Tuesday, July 31, 2012

Tuesday, July 31, 2012 - Waiting on Godot, Draghi, Bernanke, DeMarco, the Flood, and For The Lights to Come Back On

Waiting on Godot, Draghi, Bernanke, DeMarco, the Flood, and For The Lights to Come Back On
-by Sinclair Noe

DOW – 64 = 13,008
SPX – 5 = 1379
NAS – 6 = 2939
10 YR YLD -.01 = 1.49 
OIL – 1.78 – 89.89
GOLD – 7.00 = 1615.90
SILV - .18 = 28.10
PLAT + 1.00 = 1421.00

We wrap up the month of July. Let's look at the scorecard; for the month, the Dow Industrial gained 128 points; the S&P 500 index gained 17 points; the yield on the 10 year treasury note dropped 9 basis points. 

S&P Case Shiller index of home prices rose  2.2% in May. All 20 cities in the index saw monthly gains. On a year-over-year basis, prices are down 0.7% nationally, the smallest fall in 18 months. Phoenix prices have climbed 11.5% - the strongest in the nation, while Atlanta’s have dropped 14.5%. Meanwhile, Corelogic reports there were about 60,000 completed foreclosures in June, down from about 80,000 in the same month last year. According to the report there were roughly 3.7 million homes lost to foreclosures since  2008. 

Ed DeMarco, the acting chief of the regulator for Fannie and Freddie, the Federal Housing Finance Agency, said in a letter to the top Republican and Democrat on the Senate Banking Committee that “after much study,” he has concluded that Fannie and Freddie’s participation in the Obama administration’s program to cut the amount owed by underwater borrowers would “not make a meaningful improvement in reducing foreclosures in a cost effective way for taxpayers.”

Treasury Secretary Tim Geithner criticized the decision in a response letter, writing: “I am concerned by your continued opposition to allowing Fannie Mae and Freddie Mac to use targeted principal reduction in their loan modification programs.” Roughly 56% of all US mortgages are owned or guaranteed by Fannie and Freddie and about 11 million homeowners owe more than their properties are worth. Geithner said in his letter that allowing Fannie and Freddie participation in the White House principal-reduction program could help up to half a million homeowners and result in savings to the two mortgage giants of $3.6 billion when compared to other loan-modification programs. Geithner added that the Treasury’s estimate is based on FHFA’s own analysis which was provided to the Treasury. There is even a Treasury program that provides subsidies to investors of 18% to 36% of the amount forgiven depending upon the loan value. 

One might wonder why DeMarco is being so intransigent. You might further wonder why the administration doesn't just fire him. Turns out he's the head of an independent agency and he can't be fired. And then, even if he resigned, the administration would have to make an appointment which would have to be confirmed by the Senate.  In any case, deciding whether debt relief is a good policy for the nation as a whole is not DeMarco’s job. If households can't get help repairing their balance sheets, then the recovery, such as it is, will be even slower. Banks got the help they needed with their balance sheet problems, but households have not received as much attention. There is simply no way that it makes sense for an agency director to use his position to block implementation of the president’s economic policy, not because it would hurt his agency’s operations, but simply because he disagrees with that policy. This guy needs to go. 

The Commerce Department reports personal spending fell less than 0.1% in June. Spending for May was revised down slightly to a 0.1% decline. It’s the first time consumer spending has fallen two straight months since early 2009, near the end of the last official recession.

Personal income rose 0.5% last month , mainly the result of employees working longer hours. Incomes increased by at least that amount in four of the first six months of 2012 after doing so only once last year.

What’s more, consumers had significantly more buying power in June than they did at the start of the year when inflation is factored out. Real disposable income, or money left over after taxes, has increased 1.7% over the past 12 months, largely because of lower gasoline prices.

So, that means people were spending less and saving more. The savings rate increased to 4.4% in June, up from 4% in May, and up from a two year low of 3.2% last November. 

Meanwhile, the Conference Board's consumer confidence index rose to 65.9 in July, the highest level since April, and up from a revised 62.7 in June. This is not a sign of strong confidence, because that would be readings closer to 90. Still, the report indicates there was greater confidence about short-term business and employment prospects. 

In Washington DC, House and Senate leaders managed to do the unthinkable; they agreed on something, and they struck a deal to fund the government for six months. The deal sets a funding level of $1.047 trillion; in other words, they raised the debt ceiling and the government is expected to hit its $16.4 trillion debt limit, or debt ceiling, sometime after the November elections. The deal will have to be approved before the end of September. And then there is still the issue of the fiscal cliff, which refers to expiring tax cuts, automatic spending cuts, debt limit increases and other year-end deadlines. 

Unless Congress and Obama can reach a deal by January 2 on a new formula for deficit reduction, $109 billion in spending cuts, also known as sequestration, will fall into place as a first down payment on more than $1 trillion in spending cuts over a decade. Those are to be divided equally between defense and domestic programs. The automatic spending cuts are the result of a deficit-reduction deal struck last August by Obama and Congress that also raised Treasury Department borrowing authority to avoid a credit default. Congress would like to replace the automatic spending cuts with a series of more targeted, well-thought-out reductions and/or revenue increases. Lawmakers are hopeful they can revisit the matter.

This is the backdrop for this Friday's monthly jobs report. Most estimates are calling for a gain of 110,000 jobs in July, compared with 80,000 net new jobs in June. 

And Federal Reserve Federal Open Market Committee, or FOMC is meeting today and tomorrow to try  to figure out what they can do to fulfill their dual mandate of price stability and maximum employment. The price stability part has been under control lately. Inflation is right in line with Fed expectations, a little below targets actually. The economy grew at a feeble 1.5% clip in the second quarter and unemployment remains stuck at 8.2%. Job growth has only averaged 75,000 per month in the second quarter. Fed officials have indicated that this pace is unacceptable. But the unemployment rate doesn't tell the whole story. For example, the national unemployment rate doesn't take into account people who want to work but haven't looked for a job in the previous four weeks because they figured none were available. The national unemployment rate also doesn't account for people in part-time jobs who would prefer full-time work. The U-6 unemployment rate includes under-employed, marginally employed, and long-term unemployed; that rate stands at 15.3%, but in California, the U-6 is 20.3% and in Nevada the rate is 22.1%. Clearly the Federal Reserve is a failure when it comes to maximum employment. 

So what will the Fed do? The widely anticipated move is “not much”. Look for the Fed to announce they are willing to extend the ZIRP, the Zero Interest Rate Policy. There might be a move to reduce payments to banks for holding excessive reserves with the Federal Reserve. Yes, the Fed pays the banks to NOT lend money.  That might change but the Fed might just sit back and wait. 

Wait for what?  They might be waiting for Godot, or possibly Draghi. The European Central Bank is also holding meetings this week and ECB President Mairo Draghi has promised to do whatever it takes to protect the Euro-union. There is a chance we could see a bond purchase plan announced by the ECB; there is a chance we could have a big coordinated convergence of central banks all cooperating and working together as an irresistible force. But don't count on it; more likely, small, incremental steps. The more news comes out, the more it looks like Mario Draghi’s pledge that the ECB would do all it would take to save the Euro was a bluff. The best guess is that he hopes to appease the market gods until September 12, when the German Constitutional Court will render its decision on whether the “permanent” rescue mechanism, the ESM, is permissible. 

While Draghi will likely dither as long as he can, Spain is heading for insolvency as big chunks of debt come due later this year. Events are moving fast. The relevant issue is no longer whether this will happen, but whether it is better for Spain to restructure its debt inside or outside the Euro-union.

Inside the euro and without financial resources, a debt reduction is pointless. The Spanish economy would have to go into deepening internal deflation, with cuts in prices and salaries, to restore competitiveness. This is impossible, or at least improbable. What we know is that the Spanish economy is contracting and unemployment is crazy high and it is foolish to expect the Spanish people to put up with this much longer. Outside the Euro-union, the Bank of Spain would be able to act as a lender of last resort again and eliminate the risk of future debt restructurings. The country would at least have a sporting chance of avoiding protracted depression. Or maybe there will be a Euro-zone rescue, with attendant austerity. Nothing is preordained at this point, except if Spain leaves the Euro, then the union isn't worth a hill of beans. 

Hundreds of millions of people have been left without electricity in northern and eastern India after a massive power breakdown. More than half the country was hit by the power cuts after three grids collapsed - one for a second day. Hundreds of trains have come to a standstill and hospitals are running on backup generators. In Delhi, Metro services were halted and staff evacuated trains. Many traffic lights in the city failed, leading to massive traffic jams. In eastern India, around 200 miners were trapped underground as lifts failed, but officials later said they had all been rescued. The internet, banks, hospitals, and businesses of all sorts were closed. Electric service is being restored and fairly quick, but the outage has been a huge embarrassment for the Indian government and has revealed the infrastructure is a mess.

The same could be said for the  infrastructure in the US. By some estimates the US electric grid will need more than $2 trillion in investments over the next 20 years. 

Just last week, the Alliance for American Manufacturing issued a report that recommends a two-part solution. First is restoring America's infrastructure lifelines: its electrical grid, its public water and sewer systems, its railroads and dams. And second is doing it with American-manufactured steel and concrete, glass and aluminum; all American components and all American labor.

The result would be a nation more capable of fending off and recovering from natural and man-made disasters. And it would be a nation with a stronger economy based on a solid manufacturing base.

The Preparedness report was written by two security experts. One is Tom Ridge, the former Republican governor of Pennsylvania and former head of Homeland Security. The other is Robert B. Stephan, a former Assistant Secretary of Homeland Security for Infrastructure Protection.

"The American way of life is dependent upon a vibrant economy, the existence of which is based upon a skilled work force, innovation and a world-class critical infrastructure. Much of this critical infrastructure is vulnerable to attack, catastrophic weather events and obsolescence and deterioration. Immediate national security, preparedness and economic needs require an equally strong domestic manufacturing base which, for many reasons, has eroded over the years."

The Preparedness report warns of depending on foreign sources for recovery:

". . .we can no longer rely on global suppliers - many of whom may not have our best interests at heart at a time of crisis. . .or come to our rescue in the midst of an emergency."

Critical to both psychological and physical recovery, it says:

"is a robust, diverse and resilient domestic manufacturing sector. In fact, there is a direct nexus between a strong domestic manufacturing sector and America's ability to prevent, mitigate, recover from and rebuild quickly in the wake of catastrophic events."

Ridge and Stephan devoted a whole section of the Preparedness report to the threats to dams and the nation's water supply. These are vulnerable to both natural and terrorist-caused disasters. And they're already in poor shape, receiving a D grade in a review by the American Society of Civil Engineers (ASCE). Dams, the ASCE said, need more than $50 billion in repairs.

The ASCE recommended in 2009 that the nation invest $2.2 trillion to repair critical infrastructure. Americans want that work, with unemployment stuck at 8.2 percent. And America needs that economic development. And it's never been cheaper to raise the money. 

Over 60% of the nation is in some form of drought. Areas affected include West Texas, North Dakota, Kansas, Colorado and Pennsylvania, all of which are part of the recent boom in North American energy production. That boom is possible partly by hydraulic fracturing or fracking. Fracking uses lots of water. Energy production uses more water than agriculture. The drought is now pitting oilmen against farmers. The farmers used to sell water to the oilmen; now they can't afford to sell, and the oilmen can't drill without the water. 

Monday, July 30, 2012

Monday, July 30, 2012 - A Convergence of Central Bankers

A Convergence of Central Bankers
-by Sinclair Noe

DOW – 2 = 13,073
SPX – 0.67 = 1385
NAS – 12 = 2945
10 YR YLD -.05 = 1.50%
OIL - .11 = 89.95
GOLD – 1.70 = 1622.90
SILV +.39 = 28.28
PLAT + 5.00 = 1422.00

This week features a convergence of central bankers: the ECB, the BOE, and the Fed; toss in a jobs report to finish the week and the fate of the global economy hangs in the balance. Maybe, maybe not;what we can say is that the game of kick the can down the road is running out of road. A quarter point rate cut from the ECB will not satisfy anybody. ECB President Mario Draghi has promised to do whatever it takes; now he is being put to the test. Germany will be required to step up; the ECB will be required to function as a global central bank and throw off its limitations. If Draghi and the ECB can't control the downward spiral of the debt debacle in Spain and Italy, the entire global economy could start to crumble. Too dramatic? Consider China, India and Brazil are facing slower economic growth and a broken credit cycle; the US is facing the prospect of a fresh round of QE or some other tool to lift us out of a downturn – and let's not even spend time today on the fiscal cliff. 

The International Monetary Fund issued this warning:  “the euro area crisis has reached a new and critical stage … raising questions about the viability of the monetary union itself. The adverse links between sovereigns, banks, and the real economy are stronger than ever.”

So far, we've seen the playbook of how not to rescue the Euro-zone. Draghi tried a trillion dollar lending program directly to the banks; the idea was for the banks to buy sovereign debt; the results resembled a drowning man flailing in the water and dunking the lifeguard sent to rescue him. The ECB has set up various funds, such as the ESM and the EFSF but those bailout funds haven't been funded; it is hard to take them seriously. Hedge funds know how much funding the rescue funds hold, and they are willing to push the limits. Underfunding is just like handing over a bet to the hedge funds. So, one idea is to really fund the rescue funds. We'll see. 

Spain and Italy will need about $1.5 trillion dollars over the next couple of years but the problem is that the money doesn't really exist. Germany will be asked to step up but there might be some hesitation; call it bailout fatigue in Germany, Holland and France. Germans would not have joined the EU without assurances that their hard-won prosperity would remain in their control. The idea of a "transfer union" has loomed large in the German psyche for years, and not in a good way. Likewise, there are limits to the discipline Spain and Italy might be willing to accept from the German paymasters; Greece has already reached its limits. 

Today, US Treasury Secretary Tim Geithner met with German Finance Minister Wolfgang Schauble and then they issued a statement: Both expressed confidence in Euro area member states' efforts to reform and move towards greater integration. They discussed the considerable efforts undertaken by Spain and Italy, to pursue far-reaching fiscal and structural reforms. 

Both the ECB and BOE will release their policy prescriptions Thursday. Draghi has promised he'll do whatever it takes. He has vowed that action is coming and we should believe him – it will be enough. Now we hear that whatever Draghi up his sleeve will likely take a while to implement, at least a month, maybe more. And we're most likely talking about bond purchases; which does nothing to solve the fundamental economic problems. Spain has unemployment of more than 25%.  Bond purchases will not create new jobs. Draghi has done better at resisting the austerity hawks than his predecessors. Europe needs to reverse its austerity policies, to take shared responsibility for dealing with the legacy debt of its weaker members, and to turn the ECB into a true central bank. None of this is likely to happen. Draghi does not have the leverage or the will to reverse Europe's larger economic systemic flaws and prevent a slide into depression.

What this means is that the Euro probably won't disintegrate this week. The central bankers have an uncanny ability to kick the can down the road for much longer than it seems possible – it's what they do.

And then on Friday, we get the monthly jobs report. Net hiring likely rose by about 110,000 last month. It is modest but it is still a positive number. The biggest source of economic growth is consumer spending, but Americans have cut back over the past few months. The latest reading on personal spending and income, released Tuesday, is expected to show barely any increase at all in July. The economy cannot grow much faster until businesses step up hiring, but companies won’t add workers unless customers boost purchases of their goods and services. The result: a shackled economy unable to break free and expand rapidly and unemployment hovering around 8.2%. 

Of course, part of the Federal Reserve's mandate is for maximum employment. So, what is the Fed going to do to help the jobs picture? The Federal Reserve is holding a two day meeting this week. Will they make some announcement, such as a reduction in what they pay member banks to park excess reserves? How about a pledge to keep rates in the zero range until the cows come home? Will that be enough? Will it actually change the jobs picture? Probably not. So the Fed will likely hold off on major stimulus such as more asset purchases, to get a better sense of whether the economy is in a soft patch or in deeper trouble.

There is no clear consensus on how the central bankers will respond. It seems increasingly likely that the ECB and the Fed will not act with bold moves and only the disappointment will be big.  Policy makers are predisposed to incrementalism. Most problems will fade away or self-correct if they are ignored. Policy makers always assume that they can do more if needed, but they can never undo what they’ve already set in motion. The IMF says the problems in Europe will be prolonged and costly – in other words, the banks will be sucking money out of the economy for as long as they can get away with it.  Political compromise naturally leads to small steps. That is usually true, remarkably and infuriatingly true – right up until the instance it fails. 

It is my sincere hope that one day we will be able to see the banksters repent for the wrongs they have committed and then go forth and sin no more. Today, the Hong Kong and Shanghai Banking Company was repenting. HSBC apologized for  "shameful" systems breakdowns that failed to stop the bank from laundering money for terrorists and drug barons as it set aside $700 million for potential fines in the US and another $1.3 billion for mis-selling financial products in the UK.

The bank insisted that those responsible for the rule breaches in the US and Mexico had left the business and that bonuses had been clawed back from staff who allowed billions of illegal dollars to be funneled through the financial system. The bank is also caught up in the Libor rigging scandal but did not make a provision for any potential fine or legal cases.

Edward Yardeni of Yardeni Research in this week’s Barron’s:
“The problem with banks is that they tend to blow up on a regular basis. That’s because bankers are playing with other people’s money (OPM). They consistently abuse the privilege and shirk their fiduciary responsibilities. Whenever they get into trouble, government regulators scramble to bail them out first and then scramble to regulate them more strictly. Without fail, the bankers respond to tougher rules by using some of the OPM to hire financial engineers and political lobbyists to figure out ways around the new regulations.

“...banks are the Achilles’ heel of capitalism. They really do need to be regulated like utilities if their liabilities are either explicitly or implicitly guaranteed by the government, i.e., by taxpayers. Banks should be permitted to earn a very low utility-like stable return. Bankers should receive compensation in the middle of the pay scale for government employees, somewhere between the pay of a postal worker and the head of the FDIC. It should be the capital markets, hedge funds, and private-equity investors that provide credit to risky borrowers instead of the banks.”

Friday, July 27, 2012

Friday, July 27, 2012 - Wall Street Finds Pleasure in GDP Pain

Wall Street Finds Pleasure in GDP Pain
-by Sinclair Noe

DOW + 187 = 13,075
SPX + 25 = 1385
NAS + 64 = 2958
10 YR YLD +.13 = 1.56%
OIL + .91 = 91.98
GOLD + 7.50 = 1624.60
SILV +.25 = 27.89
PLAT + 6.00 = 1417.00

All right class; Pop Quiz. Question: What does Wall Street love? Answer: Free money. I know, it's the same pop quiz as yesterday. That was then and this is now. Yesterday, the free money was coming from the ECB, as Mario Draghi promised to do whatever it takes to save the euro. Today came news that was so bad that it should push Federal Reserve Chairman Ben Bernanke out of denial and into action. Economic growth was so stagnant that Bernanke will be forced to pass out free money to his bankster buddies; it's not the solution but it is what Bernanke knows how to do. 

The nation's gross domestic product, the broadest measure of the economy, grew at just 1.5% in the second quarter; that compares to GDP growth of 2% in the first quarter and 4.1% growth in the fourth quarter of 2011. Consumers cut back, local governments cut spending, factories received fewer orders and exports declined because of the global slowdown and a stronger dollar. 

Spending on durable goods, including things like cars and home appliances, fell 1.% in the second quarter. Cuts in government spending, especially at the local level, also held back growth. State and local spending fell 2.1% during the quarter while federal spending declined 0.4%. Non-residential fixed investment, including business spending on structures and equipment, increased 5.3% during the second quarter, down from 7.5% in the previous quarter. The US economy has grown for 12 consecutive quarters, but the gains have been small. It's not economic contraction – you remember that – but it is weak enough to send the Federal Reserve in search of stimulus. 

Next Friday, we'll get the monthly jobs report and if the Fed hasn't acted by then, the report will have to be extremely strong. This is what Wall Street's love of free money has devolved into; a perverse glee when the economy shows weakness simply because it might force the Fed to fire up the printing press. 

Earlier today, German Chancellor Angela Merkel and French President Francois Hollande pledged to do all in their power to protect the euro, backing up ECB president Draghi's comments yesterday. Apparently, the ECB and euro-zone governments are preparing co-ordinated action to cut Spanish and Italian borrowing costs, possibly bond purchases paid for by tapping into the ESM and the EFSF, the European Fubar Slush Fund. 

From the latest issue of the Milken Institute Review, “Trends: Better Living Through Inflation” (co-authored with Jeffry Frieden):

“If the aftermath of the Great Recession doesn’t feel like the recovery from a normal cyclical downturn, that’s because it wasn’t a normal cyclical downturn. We’re living through the consequences of a massive global debt crisis, and debt-driven crises produce an especially malign form of recession. ...

“The politics of debt is, if anything, more daunting than the economics. A debt crisis typically degenerates into bitter political conflict over who will bear the burden of the adjustment. Some of the conflict may be among countries, with creditor nations trying to force debtors to pay off in full and debtor nations rebelling against measures that could conceivably make that possible. Other political battles take place within countries, as taxpayers, bankers, government employees, pensioners and investors jockey to avoid being saddled with the costs of working off the accumulated debts.

“If we simply choose to wait for the world to find acceptable formulas for sharing sacrifice, we may be in for nearly a decade of snail’s pace growth -- a truly global lost decade.”

The US Justice Department is preparing to file charges against traders from several banks in the global probe of interest rate-rigging. Meanwhile, British prosecutors haven’t even decided whether they have a case. The Justice Department investigation of criminal activity related to Libor is moving on a parallel course with civil probes of the banks being conducted by the Commodity Futures Trading Commission, the SEC and British regulators, including the Serious Fraud Office. Barclays, which has been at the center of the rate rigging scandal, today posted first half profit that topped expectations; they also apologized for the Libor mess and tried to move on, even as they revealed they are the target of even more Libor-linked lawsuits. Barclays also sent a 12 minute video around to all its employees. The video explains how it is bad to rig the Libor rates. The video is narrated by the chief of Barclays investment arm a guy named Rich Ricci; seriously, the guys name is Rich Ricci. The sad part is that the criminal investigations are so far just looking at traders, not executives. Apparently, criminal responsibility won't happen until the Earth spin off its axis and we are hurtled through space – wait, that's supposed to happen in December. 

Last week, Capital One settled accusations that vendors used deceptive, high-pressure practices to sell optional products such as credit monitoring and payment protection. Capital One was fined $210 million. It was the first public enforcement case brought by the year-old Consumer Financial Protection Bureau. Now we're getting a few more details. The dispute concerns so-called payment protection, which pays credit-card bills in case of job loss or disability, and monitoring services that alert customers to changes in their credit profiles. Vendor call agents used “high-pressure sales tactics and made materially false, deceptive, or otherwise misleading oral statements relating to the cost, coverage terms, benefits, and other features” to sell products to Capital One customers. And Capital One billed customers for years for services they didn't receive. Customers were wrongly led to believe they needed to buy the extra services to activate cards or that debt protection or credit monitoring was free, and others were left believing that the purchase would improve their credit scores.

The credit monitoring programs were provided by third-party vendors including a couple of companies called Intersections and also, Affion Group. And then Bank of America, Wells Fargo, and Citigroup were listed in securities filings as major customers of one or both of the providers, with Bank of America accounting for more than half of annual revenue at Intersections.  In other words, the accusations against Capital One probably were not isolated. 

Yesterday, we talked about the drought and how it is affecting crops and farmland values. It might alos affect energy prices. According to an article in the NY Time by Dr. Michael Webber at The University of Texas at Austin:

“Our energy system depends on water. About half of the nation’s water withdrawals every day are just for cooling power plants. In addition, the oil and gas industries use tens of millions of gallons a day, injecting water into aging oil fields to improve production, and to free natural gas in shale formations through hydraulic fracturing… All told, we withdraw more water for the energy sector than for agriculture. Unfortunately, this relationship means that water problems become energy problems that are serious enough to warrant high-level attention.”

Cities in Texas are already forbidding the use of municipal water for hydraulic fracturing (fracking). And in the Midwest, power plants are going head-to-head with farmers for limited water supplies.

Earlier this week, Sandy Weill, the former CEO of Citigroup called for the break up of “Too Big To Fail” banks. While I find it extremely difficult to trust Weill, let's take him at his word; maybe we should break up the mega-banks. There are others that are calling for a break up, the list (from Washington’s Blog) including, former Citi CEO John Reed, former Citi Chairman Richard Parsons, former Merrill Lynch CEO David Komansky, Former Morgan Stanley CEO Philip Purcell, former director of Goldman Sachs Nomi Prins, Nobel prize winning economists Joseph Stiglitz, Paul Krugman, and Ed Prescott; current or former Federal Reserve officials: Thomas Hoenig, Richard Fisher, Thomas Bullard, Alan Greenspan, and Paul Volker; former FDIC head Sheila Bair, former head of the Bank of England Mervyn King, and the Bank of International Settlements (the Central Banks' Central Bank). That's just a partial list.

Thursday, July 26, 2012

Thursday, April 26, 2012 - Everybody Loves Free Money

Everybody Loves Free Money
- by Sinclair Noe

DOW +211 = 12,887
SPX + 22 = 1360
NAS + 39 = 2893
10 YR YLD +.02 = 1.43%
OIL +.02 = 89.41
GOLD + 11.30 = 1617.10
SILV + .20 = 27.64
PLAT + 5.00 = 1411.00

Pop Quiz: What do Wall Street bankers love? Free money. They swoon at the prospect of  money being redistributed from taxpayers to bankers. You might say they are socialists, in this regard; if redistribution of wealth is your definition of socialism. This morning European Central Bank President Mario Draghi declared "the ECB is ready to do whatever it takes to preserve the euro...and believe me, it will be enough."

We don't know the details. Draghi wasn't actually handing out euros to the bankers, but the idea is that there will be a European version of Quantitative Easing, possibly a direct bond purchase program.

The euro rallied against the dollar. European stock exchanges jumped. Commodity prices jumped. The Yield on Spanish and Italian bonds dropped. Yields on German and US bonds rose as prices dropped. And US stocks moved higher. The ECB announcement was a put, a floor under the markets. For bankers and traders, the announcement flicked the switch to “risk on”, because even if they lose money, the ECB will just print more. Draghi opening the door to a Bernanke-style monetary policy in Europe is a big deal -- at least for the financial markets. This sort of stimulative policy does a poor job of circulating money through the broader economy. 

Still, the market was excited about the prospect of “whatever it takes” even though various Euro-technocrats have been saying “whatever it takes” for three years now, and apparently it takes more and more with less and less results. Draghi’s comments today could be a signal of more action; the ECB meets next week. Maybe Draghi has something else up his sleeve. He said: “believe me, it will be enough”; we'll see. 

Treasury Secretary Tim Geithner testified before the House Financial Services Committee yesterday. Representatives mentioned the fact that  Geithner had four years, and meeting after meeting, to bring the Libor issue to Congress’ attention and it just wasn’t done. When Geithner ran the New York Federal Reserve Board, they failed to inform US regulators that they had an admission of guilt from a Barclays employee that the Libor was being rigged. The Commodity Futures Trading Commission and the Justice Department had to build their case without the direct evidence of rigging that Geithner and his staff knew all about.

Geithner claimed in testimony that he did everything he could, saying: “We took the initiative to bring those concerns to the attention of the broader U.S. regulatory community, including all the agencies that have responsibility for market manipulation and abuse.” Time will tell but right now somebody's story isn't matching up with the facts. 

Also, it is worth noting that the House of Representatives yesterday voted to pass a bill that would audit the Federal Reserve. The House passed similar legislation from Representative Ron Paul back in 2009; then as now the bill couldn't and won't make it past the Senate. Dr. Paul's website states: “The Fed was created by Congress and remains subject to full oversight and regulation by Congress — up to and including abolishing it altogether!” No question the Congress has the authority. It's a shame there isn't much enthusiasm for real transparency. 

In the early spring this year, US farmers were on their way to planting some 96 million acres in corn, the most in 75 years. A warm early spring got the crop off to a great start. We were on track for one of the largest corn harvests on record, but the corn plant is sensitive to heat and dehydration. As spring turned to summer the temperatures increased and the corn crop decreased. Drought afflicts 86% of the Midwest; and the drought is worsening in the South, which was just recovering from last year's drought - the worst Texas had seen in a century. Almost 30 percent of the Midwest was suffering extreme drought, nearly triple from the previous week. More than 53 percent of the United States are in moderate or extreme drought or worse -  the worst in five decades. 

The US Department of Agriculture says the drought will push food prices 3 to 4 percent  higher next year. Milk, eggs, beef, pork, and poultry prices will all be affected as the drought has already pushed feed prices higher. Farmers started out the season anticipating a record 14 billion bushel corn crop. The drought is expected to cut production by roughly 3 billion bushels. Corn and soybean futures hit record highs last week on the Chicago Board of Trade. Prices fluctuate with every passing rain shower, if there is one, but corn prices are up 20% from March 1; soybeans are up 22% and wheat is up 36%.

Normal grocery price inflation is about 2.8 percent a year. The USDA kept its projected food price increase for 2012 steady at 2.5 percent to 3.5 percent, saying average retail food prices were flat for the first half of 2012 thanks to unusually low fruit and vegetable prices as well as lower prices for milk and pork. Poultry prices are expected to increase quickly. Beef and dairy prices will likely increase next year as farmers start to cull herds. Milk prices might climb by as much as 10%. The new forecasts are the agency's first food price projections to factor in the drought.

Feedlots are the second largest consumer of corn. The Department of Agriculture estimates that forty percent of the corn grown last year was used to produce ethanol, a result of a federal mandate to increase the amount of corn-based ethanol used in the nation’s gasoline supply. So, the cost of the drought will be felt at the grocery store and also probably at the gas pump. 

Farmland values are ultimately correlated with population growth and the growing demand for grains, meats and other foodstuffs. Farmland has turned into a hot alternative vehicle among institutional investors like Harvard University and TIAA-CREF. The reason is simple; the Federal Reserve, or the ECB, can print more money, but there's a diminishing supply of farmland. It's a stable source of value and usually a stable source of income. 

Despite the farming boom and growing concerns there may be a farmland bubble in the Midwest, there has been less attention paid to the escalating cost of inputs that have become part and parcel in conventional agriculture—fertilizer, herbicides, pesticides, GMOs and fuel. According to the USDA's Economic Research Service, yields increased 30% between l989 and 2009. Meanwhile, the cost of inputs tripled during the same 20-year period.  And then there is the giant problem – the drought. 

While you might think drought related crop failure would be catastrophic for crop farmers, the truth is that most are not going to be affected or may even profit as a result of taxpayer subsidized insurance. When the last major drought hit in 1988, 25 percent of farmers had crop insurance, while this year 85 percent do And the program is designed so that the larger the losses for insurers, the greater the share of the payouts the government will pick up. And as prices go up, the payout to farmers goes up, so a complete crop failure means a big payday. 

In 2011, with a drought in Texas and other weather woes, government-run crop-insurance programs paid out a record $10.8 billion. Of premiums paid in 2011, farmers chipped in $4.5 billion, while the government paid $7.4 billion. Because of the program's reinsurance rules, insurers made a $1.7 billion profit even with those record payouts, while the government took an underwriting loss of about $500 million. Despite the insurance, there are still losses associated with the drought, but most farmers will still have seed money for next year. 

Wednesday, July 25, 2012

Wednesday, July 25, 2012 -

Sandy Weill, Glass-Steagall, and Banksters on the Wrong Side of History
-by Sinclair Noe

DOW + 58 = 12,676
SPX -0.42 = 1337
NAS – 8 = 2854
10 YR YLD unch = 1.41
OIL +.61 = 90.67
GOLD + 23.70 = 1605.80
SILV +.38 = 27.44
PLAT + 15.00 = 1406.00

One story today. In 1993 Sandy Weill acquired Shearson Lehman; in quick order he also bought up Travelers Corp and Aetna Life and Casualty and then Salomon Brothers. He began calling the conglomerate, Travelers Group. In April 1998, Travelers Group announced an agreement to undertake the $76 billion merger between Travelers and Citicorp. The new company, called Citigroup, combined a commercial bank holding company with an insurance company and investment banking; it was a big one stop shop that included Citibank, Travelers, Smith Barney, Primerica, Citifinancial, Shearson, Aetna, and Salomon. At the time, it was the largest merger in history and created a financial behemoth with operations in 100 countries. It was also illegal based upon the Glass-Steagall Act of 1933.

Let's go back in time to explain Glass-Steagall. At the height of the Great Depression the Congress conducted hearings which showed that the presumed leaders of American enterprise, the bankers and brokers, were guilty of disreputable and dishonest dealings and gross misuses of the public's trust, literally buying control of politicians. The hearings started in 1932 and they uncovered plenty of abuses. JP Morgan maintained a “preferred list” of clients that would get special deals, huge discounts on stock purchases that could then be flipped for a quick profit. The preferred list included: former President Calvin Coolidge, Supreme Court Justice Owen J. Roberts, former head of the Democratic Party John Raskob, and diplomat Norman Davis. The bankers had truly bribed their way into control of government. 

J.P. Morgan, Jr., the son of the founder of the banking empire, testified that he had not paid any income taxes in 1930, 1931, and 1932; and dozens of multi-millionaire partners in JPMorgan had also not paid taxes. The revelation that the wealthiest American were not paying income tax must be juxtaposed against the desperate demands of the Bonus Army, the World War 1 veterans looking for their pensions, only to be turned away at the point of a gun by active troops led by Patton and MacArthur.

The hearings of 1932 ultimately led to reforms: “The Glass-Steagall Act was enacted to remedy the speculative abuses that infected commercial banking prior to the collapse of the stock market and the financial panic of 1929-1933. Many banks, especially national banks, not only invested heavily in the traditional sense of the term by buying original issues for public resale. Apart from the special problems confined to affiliation three well-defined evils were found to flow from the combination of investment and commercial banking.

The three evils were: 1) banks were investing their own assets in securities with consequent risk to commercial and savings deposits; 2) loans were made in order to shore up the price of securities or the financial position of companies in which a bank had invested its own assets; 3) and commercial banks' financial interest in the ownership, price, or distribution of securities inevitably tempted bank officials to press their banking customers into investing in securities which the bank itself was under pressure to sell because of its own stake in the transaction. 

The Glass-Steagall Act was one of the pillars of banking law since its passage in 1933. Glass-Steagall built a wall between commercial banking and investment banking. The law kept commercial banks that accept deposits from doing business on Wall Street as investment banks that issue and trade securities, and vice versa. Glass-Steagall is actually the Bank Act of 1933, which also included allowing the Truth in Securities Act and the Securities Exchange Act, which created the SEC; and also the FDIC to insure bank clients' deposits. The bankers had so thoroughly abused depositors' confidence that insured accounts were the only way to lure depositors back to banks; even then, millions of Americans would never trust banks again. 

The Bank Act of 1933 worked, all the way up until 1998 when Sandy Weill and John Reed illegally merged Citicorp and Travelers Group in direct violation of Glass-Steagall. So, they decided to change the law. They hired former President Gerald Ford and former Secretary of the Treasury Robert Rubin. Their lobbying efforts cost more than $300 million dollars and produced fast results. Senator Phil Gramm, who received almost $5 million in campaign donations, led the assault. Gramm would eventually become a high paid consultant for the Swiss bank, UBS. Treasury Secretary Robert Rubin, a former partner at Goldman Sachs and soon to be Director at Citigroup, also championed repeal of Glass-Steagall.

The Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act of 1999 , finally killed Glass-Steagall. The wall between commercial banks and investment banks was torn down. It did not take long for the financial behemoths to start making risky bets with depositors' money. 

The Commodity Futures Modernization Act of 2000 then provided the casino for the big banks to play; the act was written by lobbyists and co-sponsored by Phil Gramm and Richard Lugar. The Act was tacked onto thousands of pages of a budget bill in the final hours before a vote; it is doubtful any legislators read the complete Act before voting. The Act removed regulation on newfangled financial products called swaps and derivatives. According to Senator Gramm, the Act would “protect financial institutions from over-regulation” and “position our financial services industries to be world leaders into the new century.” What it did was to turn banks into a modern version of the bucket shops that caused the Panic of 1907. Banks were now allowed to place private bets, called derivatives, on underlying assets, such as commodities, securities, interest rates, or anything else they wanted to bet on. The bets were private and did not fall under the regulation of public exchanges. If the bets went bad, the banks could and would turn to the taxpayer for bailouts; and when the public grew weary of bailouts, the bankers used excess deposits, insured by the FDIC to place their bets.

The derivatives and swaps market has now grown to more than a quadrillion dollars. The GDP of the US is around $15 trillion; global GDP is about $55 trillion. To say that the banks are out of control is a huge understatement. 

In 2009, John Reed, co-founder of Citigroup came to regret the repeal of Glass-Steagall and his role in bribing politicians for the repeal. Reed said: “I would compartmentalize the banking industry for the same reason you compartmentalize ships. If you have a leak, the leak doesn't spread and sink the whole vessel. So generally speaking you'd have consumer banking separate from trading bonds and equity.” 

Ten years after his treasonous deal, Reed tried to justify his unfettered greed; he said: “When you're running a company, you do what you think is right for the stockholders. Right now I'm looking at this as a citizen.” Apparently Citigroup management must renounce citizenship as a requisite  for employment; or is it just to take their severance pay?

The real catalyst for repeal of Glass-Steagall was Sandy Weill. Weill went on to run Citigroup; where he financed such frauds as Worldcomm and Enron. For years Weill has denied that repeal played any role in the 2008 financial crisis, even as the House of Sandy failed in 2008 and required bailouts. 

Today, he appeared to change his mind. On CNBC this morning, Weill said: “What we should probably do is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail. I’m suggesting that they be broken up so that the taxpayer will never be at risk, the depositors won’t be at risk, the leverage of the banks will be something reasonable,” and "We should have banks do something that is not going to risk the taxpayer's dollars.”

Well, I hope the hypocrite burns in hell. He has done a terrible disservice to his country. We should not have listened to him in 1998. We should not listen to him now. It is unlikely his about face will have any impact. Still, it is an admission that the banking system is broken; an admission from one of the people who built that system. When Sandy Weill says the banks should be broken up, it's hard to make a case for the status quo. Clearly, after you strip away the golden parachutes and the bribery; and in the patina of time, the apologists for the banksters will all be proven to be on the wrong side of history.

Tuesday, July 24, 2012

Tuesday, July 24, 2012 - The Dog Days of Summer

The Dog Days of Summer
- by Sinclair Noe

DOW – 104 = 12,617
SPX – 12 = 1338
NAS – 27 = 2862
10 YR YLD -.03 = 1.40%
OIL +.58 = 90.29
GOLD + 4.40 = 1582.10
SILV - .10 = 27.06
PLAT – 13.00 = 1391.00

These are the Dog Days of Summer; those lazy, languid, sultry days where not much happens; theoretically.

The economy could use another boost, and it won't come from fiscal policy. Can the Federal Reserve provide it? Chairman Ben Bernanke keeps insisting that the central bank is not out of ammunition, and in a literal sense he is right. After all, the Fed has not yet exhausted its bag of tricks. It is still twisting the yield curve.  Maybe Bernanke has a few tools he hasn't pulled out yet. For example, some sort of "funding for lending" plan that favors banks that are actively making loans; lowering the rate the central bank pays financial institutions for parking their reserves at the Fed, currently at 0.25 percent.

Or, the Fed can purchase more assets; they are clearly still considering a third bout of quantitative easing, or QE3, and recent weakness in the economy could prompt policymakers to launch such a program as early as September. The problem is that the economy is building up resistance to monetary stimulus that only stimulates the banks and the stimulus never works its way to Main Street. 

Another alternative is the possibility of cutting the rate of interest on excess bank reserves (IOER), now at a quarter percentage point, all the way to zero, or even making it negative; in other words kick the capital off the sidelines and into circulation; stop rewarding the banks for not lending. 

We don't know exactly what a lending incentive program might entail, but the Fed might accept longer-maturity collateral for loans only if the banks prove they will lend to small businesses, which have generally struggled more than big firms to borrow.  In another approach, the Fed could accept certain mortgages as collateral to stimulate demand for mortgage-backed securities and encourage lending to home-buyers having trouble getting loans.

Of course, these monetary tools would not necessarily create demand.  If there is nobody to lend to, then money will not circulate. And the banks might just take the money and gamble in derivatives or some other such risky bet. The Fed might be better off simply distributing the money to the end users – direct distribution to individual savers and consumers.  Of course, if the Fed actually dropped money from helicopters, people would begin to realize that their hard earned money was actually printed at will by the folks that run the electronic printing press. 

So, why were the markets trading lower today? Earlier in the session, the Dow was down more than 200 points. Today marked the third straight day of triple digit losses, the worst streak since last September. Two possible answers: the markets realized that Europe really is in trouble and could drag down the US, coupled with slow trading (these really are the Dog Days) and the only people still pushing buttons are the High Frequency Traders, and they can be turned like a herd of sheep by just yelling depression, which is something they should have known anyway. The second possibility is that folks were anticipating a weak earnings from Apple and when you strip Apple out of the market, the market is weak. During the latest quarter, Apple shipped 26 million iPhones, well below the 28 million to 29 million predicted, even taking into account a pause in buying ahead of the iPhone 5. They sold more iPad tablets than anticipated. Apple's fiscal third-quarter revenue rose to $35 billion, much lower than the average analyst estimate of $37.2 billion. It reported net income of $8.8 billion or $9.32 a share, compared to $7.3 billion or $7.79 a share a year earlier. That lagged the $10.37 Wall Street had forecast. And then they lowered expectations for the third quarter.

Catalonia has joined Valencia in requesting a bailout, and Spain is considering asking for a bailout. Things in Spain are now in freefall. Greece needs more money and we don't know what they are willing to do to get the money. Yesterday, Moody's warned that Germany is now officially on the hook should it continue bailing out the insolvent periphery. And so Germany has a decision to make – are they all in or all out, or maybe they'll just drag out the pain, doling out small doses of relief while demanding more and more austerity. 

The whole point of exiting the Euro-zone is because a country no longer has the money to finance its continuing operations. When Greece, or Spain, or Italy run out of money they will demand more and if they don't get it, the most likely response will be to drop out of the euro and print their own currency and devalue the currency and pay for day to day operations and inflate away their debts. Think of it as a fresh start. In a couple of years, things are rolling along again. 

By the way, this morning, the European Central Bank said its investigation of Libor rate rigging will not be closed without results. It now appears Barclays has been manipulating Libor rates since at least 2005 and they were regularly pulling in $40 million dollars a day in bets on interest rate derivatives. If the LIBOR, one of the most fundamental metrics of our banking system can be rigged, can you imagine what other elements of our financial system are a fraud?  Sure, the answer is the gold markets. Now, who will step up and start that investigation?

Americans’ trust in the US financial system fell in June to its lowest point since March 2009, driven down by a notable drop in confidence in big banks, according to the quarterly Chicago Booth/Kellogg School Financial Trust Index. The authors of the survey say the drop resulted from concern over the trading losses at JPMorgan, not that it directly affects individual Americans, but because it had the catchy name “London Whale” and it sounded bad. The authors of the survey say Americans are too stupid to understand the Libor scandal. They say it’s quite interesting to see what catches people’s imagination. It may be that Libor is too technical. 

Or maybe Americans are concerned about potential bank holidays (think Argentina in 2001), multiple sovereign defaults as well as broad economic contractions and widespread unemployment and diminishing retirement accounts and pensions - this process has already begun in some US municipals, like San Bernandino and Stockton in California, and Scranton and Harrisburg in Pennsylvania). Maybe new currencies being introduced or new denominations of currencies; followed by immediate devaluation and big bouts of inflation, massive wealth destruction to the tune of tens of trillions of dollars think MF Global but bigger; the money is gone, vaporized, only systemically; followed by a global contraction that will result in new political structures. And maybe consumer price inflation is set to remain positive following a large spike in global food prices. Few things damage economic confidence more than food price inflation – working on the assumption that there aren't devastating shortages. 

I'm not saying that is how it will work out but if your confidence is shaken it just means your paying attention.

Monday, July 23, 2012

Monday, July 23, 2012 - There Are Problems With Spain And Greece And Germany

There Are Problems With Spain And Greece And Germany 
- by Sinclair Noe

DOW – 101 = 12,721
SPX – 12 = 1350
NAS – 35 = 2890 
10 YR YLD - .02 = 1.44%
OIL + .10 = 89.81
GOLD – 7.30 = 1577.70
SILV -.27 = 27.16
PLAT – 17.00 = 1404.00

There are problems with Spain. We've been talking about the problems for quite some time; they had a housing crash; a whole bunch of real estate is underwater; the banks were clobbered; the unemployment rate jumped up to more than 25%, which is in line with unemployment during the Great Depression. The IBEX 35, the Spanish equivalent of the Dow Industrials finished the day down 1.1% after trading as low as -5.8%, and the FTSE MIB (Italian index) was down 2.76% on the day. 

Spain announced that it is banning all short selling for the next three months. Italy announced it would ban short selling for banks and insurers.  The move echoes decisions in August last year by the two nations plus France and Belgium after European banks hit their lowest levels since the credit crisis of 2008 and 2009. The ban worked, sort of; the IBEX rose 6% last year during the ban, and the financial stocks that were covered under last year's ban they gained 10%. Most bank stocks extended their decline once the bans were lifted. Last time around it didn’t really have any lasting impact. They artificially propped up prices but they didn't correct the underlying problems. This is trying to avert hedge fund speculation; think of the hedge funds as sharks and they smell blood; the ban on short selling is designed to keep the sharks from ripping off your arm, but the sell-off is not really about speculation.

Last week, Valencia announced it needed a bailout; now there are reports that another half dozen of Spain's 17 regional authorities might be ready to ask for bailouts. Spain has already set up $121 billion in  bailouts for its banks. Last week, the International Monetary Fund demanded an unequivocal commitment to the euro from member governments and urged the European Central Bank to purchase sovereign bonds. In other words, Spain was supposed to be a firewall, where the financial crisis was to be contained. It doesn’t look contained. 

Spanish bond yields continue to climb to very dangerous levels. The 10-year yield hit an all time high of 7.5%, a 3% intraday rise. The two-year yield rose 77 basis points on the day to 6.53%. As Spanish yields make new highs, US government bonds yields continue to make new all-time lows. The US 10-year fell as low as 1.40%, finishing the day down 2 bps to 1.44%. The euro traded below its lifetime average against the dollar, and hit a 2 year low on concern the debt crisis is growing.

After the close of trade, Moody's Investor Services cut the Aaa credit rating outlooks for Germany, the Netherlands, and Luxembourg. Moody's cited the risk that Greece  may leave the 17-nation euro currency and “increasing likelihood” of collective support for European countries such as Spain and Italy. The burden  would fall most heavily on the more highly rated member states of the euro zone if the euro zone is to be preserved in its current form.

While there was never going to be an easy path out of the interconnected Euro-crisis, since lasting solutions would require fundamental changes in institutional arrangements, there seems to be an increase in national prejudices. The northern countries appear to hold surpluses but they're unwilling to rescue of periphery countries which in turn should rescue their own banks and export markets.  So they continue to punish the supposed laziness of the periphery countries, unable to see that their economic morality play will visit retribution on all the actors. A pound of flesh comes at a heavy price. 

Germany is insisting on continued austerity for Greece, even though it is clearly a massive fail. Prime Minister Antonis Samaris said over the weekend that his country is a depression on a scale of the US Great Depression, and he wants relief from the conditions imposed in a 130 billion-euro rescue package in March. He wants the money for Greece, but the conditions are unacceptable. It's pretty clear that Greece will fail to meet its fiscal targets and will need even more relief before year end. This is exactly what you expect to see in a deflationary spiral: budget cuts shrink the economy, tax receipts shrink deficits grow, and debt to GDP becomes unsustainable – it's a downward spiral. As conditions in Greece become even more desperate, Germany has become more rigid.

The immediate trigger is inspectors from the Troika are due back in Greece this week to “assess” progress towards meeting targets. Since there is no way for a patient in an intensive care ward to starve himself back to health, it is not at all obvious how Greek leaders can convince their new economic lords and masters that they can do the impossible. So, it looks less and less likely that Greece will be approved for the bailout. Athens risks being cut off from aid and could run out of cash as early as August. It has sought emergency funding from Europe to cover a bond redemption in late August.

Greece faces a much more important deadline in September, when international creditors are due to make their next aid payment, which they delayed in June as the elections played out. The political situation in Greece hasn't really changed. Extending the deadline could require even more aid to support Greece while it delays more cuts. So, in addition to the problems with Spain today, there were concerns about a possible Greek exit from the Euro. 

The Greeks should thumb their nose at the Germans, maybe the Germans will exit the Euro-union. Would that be something? The currency misalignment in the  EMU would be cured instantly. There might even be a stock market rally. It would certainly be a better outcome than the current course of deflationary spiral.  Troika demands and loan packages for economies trapped with the wrong exchange rate, or even under the control of the technocrats, seem to lead to the inevitable result that one country after another will be thrown out of Euro-union in an attempt to stop the fires from spreading.

If Germany, not Greece, were to exit the Euro, the results would likely be far worse for Germany; a revaluation shock and stiff losses for German banks and insurers. If the powers that be are balking at coming up with tens of billions for Greece, it is a sure bet they won't come up with hundreds of billions for Spain, and hundreds of billions more for Italy. Maybe Germany should just accept the pain and move on. 

We seem to have been going through a lot of bankster fraud: there is the LIBOR scandal, the muni bond fixing scam, the JPMorgan London Whale trading fiasco and the Corzine-MF Global collapse, PFGBest (MFGlobal Junior), Capital One Credit Card schemes,  and any number of other scandals in recent months. In every case it was traders run amuck, fixing markets to make an easy buck at someone’s expense. 

I think the problems are more systemic than rogue traders.  So, what is the next show to drop? Shoes, plural. One problem is the price fixing and faked assays in the gold vaults of London; the other is we should see some perp walks in the Libor rate rigging case. 

The London Bullion Market Association's price fixing scheme  may be coming to an end. The eventual move in gold and silver will literally frighten most people.  It is now beginning to be discussed, openly, that the unallocated gold is not at the banks. This is definitely the case with many of the allocated accounts as well. The reason I'm pointing this out is you have a more 'open' disclosure that's taking place with regards to this.  It is difficult, so far as I am concerned, to describe the ongoing crookedness of the Western world's leading financial institutions. Financiers are forcing schools, parks, pools, fire departments, senior citizen centers, and libraries to shut down. They are forcing national governments to auction off their cultural heritage to the highest bidder. Everything must go at fire-sale prices.

Meanwhile, agencies like the CFTC and the Securities and Exchange Commission do not have the authority to level criminal charges, although they do refer cases of possible criminality to the Justice Department. The Justice Department has been investigating allegations of Libor manipulation. The Barclays settlement makes it clear that regulators have evidence that allegedly show Barclays traders colluding with other traders in an attempt to rig Libor to benefit their derivatives trades. Barclays was fined but they are now required to tell all about their fellow banks to investigators. They only get immunity if they rat out their fellow banksters. The Sarbanes-Oxley Act of 2002, the reforms passed after the Enron scandal, expanded criminal sanctions under securities laws. It created a general criminal fraud provision that can cover almost any act of deception that might affect the price of the security of a public company.

A bank that willfully creates a false impression of its financial health by misstating its borrowing rates may have violated the first of these Sarbox fraud provisions. Since false information about a bank’s financial health would likely boost the stock price of a company, this probably runs afoul of the law. In legal terms, the bank may have executed “a scheme or artifice” intended “to defraud any person in connection with…any security” of a public company. Some traditional criminal law provisions may also apply against any derivatives traders who attempted to manipulate the Libor submission of their bank or another bank; that's just plain old fraud. A derivatives trader with a financial institution on the other end of a Libor-linked trade, attempting to manipulate Libor is a pretty clear instance of bank fraud. Libor manipulators could also face criminal charges under an even older law: the Sherman Act, the U.S.’ principal antitrust statute. Under the Sherman Act, price-fixing conspiracies are illegal.

So, we should see criminal prosecutions coming out of the Libor rate rigging. We should see perp walks soon, but don't hold your breath. 

The Tax Justice Network USA, which I've never heard of, has come out with a new report claiming there are two banking systems for the wealthy; private banks and pirate banks. “Pirate banks” form a large and fast-growing virtual banking system that has helped the wealthy hide more than $21 trillion offshore. That hidden wealth is costing governments $280 billion a year in lost tax revenue. The pirate banking system launders, shelters, manages and, if necessary, re-domiciles the riches of many of the world’s worst villains, as well as the tangible and intangible assets and liabilities of many of our wealthiest individuals. The report says that traditional offshore havens like Switzerland and Singapore hold substantial amounts, and much of the offshore fortune is held in a “virtual country” – a network of cross-border entities designed to shelter wealth.

The AP surveyed economists and for a consensus forecast that the poverty rate would rise from 15.1 percent in 2010 to as high as 15.7 percent. If the rate only increases by one-tenth of a percentage point to 15.2 percent, it will tie 1983’s poverty rate, which was the highest poverty rate since 1965. The highest poverty rate on record — 22.4 percent — was measured in 1959. The 2010 poverty level was $22,314 for a family of four, and $11,139 for an individual, based on an official government calculation that includes only cash income, before tax deductions. It excludes capital gains or accumulated wealth, such as home ownership. For the past 4 years, I've been saying we're in a small “d” depression. I know that officially we were in a recession and then we came out of the recession.

The unique feature of the downturn is not just the high rate of unemployment, but the long duration of unemployment that millions of Americans have experienced. For a lot of these long-term unemployed, the job that they had won't exist when they go back in to the labor market. The problems have been so pervasive that it has substantially increased poverty. We have a pretty good definition of recession. We have a pretty good denial of the definition of depression.

Friday, July 20, 2012

Friday, July 20, 2012 - Why Hasn't Anything Been Fixed on Wall Street?

Why Hasn't Anything Been Fixed on Wall Street?  
-Sinclair Noe

DOW – 120 = 12,822
SPX – 13 = 1362
NAS – 40 = 2925
10 YR YLD -.05 = 1.46%
OIL – 1.14 = 91.83
GOLD + 2.30 = 1585.00
SILV +.05 = 27.43
PLAT – 3.00= 1421.00

For quite some time it has been accepted that Greece was toast; the Greeks would be forced to swallow the bitter pill of austerity; somehow the Euro-union would survive. And the EU seemed to be dealing with the meltdown of Ireland and Portugal as well; they just forced them to pay for their own bailouts; that plan isn't working out so well with Spain. The Kingdom of Spain was supposed to be the firewall where the breakdown of the Euro-union stopped; that plan isn't working our so well. The problem today is Valencia, a region of Spain, not the orange; they are asking for a $22 billion dollar bailout; apparently in addition to the $123 billion dollar assistance package that is going to bailout Spanish banks and backed by the Spanish citizens, at least theoretically. May be good for the banks but the Spanish economy is still in a downturn and the government says it will step up austerity measures.

Spain's IBEX stock index fell 5.8 percent, its biggest one-day drop in two years, and the risk premium on government debt hit a euro-era high as its borrowing costs rose to 7.32 percent. That yield is above the 7 percent threshold considered unsustainable, with little relief in sight. And that is about 615 basis points higher than the German Bunds. Spain's 2 year bond yield is up 132 basis points from last week.

There is very little to stop Spanish bond yields moving higher at the moment. The euro fell as low as $1.21, its weakest level against the dollar since mid-June 2010, and the euro hit record lows against the Australian, Canadian and New Zealand currencies; and the lowest level against the yen in 11 years. The euro is looking like a slow motion train wreck, and there doesn't seem to be much to stop it. Every now and then we look away, but when we look back, it's just scary and the markets get shaken out of their complacency for a day or so. 

Treasury Secretary Tim Geithner recently described the Euro-situation, saying: “What is very important is that (Eurozone officials) not leave the Continent hanging on the edge of the abyss as a device for getting more leverage for reform, because that leaves the rest of the world much more exposed to financial pressure and slower growth from Europe.”

First, it is a little strange to hear Geithner admit that Europe is on the edge of the abyss; strange because it's true.  Germany would seem to be the most likely country in the EU to provide assistance but they don't seem to be willing to ride to the rescue; they cannot or will not prevent that disastrous scenario, either for economic or legal reasons.  Germany’s constitutional court delayed its ruling to approve German ratification of the ESM, the bailout fund and fiscal compact. So, yes they are on the edge of the abyss. The final decision on the ESM and fiscal compact may not be made for several months. The Germans are opposed to bailouts, or Euro-bonds, or Euro-wide deposit insurance. Meanwhile, the bond sharks are circling around Spain and they smell blood. 

The ECB and the EU may do something to kick the can down the road and usually the central bankers have been able to postpone and extend far longer than you might imagine. The news from Europe continues to be a smoldering mess, and it could be a long convoluted process before things are resolved there, or the economy could fall over the edge on any given day. 

Earlier this week, Geithner forcefully defended the New York Fed's actions after it was made aware of Libor irregularities. Geithner said: “We did the right and necessary thing and we did it early.”

Maybe not. The Bank of England Says New York Fed Gave No Warning on Rate-Rigging. The call for a review into Libor in 2008 came after Mervyn King, the Head of the Bank of England and Mr. Geithner, then the head of the Federal Reserve Bank of New York, had talked about potential problems with the rate during a meeting in Basel, Switzerland, in early May 2008. This discussion was followed by a flurry of e-mails a month later in which Mr. Geithner, who is now the Treasury secretary, recommended changes to the rate, which is used as a benchmark for more than $360 trillion financial products worldwide. The suggestions included ‘‘strengthen governance and establish a credible reporting procedure’’ and ‘‘eliminate incentive to misreport,’’ according to documents released by the New York Fed. Mr. King told Mr. Geithner that he supported the suggestions. Yet, according to documents released today,  the New York Fed did not make any allegations of wrongful behavior connected to Libor. Mr. King told a British parliamentary committee on Tuesday that Mr. Geithner’s suggestions did not represent a warning about the potential manipulation of Libor.

Sheila Bair, the former head of the FDIC, said, "Looking at those emails, it looks like they had pretty explicit notification of some very bad behavior, and I don't understand why they didn't investigate." 

Bair said the Libor scandal exemplifies the reckless risk-taking culture on Wall Street, something she said remains despite the Dodd-Frank banking reforms. "There's still a lot of challenges on the horizon, especially on the trading desks of these large financial institutions," Bair said. "It doesn't appear that reform has really taken hold. The culture still seems to be one of excess risk-taking, perhaps ignoring the law if that means they can fatten their year-end bonuses." So, the very basic question is – why hasn't anything been fixed on Wall Street?

The California Independent System Operator, which has jurisdiction over 80% of the state's electrical transmission estimates that JPMorgan may have gamed the state's power market for $57 million in improper payments over six months in 2010 and 2011.But that could be just the tip of the iceberg: The bank continued its activities past that time frame. JPMorgan's alleged manipulation could have helped throw the entire energy market out of whack, imposing what could be incalculable costs on ratepayers.

The Federal Energy Regulatory Commission, in December accused Deutsche Bank of manipulating the California market and in March extracted a $245-million settlement from Baltimore-based Constellation Energy over charges it made manipulative trades in the New York market. (The Deutsche Bank determination is "preliminary" and subject to further investigation.) Hints of JPMorgan's behavior leaked out this month, when FERC went to court to demand unedited versions of emails it had subpoenaed from the bank. JPMorgans's response to the documents – stonewalling. The California ISO hasn't been very forthcoming with details of JPMorgan's alleged misdeeds. Its public filings don't even name the bank; it was FERC's court brief that fingered JPMorgan.

According to ISO documents, JPMorgan's scheme got discovered only because the firm was collecting so much in excessive payments that it became hard to miss. The scheme apparently involved rigging bids for electricity; this was nothing that improved the electric grid, did not help the efficent distribution of electricity; did not produce jobs; and did not add any economic value. They got greedy, real greedy. FERC says it has the legal authority to return the state's wholesale market to a utility model, in which generators would get paid only for their true cost of generation, plus a reasonable financial return. It also has the authority to place trading restrictions on JPMorgan or any other market participant it finds guilty of manipulation. No word yet on the next step.

If it all sounds familiar, that's because we've seen this movie before – it was called Enron. Basically the same sleazy deal. And you've got to wonder who the auditors are for JPMorgan? Didn't they learn anything from what happened to Arthur Anderson? And when do the enablers become just as guilty as the perpetrators? And 12 years after the collapse of Enron we're asking the question again – why hasn't anything been fixed on Wall Street?