Monday, March 5, 2012

March, Monday 05, 2012

DOW – 14 = 12,962
SPX – 5 = 1364
NAS -25 = 2950
10 YR YLD +.02 = 2.00%
OIL +.42 = 107.12
GOLD – 4.60 = 1707.40
SILV -.73 = 34.10
PLAT – 34.00 = 1671.00

Resource Consultants 800-494-4149

Last week, Federal Reserve Chairman Ben Bernanke went to Capitol Hill and mumbled a little and the general consensus was that the Fed would not be throwing money out of a helicopter any time soon, and the markets dipped and gold dumped. Today, Federal Reserve bank of Dallas president , Richard Fisher gave a speech in Dallas, and he was a bit more plainspoken about the economy and QE3. He said, “I would suggest to you that, if the data continue to improve, however gradually, the markets should begin preparing themselves for the good Dr. Fed to wean them from their dependency rather than administer further dosage.” Fisher said financial markets “have become hooked on the monetary morphine we provided” after the 2008 financial crisis.

He added, “I am personally perplexed by the continued preoccupation, bordering upon fetish, that Wall Street exhibits regarding the potential for further monetary accommodation -- the so-called QE3, or third round of quantitative easing.” Allow me to explain. The economic news is looking better lately. But after previous false starts — remember “green shoots”? — it would be foolish to assume that all is well. And in any case, it’s still a very slow economic recovery by historical standards.

And the problems with bad debt and derivatives haven't really changed, and we haven't really corrected any of the systemic problems that we had when the global economy nearly melted down, and the banks are still behaving like bratty schoolchildren. And there are a few problems that could blow up in our faces at any given moment.  And there's still a pretty good chance we'll see QE3, but for now the Fed is keeping its powder dry. And the fetish with QE3, well the Fed has been passing out free money to Wall Street, and now they're hooked. I can blame the banks for a bunch of bad behavior, but not this. I would like some free money, but the Fed didn't pass out free money on Main Street, just on Wall Street.

Three years ago the government stepped in to bailout the big banks; later, in the summer of 2009, the Federal Reserve conducted “Stress Tests” to determine whether the banks might survive. The tests were a sham. By the time the Fed issued guidelines, the worst case scenario for the economy had already been surpassed. What little information was released was highly filtered, to make sure nobody knew whether a bank was in bad shape or not, the Fed only published potential loan losses and how much capital each institution would need to raise to absorb them. And the 19 biggest banks that took the test, all passed. Kinda crazy that all the big banks were in such great condition, when just a couple of months earlier we were told they were moments away from complete and catastrophic collapse.

Last year the Fed conducted another stress test and they didn't make any aspect of its stress test public, leaving disclosure to institutions, many of which then released some results. And surprise, everybody passed the test.  I mean this is worse than the first graders on the soccer field; everybody wins, nobody losses, we wouldn't want to hurt their self-esteem, and everybody goes home with a trophy that says Champion Banker.

So, now, we're watching the Fed conduct another Stress Test. And rather than full disclosure and complete transparency, the bankers are doing back flips to ensure that next to no information becomes public. If banks look ill-equipped, markets could be spooked, adding to the stress on firms already struggling with the low interest rates, soft growth and plenty of toxic assets still on the books. Banking-industry revenue fell last year for just the second time in 74 years. Shares of the biggest banks fell as much as 58% in 2011, and 2012 promises a few possible challenges, like what's happening in Europe. If regulators are viewed as too pliant, the tests will fall short of their basic confidence-building purpose. Similar tests administered by regulators in the European Union were denounced for giving passing grades to some lenders that later required taxpayer bailouts. About one month after receiving the highest possible grade in the European Stress Test, Dexia failed.

So, the bankers have been sending their lobbyists to argue that revealing the information in the tests would put banks at a competitive disadvantage. Which is pretty much the point of the test to begin with. And the reason this is important is because it will tell us who is really in charge – the banksters or the regulators; this will tell us whether we've learned anything in the last three years. I think there's a really simple solution. Any banks that received any bailout money (and that includes all 19 of the biggest banks) and then paid out bonuses  - they have to release everything to the public. Simple.

Meanwhile, in Greece they are getting closer to an orderly default. Last week the ECB agreed to a partial write-down on Greek bonds; this week private sector investors are putting the finishing touches on a deal to wipe out approximately 74% of the value of Greek bonds, but they won't call it a default, and it won't trigger a credit event, and that means the Credit Default Swaps, won't have to pay off. Just a little background. The Credit Default Swaps, or CDS is kind of like insurance, in that it's designed to pay off in the event a company or a country defaults. Unlike insurance, CDS does not require an insurable interest; for example, you can only buy life insurance on someone if there is a reason, like if you are in the same family or partners in a business. A stranger can't buy life insurance on your life; your doctor can't buy life insurance on you because there is no insurable interest, and because you just don't want to create that kind of temptation. The other major difference between CDS and insurance is that the Credit Default Swaps are derivatives, unregulated, not written by insurance companies, and not required to maintain reserves to pay off claims. How much CDS insurance derivatives are floating around out there? Nobody knows for certain, best guesses are around 30 trillion or so. If the banks and hedge funds and other big money firms had to pay off, they might find themselves a little short.

And so Greece and the European Central Bank have worked out a deal for private investors to receive 26 cents on the dollar, and take a 74% haircut on Greek bonds, but it won't be considered a default. You know, like if you only pay 25% of your mortgage, that's not really a default; like if you go to the restaurant and pay 25% of the bill, you won't end up washing dishes. But, Greece is only looking at $130 billion-dollars in semi-bad bonds, not tens of trillions in CDS. So, its the cheaper of the two alternatives, and if 75% of the private sector investors in Greek bonds approve by Thursday afternoon, that is what will happen.  Of course, there is a chance that the required 75% of private investors might not all agree to getting shafted. In which case, Greece defaults, credit default swaps will be forced to pay, liquidity will freeze, contagion will spread, and the global financial economy will melt down.

There is something else. What happens to all the Credit Default Swaps everywhere else? Who's going to buy this quasi-insurance when you know that it doesn't really pay off? And if you can't buy Credit-default Swaps, how will you manage risk? And if you can't manage risk, then you'll get a lower credit rating from the credit rating firms on your debt, and that means you'll have to pay more for your debt, because who will buy the debt if they can't manage the risk? And if nobody is willing to buy debt, liquidity will freeze, contagion will spread, and the global financial economy will melt down.

The February ISM Non-manufacturing index rose to 57.3%, up from 56.8% in January.  Above 50 indicates expansion, below 50 contraction. So, the services side of the economy is expanding. 

The Dow is off to its best start to a year since 1998. But if history is a guide, this exuberance soon could give way to the first pangs of electoral anxiety. According to Ned Davis Research, in a typical presidential-election year, stocks start well but slip into a funk by spring. At least in part, the slump reflects the electoral unknowns. In a good year, investors deal with their jitters by late summer or early autumn and stocks recover. People get more comfortable with the November election outlook and put money back into stocks. This year, with the Dow Jones Industrial Average up 6.2% in just over two months, many investors and analysts expect a pullback soon.

The moral condemnation directed towards the Greeks is the saddest aspect of this financial crisis, and it says a lot more about the givers than the receivers. Just like the smell of burning books, the demonisation of entire populations and a 'we good, they bad' mentality is an unmistakeable manifestation of pathology. Lacking the intelligence or the interest to understand what the hell is going on, the morally outraged resort to silly stories and juvenile good/evil dichotomies to make sense of the world.

There was an interesting article in the FT about a week ago and it said:
Greece desperately needs reforms. Mr Papandreou knew this well before the crisis, as did most Greeks. But the larger problem was the panic that swept over Europe and the easy moralising that financial crises evoke. Greeks were cast as tax-evaders, lazy and anti-business, their government as over-indebted, bloated and corrupt – a situation that required castor oil and humiliation.

But almost none of the moralising clichés were true. Greek taxes were more than a third of gross domestic product, near the European average. And if Greeks were anti-business, why then were there more small entrepreneurs per capita than anywhere else in Europe? Government was not bloated in terms of employees – at a fifth of the labour force, it was about the European average. Corruption was clearly a problem, but our data showed it was concentrated – incomprehensibly to non-Greeks – in the health sector, where minor “gifts” to doctors secured early scheduling of surgeries.

Two more facts to add here. One, Greeks work amongst the highest number of hours of all OECD countries. Two, while there is a lot of tax evasion in Greece (together with high tax rates so that overall tax take is comparable to elsewhere), this has to do with the fact Greece has a relatively large number of small, family businesses. The Germans have as much inherent propensity to tax evade as the Greeks.

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