Eye on the Market I November 4,2011 J.P.Morgan Topic: The intersection of politics and economics comes to a head in the US, Italy and Greece; Chart of the Year I can't remember a time when stock price movements were quite so heavily affected by macroeconomic developments. One of our models indicates that 75%-80% of stock price movements for the S&P 100 are now explained by macro forces, a new all- time high. With that in mind, here are the latest developments in countries facing the political realities of fiscal austerity. This is not a fun time to be a politician in the birthplace of Western Democracy (Italy, Greece), or its 18th century offshoot (the US). The United States, and the Incredible Shrinking Expectations for the Joint Select Committee on Deficit Reduction The chorus of voices calling for compromise and "big bang" long-term deficit reduction includes a bipartisan group of 100 House Democrats and Republicans in a letter to the Deficit Reduction Committee (DRC). However, so far, most policy proposals we hear about are far less ambitious, while others are already back-tracking on the Budget Control Act: • A November 3 letter to the DRC by 33 Republican Senators calling for tax reform that lowers rates with no net tax increase • A plan to have the DRC agree to a few hundred million of revenue increases, but then assign the task of finding them to other congressional committees, whose decisions would not be binding • Using lower forecasts of war funding assumptions (declines in "Overseas Contingency Operations") to get to the targeted deficit reduction, rather than tackling structural deficits • If the DRC does not come to agreement on $1.2 trillion in deficit reduction, there are mandated, "sequestered" cuts that would impact Medicare payments, security/defense allocations and non-defense spending. The latest reports indicate that Republican senators are working on legislation to derail mandated cuts to on defense spending, which of course