March, Thursday 08, 2012

DOW + 70 = 12907
SPX + 13 = 1365
NAS + 34 = 2970
10 YR YLD +.04 = 2.01%
OIL + .69 = 106.85
GOLD + 15.20 = 1699.50
SILV +.45 = 33.98
PLAT  + 32.00 = 1665.00

A couple of months ago we were talking about the situation in Greece; this has turned into the never-ending-story. I told you that the smart boys and girls at the Federal Reserve and the various central banks around the world believed that they learned a lesson in 2008, and they were determined not to let Greece become the subtitled sequel to the Lehman Brothers Debacle. And so today was the deadline for the private sector investors to approve the deal for a 75% haircut on Greek bond holdings and avert a meltdown. And the deal was done.

The assorted Central Bankers have primed pump; they have rolled out tow tranches of the Long Term Refinance Operation in Europe, dumping more than a trillion dollars worth of easy cash on the Euro-banks. If you want to cram down a few billion dollars worth of lousy Greek bonds, it turns out that a trillion dollars or so of free money is very persuasive.

Greek government officials said  that more than 75 percent of eligible bonds have been committed. Greece will swap their old bonds for new bonds, wiping out 105 billion-euro in debt in the swap. The deal will not solve Greece's deep-seated problems and at best it may buy time for a country facing its biggest economic crisis since World War Two and staggering under debt equal to 160 percent of its gross domestic product. In a best case scenario, Greece will still have 120% debt to GDP in 8 years; which is still unsustainable debt. And the financial markets are already betting Greece will default again in the future. The New Greek bonds are being priced, unofficially at around 17 to 28 cents, which would indicate  immediate losses of 80% when the bonds start trading post-restructuring. That implies about a 98% probability that Greece will default again with the next few years.

It may already be happening on the ground. In Athens the traffic lights don't work, once thriving shops are blackened ruins – burned out by the riots. Some 250,000 Greeks now receive free meals from churches or shelters. Schools, hospitals and social services are devastated. Staff at many of these public facilities haven't been paid in months, others have no electricity; some hospitals have run out of bandages. The financial markets may consider this an orderly restructuring, but it isn't.

However financial markets rose strongly as the threat of an immediate and uncontrolled default receded. Bank stocks rose sharply and the risk premium on Italian and Spanish government bonds fell as investors hoped a Greek deal would curb the likelihood of any contagion spreading to other weaker euro-zone economies. The markets may be feeling better, but as the focus shifts to Spain, the wrongness of the European policy focus will become more apparent, and the Spanish government is already balking at increased austerity – after all, they can see what's happening in Greece.

Next is the question of the Credit Default Swaps, the derivative insurance that supposedly pays off in the event of default. What happens to a multi-trillion dollar insurance industry that doesn't pay its claims? Time will tell, but don't forget there are some very bright boys and girls at the various Central Banks that have demonstrated that they can be very accommodating.

There are a few different areas of the world that could explode or implode or collapse at any given moment and essentially make a mess of the economy. It could be Greece, it could be the Strait of Hormuz, it could be solar flares shorting out the electric grid and frying our electronic gizmos. So, any day we can get past those issues, it's a good day and we can move on to the rest of the news.

Household wealth in the U.S. climbed from October through December for the first time in three quarters as an increase in stock prices outstripped a decline in home values. Net worth for households and non-profit groups increased by $1.19 trillion in the fourth quarter, or 2.1 percent from the previous three months, to $58.5 trillion.

Since reaching a five-year low of $50.5 trillion in the first quarter of 2009, net worth has improved by $8 trillion. That still leaves it $8.4 trillion below the record high of $66.8 trillion reached in the quarter ended June 2007. The value of household real estate fell by $367.4 billion in the last three months of 2011, the first decrease in three quarters. The value of financial assets, including stocks and pension fund holdings, held by American households increased by $1.46 trillion in the fourth quarter.

Household debt rose at a 0.3 percent annual rate last quarter, the first increase in more than three years. The Federal Reserve's Flow of Funds Report showed mortgage borrowing decreased at a 1.5 percent pace, the 11th consecutive drop. This means the housing market is still weak and it means that households are throwing off mortgage debt, not just an absence of new mortgage debt, households continue to default. And in a strange twist, eliminating that debt, even through default, is often the quickest and most sure path to increasing net worth.

Other forms of consumer debt, including auto and student loans, climbed at a 6.9 percent pace, the biggest gain in at least seven years. We've been buying new, more fuel efficient cars in response to higher prices at the pump. Depending on your mileage, it is a money saving move. And the student loans – well, we're just trying to work our way out of this mess and education has always been a great long term investment.

Company balance sheets are faring better than households. Businesses had a record $2.23 trillion in cash and other liquid assets at the end of the fourth quarter, up from $2.12 trillion in the prior three months. This should bode well for jobs. Americans filing for jobless benefits rose last week, but the labor market is still getting a little better, very slowly. But the big takeaway from the Flow of Funds Report is that for the first time in four years, debt across all holder classes increased; debt held by Households, Nonfinancial corporate business, nonfinancial noncorporate business, state and local governments and of course the Federal government, all rose in the quarter. In other words, the US deleveraging is now over as everyone adds debt for the first time since before the crash.

There may be some implications to this; for example, the deleveraging process has held back the forces of inflation. It may be too early to proclaim the credit bubble is back, but deleveraging  won't have the drag effect on the economy and on prices.

Tomorrow, we'll have the monthly jobs report. The economy gained a preliminary 243,000 jobs in January and 203,000 in December, though both of those numbers will be revised. Tomorrow the report is expected to show job gains of 210,000 to 225,000 for February. These are not strong, powerful gains but we're not losing jobs; it's enough to absorb the natural increase in the labor force — roughly 125,000 a month — and slowly whittle down unemployment. The jobless rate has fallen to 8.3% from 9.1% last summer. Part of the reason for the improving numbers is workers dropping out of the labor force because they’ve become too discouraged in their job search, and after a while, if you don't have a job, you become invisible. And yes I know about the birth/death statistical factors, and the seasonally adjusted modifications to the unemployment rate, and I know that the government has the ability to make the numbers whatever they want the numbers to be. Still, layoffs also tapered off and companies are gradually adding more workers. We're not going to see a boom in employment, nobody is expecting that, but we are seeing small gains; there is some anecdotal evidence to support that and so that's my best guess, and I'm sticking with it for now.

Now, I know this is starting to sound irrationally exuberant, especially from a guy who said back in 2008 that we were in a small”d” depression.

For example, 4 years ago, the number of long-term unemployed workers in the U.S. was approximately 2.6 million, now there are 5.6 million. The average duration of unemployment is nearly 3 times as long as it was 12 years ago. In 1980, less than 30% of all jobs were considered low income jobs; now, more than 40% of all jobs are low income.

In the year 2000, 11.3% of Americans were living in poverty, now the number is 15.1%. The U.S. Dollar has lost 97% of its value since 1913, which coincidentally is the same year the Federal Reserve was created. In 1950, the U.S. Was #1 in GDP per capita, Now the U.S. Ranks #13 in GDP per capita.  Total consumer debt has increase 1700% since 1971. The economic pie is growing again. Growth in the 4^th quarter last year hit 3 percent on an annualized rate, but that's not enough to overcome the challenges we face. The nation is now producing more goods and services than it did before the downturn in 2007, but we're doing it with about 6-million fewer workers. Maybe part of that can be chalked up to increased technology and increased productivity, but part of it is that we haven't managed to adjust to changes in technology and productivity. The pie is growing but most people aren't getting much of a slice.

Today at the Citi Financial Services conference at the Waldorf in New York, Brian Moynihan, CEO of bank of America was speaking: a woman in a low-cut dress came down the aisle during Moynihan’s presentation and started chanting “bust up Bank of America before it busts up America” (she also had the slogan written across her shirt). They cleared her out and then another one came onto the stage, elbowed Moynihan out of the way and took the microphone to do the same thing– security hauled here away before she could strip. Then a third one jumped on a table in front of the stage, pulled off her top– had the slogan written across her chest – and started chanting. It took a good 1-2 minutes to get her out of there.

I'm just saying, I know we have problems in this country, but you gotta love America.

The Department of Labor has asked Sandia National Laboratories — the organization that ensures the safety of the nation’s nuclear weapons stockpile — to scrutinize the security procedures surrounding the release of monthly jobs report data. Separately, officials at the U.S. Energy Information Administration tell CNBC they have taken steps to block computers operating from certain Internet protocol addresses from accessing the administration’s website, arguing that some users appear to have a “malicious intent” to slow down the website’s release of data for the general public while speeding it up for themselves. Which is another way of saying that the monthly jobs report is relatively important.