Recap 11-9-12: Path vs Destination


As I noted on Wed, it is the RISK of a fiscal cliff event that is not priced in. I know that people have TALKED about the cliff forever. But almost all the commentary I’ve read does NOT expect a cliff event. A 4Q survey of professional forecasters shows little change in expectations. The variant perception here is that though there probably won’t be a fiscal event, much of the world will have to believe that there will be one before we back off from the edge. In other words, I agree on the outcome, but disagree on how we will get there.

It’s always hard to gauge exactly how much of an economic event is priced in, but it’s probably reasonable to argue that a VIX print below 20 (roughly the long term average) suggests that sentiment is still broadly complacent. Also odd is where Vix is relative to how far stocks have sold off. Perhaps the massive growth in volatility ETN’s are having an outsized effect, but it’s not easy to quantify.

Some history reading:

  • Clinton’s approval rating fell significantly during the shutdown. According to media commentators, this indicated that the general public blamed the president for the government shutdown. However, once it had ended his approval ratings rose to their highest since his election. (Will Obama follow such a plan as well?)
  • According to Gingrich, positive impacts of the government shutdown included the balanced-budget deal in 1997 and the first four consecutive balanced budgets since the 1920s. In addition, he has stated that the first re-election of a Republican majority since 1928 was due in part to the Republican party’s hardline on the budget. The Republican Party had a net loss of eight seats in the House in the 1996 elections but retained a 228-207 seat majority. In the Senate, Republicans gained two seats. (So the Republicans also felt that the shutdown was a ‘win’)
  • Bob Dole, the Senate Majority Leader, was running for president in 1996. Because of his need to campaign, Dole wanted to solve the budget crisis in January 1996 despite the willingness of other Republicans to continue the shutdown unless their demands were met. In particular, as Gingrich and Dole had been seen as potential rivals for the 1996 presidential nomination, they had a tense working relationship. (Note the current tense relationship between Boehner and Majority Leader Eric Cantor)

Also this happened in 1892:


  • U Michigan Confidence improved to 84.9 in Nov vs 82.9 exp and 82.6 prev
  • Basel 3 implementation will be postponed. Originally they were supposed to take effect on Jan 1st.
  • Fidelity Investments, the largest provider of 401(k) retirement plans, said average balances in employer-sponsored accounts reached the highest level since it began tracking values in 2000, as market gains boosted assets. The average account balance in the U.S. rose to $75,900 as of the third quarter, an increase of 18 percent from a year earlier
  • USDA Ag report End Stocks:
  1. Corn: 647m vs 625m exp and 619m prev
  2. Soybean: 140m vs 130m exp and prev
  3. Wheat: 704m vs 654m exp and prev

Upcoming Data:

  • Fri: China IP, Retail Sales, US UMichigan Consumer Confidence, USDA Ag report
  • Mon: AU Business Confidence, BoJ Governor Shirakawa speaks,
  • Tue: French Payrolls, UK CPI, German Zew
  • Wed: UK Jobless Claims, BoE Inflation Report, US PPI, Retail Sales, FOMC minutes
  • Thu: UK Retail Sales, EU CPI, US CPI, Empire Mfg, Jobless Claims, Philly Fed, China will unveil the new leadership slate