Tuesday, June 26, 2012

Tuesday, June 26, 2012 - Grapes of Wrath

Grapes of Wrath 
by Sinclair Noe

DOW + 32 = 12,534
SPX + 6 = 1319
NAS + 17 = 2854
10 YR YLD +.02 = 1.63%
OIL +.23 = 79.59
GOLD – 12.70 = 1573.60
SILV - .43 = 27.21
PLAT – 17.00 = 1433.00

The S&P/Case-Shiller reports shows home prices rose 1.3% in April.  The Conference boards Consumer Confidence Index fell for a fourth straight month; the index hit 62 last month, which is still above average and better than last year at this time. We are not officially in the Dog Days of Summer; it just feels like it. 

The European Union has released a road map outlining the path to tighter fiscal integration. Nothing too flashy and it might take a year or more to implement. German Chancellor Angela Merkel  had played down large moves such as the issuance of common debt until euro-area countries agree to broad oversight of their budgets.  Egan Jones downgraded Germany from A+ to AA-. 

Today, Reuters reported Merkel told politicians in her ruling coalition that Europe would not have shared total debt liability “as long as I live.” So, that pretty much kills any idea of a euro-bond. Mario Monti, the technocratic non-elected Prime Minister of Italy now denies he said: “Eurobonds or I resign.” 

Meanwhile, Spanish and Italian bonds aren't feeling healthy as yields rose again. Spain had to pay the highest yields since last November to sell 3.08 billion euros in short-term debt as demand from its ailing banks dwindled. Spain has officially requested a $125 billion dollar bank bailout. Details are being worked out. There are calls to just directly inject the money straight into the banks. Nobody is calling it theft. I don't know why not. Bondholders would be forced to take haircuts. 

Cyprus is bust and they need 10 billion euro but nobody is rushing in because it might set a bad example for those pushing the idea that suffering is good and mitigating pain might somehow be a bad thing. 

Another emergency Euro-summit starts on Thursday in Brussels. France will push a growth package. Germany will push for more pain. The United States will push for something, anything that looks like progress, and everyone will mildly disappointed except for the waffles and chocolates and beer. I'm not suggesting the players are taking this lightly. Deep economic collapses are dangerous. I think that is accepted. 

 In Europe, whether it’s Greece or Spain or Italy, they have insolvent banks that are in a deadly embrace with insolvent states. So, the states borrow money from the Euro-institutions in order to give to the banks and banks borrow to give to the state and both banks and states are sort of locked into a deadly embrace and they are sinking, unable to even tread water. 

So what can be done to break this  death bond  between insolvent banks and insolvent states? It will go one of two ways: either, to unify the banking system, and have it being funded directly not through national governments. Or, allow the banks to fail.  As for Greece, it has failed. Greece is in a depression. Think Oklahoma, circa 1931, Tom Joad- opoulous. Grapes of Wrath. 

The quote of the day: "An imbalance between rich and poor is the oldest and most fatal ailment of all republics." -Plutarch

A new book by Joe Stiglitz on Inequality. He wrote a piece for the Financial Times, and I'm sure the editors at the FT didn't quite comprehend the import. Here are the key ideas via Economist's View:

US inequality is at its highest point for nearly a century. ... One might feel better about inequality if there were a grain of truth in trickle-down economics. But the median income of Americans today is lower than it was a decade and a half ago... Meanwhile, those at the top have never had it so good. ...

Markets are shaped by the rules of the game. Our political system has written rules that benefit the rich at the expense of others. ... There is good news in this: by reducing rent-seeking ... and the distortions that give rise to so much of America’s inequality we can achieve a fairer society and a better-performing economy. …

America used to be thought of as the land of opportunity. Today, a child’s life chances are more dependent on the income of his or her parents than in Europe, or any other of the advanced industrial countries for which there are data. …

We can once again become a land of opportunity but it will not happen on its own... The country will have to make a choice: if it continues as it has in recent decades, the lack of opportunity will mean a more divided society, marked by lower growth and higher social, political and economic instability. Or it can recognize that the economy has lost its balance. The gilded age led to the progressive era, the excesses of the Roaring Twenties led to the Depression, which in turn led to the New Deal. Each time, the country saw the extremes to which it was going and pulled back. The question is, will it do so once again?

I promised I would follow up on a question from a listener on Friday. 

Hong Kong Exchanges and Clearing agreed on Friday to buy the London Metal Exchange for $2.14 billion, The deal will be presented to the London exchange’s shareholders by the end of July. The deal requires approval of at least 50 percent of the L.M.E.’s shareholders, who hold more than 75 percent of the firm’s stock. It also requires approval of British regulators.

The acquisition could provide a windfall for JPMorgan Chase and Goldman Sachs, which collectively own a 20 percent stake in the London-based exchange. The banks could pocket a combined $436 million through the transaction. This seemed to be the focus of the Financial Times' reporting on the story; they seemed entirely focused  on the sale as a liquidity event for the shareholder-members of the LME; indeed, they will have a nifty payday. They will collect their lucre and be long gone before there are any consequences. 

For the Asian investors, there is a longer term view. This represents another sign of Asia’s importance to the world’s commodities industry. The Asian bourse, one of the world’s biggest financial exchanges based on market capitalization, outbid several American rivals for control of the 135-year-old London firm.

Despite concerns that the Chinese economy may be slowing down, the country and other emerging markets in the region now are the largest buyers of a number of commodities, such as iron ore and coal, as their domestic markets continue to report high levels of growth. The latest acquisition will help the Asian bourse take advantage of this demand. 

The Fed last week decided to extend through the end of the year a bond maturity-extension program called Operation Twist, in which the central bank replaces short-term debt it holds with longer-term securities. Operation Twist had been due to end this week. Dallas Federal Reserve Bank President Richard Fisher says:
"My suspicion is Operation Twist is having a very minor effect and I have argued that the benefits do not exceed the costs; the costs exceed the benefits, and that's why I personally didn't support the program. But I was in a minority." 

I’m not sure what the costs are because it is basically a wash. Sell short buy long.

Fisher, an inflation hawk, has been a staunch opponent of further Fed easing. Though he does not have a vote on the Fed's policy-setting panel this year, he participates in the committee's deliberations. All but one voting member on the panel supported last week's extension of Operation Twist.

"In practical terms, there's a limit to what we can do without distorting the marketplace," he said. "And that's a subject of much debate at the committee."

Jeffrey Lacker, the president of the Richmond Federal Reserve Bank says it is doubtful that another round of bond buying would boost economic growth. "The impediments to growth are things that monetary policy is really not that capable of offsetting," Lacker was the one dissenting vote against the extension of Operation Twist. 

Lacker said he expects inflation to stay close to the Fed's 2% target despite the recent softness in oil prices. Lacker said he favors steady policy and now sees the first rate hike coming in "late" 2013 due to the recent slowdown, later than the "mid" 2013 projection he made last month.

So, we have a couple of Fed heads saying they’ve hit the 2% inflation target actually, the core number is below 2%, and they are impotent to use monetary policy to boost growth, or they just don’t give a damn about their mandate to achieve maximum employment. 

What does the Fed propose doing about the situation? Almost nothing. Last week the Fed announced some actions that would supposedly boost the economy, extending the Twist. This helps a little with housing and mortgage rates but it does nothing for employment; it was the bare minimum the Fed could do to deflect accusations that it is doing nothing at all.

Why won’t the Fed act? The Fed, like the European Central Bank, like the U.S. Congress, like the government of Germany, has decided that avoiding economic disaster is somebody else's responsibility.  The fundamentals of the world economy aren’t, in themselves, all that scary; the building blocks for providing food and jobs and housing and care for the world's population – that's all within our reach – we can do it; but there has been a shift from those in positions to make a difference and those in positions of power that don’t want things to change for the better. It’s the almost universal abdication of responsibility that should scare the beejeesus out of you. 

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