January, Friday 13, 2012

DOW – 48 = 12422
SPX – 6 = 1289
NAS – 14 = 2710
10 YR YLD -.08 = 1.85%
OIL -.35 = 98.75
GOLD – 8.90 = 1640.70
SILV - .48 = 29.87
PLAT – 7.00 = 1497.00

For all our triskaidekaphobic friends, Friday the 13th actually has a mild upward bias in stock market history. It’s up 55% to 60% of the time. That said, we were down today, and there was a massacre, of sorts, after the close of trade.

We start with some shocking news – this is utterly remarkable – Standard & Poor's has cut France's credit rating by one notch to AA, down one notch from AAA. Shocking. And expected for about a month now. 

More shocking news – S&P cut Italy’s credit rating to BBB+. The cut their ratings on 24 Italian banks and affirmed their ratings on 19 banks.  Now, here’s the fun part. S&P has to provide 24-hour notice to the countries if they are going to change their ratings.  S&P had Italy as A1 on negative watch, and just cut them to BBB+. Earlier today, Italy held a bond auction. Italy sold bonds while in possession of information that they were going to be downgraded. Are those bond sales valid? They sold $ 6 billion–dollars worth of bonds without disclosing insider information of an impending downgrade that would certainly be harmful to the value of the bonds. It doesn’t get more insider than that.

But wait – there’s more! Then they cut Russia to BBB. Austria dropped one notch to AA+. Spain fell to A from AA-. Portugal and Cyprus also dropped two notches. The agency also cut ratings on Malta, Slovakia and Slovenia. Germany gets to keep their AAA rating.

Meanwhile, Greece is on the edge of default. Talks broke down between Greece and its creditor banks to restructure the country's debt. The Greeks warn of "catastrophic" results if a deal to swap bonds is not reached soon. Athens needs an agreement to reduce its debt to more sustainable levels and convince the European Union and International Monetary Fund to keep lending it cash. The idea is for the banks to swap their old Greek bonds for new ones and the banks would take big writedowns. They apparently can’t agree on the interest rates the new bonds would pay.

The main problem was the European Union and International Monetary Fund's insistence on a coupon lower than 4 percent on the new bonds. That could mean an accounting loss of more than 70 percent for banks on their books, far more than the actual 50 percent cut in the original value of the old bonds laid down in the original deal.

“We think the fundamentals of the expansion going forward still look good,”so said Turbo Timmy Geithner in December 2006, back when he was president of the Federal Reserve Bank of New York. Susan Bies, a Fed governor, suggested that a housing downturn actually could bolster the economy by redirecting money to other kinds of investments. This is just a smidgen of the wisdom we are gleaning from the transcripts of Federal Reserve Board meetings being released from 2006. They release these transcripts after a standard five-year delay. The transcripts show that the greatest economic minds in the world are actually pretty stupid, isolated in their marble halled banks, and completely out of touch with reality, the economy, and with the everyday lives of most Americans.

It’s embarrassing for the Fed. It’s also embarrassing for economics. You see a lack of awareness of the connection between the housing market and financial markets. The Fed officials exchange jokes, gossip about people who are not present, and speak much more frankly about the economy and policy than they did in the public remarks that they made contemporaneously.  There was considerable fawning over the Fed Chairman Alan Greenspan.  The Fed officials seemed to be having a grand old time, telling lots of jokes and laughing at all sorts of things. It was a very happy office. Proof positive that ignorance is bliss.

The transcripts of the Fed meetings were released at the same time as Europe is on the edge of the cliff. Is there any connection? Well, for the past few months, the Fed has been saying they are watching the situation in Europe; they are alert; they are aware; they got it covered; everything is under control. The Fed has said that they have learned their lessons from the near meltdown of 2008. We’ll have to wait a couple more years until those transcripts are released, but I have to tell you that I am not feeling confident.

We know the Fed has spent trillions of dollars; there was QE, the QE3, and Operation Twist. We know the Fed has cranked up the printing press. We know there was at least $6 trillion in additional Federal borrowing to just keep the economy from a meltdown. We know there are trillions more spent on guarantees, backstops, asset purchases, and who knows what. And after all that, we still haven’t made it back to the employment levels that we had back in 2007.

Maybe we need to rethink the role of the government and the Federal Reserve. The basic reality is the Federal government has already pulled out all the stops in the past 5 years to "make the economy recover," and all its unprecedented actions have accomplished is to maintain the Status Quo. The results of the past 5 years point to the inevitable conclusion that the Federal Reserve is either impotent or incompetent or incredibly corrupt.

In Greece, the public hospitals are running out of basic supplies such as bandages and syringes. The Greeks are told they must come up with a deal for hedge funds to receive an acceptable return on bonds. The financial institutions are ready willing and able to destroy the Greek and European economy. Here in the USSA, there are communities that have started down the road of austerity. There have been massive cutbacks in public employment; there have been cutbacks …everywhere. We still haven’t recovered. Maybe we need to learn that the government and the banks are not the answer. The Federal Reserve and the Treasury has been telling the ECB and the IMF that they should follow the playbook from 2008, but we may be looking to Europe to see our future instead. And part of what we might see is that the Fed’s playbook called for papering over the systemic problems in our economy. We still have some big and difficult changes to be made.

Are we on the verge of a Euro breakdown?

Is the US economy really recovering?

How about the housing market, remember the downturn form 5 years ago. I’ve heard probably 20 times that the housing market ahs hit bottom. What do you think?

Mailbag:

The Federal Reserve is apparently doing something right.  It handed over about $87 billion in profit to The Treasury earlier this week!  The news media should highlight this a whole lot more!  Good work Dr. Bernanke!

Do you have any thoughts on the question of increasing the size of Congress, which began with 1 member representing 30 to 50 thousand people but now has a 1:700000 ratio.
This NY Times piece summarizes the issue very well:
http://www.nytimes.com/2011/01/24/opinion/24conley.html?_r=1

I have not made up my mind on this yet except to decide it is worth discussing.
Thank you for considering this, keep up the good work,