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.