Archive for December, 2012

Democrats staying one step ahead of the blame

A Reuters/Ipsos poll late last week reiterated what has been true for the majority of the time that this fiscal cliff saga has rumbled on: that if the USA goes over the fiscal cliff, the Republicans will be blamed more than the Democrats.

It seems like this fact has conditioned a lot of the Democratic approach to negotiations, sitting back as Boehner fails to come up with a proposal that even his own party will sign up to, portraying the GOP as a party which is behind the times when it comes to progressive taxation, and a party which is ignoring the will of the majority following Obama’s re-election.

This is very much like the Democratic approach to the FY 1996 budget, where Clinton and Gingrich went head to head. Clinton was prepared to resist Republican demands, even if it meant shutting down federal government, and was unwilling to sacrifice popular federal programmes so long polls showed that Republicans would get the majority of the blame for any shutdown.

Tell Newt To Shut Up! is the definitive guide to those winter ’95 budget negotiations, and quotes a conversation between a senior Republican (perhaps Dick Armey – though don’t quote me on that) and Vice President Al Gore. The Republican tells the veep that his party are willing to shut down the government unless the Democrats agree to their proposed spending cuts.

“Our numbers show that if you do that, you guys lose,” Gore replied.*

That dynamic has been very much at play in 2012 too.

* At least approximately. It’s not online and I don’t have a copy of the damn book. Wanted to get the blog out before the deadline (it’s late enough as it is) but if anyone knows the exact quote or has the book (I think it’s p. 146) then let me know…

Fiscal cliffhanger

I’ve been following, albeit not blogging, this one closely, not least as every market report of the last month or so has had to explain what it is and what it means. I’m going to assume some knowledge and just note a few particular aspects about it. There’s an idea doing the rounds that there isn’t too much to worry about because, as neither Democrats or Republicans want to raise taxes, they’ll let the automatic tax rises happen, then strike a deal, so they can claim credit for “cutting” taxes for the bottom 96 percent rather than raising them on the top 4 percent. As they is the possibility of retroactive application of these measures, then the crisis can be averted after the deadline and still avoid the cliff’s full force. It seems like quite a big fuss to cause for a basically semantic point – sure, incumbent Republican Representatives may have right-wing  primary challengers to fear more than anyone for the next election, but I think most people know the difference between an expired tax-cut and a tax raise. True, Ezra Klein points out that Democrats do actually want to raise some taxes, but then so do Republicans. So it’s a question of which taxes are being raised, and who will bear the brunt, so I think there are still substantive issues to overcome, and the idea that a deal will be straightforward once the deadline expires is simplistic (even if it does instill a sense of urgency).

The thesis that there is a mutually beneficially desire for Dems and the GOP to cut taxes after a rise rather than pre-empt the rise (and so the fiscal cliff with have limited impact) is interesting, however, because of how recent this it is. No-one was entertaining thoughts of retroactive tax cuts and technical tactical maneuverings two months ago – if you spoke to to analysts and traders, the majority would say that they anticipated a deal with time to spare. This meant that stock markets, which have already seen impressive gains for the year, could push on – especially in Europe. Yet at the same time the good news of a resolution is not seen as priced in, so a resolution, it is anticipated, could see prices spike higher. Even U.S. indices, which haven’t seen gains in December, don’t really seem to have the bad news priced in (S&P 500 is up 12 percent on the year). And as the deadline closes in, stocks may finally be easing off on gains, but people in the market are still inventively coming up with new reasons why a deal isn’t getting done, and new reasons for longer term optimism. And I’m not saying they’re wrong to, it’s just interesting that had you put it to them two months ago that we’d have 2 business days til New Year and no deal, I think they’d have been less phlegmatic about it.

The underperforming FTSE – set to rebound?

See my piece here. The FTSE’s underperformance in the last year is rooted in two main factors: that it has a defensive skew, which mean it naturally rises less in rising markets, and the fact that the rising market itself has not been driven by those cyclical sectors that it is more heavily weighted in. That means that the last year has been the perfect storm for the FTSE to lag.

The converse is therefore also true, and moving into next year, the FTSE could find itself a winner whatever the weather. If miners rebound, as is expected, then that will benefit the FTSE disproportionately but also if the global growth outlook darkens and the “Draghi put” runs out of steam, with the euro zone debt crisis re-intensifying and hammering financials once again, the the British defensive skew should also help it out.

As China sees a soft landing, a certain amount of cyclical rotation into miners seems likely, which may dampen enthusiasm for financials even without renewed crisis. Fund flow data reflects this. And while the perfect storm that has hampered the FTSE could carry on into the first part of next year, the bets on the FTSE falling are being reduced by even more than my story says, with Karl Loomes, Market Analyst at Astec Analytics, informing me yesterday that over the past 30 days there has now been a 54% decrease in shares being borrowed on the FTSE– far outstripping European peers.