Tuesday, September 11, 2012 - I Woke Up Early Today

I Woke Up Early Today

- by Sinclair Noe

DOW + 69 = 13,323
SPX + 4 = 1433
NAS +0.50 = 3104
10 YR YLD +.01 = 1.70%
OIL - .37 = 96.80
GOLD + 7.70 = 1733.50
SILV + .14 = 33.58
PLAT + 12.00 = 1610.00

Rating agency Moody's says it likely would cut its "Aaa" rating on US government debt, probably by one notch, if negotiations on the federal budget fail. The lower rating by Moody's would be the equivalent of the rating that Standard & Poor's put on the US last year when it downgraded the rating following the debate over raising the debt ceiling. Moody's says that if Congress and the White House don't reach a budget deal, $1.2 trillion in spending cuts and tax increases will automatically kick in starting Jan. 2. House Speaker John Boehner says he's not confident that Congress can reach a deal and avoid a downgrade. No serious negotiations are expected until after the November elections.

The Federal Reserve's FOMC policy making meeting commences on Thursday and the central bank is all but certain to extend its plan to keep interest rates low, moving the possible cutoff to 2015 from 2014. Also, it is widely expected the Fed will launch a bond-buying program targeting the mortgage market, QE3, or some new name to describe the same. The guidance on interest rates is supposed to encourage businesses and consumers to invest and spend, stimulating the economy, while the bond purchases are designed to further lower interest rates. The Fed's economic prescription may be part of the problem; might even be counterproductive. The Fed's actions serve as acknowledgment that the economy is weak and requires help. This approach not only may make consumers and businesses fear a long period of economic malaise, but also suggests that the Fed will start to raise rates if the economy shows signs of recovery.

Fed officials are cognizant that their policies may not have sent as clear a signal as they hoped; they are surely aware of the idea their actions will have diminishing returns. So, look for the Fed to announce something like open-ended bond purchases until such time as the economy recovers. Of course, part of the Fed announcement will surely be influenced by Europe.

The ECB's new unlimited bond-buying program hasn't been enacted and it is already producing some results. The yield on Spanish 10-year government bonds fell below 6 percent for the first time since May. The risk premium, or the comparison of Spanish bonds to German bonds; that gap narrowed to 412 basis points, down 141 basis points on the week. On Thursday, the Germans will decide the constitutionality of the Euro-zone bailout schemes. Italy's Mario Monti, in a delusional outburst of irrational exuberance, says the Italians have averted the worst case scenario of the debt crisis. France, meanwhile, looks like its economy is shrinking after nine months of just stagnating. The Germans may not be happy about a euro-wide bailout but it seems like slow motion karma, and if they don't step up now, they'll just have to pay more later.

Here in the US, the rich aren't just getting richer, they're getting very rich. You're getting poorer. Most of you, anyway. The wealth gap between the richest and the typical family more than doubled over the past 50 years. The Economic Policy Institute report finds that the top 1% had 125 times the net worth of the median household as of 1962; but by 2010, the disparity reached 288 times. The median household saw its net worth drop to $57,000 in 2010, down from $73,000 in 1983. It would have been closer to $119,000 had wealth grown equally across households. The top 1%, meanwhile, saw their average wealth grow to $16.4 million, up from $9.6 million in 1983.

Meanwhile, a new survey from the Pew Research Center finds more Americans consider themselves to be part of a growing lower class. The group of people ages 18 to 29 who consider themselves in the lower class ballooned in 2012 to nearly 40% from 25% in 2008. The percentage shrinks with age – only 20% of Americans of retirement age feel the same.

If you are looking for a way to lift yourself from the lower economic rung, if you would like to lift yourself out of the middle class, we have a case study in quick wealth. The secret is to start by getting a job with a giant Swiss bank, like maybe UBS; help rich Americans to set up phony companies to conceal secret Swiss bank accounts; give those clients credit cards to access their hidden cash. Convert the wealthy Americans' money into diamonds, smuggle the diamonds to Switzerland. This, in and of itself, will only earn you a good salary. If you want the big liquidity event, you have to go a step beyond, and blow the whistle and report your US clients to the IRS.

This is the story of Bradley Birkenfield, and today he was awarded $104 million. UBS's tax avoidance program tried to hide more than $20 billion from the US taxman, but the scheme began to unravel in 2007 after Birkenfield spilled the beans on his former clients. UBS paid a $780 billion fine and agreed to disclose the names of 4,450 US clients. Of course, the story had a few twists along the way. Birkenfield was not exactly an angel, and he was charged with conspiracy related to the case; Birkenfield pleaded guilty and went to jail for a couple of years. He got out last month. To the best of my knowledge, no other UBS banking officials went to jail, just the whistleblower.

Pulling yourself out of the middle class is no easy accomplishment, it takes hard work, risk, and in the case of Bradley Birkenfield, it required conviction. And if you are in the upper class; if you are among the wealthiest Americans, and you think it is a clever idea to move some of your money offshore, the case of Bradley Birkenfield offers 104 million reasons why a tax avoidance scheme might not be so clever after all.

I have a correction. Yesterday, I told you about the problems with GoDaddy, the website domain company. Millions of their websites were shut down, to the great consternation of website owners. There was speculation the highly effective, activist hackers known as Anonymous may or may not have claimed credit for the shutdown. This afternoon GoDaddy said it didn't need any outside help to screw up its operations; it had done so by accident all by itself. So what looked like another in a long line of institutions being taken to task by Anonymous turns out to be just normal, run of the mill, day to day, GoDaddy incompetence.