Friday, August 24, 2012 - Say It Ain't So

Say It Ain't So
-by Sinclair Noe

DOW + 100 = 13,157
SPX + 9 = 1411
NAS + 16 = 3069
10 YR YLD +.01 = 1.68%
OIL - .44 = 97.47
GOLD - .40 = 1671.70
SILV +.24 = 30.92
PLAT + 7.00 = 1554.00

Say it ain't so Lance. The unbeatable Lance Armstrong; the guy who did so much with the yellow bracelets; he finally admitted he is a cheat. He used performance enhancing drugs. He doped. “Enough is enough,” that was Armstrong's statement. I couldn't agree more. And yet, even with this I have to take exception. You see, Armstrong didn't admit guilt. He didn't come clean. Armstrong will not contest the charges of doping against him. Weary from years of denial, legal battles, skirmishes with former-team mates and anti-doping chiefs, it is a fight Armstrong says he no longer has the stomach for: "Today I will turn the page," Armstrong said. "I will no longer address this issue regardless of the circumstances."

He didn't go through a discovery process that would have brought out all the sordid details and entered them into evidence. No, that might have allowed his corporate sponsors to claw back all those endorsement fees. So, Armstrong and his attorneys just say that's it, enough is enough. This is what corporations do when they want to limit liability; make no mistake, Armstrong is a corporation.  Pay the fine, but do not admit guilt, give up the Tour de France championship but keep the money. The workers were already taking down his statue in front of the stadium at Penn State. 

This is an ongoing and systemic problem, and it includes Penn State and the Catholic Church, and major league baseball, and the NFL; and it includes FEMA and Hurricane Katrina and the Army Corps of engineers, and WMD's and Iraq. We can't even seem to make it through a week without another mass shooting. Ten people shot in the street near the Empire State building. Yea, that gets the headlines. What about the 19 people shot in Chicago in one night; they weren't all in the same intersection, but still it's a lot. And don't forget Enron, Worldcomm, Global Crossing, Lehman Brothers, Bear Stearns, Bank of America, JPMorgan, Morgan Stanley, Goldman Sachs, Standard Chartered, HSBC, the London Whale; Wall street in general; Stockton, Birmingham, Portugal, Ireland, Italy, Greece, and Spain, and all the other little piggies, the Big 3 car companies, regulators, and the courts. Congress has an approval rating of 12%. I didn't realize they had that many relatives. And those ratings are about where we place the large corporations, and labor unions, and of course, the news media. Who do you trust? 

The institutions that have lost the most trust are also among the most important to basic functioning. We don't trust these vital institutions because they have proven themselves to be untrustworthy. We can no longer assume competence nor common sense nor common decency nor good faith. And this, as much as any particular truth, the thing that defines America in 2012.  We seem to have entered a downward spiral of misconduct and low expectations.

Meanwhile, Ben Bernanke wrote a letter to a congressional oversight committee and he said the Fed has room to deliver additional monetary stimulus to boost the economy. The letter comes a week ahead of the annual economic symposium at Jackson Hole, Wyoming, where Bernanke and ECB President Mario Draghi will speak. The ECB is discussing yield-band targets under a new bond-buying program to let it shield its strategy and avoid speculators trying to cash in; any decision would not be made before the ECB's September 6 policy meeting. So, the Dow Industrials go up 100 points, not because the economy got better, not because Quantitative Easing will actually provide stimulus to the economy but because it will put money in the pockets of bankers who didn't do anything productive. 

Bernanke also defended accusations that the Fed acts when the market pouts. “Markets understand that basic fact [that policy is set on future economic forecasts]; as a result, when new information becomes available regarding the future state of the economy, they draw their own inferences regarding the likely future course of policy.”

As for whether Fed action obscures signals for potential economic growth, hides risks of inflation and alters returns on investment, Bernanke responded by repeating the Fed’s mandate — to promote price stability and maximum sustainable employment, adding it’s “keenly attuned” to the risks of inflation.

Barring some miraculous recovery in the economy, the Fed will embark on additional accommodation, which is not to be confused with stimulus. That’s not really news. We already knew the Fed had inched closer to action from the statement it released following its last FOMC meeting. The minutes released on Wednesday only reinforce that view.

The key difference is that the bar has been lowered. The economy doesn’t have to get worse to compel the Fed to act, it now has to show “substantial and sustainable improvement” in order for it not to act. We can assume that means growth higher than the 1.5 percent pace tallied in the second quarter.

The Fed has expanded its balance sheet to about $2.8 trillion, from about $900 billion in August 2008. The bigger the balance sheet the weaker the results; the strategy appears to be suffering from the law of diminishing returns. The more you do something, the less effective it becomes over time. Not only that, but monetary easing isn’t really a good solution to what’s wrong with the economy. The economy isn't growing because demand is low. And one reason demand is low is because the money that could have gone to economic stimulus went instead to monetary easing, then it got stuck in corporate coffers and Federal Reserve deposit accounts.  And the Fed forgot about their mandate to provide maximum employment; they took care of the banks first, and foremost. For the first time ever, household net worth has contracted over a five-year period. The remedy to that problem isn’t lower rates.

The Fed may be printing money, but no one’s doing anything with it. Just look at the banks. The gap between deposits and lending is now a record $1.7 trillion. The banks have money and they buy Treasuries with it. Banks have already bought double the amount of Treasuries they did in 2011, pushing their holdings to an all-time high of $1.8 trillion. The Fed prints money and gives it to the banks; the banks give it to the Treasury. You scratch my back and I'll scratch yours; tit for tat; quid pro quo. And all that money just can't seem to find its way to willing hands of practical purpose. 

People who lost long-held jobs during this depression struggle to find new employment and often take substantial pay cuts if they did find new work. I don't know what arrow Bernanke has in his quiver to  deal with this. A new Labor Department report shows that the people lucky enough to find new work are often taking steep wage cuts. Of the displaced workers who lost full-time wage and salary jobs from 2009-2011 and were reemployed by January, just 46% were earning as much or more than they did in their lost job. A third of them reported earnings losses of 20% or more. 

From the most recent FOMC minutes we learned  "the majority of FOMC participants don't seem to think that the unemployment rate will improve that quickly, but "it is not at all obvious that the pace of the recovery is inconsistent with the FOMC's view of achieving its dual mandate." In other words, the high unemployment numbers aren't cyclical, they are structural; we have yet another systemic failure.