Daily Market Commentary (1-2-13): Deal or No Deal…
Nothing Was Fixed
January 2, 2013
‘A month back I warned that the
US political class was adopting the very same tactics employed by EU
politicians in combating our growing economic/ financial problems.
Those tactics are as follows:
1) Stage a meeting/
talk
2) Spread rumors
that a solution had been reached (verbal intervention to prop the markets up)
3) Fail to address
any real issues or provide solutions
4) End the meeting
with a PR campaign that much was accomplished without providing any details
5) Wait for the
markets to realize that nothing was fixed and fall
6) Repeat the whole
process over again
This strategy has allowed EU
officials to drag out the Greek issue (a country whose economy comprises only
2% of the EU’s GDP) for over two years with little political
consequences for the key players. Seeing this, the US political class is now
employing these tactics in full force as revealed by the fiscal cliff debacle.
Regardless of one’s political
affiliation or beliefs, from an economic and fiscal perspective, the cliff deal
has accomplished nothing of import. The tax increases will raise $620 billion
over the next ten years. So that’s roughly $62 billion in new tax
revenue per year.
The US has run a $1+
trillion deficit for four years now. $62 billion is barely even 6% of this.
When you combine this with the proposed $15 billion in spending cuts (less than
even 2% of our deficit) presented in the “deal,” it’s clear that nothing of significance has been addressed or
solved.
Regardless, the markets rallied
on this news, just as they’ve rallied on countless rumors of a Greek solution
and other announcements from EU leaders over the last two years. Verbal
intervention is a key force for the political class. They will use it as much
as they can.
In broad strokes, this is the
official playbook for political leaders in the Western world. Facilitating this
is the ongoing monetary easing by the global Central Banks who have
collectively pumped $10 trillion into the system since the Great Crisis began.
In simple terms, Central Banks provide the glue to hold the system together
while politicians meet and negotiate without ever really solving anything.
This will work until the bond
markets finally begin to crack. With Central Banks buying much of the bond
issuance coming out of the Western world, once the bond markets really drop
it’s game over for this scheme as the Central Banks won’t have the firepower to
keep the system together.
On that note, the S&P 500
continues to trace out a large rising wedge pattern. We’re at a critical
juncture: overbought in the middle of the pattern. Whichever way we move from
here will outline the intermediate trend.
Meanwhile, the 30-year Treasury
is once again testing its upward sloping trendline. Bernanke better hope this
line continues to hold because he’s fast running out of ammunition.
On that note, we recently
outlined a number of targeted trades to help our Private Wealth Advisory newsletter subscribers profit from the
fiscal cliff negotiations.
This morning, three of them are
up 4%, 5%, and 6%.
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Graham Summers
Chief Market Strategist
Phoenix Capital Research