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.