Friday, November 30, 2012

Friday, November 30, 2012 - We're All Just Muppets Living in a Fairy World

We're All Just Muppets Living in a Fairy World
by Sinclair Noe

DOW + 3 = 13,025
SPX +0.23 = 1416
NAS – 1 = 3010
10 YR YLD - .01 = 1.61%
OIL + .88 = 88.95
GOLD – 10.60 = 1716.20
SILV - .85 – 33.54

October 31 Closing Numbers:      
DOW                                                13096
SPX                                                 1412
NAS                                                 2977
10 YR YLD                                      1.69%
OIL                                                   88.51
GOLD                                              1721.20
SILV                                                 32.36

So for all the talk about the fiscal cliff, the election, Hurricane Sandy, The Euro-Debt Crisis, the unrest in the Middle East; for all that and more, the markets gave a big yawn in the month of November.

So, yesterday afternoon the House Republicans told reporters that the White House plan to avert the fiscal cliff was nothing more than a “joke”, an “insult”, and a “complete break from reality.” Mitch McConnell said he “burst into laughter. John Boehner said: “It was not a serious proposal.”  The plan, or the opening salvo from the White House calls for $1.6 trillion in tax increases spread out over ten years, $50 billion in additional stimulus spending, and $400 billion in spending cuts over ten years, plus an extension of the 2 percentage point payroll tax deduction or something comparable to it, and a permanent extension on the debt ceiling.

Meanwhile, the Republican plan is, well, it's still something of a mystery but we know they want cuts to entitlement programs, and no they're not referring to the corporate welfare programs that allow $1.5 trillion in corporate profits to be booked offshore, or the other corporate welfare loopholes. No, the Republicans are kinda-sorta arguing for the Ryan Budget, with its deep cuts to entitlements and other spending, and with a zero percent chance of getting through the Senate, just as the Obama plan has a zero percent chance of getting through the House. We are still in the initial phase of negotiating; it's all about tactics, not final numbers.

And so President Obama hit the road today to rustle support for his side. He traveled to Pennsylvania to make the case that Congress should immediately extend the Bush-era tax cuts on income under $250,000 per year. He went to a toy manufacturer in Hatfield, PA, the obvious graphic being that his plan will mean a tax break for most, that the companies depend on consumer spending, and that the extension of the tax cut will help keep the company making toys and employing workers; everybody gets a Merry Christmas, and toys under the tree.

Adding to the discussion today, a New York Times article that says most Americans in 2010 paid far less in total taxes — federal, state and local — than they would have paid 30 years ago. The combination of all income taxes, sales taxes and property taxes took a smaller share of their income than it took from households with the same inflation-adjusted income in 1980.

Households earning more than $200,000 benefited from the largest percentage declines in total taxation as a share of income. Middle-income households benefited, too. More than 85 percent of households with earnings above $25,000 paid less in total taxes than comparable households in 1980.

Lower-income households, however, saved little or nothing. Many pay no federal income taxes, but they do pay a range of other levies, like federal payroll taxes, state sales taxes and local property taxes. Only about half of taxpaying households with incomes below $25,000 paid less in 2010.

The analysis shows that the overall burden of taxation declined as a share of income in the 1980s, rose to a new peak in the 1990s and fell again in the 2000s. Tax rates at most income levels were lower in 2010 than at any point during the 1980s.

This week the Euro-Union, and specifically Germany's parliament approved a debt restructuring plan that essentially allowed Greece to hit the pause button on its debt. It didn't resolve the Greeks debt problem and it didn't create a plan for rebuilding the Greek economy, but it kicked the can down the road. The Euro-zone's crisis is far from over. Today, European Central Bank President Mario Draghi said Euro-zone members must tighten budgets and form a banking union to leave behind the “fairy world” that allowed problems to grow.

Draghi's call for reform was echoed by International Monetary Fund chief Christine Lagarde, who said implementing a banking union with powers to supervise all banks in the Euro-zone should be the currency bloc's top priority. The economic data from the EU today was bleak. Another 173,000 people joined the ranks of the jobless in October, and German retail sales and French consumer spending dropped more than expected.

And the Greek deal is looking like it might not hold together, as banks and pension funds balk at fresh losses, raising fears that the package could unravel before a deadline in mid-December.The International Monetary Fund said it would not disburse funds under its part of the EU-IMF package unless the euro-zone delivers on a bond "buy-back" scheme, which is supposed to cut Greece’s burden by 10% of GDP. The dispute comes as Moody’s said the EU-IMF deal to unlock $56 billion in bail-out payments to Athens merely papers over cracks and does little to alleviate Greece’s "extreme economic and social fragility". Moody's says: "We believe that the country’s debt burden remains unsustainable."

Leaked documents have already cast serious doubts on that Greece can reach its debt reduction target, much to the irritation of the IMF, which fears that its own credibility is being damaged by the continued fudge over figures that appear to be extracted out of thin air and have repeatedly proved wide of the mark over the past two years.

There is mounting irritation among the Asian and Latin American members of the IMF Board - as well as the US - at the failure of the Europeans to deploy their full wealth to clean up an internal EMU problem. It is a long way away from the permanent fix that the IMF had been insisting upon. It is just one more big kick of the can down the road. And so, Draghi is calling for a banking union to leave behind the fairy world.

Sometimes this economic stuff makes sense, sometimes it doesn't.

The Chinese government would like to develop Shanghai into a major gold trading center; to that end, beginning Monday, they will allow over-the-counter gold trading between banks for the first time. The introduction of interbank trading is intended to develop China into a liquid market such as London, and demonstrates the government’s readiness to open the market to greater participation by international banks. Chinese banks already play a significant role in determining international gold prices, so the move will have a limited impact on prices.

China offers a massive gold market, albeit one that is tightly controlled. The country is the world’s biggest gold producer and ranked as the No. 2 gold consumer in the third quarter of this year. It has official gold reserves of 1,054 metric tons, the world’s sixth-largest. But gold exports are banned and only a handful of banks hold import licenses.

Until now, member banks have been able to trade physical gold between themselves on the Shanghai Gold Exchange, but the absence of an over-the-counter market restricted them from becoming market makers in gold. In an over-the-counter market, transactions are quoted and conducted between parties on a principal-to-principal basis rather than being traded through a broker on an exchange.

So, you're looking around for a nice place to invest these days. Where do you go? Subprime mortgage indexes have rebounded substantially – one is up 39% already this year. Goldman Sachs is telling its clients to invest in some of the ABX subprime mortgage indexes that it helped create back before the crisis. What could go wrong? Wait a minute, you say, aren't those the same subprime garbage Goldman Sachs bet against? Well, yes, but they paid a $550 million dollar fine for selling toxic collateral debt obligations and then betting against their own clients; and $550 million is a big fine, it's a couple of days work for Goldman. I know what you're thinking; these guys are still the same Muppet milking masters of the universe they used to be; they would sell their own grandmother to Somali pirates if they held credit default swaps on her. And its not like they had to admit wrongdoing, so they can just go back to the same old, same old. Everything is cool now.

Thursday, November 29, 2012

Thursday, November 29,2012 - Place Your Bets

Place Your Bets
by Sinclair Noe

Let's start with the important numbers today: 5, 16, 22, 23, 29, and the Powerball 6. And I did not win.
Somebody in Missouri and somebody in Phoenix are holding the winning tickets. Not me. All I'm holding is a $10 piece of paper which is my donation to the tax fund for the mathematically challenged.

DOW + 36 = 13,021
SPX + 6 = 1415
NAS + 20 = 3012
10 YR YLD un = 1.62%
OIL + 1.23 = 87.72
GOLD + 6.00 = 1726.80
SILV + .50 = 34.27

The U.S. economy grew at a 2.7 percent annual rate from July through September, much faster than first thought. The Commerce Department said growth in the third quarter was significantly better than the 2 percent rate estimated a month ago. And it was more than twice the 1.3 percent rate reported for the April-June quarter. The main reason for the upward revision to the gross domestic product was businesses restocked at a faster pace than previously estimated. That offset weaker consumer spending growth.
The fourth quarter GDP is expected to drop back down below 2 percent because of Hurricane Sandy, which put the brakes on all sorts of business activity along the East Coast. And then the other reason cited for the possible fourth quarter slowdown is the fiscal cliff. (Sorry, we just can't get through the day without talking about it.) So, here is the annotated version of today's fiscal cliff report: a little partisan sniping, a few snarky comments; no substantive progress, but talks are ongoing. Despite all the hype about the fiscal cliff, the markets appear to be treating it more like a fiscal bunny hill. The VIX, the volatility index is scraping along bottom at about 15, indicating a broad based complacency. And if you're actually paying attention to one of those countdown clocks, you really need to be doing something different.
Anyway, back to the GDP report. Consumers and businesses appeared to be more cautious over the summer. Consumer spending grew at a weaker 1.4 percent rate in the third quarter, down from the 2 percent rate estimated a month ago and nearly in line with the 1.5 percent rate in the second quarter. Businesses spending on equipment and software fell at an annual rate of 2.7 percent in the third quarter, the first decline since the depths of the recession in April-June 2009. The report showed continued strength in homebuilding, which rose at an annual rate of 14.2 percent. And government spending expanded at an annual rate 3.5 percent, marking its first positive contribution to overall economic growth in two years. The increase was driven by a big jump in defense spending.
Consumer spending will be a big part of the fourth quarter GDP, and it looks like we are still consuming. The National Retail Federation reports the number of shoppers in stores and on websites rose 9% over the Black Friday weekend to 247 million. Spending per shopper rose 6% to $398 and total spending was up 13% to $59 billion. Retailers were very promotional as we have to come expect during the kickoff of the holiday season. Deals were offered earlier with many stores opening on Thanksgiving and seeing good traffic. Online retailers were at least matching in-store deals and offering many of their own promotions even before Cyber Monday. Black Friday and Cyber Monday promotions appear to be holding for at least an extra week; that's not great for margins but overall it looks like a pretty strong start to the shopping season.
If you've been doing most of your shopping online Microsoft has launched a holiday season offensive against Google, claiming that search results on its rival's shopping site are bought and paid for. Microsoft says: "Google’s new redesigned shopping vertical now decides what to show you -- and how prominently to display what product offers they show -- based partially on how much a merchant selling the product has paid Google.”
This refers to new rules that Google adopted for its shopping site. Google Shopping now charges merchants who participate in its Product Listing Ads program fees on a per-click or cost-per-acquisition basis. Google makes no bones about the program. They say their relationship with merchants results in accurate and timely pricing information. Microsoft begs to differ. Google's pay-to-play program means the results that potential shoppers get will be based more on what merchants are willing to pony up than on query relevancy.
The point here is that if you are shopping online, it might pay to comparison shop by using different search engines, at least that's what Microsoft wants us to believe.

Back to the GDP report. The report reveals a dichotomy between consumers and businesses. Consumers have gone from being cranky and tight-fisted to slightly positive and mildly optimistic. Businesses, meanwhile, appear to be hunkering down in like a gaggle of doomsday preppers.
The most recent Conference Board consumer sentiment survey released earlier this week showed consumer confidence at its highest level since February 2008, while the University of Michigan consumer sentiment index is up 30% from a year earlier as of late November. The Michigan survey revealed more optimism about the employment situation than at any point since 1984. Of course any measure of consumers' feelings is bound to be subjective. And consumers have been beaten like a drum over the past few years. The surge in morale might be nothing more than a pause in the beatings.
So while the surveys show the most positive results in years, it’s possible that they are only positive relative to how negative people were in 2009, 2010 and 2011, and that compared to the 1980s and 1990s, people aren’t actually feeling so confident. The same goes for income: More people than at any point since early 2008 say their finances are improving; that raises the index. But given that most incomes have been stagnant for the past decade or more, improvement does not necessarily translate into objectively good.
On the flip side, business executives can't seem to get past this idea that uncertainty is the boogie man that lurking in the shadows. The big fear is the fiscal cliff, of course. And frankly it is disconcerting to see the captains of industry cowering like an abused dog. There is a real good chance that the CEO who is afraid of the fiscal cliff, doesn't have the stuff of a real entrepreneur. An entrepreneur will put a second mortgage on the house. An entrepreneur will max out the credit cards to keep the business afloat for another week, or another month. (truck full of canaries)
An entrepreneur sees a fiscal cliff and straps on the bungee cord. A CEO sees a fiscal cliff and breaks down in flop sweat.
From 2009 to 2012, the companies of the Standard & Poor’s 500-stock index generated double-digit profits and even healthier revenue gains. Yes, it looks like corporate profits are slowing slightly but corporate coffers are bulging; there seems to be a little resolution to the crisis in Europe, even if it is just kicking the can out a year or two; emerging markets may not be booming but Brazil, and India, and China are still rolling along.
So, who is right, the consumer or the business exec? Income levels tend to be a better predictor of what people will spend, along with the value of their homes and the ease of obtaining credit. Given that incomes are stable and slightly growing, homes values are on the rise and credit is easing, it’s a good bet that people will spend a bit more and the overall economic picture will brighten.
Business execs are lousy economic prognosticators. While spending by companies is a key component of economic vitality, spending plans are much more elastic than they were decades ago and can be adjusted more rapidly. That may not be true for building a manufacturing plant, but it is certainly true for hiring and marketing and inventory. So present concerns and stated intentions to cut back could change quickly to exuberance and plans to spend more freely.
A separate report today showed the number of Americans seeking unemployment benefits fell 23,000 to a seasonally adjusted 393,000 last week, the Labor Department said. It was the second straight drop after Hurricane Sandy had driven applications to 451,000 three weeks ago. Millions of Americans are unemployed and underemployed, but tens of millions more are gainfully employed,and although they might be feeling some anxiety about their job, most of the deepest corporate cost cutting has already been done. If you still have a job, it's probably because you're good at it, and the company you work for is about as lean as it can get. If it could be outsourced, it probably was. When people feel gainfully employed, they tend to spend and demand increases, businesses respond to demand, not to sentiment.
Expectations have undoubtedly come down in recent years, as people reconcile themselves to more modest changes and more realistic horizons. Business sentiment matters, but it is the consumer and the demands of the consumer that push the economy. The smart business execs will be on the lookout for indications of increased demand, and they will be well suited to go out on the far end of the curve and they should be ready to gamble just a little, ready to invest to meet demand. Americans have shown a remarkable and consistent predilection to spend over the years, with only a few notable pullbacks such as during the worst periods of the past few years.
Take it from someone who knows a lousy bet. You shouldn't bet against the American consumer.

Years ago, the late Mexican dictator Porfirio Diaz utter a famous line about his country: “Mexico, so far from God, so close to the United States.”
Next week the leaders of North America’s two most populous countries are due to meet for a neighborly chat in Washington, DC. According to The Economist The re-elected Barack Obama and Mexico’s president-elect, Enrique Peña Nieto, have plenty to talk about: Mexico is changing in ways that will profoundly affect its big northern neighbour, and unless America rethinks its outdated picture of life across the border, both countries risk forgoing the benefits promised by Mexico’s rise.
The White House does not spend much time looking south. During six hours of televised campaign debates this year, neither Mr Obama nor Mr. Biden mentioned Mexico directly. That is extraordinary. One in ten Mexican citizens lives in the United States. Include their American-born descendants and you have about 33m people (or around a tenth of America’s population).

Mexico's GDP ranks higher than South Korea. It's economy is growing faster than the Brazil's. Can you name the largest exporter of flat screen TV's? It's Mexico. And the place where you will likely see signs of the growing Mexican economy is in the shopping malls. In addition to TVs, they are the top exporter of BlackBerrys and fridge-freezers, and is climbing up the rankings in cars, aerospace and more. On present trends, by 2018 America will import more from Mexico than from any other country. “Made in China” is giving way to “Hecho en México”.
The doorway for those imports is a 2,000-mile border, the world’s busiest. Yet some American politicians are doing their best to block it, out of fear of being swamped by immigrants. They could hardly be more wrong. Fewer Mexicans now move to the United States than come back south.
Undervaluing trade and overestimating immigration has led to bad policies. Since September 11th 2001, crossing the border has taken hours where it once took minutes, raising costs for Mexican manufacturers (and thus for American consumers). Daytrips have fallen by almost half. More crossing-points and fewer onerous checks would speed things up on the American side; pre-clearance of containers and passengers could be improved if Mexico were less touchy about having American officers on its soil (something which Canada does not mind). After an election in which 70% of Latinos voted for Mr Obama, even America’s “wetback”-bashing Republicans should now see the need for immigration-law reform.
Mexico is poised to become America’s new workshop. If the neighbors want to make the most of that, it is time for them to take another look over the border.

You know who Rupert Murdoch is? Owns Fox News. The same Rupert Murdoch who scandalized England with phone hacking, influence peddling and bribery. The same Rupert Murdoch who stays up late Saturday nights pondering things on Twitter, like what to do about "the Jewish-owned press".
Murdoch already owns the Wall Street Journal, the New York Post, Fox News Channel, Fox movie studios, 27 local TV stations, and much more. And there are reports that he really wants to buy the Los Angeles Times and the Chicago Tribune - the bankrupt-but-still-dominant newspapers (and websites) in the second- and third-largest media markets, where Murdoch already owns TV stations. Under current media ownership limits, he can't buy them. It's illegal ... unless the Federal Communications Commission changes the rules.
Just by pure coincidence, FCC Chairman Julius Genachowski has been circulating an order at the FCC to lift the longstanding ban on one company owning both daily newspapers and TV stations in any of the 20 largest media markets. And he wants to wrap up this massive giveaway just in time for the holidays.
If these changes go through, Murdoch could own the Los Angeles Times, two TV stations and up to eight radio stations in L.A. alone. And he's not the only potential beneficiary: These changes could mean more channels for Comcast-NBC, more deals for Disney and more stations for Sinclair Broadcasting.
For anyone who actually cares about media diversity and democracy, the gutting of media ownership limits will be a complete disaster. These rules are one of the last barriers to local media monopolies. Without them, we will lose competing voices for local news. We will see the mainstream media get even more monotone, monochrome and monotonous, and more than likely, even more inaccurate.
Genachowski's proposal is essentially indistinguishable from the failed policies that millions rallied against in 2003 and 2007. Ninety-nine percent of the public comments received by the FCC opposed lifting these rules when the Republicans tried to do it. Genachowski's proposal is nearly identical to the one the Senate voted to overturn with a bipartisan "resolution of disapproval" back in 2008. The federal courts have repeatedly - and as recently as 2011 - struck down these same rules, noting the FCC's failure to "consider the effect of its rules on minority and female ownership." The 3rd U.S. Circuit Court of Appeals ordered the FCC to study the impact of any rule changes before changing the rules. The FCC has done nothing of the kind.
Yet if Genachowski gets his way, according to reports, the FCC will vote on this major overhaul "on circulation" - that is, in secret and behind closed doors - with no public participation or accountability.

Wednesday, November 28, 2012

Wednesday, November 28, 2012 - If They Don't Jump, I Might Push Them

If They Don't Jump, I Might Push Them
by Sinclair Noe

DOW + 106 = 12,985
SPX + 10 = 1409
NAS + 23 = 2991
10 YR YLD - .03 = 1.62%
OIL - .52 = 86.66
GOLD – 22.00 = 1720.80
SILV - .28 = 33.87

I am getting so sick and tired of this fiscal cliff malarkey* (* a politically acceptable euphemism, according to the debates), that I would like to throw some politicians off a fiscal cliff; maybe we could toss in a few media types as well. Today, I hear that stocks moved higher because John Boehner, the Speaker of the House, said he was optimistic about not going over the cliff. Really? That's all it takes for stocks to post triple digit gains? Maybe tomorrow, Mr. Boehner can tell us he is both optimistic, and confident, and chipper, and slightly perky, and everything in his universe is copacetic; and the markets could celebrate with a monster rally.

I don't think this is the real motivation for market moves but it might be, but I don't think so. On Friday, President Obama will hit the road to promote his version of fiscal cliff avoidance. Business executives and others who’ve met with President Barack Obama in recent days describe a president who’s supremely confident that he’ll come out on top of a fiscal cliff deal; with Republicans bending to his will on tax increases for the wealthy and Democrats sucking up deep spending cuts.

You have to wonder about the austerity advice being offered by the very rich CEOs that have been visiting the White House. There are 9 CEOs, including a few defense contractors, a couple of airlines, a software firm, a telecom company, and a few bankers. They all suck on the government teet; several of the companies paid no corporate taxes despite profits; a few others received multi-billion dollar bailouts to keep their companies afloat when they almost melted down. The CEOs went to the White House with a concerted message: no more government handouts to the moochers; waste must be eliminated; cuts must be made; and by that they mean Social Security, Medicare, and Medicaid. They don't want cuts to their own corporate welfare; they just want to cut yours.

There is only one problem: the vast majority of Americans oppose cuts in Social Security, Medicare and Medicaid. That's a minor problem now, because the election is over; no invites to lunch at the White House.

By the way, Nassim Nicholas Taleb, the author of “The Black Swan”, was speaking at some event in London the other day, and he said bankers who take government bail- outs to stay afloat should be paid no more than the civil servants who saved their business. Individuals in positions of power, including those who work in the financial system, must be held accountable for their decisions and have more “skin in the game.” He also advocated clawing back bonuses of highly paid executives who contribute to the failure of a firm. Actually, it's happening.

The Financial Services Authority, the U.K. industry regulator, told bank executives in a letter last month that bonuses must reflect recent scandals, and that clawbacks should be sought from those involved. The EU is seeking to cut variable pay as part of politicians’ quest to make lenders more like utilities than private money-making machines. The bloc’s 27 member nations plan to implement rules on bank-capital requirements next year that include caps on bonus size relative to salary. Here in the US, we let the bankers keep whatever they can scrounge, and then they lunch with the president and advise him to cut the handouts.

Anyway, back to the cliff. If the GOP line against marginal rate increases somehow holds between now and the end of the year, when the fiscal cliff tax hikes and spending cuts begin to kick in, the president is confident he can use the bully pulpit of the second inaugural address and the State of the Union speech to blast Republicans as holding the American economy hostage to a narrow and outdated ideology.

Of course, the Republicans are finding it more difficult to hold the line; vague plans to limit tax breaks will soon die from lack of definition or from too much clarity. Today, Republican Oklahoma Congressman Tom Cole, said the GOP should agree to a quick deal that keeps the Bush era tax rates for 98 percent of taxpayers while letting the top two rates increase. Cole said doing so would not violate Grover Norquist’s no-new-taxes pledge signed by many Republicans because it would amount to approving a tax cut for most tax payers and simply doing nothing about the other rates, which were scheduled to expire under the legislation first pushed by Bush in 2001.

Of course, the easiest way for Republicans to keep their pledge to Grover is to do nothing; go over the cliff; allow the Bush Era Tax Cuts to expire, and then come back in and vote alongside Democrats for tax cuts on 98% of taxpayers.

The bottom line, for today at least, is that the president believes he will get his marginal rate increase, or at least an acceptable version; and Republicans will get some spending cuts and a commitment to broader entitlement and tax reform. The idea is the cliff is resolved just barely by year end or near enough; toss in a continued phase down of Emergency Unemployment Compensation, temporary extension of tax cuts; assume the payroll tax cut expires and new taxes under the Affordable Care Act are implemented. Total fiscal austerity under this scenario would be about $160 billion; the GDP would take a 1% hit. Don't forget that New York is asking for $40 billion in Hurricane disaster aid; New Jersey wants about $30 billion.

The fiscal cliff is a permanent part of the economy; even with harsh action, the deficit will grow. Widening the deficit is already baked in.

It almost seems a pre-ordained outcome to a manufactured crisis. The pre-election abyss between the two parties has narrowed to a little ditch. The final outcome will include austerity, which has been a horrid failure in Euro-land. Notice we haven't heard any post-election chatter about the necessity of creating more jobs. Austerity is more important than jobs. Got to get our financial ducks in a row and then we'll look at the labor market. Of course, those ducks won't ever line up until people have jobs, and demand increases.

Over in Euro-land, Greece was the recipient of a bailout deal earlier this week; the plan was met with some initial enthusiasm that anything had been accomplished; then people started to look at details.

The eurozone finance ministers and the IMF agreed to unlock loan tranches totaling $56 billion. Most of the funds are expected to be disbursed in December, with further payments in the first quarter of next year on condition that Greece continues to deliver on its austerity pledges under the bailout plan. The bailout comes in the form of fresh loans, extended loan maturities, lower interest rates on loans and allowing sovereign debt buyback on the market at discounted prices, thereby putting an end to speculation about Greece leaving the eurozone or defaulting. The problem was that Greece had too much debt and so they've replaced the old bad debt with new and improved debt.

And by new and improved we mean they buy some of their debt for what the market was paying, in other words, discounted, and then they extend the term without paying more. I know what you're thinking – that is a very clever way to pay down debt without paying down debt. These are all fake numbers both because the data is patchy and because they’re sort of not the point; the point is to return Greece to a sustainable path where it pays off all its debts, its borrowing costs come down, and in 45 years when the balloon payment comes due, well, somebody else can have that job. And because this new bailout package has delayed the reckoning, the Greeks can get back to improving their economy, which has been decimated by austerity, to the point that there are almost no jobs. So that's the deal for Greece. I don't make this stuff up, folks.

The Federal Reserve released its Beige Book today. Economic growth improved in October and early November, helped by a pickup in consumer spending and steady home sales. Hurricane Sandy slowed growth in the Northeast. Hiring increased in more than half of the districts. But manufacturing shrank or slowed in seven regions and was mixed in two others. The information collected by the regional banks and bound in a Beige cover, will be used as the basis for the Fed's policy discussion at the Dec. 11-12 meeting.

I also ran across this strange little bit of news from the Atlanta Fed; it seems banks are under attack, cyberattack. The Atlanta Fed writes:
A real financial stability concern ... is the potential for malicious disruptions to the payments system in the form of broadly targeted cyberattacks. Just in the last few months, the United States has experienced an escalating incidence of distributed denial of service attacks aimed at our largest banks. The attacks came simultaneously or in rapid succession. They appear to have been executed by sophisticated, well-organized hacking groups who flood bank web servers with junk data, allowing the hackers to target certain web applications and disrupt online services. Nearly all the perpetrators are external to the targeted organizations, and they appear to be operating from all over the globe. Their motives are not always clear.

Unlike other cybercrime activity, which aims to steal customer data for the purpose of unauthorized transactions, distributed denial of service attacks do not necessarily result in stolen data. Rather, the intent appears to be to disable essential systems of financial institutions and cause them financial loss and reputational damage.”

Almost seems redundant doesn't it?

Tuesday, November 27, 2012

Tuesday, November 27, 2012 - Economic Data, Geithner's Cliff, Greek Bailout, Warren's Pitch, Blankfein's Irony

Economic Data, Geithner's Cliff, Greek Bailout, Warren's Pitch, Blankfein's Irony
by Sinclair Noe

DOW – 89 = 12,878
SPX – 7 = 1398
NAS – 8 = 2967
10 YR YLD -.02 = 1.65%
OIL - .45 = 87.29
GOLD – 7.60 = 1742.80
SILV - - .13 = 34.15

Durable goods orders leveled off in October, mainly because of slack demand for automobiles and airplanes and a reversal in defense orders. Most other manufacturers saw an uptick in demand; so, conditions aren't getting worse; they aren't getting better either. Or at least that is how it looks at first blush. Overall orders for durable goods were virtually flat in October, but factoring out the volatile defense and transportation industries, so-called core capital orders jumped 1.7% last month to mark the strongest gain since May.

Home prices rose in September for the sixth straight month. The S&P/Case-Shiller 20-city composite posted a non-seasonally adjusted 0.3% increase in September to reach the highest level in two years, following a 0.8% gain in August. Home prices were up 3% from September 2011 for the largest annual percentage growth since July 2010.

In the latest Quarterly Report on Household Debt and Credit, the Federal Reserve Bank of New York reports that non-real estate debt jumped 2.3% to 2.7 trillion, with increases in student loans, auto loans, and credit card balances. Overall consumer debt shrank $74 billion to $11.3 trillion as mortgage debt decrease more than $120 billion. Nearly a quarter of a million people had a foreclosure tacked onto their credit reports.
Late last year, total student debt outstanding surpassed $1 trillion for the first time. New data released today shows 11% of student loans were 90 days or more past due in the third quarter, up from 8.9% in the previous quarter and 8.8% a year prior. Students who graduated with a Bachelor’s degree this spring left school with roughly $28,700 in student debt, up 31% from five years ago. And in many cases, borrowers who’ve fallen behind on loans dropped out of college. Those borrowers are four times more likely to default on student loans than those who graduate.

Consumer confidence rose in November to the highest level in more than four years. The Conference Board’s confidence index climbed to 73.7, the highest since February 2008, from a revised 73.1 reading the prior month.

The percent of respondents expecting more jobs to become available in the next six months increased to 20.3, the highest since February 2011, from 19.7 the previous month. The share planning to buy a house within the next six months jumped to 6.9 percent, the most in data going back to 1964. The previous all-time high was 5.5 percent.

Even as consumers are feeling more confident, business sentiment has been stagnating as the year-end deadline for automatic fiscal tightening approaches.

The Obama administration has a way to blunt about half of the fiscal cliff’s economic fallout for 2013, even if Congress stays deadlocked: Freeze paycheck withholding levels. Treasury Secretary Tim Geithner has the authority to set withholding, whether or not tax rates increase. He has said Congress should act to extend current rates for most taxpayers. A freeze could keep $10 billion per pay period in taxpayers’ pockets and prevent a loss of 1.5 percent of monthly gross domestic product.

The move would make sense, especially if by late December a congressional deal to avert the tax-rate increases set for January looks probable though isn’t completed. The tax code gives Geithner broad latitude to set withholding tables. The statute says only that he must set the tables in a manner consistent with the purposes of withholding and the income tax rates. It doesn’t prescribe specific numbers or a specific relationship between withholding and the underlying rates. Geithner has indicated he would prefer to see a deal come out of Congress rather than have to test the Treasury's powers.

The White House has tapped the Treasury secretary as its lead negotiator in deficit-reduction talks with Congress, giving Mr. Geithner about a month to help cut a deal before $500 billion in tax increases and spending cuts begin in January—and before his long-planned departure from the administration. Yes, Geithner has said he'll stay on at Treasury until a deal gets done but you have to imagine he's itching to get out of Washington and sign a lucrative deal to sit on the Board of Directors of one or more mega-banks, so if you think he's going to let people fumble around and screw up his liquidity event, well, think again.

President Obama is scheduled to meet with small-business owners at the White House today and plans to travel to a toy factory in Pennsylvania on Nov. 30 to build public support for his approach to averting the fiscal cliff at year’s end.As Congress returns to Washington this week to confront the fiscal dilemma, many Republicans who long dismissed any tax increase as unacceptable say now they are willing to consider higher revenue -- so long as Democrats accept cuts in entitlement programs as part of a deficit-reduction deal. So far, talks between Obama and congressional Republicans haven’t yielded any significant progress. Even with the changes in rhetoric and the willingness to work together, neither side has offered a plan that moves off their pre-election position.

For the past week, GOP lawmakers have been falling over themselves to move away from Grover Norquist, pied piper of low tax rates on rich people. Tennessee Senator Bob Corker said that he was not “obligated on the pledge,” and Georgia Senator Saxby Chambliss followed suit, telling a local TV station that he cares “more about his country” than a “20-year-old pledge.” Likewise, South Carolina Senator Lindsay Graham declared that he would violate his promise for the good of the country, only if Democrats will "do entitlement reform."

On the face of it, this is both high-minded and politically realistic. The Norquist pledge is a bad idea; it hampers legislators as they attempt to solve a series of fiscal problems. And it's pretty clear that Obama campaigned for higher taxes for the top income earners, and he won. You could read these statements as a declaration that some Republicans, at least, are ready to work with the president.

Unfortunately, you’d be wrong. As loud as Republicans have been about bucking the Norquist pledge, none have actually signaled support for higher tax rates on the rich. Instead, they’ve turned the conversation toward closing loopholes as a way of raising revenue. And in the case of Lindsay Graham, the pre-condition for cooperation is for Democrats to support Bush-era tax rates, minus the loopholes, or at least a couple of loopholes.

This is the opposite of cooperation, and a sign that Republicans are still committed to keeping tax rates low on the rich. The only difference, now, is that they’ve decided to stay quiet about it.

Meanwhile, European finance ministers say they've worked out a deal to nurse Greece back to financial health. The ministers cut the rates on bailout loans, suspended interest payments for a decade, gave Greece more time to repay and engineered a Greek bond buyback. The country was also cleared to receive a $45 billion loan installment in December. Greek bonds rose.

The ECB chipped in by steering profits from its Greek bond holdings back into the rescue program. National governments will funnel their share of the profits to Greece’s bailout account, getting around rules that bar the politically autonomous central bank from directly lending to the state. The batch of measures will help pare Greece’s debt from 190 percent of gross domestic product in 2014 to 124 percent of GDP in 2020, a target set by the IMF as its condition for continuing to fund a third of the Greek program. One IMF concession was to raise that target from 120 percent.

While the financing pact rewarded the government’s budget cuts and steps to overhaul the economy, Greece will have to deliver on its commitments to earn each payout. Doubters questioned whether Greece can stomach further economic discipline and whether the bond buyback will generate enough savings. A shortfall would put outright debt relief back on the agenda.

Don't celebrate the Greek deal for long. Currency traders certainly didn't celebrate long; there was a quick rally in the euro, then it slipped. Spain is thinking about asking for a bailout. And did you notice that Britain just named a Canadian as it's top central banker? The new governor of the Bank of England will be Mark Carney, currently governor of the Bank of Canada. Carney is to take over for Mervyn King in June, when King’s term ends. Carney helped lead the Canadian economy through perhaps the best performance of the major Western nations during the crisis itself; there were no major failures of Canadian banks at a time when their international counterparts were falling like dominos, and the economic downturn in Canada was relatively mild.

Meanwhile, while we've all been looking elsewhere Argentina's credit rating was cut by Fitch Ratings, which said a default is probable after a US judge ruled the country can’t make payments on its restructured bonds unless it pays holders of defaulted debt by Dec. 15. So, now there is speculation that Argentina will halt payments on performing bonds rather than pay the holdouts on the old bonds. In other words, there might be defaults.

Warren Buffett has been talking about the fiscal cliff. Yesterday he published an op-ed piece in the New York Times. This morning he was interviewed on NBC and he said the ability of some of the highest earners to avoid federal taxes shows why laws should be changed so the wealthy pay more. Buffet said: “They were the moochers, and they paid zero,” and “The way they get at them is a minimum tax and it’s very simple to do.”

Buffet's idea is to set a minimum tax on incomes above $1 million, and among the 400 with the highest incomes in the US in 2009, the average income was about $200 million, and that six people in that group paid “nothing at all.”

Buffett’s tax bill for 2010 was about $6.9 million, or 17 percent of taxable income, he wrote in the Times last year. He said that’s a lower rate than the other 20 employees in Berkshire’s office in Omaha, Nebraska, and that the wealthy benefit from favorable treatment of capital gains and dividends, compared with wages. Buffett’s salary is $100,000 a year, so most of his income comes from capital gains and dividends at the lower tax rates. Buffet says raising the top tax rates won't dampen economic growth and would not scare off critical investment for job creation, however it would "raise the morale of the middle class."

Buffet was asked about a recent quote from Honeywell CEO David Cote who told Meet the Press that he and others like him were feeling a lack of confidence in the political process, so much so that the uncertainty was making them keep their money on the sidelines and preventing them from making additional investments, including hiring. Buffet said: "At Berkshire Hathaway, we're investing 9 billion in plant equipment, a record, breaking last year's record. It's always uncertain."

So, Buffet sounds optimistic, and he seems to be talking common sense, and then he broke from message and says he thinks Jamie Dimon, the CEO of JPMorgan Chase would make a great replacement for outgoing Treasury Secretary Geithner. And what sounded good, suddenly sounds like the insane ravings of a lunatic.

Of course Buffet isn't the only high profile corporate lunatic CEO trying to sway public opinion on the deficit negotiations. Several executives have formed a group called “Campaign to Fix the Debt” and they know a few tricks of deficit reduction because they have received trillion in federal defense contracts, subsidies and bailouts, as well as specialized tax breaks and loopholes that virtually eliminate their corporate tax bills, and sometimes result in refunds.

The CEOs are part of a campaign run by the Peter Peterson-backed Center for a Responsible Federal Budget, which plans to spend at least $30 million pushing for a deficit reduction deal. During the past few days, CEOs belonging to what the campaign calls its CEO Fiscal Leadership Council have barnstormed the media, making the case that the only way to cut the deficit is to severely scale back social safety-net programs -- Medicare, Medicaid, and Social Security -- which would disproportionately impact the poor and the elderly. Leading the charge: Goldman Sachs' Lloyd Blankfein and Honeywell's David Cote.

As part of their push, they are advocating a "territorial tax system" that would exempt their companies' foreign profits from taxation, netting them about $134 billion in tax savings. Three of the companies -- GE, Boeing and Honeywell -- were handed nearly $28 billion last year in federal contracts alone. Many of the companies recommending austerity would be out of business without the heavy federal support they get, including Goldman Sachs and JPMorgan Chase, which both received billions in direct bailout cash, plus billions more indirectly through AIG and other companies taxpayers rescued. To hear them tell, the 2008 financial crisis was caused by Social Security and Medicare, not by banksters.
In an interview yesterday, Goldman Sachs chairman and CEO Lloyd Blankfein said Social Security "wasn't devised to be a system that supported you for a 30 year retirement after a 25-year career." (who works only 25 years?) The key to cutting Social Security, he said, was simply a matter of teaching people to expect less: "You're going to have to do something, undoubtedly, to lower people's expectations of what they're going to get, the entitlements, and what people think they're going to get, because you're not going to get it."

Following Blankfein's evening news appearance on Monday, Cote, the Honeywell CEO was interviewed and he said essentially the same thing that Blankfein did. Cote recommends cutbacks in Medicare and Medicaid, but when it comes to the tax obligations of corporations, he's clear about what he wants: corporate tax rates at zero.

At Honeywell, Cote practices what he preaches. Between 2008-2010, the company avoided paying any taxes at all. Instead, the company got taxpayer-funded rebates of $34 billion on profits totaling nearly $5 billion.

So, the Campain to Fix the Debt sends out Lloyd Blankfein of Goldman Sachs to tell us that we need to expect less from Social Security, and David Cote of Honeywell to tell us that we have to slash Medicare and Medicaid; the council says we have to make drastic cuts to “entitlement programs” and what they call “low-priority spending”.

Just in case your thinking about casting a vote for the Academy Awards, consider this: Blankfein and Cote lay out this drivel without the least sense of irony or self-awareness; it is a remarkable performance.

Monday, November 26, 2012

Monday, November 26, 2012 - Shopping, Cliffs, Greece, Two-Tiered Justice, Doha, Infrastructure

Shopping, Cliffs, Greece, Two-Tiered Justice, Doha, Infrastructure
by Sinclair Noe

DOW – 42 = 12,967
SPX – 2 = 1406
NAS + 9 = 2976
10 YR YLD -.03 = 1.66%
OIL + 1.22 = 86.67
GOLD – 2.50 = 1750.40
SILV + .05 = 34.28

Well, I survived Black Friday, which actually creeped into Black Thursday; I made it through Shop Small Saturday, and I've arrived at Cyber Monday. Tomorrow will be Buyers' Remorse Tuesday. Don't forget Credit Card Shock January. I have not and will not go into debt for the holidays. Consumer debt is the worst.

A rebound in housing and the job market, along with a drop in household debt, has led additional consumers to say they’ll buy more this holiday. A new survey from the Credit Union National Association and the Consumer Federation of America shows 12 percent said they would boost spending, the highest level since 15 percent in 2007, while 38 percent said they would spend less.

According to the National Retail Federation, retail sales for the weekend are up about 13% from a year ago. Online shopping on Black Friday rose 26 percent to exceed $1 billion for the first time. Spending in stores and online rose to $59 billion in the four days starting Nov. 22. Customers spent $423 on average this weekend, up 6.3 percent from last year. The 13 percent jump in total spending suggests that some sales were pulled ahead from December and that retailers will have to keep up the promotions to avoid a lull. Retailers are going to have to get creative, such as price discounts or special events, to keep the customer engaged

Major indexes last week gained 3 to 4 percent, with the Dow above 13,000 and the S&P above 1,400 for the first time since November 6. Those gains represented a turnaround from recent losses founded on worries about Washington's ability to solve budgetary problems.

Once again today, the fiscal cliff and the Euro-crisis seemed to weigh on Wall Street, or maybe it was just a good excuse. The White House threw cold water on a proposal that tried to avoid the "fiscal cliff" of spending cuts and tax hikes by limiting tax deductions and loopholes, instead of allowing tax rates to rise for the richest Americans. Investors are hoping for advances in talks over the $600 billion in spending cuts and tax hikes scheduled to begin next year, which threaten to drag the U.S. economy back into recession.

The White House released a report today that warns of the catastrophic consequences if Republicans allow the tax bill for the middle class to rise $2,200 by not freezing middle class tax cuts. The report says that going over the cliff could take a combined $800 billion or so, out of the economy.
In its report, entitled “The Middle-Class Tax Cuts’ Impact on Consumer Spending & Retailers,” prepared by the National Economic Council and the Council of Economic Advisers, the White House argues that if Congress allows the middle-class tax cuts to expire, the economy would be devastated—the growth of the GDP could be slowed by 1.4 percentage points and consumers could spend an estimated $200 billion less than they would have in 2013 just because of the higher taxes. While Republicans are trying to get Democrats to agree to larger cuts in entitlements, Democrats are trying to hold the line on entitlement cuts while getting Republicans to agree on tax hikes for the wealthy.

In an op-ed article in the New York Times today, Warren Buffet Buffett asks readers to imagine they've been offered a great investment opportunity. The Oracle of Omaha concludes from his decades of experience in the investment world that most wouldn't shy away from an opportunity just because they might have to pay more in taxes. "Only in Grover Norquist’s imagination does such a response exist," Buffett writes.

Buffet writes that solving the country's deficit problem and getting the economy on track requires raising taxes on the rich and higher taxes won't keep the super-rich from trying to make money. He calls for a minimum 30% tax on incomes between $1 million and $10 million. At first blush, his position seems noble: A rich guy says that people like him should pay more to support the commonwealth. But on closer examination, one realizes that Mr Buffett never mentions doing anything to eliminate the tax-avoidance strategies that he uses most aggressively. And don't forget, we have been talking for a couple of years about the fact that Buffet pays less tax than his secretary, which means there is a huge gap between tax rates in theory and tax rates after the accountants have shredded the code.

The brunt of the cliff could be delayed, however. For instance, the Treasury Department and the Internal Revenue Service could wait to adjust withholding tax tables, which determine how much money is taken out of paychecks. Tax rates could also be fixed retroactively. The Federal Reserve is clothed in immense monetary power and has a few tricks up its sleeve that could keep money flowing to the government despite Congress. And the spending cuts to defense and domestic programs may be phased in over time rather than crashing down all at once at the beginning of January.

Part of the strategy might be to go over the cliff and let the blame fall; knowing that wherever the blame falls, that party will be forced to cave in. Of course, the whole process is being painted as a potential catastrophe, when it is in fact just politics as usual.

Finance ministers from the 17 countries sharing the euro, the European Central Bank and the IMF were locked in a third round of talks today to decide how to make Greek debt, expected to rise to 190 percent of GDP next year, more sustainable by reducing it to 120 percent or below by 2020. The International Monetary Fund wants Euro-zone finance ministers to agree to cut Greece's debt by 20 percent of GDP now and commit to further debt reduction in the future to get the country's finances back on a sustainable path. The IMF and the ministers are at odds on how to achieve the goal, with the IMF pushing for a bolder reduction of Greek debt through the forgiveness of some of the official loans to Athens which now make up the bulk of the country's obligations. Greece's biggest creditor, Germany, opposes any debt forgiveness for Athens.

The IMF argues that if there is no debt reduction up front, the Greek economy will not grow, nobody will invest and Greeks themselves will not spend, derailing other macro-economic assumptions of its adjustment program.

Mary Schapiro will step down as chairman of the Securities and Exchange Commission next month; Schapiro has lead the SEC since being appointed in 2009. President Obama designated Elisse Walter, an SEC commissioner, to replace Schapiro.

Under Schapiro, the SEC reached its largest settlement ever with a financial institution. Goldman Sachs agreed in July 2010 to pay $550 million to settle civil fraud charges that it misled investors about mortgage securities before the housing market collapsed in 2007. Similar settlements followed with Citigroup, JPMorgan Chase and others. The SEC has authority to pursue civil charges.

Although there were large fines, there was little accountability required by Schapiro's SEC. For example, in the Goldman Sachs case: no senior executives were singled out. The penalty amounted to roughly two weeks of earnings at Goldman. And Goldman was allowed to settle the charges without admitting or denying any wrongdoing, as were other large banks that faced similar charges.

Among the leading critics was U.S. District Judge Jed Rakoff, who questioned how the SEC could allow an institution to settle serious securities fraud without any admission or denial of guilt. Rakoff later threw out a $285 million deal with Citigroup because of that aspect of the deal.

Regulators sued Intrade today. Intrade is the online prediction market that gained popularity as an informal oddsmaker for the presidential election, saying it illegally let customers bet on future economic data, the price of gold and even acts of war. The Commodity Futures Trading Commission said in a complaint in federal court that Intrade and its operator solicited customers to trade investment contracts that technically are options. Options must be traded on approved, regulated exchanges.

The private Swiss bank, Pictet, is under investigation by US authorities trying to determine if the bank helped wealthy Americans seeking to avoid paying taxes. The investigation is part of a global offensive on the tradition of strict banking secrecy that has helped Switzerland build up a $2 trillion offshore wealth management industry. UBS was the first Swiss bank to come under scrutiny by the US authorities in a tax evasion crackdown, an investigation it settled in 2009 by handing over client data, admitting wrongdoing, and paying a $780 million fine to avert prosecution. US officials have subsequently mined the UBS data as well as a flood of voluntary disclosures by U.S. citizens and have widened their investigation to other Swiss banks, including Credit Suisse and Julius Baer. Switzerland is trying to get those investigations dropped in return for the payment of fines and the transfer of names of US clients. It is also seeking a deal to shield the remainder of its 300 or so banks from US prosecution.

Tax avoidance, flash crash trading from Knight Capital, insider trading at SAC, don't forget MF Global. The new head of the SEC should get busy, and please, please no more deals that don't admit or deny guilt. I'm getting sick of two-tiered justice.

That radical green pressure group PriceWaterhouseCoopers warns that even if the current rate of global decarbonisation were to double, we would still be on course for six degrees of warming by the end of the century. Confining the rise to two degrees requires a sixfold reduction in carbon intensity: far beyond the scope of current policies. The World Bank, another group of tree-huggers, expects warming in the range of 4 degrees.

And that Brings us to Doha 2012, in the gas-rich, gas-flaring nation of Qatar. The tiny Persian Gulf emirate owes its wealth to large deposits of gas and oil, and it emits more greenhouse gases per capita than any other nation. And it is now playing host to a United Nations climate change summit, which tend to be messy affairs, going back to the 1997 conference that produced the Kyoto Protocol, which has now largely unraveled. While there is always the potential for a diplomatic disaster at any negotiation involving 194 countries, the agenda for the two-week Doha convention includes an array of highly technical matters but nothing that is likely to bring the process to a screaming halt.

Despite the occasional chaos at the summits over the past three years, negotiators achieved a number of significant steps, including pledges by most major countries to reduce their emissions of climate-altering gases, a promise by rich nations to mobilize $100 billion a year by 2020 to help more vulnerable states adapt to climate change, a system for verifying emissions cuts and programs to help slow deforestation. The delegates in Doha hope to firm up these promises and create the concrete means to fulfill them.

The success of the Doha 2012 talks will likely hinge on the approach of the world’s two biggest greenhouse gas emitters and robust economies, the United States and China.

In the aftermath of Hurricane Sandy, which inflicted tens of billions of dollars in damage, it’s might sound like a good idea to take some preventive measures. Sandy was not an isolated incident: only last year, Hurricane Irene caused nearly sixteen billion dollars in damage, and there is a growing consensus that extreme weather events are becoming more common and more damaging. The annual cost of natural disasters in the US has doubled over the past two decades. Instead of just cleaning up after disasters hit, we would be wise to take steps to make them less destructive in the first place.

There are several interesting ideas, including building seawalls , burying power lines, and elevating buildings and subway entrances. The question is whether we can find the political will to invest in such ideas. Several new York politicians have called for major new investment in disaster prevention, but it appears Congress is more willing to spend money on relief than on preparedness. That’s what history would lead you to expect: for the most part, the U.S. has shown a marked bias toward relieving victims of disaster, while underinvesting in prevention. A study by the economist Andrew Healy and the political scientist Neil Malhotra showed that, between 1985 and 2004, the government spent annually, on average, fifteen times as much on disaster relief as on preparedness.

Politically speaking, it’s always easier to shell out money for a disaster that has already happened, with clearly identifiable victims, than to invest money in protecting against something that may or may not happen in the future. Voters reward politicians for spending money on post-disaster cleanup, but not for investing in disaster prevention, and it’s only natural that politicians respond to this incentive. The federal system complicates matters, too: local governments want decision-making authority, but major disaster-prevention projects are bound to require federal money. And much crucial infrastructure in the U.S. is owned by the private sector, not the government, which makes it harder to do something like bury power lines.

We’ve been skimping on maintenance of roads and bridges for decades. In 2009, the American Society of Civil Engineers gave our infrastructure a D grade, and estimated that we’d need $2.2 trillion to bring it up to snuff. Our power grid is, by the standards of the developed world, shockingly unreliable. A study by three Carnegie Mellon professors in 2006 found that average annual power outages in the U.S. last four times as long as those in France and seven times as long as those in the Netherlands.

Disaster-prevention measures are expensive: a New York seawall might cost from ten to twenty billion dollars. Yet inaction can be even more expensive; after Katrina, the government had to spend more than a hundred billion dollars on relief and reconstruction; and there are good reasons to believe that disaster-control measures could save money in the long run. The A.S.C.E. estimates that federal spending on levees pays for itself six times over, and studies of other flood-control measures find benefit-to-cost ratios of three or four to one. A 2005 independent study of disaster-mitigation grants made by FEMA found that every dollar in grants ended up saving taxpayers $3.65 in avoided costs. Right now, it's cheap to borrow money for infrastructure; the projects would create immediate employment.

The size of our current deficit does not change the math.