-end rally was merely a product of the closing of short positions and profit-taking.

The key to predicting how the Dollar will perform in 2009, then, largely rests in correctly discerning which paradigm currently underlies the forex markets. Let’s begin by comparing the first possibility – that good economic news will be good for the Dollar – to its antithesis – that the Dollar remains the safe havens. I think two WSJ headlines can shed some light on which interpretation is more accurate: Dollar Rises On Lower Demand For Riskier Assets and Dollar Slumps As Investors Snap Up Risky Assets. In other words, the market logic is that the Dollar is still a safe-haven currency, to the chagrin of market fundamentalists.

While there are certainly “naysayer” analysts that think the US stocks will soon outpace their counterparts abroad (namely in emerging markets), such a view can best be ascribed to the minority. The majority, then, believes that good economic news (from the US, or anywhere else from that matter) is a sign that risk-taking is relatively less risky, and will lead to capital flight from the US. In short, “It’s too early to dismiss the negative correlation between equities markets and the dollar, i.e., when risk appetite declines, that still seems to favor the dollar even though we’ve seen a slight decoupling from that in early December.”

With regard to the notion that the Dollar is being driven by expectations that the Fed will tighten monetary policy at some point in 2010, that seems to have some traction. The markets have priced in a 60% possibility of a Fed rate hike by June, and a majority of economists (9 out of 15 surveyed) think that the Federal Funds rate will be higher at the end of the year. This optimism is a product of the last month, which saw strong improvements in non-farm payrolls, housing sales, durable goods orders, ISM supply index, and more. Some of these indicators are now at their highest levels since 2006; “That speaks better about the health of the U.S. economy and that could help move up the timetable for the Fed to boost interest rates,” goes the accompanying logic.

That investors believe the Fed will hike interest rates and that it will be good for the Dollar is not so much in dispute. Whether investors are right about rate hikes, on the other hand, is less certain. To be sure, momentum is growing in the US as the economy shifts from recession to growth. While current data is unambiguous in this regard, the future is less certain. A vocal minority of analysts argues that the apparent stabilization is largely due to government incentives. When these expire, then, the result could be a double dip in housing prices, and a second act in the economic downturn.

The result, of course, would be a delay and/or slowing in the pace of Fed rate hikes. Some economists predict that that Fed will indeed hike rates in 2010, but only incrementally. Others have argued that it won’t be until 2012 that the Fed lifts its benchmark FFR from the current level of approximately 0%. Instead, the Fed will first move to withdraw some of the liquidity that it unleashed over the last two years, of which an estimated $1.1 Trillion still remains “in play.” Such would be directed primarily at heading off inflation, and wouldn’t do much for the Dollar.

Regardless, the implication is clear: “The fate of the dollar is in the hands of Ben Bernanke. If he begins the exit process and starts to raise interest rates, the dollar will perform okay this year.” If he stalls, and investors accept that they may have gotten ahead of themselves, well, 2010 – especially the second half – could be a sorry year for the Dollar.

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