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Monday, December 10, 2012

TIME and Message of the Market Implies A Change Underway

The real causality of the fiscal cliff  is common sense.  Although policy makers talk a tough game of austerity, they tend to follow the path of least resistance in order to protect the status quo.  This implies only superficial (headline grabbing) changes combined with an unbelievable amount of liquidity unit the next Presidential election in 2016.

An upward acceleration in average weekly initial claims trend with a change in TIME should not be ignored by policy makers (chart 1). Remember, inaction towards jobless benefit extension will butcher incumbents in the 2014 mid-term elections.

Chart 1:  Average Weekly Initial Claims State Unemployment (AWIC) And YOY Change

Headline: End of Jobless Benefit Extension 'the Real Cliff'

Hovering in the background of the "fiscal cliff" debate is the prospect of 2 million people losing their unemployment benefits four days after Christmas.

"This is the real cliff," said Sen. Jack Reed, D-R.I. He's been leading the effort to include another extension of benefits for the long-term unemployed in any deal to avert looming tax increases and massive spending cuts in January.

Source: more

  • A major trendline break in the movement of capital from the public to private sector.
  • As demand for public sector assets declines, the Fed will increasingly become the buyer of last resort to fund the old paradigm.

Chart 2:  Long-Term U.S. Corporate Bonds Total Return Index (LTCBTRI) to Long-Term U.S. Government Bonds Total Return Index (LTGBTRI)

Headline:  Federal Reserve may buy more bonds

More stimulus for the U.S. economy could be on the Federal Reserve's agenda when its policy committee meets this week.

The Fed will present new economic forecasts at the conclusion of its two-day meeting on Wednesday. Fed chairman Ben Bernanke will also discuss the state of the economy at a press conference.

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