March, Wednesday 07, 2012

DOW + 78 = 12,837
SPX + 9 = 1352
NAS + 25 = 2935
10 YR YLD +.03 = 1.97%
OIL + 1.46 = 106.16
GOLD + 9.70 = 1685.30
SILV +.48 = 33.53
PLAT + 18.00 = 1633.00

Yesterday the Dow Industrials dropped a couple of hundred points. That was all it took; now the talk is about more free money from the Fed. The Murdoch Street Journal is reporting the Fed is considering a new type of bond-buying program. The Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates.

I'm sure we'll hear more details in the days and weeks ahead, but this goes in line with the idea that the Fed will try to juice the housing market in an election year. The initial guess is that this move might lower long term rates and mortgage rates. This quantitative easing, the article calls it “sterilized” quantitative easing, would use reverse-repurchase agreements to keep the money from flowing to bank reserves, the thinking there is that it would not be a big boost of inflation. The Fed has an existing program in place to lower long-term interest rates. Since September, the Fed has been replacing short-term securities on its balance sheet with longer-term securities, a program known as Operation Twist. This $400 billion program ends in mid-June. So, this is no surprise. We've been telling you the Fed would have some form of QE3 and it would concentrate on the housing market.

This is a little strange though. According to the article, the Fed thinks they can print money and then inject the money into the economy and then pull the money out and there won't be inflation and the dollar will get stronger. So, the Fed might be trying to jawbone the markets with a news leak to the Journal. Who knows? The ongoing problem for the Fed is that there is no exit strategy from some sort of quantitative easing. And the reaction of the markets over the past couple of days just confirm that the markets will demand more and more and more free money from the Fed.

Let's take a look at the economic news of the day: ADP, the payroll processing firm reports private-sector payrolls increased 216,000 in February, led by the service-providing sector and small businesses. Over the last three months, gains have averaged 223,000, compared with a monthly average of 156,000 for 2011. We'll get the government's monthly jobs report on Friday. The January report showed unemployment at 8.3%. Don't expect much change on Friday. And yes, I know the jobs report is bogus and numbers are very imperfect but these are the numbers we have and the numbers are getting better.

The Labor Department reports businesses were a little more productive in the fourth quarter than previously believed. Productivity was revised up to 0.9% from 0.7%. For all of 2011, productivity rose at a 0.4% annual rate — the smallest increase since 1995. Digging a little deeper; hourly compensation, adjusted for inflation, shot up 2.8% in the fourth quarter, much higher than the initial reading of 1.9%. It was the fastest increase in nine months, but (and this is a big but) the benefit to workers was wiped out by higher inflation in 2011. Adjusted hourly compensation actually fell 0.7% last year, the biggest drop since 1989. I've been trying to figure this out. Stuff costs more, so people have to work more or they need to get paid more for their hours worked. This kind of sounds like the roundabout definition of inflation, but we know there is no inflation.

Look a shiny fish!

I mean what inflation? Bernanke thinks he can sterilize quantitative easing, but he also told us there was no risk of wage-pull inflation because of excess capacity in labor markets. So, the only thing I can figure is the Fed has been juicing the economy.

Meanwhile, the Federal Reserve reports consumers increased their debt in January by a seasonally adjusted $17.8 billion. Over the three most recently reported months, total consumer debt has gained an average of $18.0 billion, compared with an average monthly gain of $5.3 billion from October 2010 until October 2011. Credit has risen for 5 straight months and fifteen out of the last sixteen months. This would be an indication that consumers are loosening their grasp on their purse-strings, going out and shopping, willing to take on more debt, because they feel more confident about their employment outlook. And you might think all this money circulating through the economy would have inflationary implications, but we have to dig a little deeper. The consumer is still deleveraging. Credit card debt declined by $2.9 billion compared to December. Consumers put a lid on the purse following a weak holiday shopping season. The increase came from non-revolving debt, specifically student loan debt increased by $20.7 billion. January was the start of a new semester. People are trying to get the training and education they need to move forward in a changing labor market, and the average household is still deleveraging. Once upon a time, higher education was not so expensive, now it has turned into a profit mill for subprime lenders.

The process of amending the U.S. Constitution to reduce the influence of money in politics is long and difficult but that process was part of Super Tuesday in Vermont. 53 towns in Vermont have voted to push Congress to amend the U.S. Constitution to make clear that corporations aren't people.  They adopted a nonbinding resolution on Town Meeting Day asking that the Supreme Court's Citizens United decision be overturned.  That's the 2010 ruling that recognized the rights of corporations to participate in campaigns. They're still counting some of the results from Vermont but it appears to be unanimous condemnation of corporate personhood.

Meanwhile, we keep our eyes on the goings on in Greece. Tomorrow is the deadline for determining whether there will be an orderly or disorderly default. It really boils down to how many private investors go along with the deal, and whether the ISDA can convincingly smile and convince people that the default is not a credit event that would trigger payouts on credit default swaps. So anyone with a CDS against a Greek bond has every reason not to participate. The idea is that ISDA can't call it a default without completely discrediting credit default swaps as a product, even though that is what they are trying to do.  This could get a little wild. Everybody knows that credit default swaps are a huge source of interconnectedness and systemic fragility. The CDS is fake insurance that is designed to collect premiums but never pay out claims, and everybody knows that if they are ever forced to pay out claims, the whole thing goes boom. Either having meaningful CDS payouts on Greek bonds or having none, which discredits CDS and possibly destroys the multi-trillion derivatives market, will have unexpected but likely significant outcomes, so pick your poison.