December, Tuesday 13, 2011

DOW – 66 = 11954
SPX –10 = 1225
NAS –32 = 2579
10 YR YLD -.05 = 1.96%
OIL +2.59 = 100.36
GOLD –34.40 = 1631.90
SILV -.45 = 30.94
PLAT – 14.00 = 1477.00

A quiet day on the European front. I ran across an interesting statistic from the Bureau of Labor Statistics. You’ve probably heard that the Germans and the French are upset with the prospect of bailing out the Greeks and the Italians. Usually the narrative is that the industrious Germans don’t want to support the lazy lifestyle of the Italians. Turns out the Italians work approximately 25% more hours per year than the Germans and 24% more than the French. No word on the Greek work schedule.

I’ve been saying the Euro Crisis will likely follow the Federal Reserve Playbook. There was confirmation of this on Sunday. A small, unobtrusive report issued by the Bank of International Settlements endorsing coordinated action by the world’s largest central banks to ease funding conditions for banks.  The BIS said: “A freezing of interbank markets in major funding currencies, as during the recent crisis, may require the ability to supply official liquidity in major currencies in an elastic manner.”

Allow me to translate for you: The BIS is saying the plan is to print lots and lots of cash to prevent a modern day run on the banks. Now, the next logical question: who is the Bank of International Settlements? The BIS is a bank for the central banks, and it is not accountable to any national government. The Board of Directors includes Ben Bernanke, Mario Draghi, and Jean Claude Trichet, among others. So, the Central bankers basically run the bank for central bankers. The playbook is pretty straightforward – crank up the printing press as needed.

The Federal Reserve’s Federal Open Market Committee, the FOMC, met for the final time this year. The FOMC left interest rate targets unchanged. No surprise. The Fed has held a Zero Interest Rate Policy for the past 3 years. The Fed says global economic growth has slowed – a reference to Europe’s debt crisis, but the US economy has grown moderately; consumer spending has improved but unemployment remains high. So, the big issue for the Fed was how to improve communications and make Federal Reserve decisions more transparent. It is a bit bizarre when you consider the Fed spent the past 3 years denying it was involved in a massive, multi-trillion dollar lending program; they even fought a two year court battle to prevent the release of information; they fought a partial audit by the GAO. So, when you hear about the Federal Reserve talk about transparency, you have to understand, they have a strange definition of transparency.

Still, they released a formal statement today:

Information received since the Federal Open Market Committee met in November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated.

Household spending has continued to advance, but business fixed investment appears to be increasing less rapidly and the housing sector remains depressed. Inflation has moderated since earlier in the year, and longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate.

Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September.

The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee also decided to keep the target range for the federal funds rate at zero to 0.25% and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability.

UNEMPLOYMENT:

November: There is "continuing weakness in overall labor market conditions, and the unemployment rate remains elevated."

December: Fed policymakers are taking a slightly more positive view of the job market now: "While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated."

ECONOMY:

Then: "Economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year."

Now: The Fed still sees growth in the US, but is worried about overseas growth, a reference to Europe's debt crisis. The statement said: "The economy has been expanding moderately, notwithstanding some apparent slowing in global growth."

CHALLENGES AHEAD:

Then: "There are significant downside risks to the economic outlook, including strains in global financial markets."

Now: "Strains in global financial markets continue to pose significant downside risks to the economic outlook."

The Fed said nothing about a third round of Quantitative Easing, but we realize they don’t have to say anything; they can just crank up the printing press as needed. That is the game plan; they done it in the past; they will do it in the future. Pimco, the gigantic bond fund is betting there will be QE3. The Pimco Total Return Fund is betting the Fed will monetize MBS, Mortgage Backed Securities

John Corzine, the former CEO of MF Global,  returned to Washington to face the intense scrutiny of the Senate Agriculture Committee. Corzine said he has no idea what happened to $1.2 billion in customer funds. Bradley Abelow, the firm's president and chief operating officer, and Henri Steenkamp, the chief financial officer couldn’t explain the missing money.

Corzine said he did not direct anyone to misuse the money. Abelow said he does not recall directing anyone to divert the money. Steenkamp said clearly that he did not "authorize, approve or know of any transfers of customer funds" out of their accounts."

Kansas Senator Pat Roberts stated the obvious: "Funds don't simply disappear. Someone took action, whether legal or illegal, to move that money. And the effect of that decision is being felt across the countryside."

There’s no telling where the money went – not yet. Bloomberg reports that JPMorgan’s actions as a lender to MF Global will likely result in an investigation. The Wall Street journal reports that after MF entered bankruptcy, the firm sold Italian bonds to JPMorgan and a large hedge fund at discounts of around 6%. No word on whether MF had been authorized by the bankruptcy trustee to make those sweetheart sales. Time will tell. So far, the wheels of justice have been grinding slowly with regard to MF Global.

There is real damage, and not just to the customers who had accounts that were pillaged. The loss of confidence in the financial transaction involved will mean that farmers and businesses interested in fixing its costs and profit markets through the use of forward contracts will be greatly jeopardized. That means food will probably cost more in the future.

You might think that Wall Street would see the problems with a company like MF Global and they might want to take every possible precaution to avoid a similar problem. The new Dodd-Frank law authorizes the Commodity Futures Trading Commission to limit speculative trading.  Seems prudent.

The Street’s biggest lobbying groups have just filed a lawsuit against the Commodities Futures Trading Commission, seeking to overturn its new rule limiting speculative trading.

Capitalism depends on trust. Without trust, people avoid even sensible economic risks. They also begin trading in gray markets and black markets. They think that if the big guys cheat in big ways, they might as well begin cheating in small ways, after all, the game is rigged.

Most Americans assume the reason Wall Street got its taxpayer-funded bailout without strings in the first place was because the banksters bought off the politicians. That must be why the banks didn’t have to renegotiate the mortgages of Americans – many of whom are still under water.

That must be why taxpayers didn’t get equity stakes in the banks we bailed out – as Warren Buffet got when he bailed out Goldman Sachs. That means when the banks became profitable we didn’t get any of the upside gains, even though we were required to cover the downside risk.

Wall Street executives who were bailed out by taxpayers still have their jobs, they have avoided prosecution, they are still making vast fortunes – tens of billions of dollars will be paid out in bonuses this holiday season – while tens of millions of average Americans continue to lose their jobs, their wages, their medical coverage, or their homes.

The Dodd-Frank bill was supposed to clean up some of the glaring problems of Wall Street, but the bankers have been fighting the new rules, and very few of the rules have been enacted, and for every rule there are two loopholes.  And now the bank lobby wants to make sure they can continue to conduct speculative trades on food and energy; trades that increase the cost of your daily commute, increase the cost to heat or cool your home, increase the cost of your daily bread.

At some point we need to do a cost benefits analysis. Do the benefits provided by Wall Street outweigh the costs?

The wealth of the world -- from all the global stock markets, insurance funds, and families -- comes out to about $200 trillion, according to the McKinsey Global Institute's new report on investors in developing nations. Who owns all that?

Households, mostly. U.S. and Western European households own about one-quarter of the world's financial assets; and worldwide the amount grows to 42%. Banks, pensions, and insurance accounts for 47% of the total.  It is a pretty interesting report and one of the things I kept thinking of was that there is a derivatives market that has grown to more than a quadrillion dollars, which apparently is nothing but make believe.

From yesterday’s mailbag: we have a letter I read, and then we’ll follow that with a response form a listener.

 Listening to the TV this weekend the politicos and the commentaters all seemed to dwell on the problems of the MIDDLE CLASS. 
> The more I thought about it , the more it seems to me that not only is such a designation a disparaging and discriminatory one, but insiduously un-American.  
> A furor over European Class Distinctions was a major plank in the platform that the Revolutionary War  was fought over.  Didn't we do away with  titles; aristocratic rights and privileges? The real clincher to such a danger is that by so labeling groups of people we risk a permanent assignment without any basis for change.  The very dream of this country has always been America as a Classless Society that has its basis on hard work and opportunity that is wide open and available to one and all.    Only in the past half century has race and religious discrimination been able to begin to wipe out the "class" issue that was attached thereto.  Middle Class is now tied to a concept of Working Class as though the Upper Clasess and Lower Classes don't work....a dreadful connotation.  
> That you have a "Middle Class" implies the existence of an UPPER AND A LOWER CLASS.  Who are the arbiters of these designations?  
> Is someone "Low" Class because he is poor or  culturally deficient, lazy, or even dirty?   Is someone "Upper"  Class because he is wealthy?   Does wealth somehow  imply a better person -- or poor, a bad person...what qualities constitute  such a person.?  If one is Middle Class because he works does he rise out of that designation if he makes a lot of money ...if  he stops work is he moved into the Low Classes? 

And that elicited this letter in response:

I disagree with your assumptions. The concepts espoused in our revolution and articulated in the Constitution were outrageous at the time but I believe they were right in concept (13th, 19th Amendment obviously had to correct inequalities in the the Constitution). 

It was all about "we the people" (read the middle class of the day / the masses) and not about the aristocrats and royalty (read the upper class / wealthy / the 1%). The "lower class" was excluded from the process until education became available to all and judicial reform corrected these restrictions of democracy on the lower classes (racial and gender inequality created huge immobility between classes). 
 
I think you are incorrectly inferring that any discussion of class distinction is the same as a caste distinction which restricts mobility between castes.  We all know that a caste system is wrong.  Social Status is not the a caste distinction.  The fact that we have mobility between social class distinctions is actually a very good thing.  Cutbacks in public education limit class mobility and are a far greater threat than a PR campaign by the upper class.

There exists the largest gap in income and asset disparity between the social classes that has ever existed.  The 1% know how dangerous this is to their way of life.  It brought down France and cost Marie her head.  An aristocrat that controls a large percentage of the wealth is dangerous to society.  The problem is not the term aristocrat, it is not title, not the labeling, the problem is the the asset/income disparity.  In evaluating the problem you must look at social class mobility.  Are more people moving from the lower class to the middle class?  Are more people moving from the middle class to the upper class.  You also need to look at inverse movement.  There has been the largest movement from the middle class to poverty than at any time since the Great Depression.  There had been the least movement from lower class/poverty to middle class.  The odds of making it from lower or middle class to the 1% are less than being struck by lightening, less than becoming an All-Star in the NBA. Hell, your odds are much better in winning the lotto.

Do not fall for the PR hype.  The problem is in the numbers.  The numbers are the arbiters.  This is not the only PR they are using.  They talk about re-labeling the 1% as "job creators" and that taxes should be lowered on the 1%.  Owners of businesses are not job creators and have no obligation to do so.  Their only obligation, by law, is to their shareholders.  If an officer of a public corporation fires employees and ships the jobs overseas it may create profits for them but it harms all of America by pushing people into lower social classes.  The only people that are job creators are customers.  The only reason that someone hires more employees is because they have more customers.  No business owner has ever hired someone because his taxes were lowered.  This is a self-serving diversion from the truth.

The national debt is a diversion.  The stimulus hype is a diversion.  Throughout history every country's national debt is paid off by inflation.  What was the price of the first house you bought?  Is that house now worth 10 to 100 times the original purchase price?  Does this inflation hurt lower class or middle class.  No the middle class pay off their house with inflated dollars.  The lower class live paycheck to paycheck.  Their income rises pretty much in lock step with inflation.  Who it hurts is the people that have the greatest assets, the 1%.  Therefore, they create diversions, distractions and obfuscation while they have accumulated the largest horde in our nation's history.  The longer they can create the distraction, the longer they can fight regulation the easier it will be to withstand the inevitable inflation.  

As a business owner, I am not very concerned with top tax rates of the 1% (it is not me and when it is I will figure out how to pay as little as possible); I am not concerned with labels and other distractions.  I want more customers.  My customers are school teachers, small business owners, workers, etc.  Bill Gates and Warren Buffet will never buy from me.  I have never heard from one Wall Street Banker or hedge Fund Manager. The sanctimonious, self-righteous bastards mean nothing to me.