Wednesday, August 22, 2012 - QE Soon, Inequality Grows

QE Soon, Inequality Grows
- by Sinclair Noe

DOW – 30 = 13,172
SPX + 0.32 = 1413
NAS + 6 = 3073
10 YR YLD -.09 = 1.72%
OIL - .28 = 96.40
GOLD + 15.50 = 1655.10
SILV + .50 = 29.93
PLAT + 26.00 = 1541.00

The Federal Reserve released minutes of their most recent Federal Open Market Committee meeting. Here’s the money quote from the FOMC minutes: “Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”

In other words, a majority of the FOMC members think it is time for QE3, unless we see an economic miracle, say hallelujah! So, when will they make an announcement? Well, there is a symposium in Jackson Hole, Wyoming on August 31. There is another FOMC meeting September 12 and 13. The language in today's minutes is not a guarantee of QE3, but if they do not make an announcement of QE3, then the lack of action will be interpreted as highly political and obstructionist. They have now obligated themselves to some sort of accommodation; it might not be called QE3, but a rose by any other name...

The economy is ready for help; GDP is growing at less than 2%; inflation is running less than 2%; unemployment is lingering at 8.3%; Europe could implode and hurt the US economy. So, what will happen when the Fed provides additional monetary accommodation? Kansas City Federal Reserve President Esther George thinks more easing won't work. She asks: “Is there anyone not borrowing today or purchasing a house because interest rates aren’t low enough? Do we expect that businesses will hire if their long-term rates are lower?”  And of course, the answers are no and no. 

That means the Fed had better go big, real big. Extending their zero interest rate policy another year is not enough. Revisiting the tired old bond buying program of QE 1&2 will likely fall flat. Boston Fed President Eric Rosengren thinks the new accommodation should be open-ended, with no specific time frame. How about adding a reduction in interest paid to member banks to park money with the Fed? What other tricks does the Fed have up its sleeve? If they have more tools in the toolbag, why haven't they used them? What are they waiting for? 

We have known and we have told you the Fed would have another round of accommodation; the only question was when. We now know the answer is sooner rather than later. 

There are, of course, limits to the efficacy of monetary policy. The Fed can't rescue Americans from the  fiscal follies of a dysfunctional Congress, hell bent on cliff diving. The Congressional Budget Office issued a fresh warning today on the fiscal cliff. They say the economy will grow at a 2.1% clip in 2012, but fall by 0.5% between the fourth quarter of 2012 and the fourth quarter of 2013 under the fiscal cliff scenario. If Congress can't get its act together, the unemployment rate will rise from 8.3% to 9.1%. Of  course, that is the worst case scenario for the fiscal cliff; that is when the politicians can't find any common ground, all the tax cuts expire and all the automatic spending cuts take effect. It could happen that way. If Congress manages to avoid the fiscal cliff altogether, then the CBO sees the economy growing by 1.7 percent next year and unemployment drifting lower to 8 percent. There is actually a solution that involves some tax increases and some spending cuts and life is beautiful and easy. 

It could happen.

I have a dream.

A new report from the Pew Research Center shows inequality increasing, the middle class shrinking and wealth concentrating at the top. Surprise, surprise.

The study shows that for the roughly 50 percent of adults defined as middle class, with household incomes ranging from $39,000 to $118,000, the past ten years were the "worst decade in modern history," as income dropped for the first time since the end of World War II.

Most middle class Americans say they have been forced to reduce spending in the past year; fewer now believe that hard work will allow them to get ahead in life. Families are now more likely to say their children's economic future will be the same or worse than their own. In all, 85 percent of middle class Americans say it is more difficult now than a decade ago to maintain their standard of living. 

In 1970, the share of income that went to the middle class was 62 percent, while wealthier Americans received 29 percent. But by 2010, the middle class earned just 45 percent of the nation's income, tying a low first reached in 2006, compared to 46 percent for upper-income Americans. 

Since 2000, the median income for America's middle class has fallen from $72,956 to $69,487.Median net worth for the middle class fell 28 percent over the last decade, from $129,000 in 2001 to $93,000, wiping out two decades of gains. Among upper-income families, net worth edged higher from $569,000 to $574,000. Lower-income families saw net worth fall 45 percent to $10,000. 

Roughly 42 percent of middle-class adults say their household's financial situation is worse now than before the recession began, compared to 32 percent who reported they are now better off and 23 percent who said their finances are unchanged. Of those who said they were worse off now, about 51 percent said it will take at least five years to recover, including 8 percent who said they will never recover.

Who's to blame?  By a wide margin, 62 percent say the blame lies with Congress. About 54 percent blame  banks and financial institutions, while 47 percent say large corporations, 44 percent point to the Bush administration, 39 percent cite foreign competition, and 34 percent find fault with the Obama administration. About 8 percent say the middle class itself deserves a lot of the blame.

One area where the middle class was hammered in the past few years was real estate; the dream of home ownership turned into an underwater nightmare. The National Association of Realtors reported today that July sales of existing homes increased to an annual rate of 4.47 million. They say the housing market is constrained by unnecessarily tight lending standards and shrinking inventory supplies. So, it is stabilizing but not close to normal. 

Public pension funds from Arkansas, Ohio, Oregon and Sweden will be lead plaintiffs in a group lawsuit against JPMorgan Chase over trades made by Bruno Iksil, also known as the London Whale. A district judge in New york ruled the lawsuits could be consolidated into a class action. The lead plaintiffs are the Arkansas Teacher Retirement System, Ohio Public Employee Retirement System, School Employees Retirement System of Ohio, State Teachers Retirement System of Ohio, Oregon Public Employee Retirement Fund and a Swedish pension fund. The pension funds allege they lost as much as $52 million because of fraudulent activities by JPMorgan’s London chief investment office, and that they were given false information that hid the nature of the bank's trades.