Tuesday, March 12, 2013 - Smoke Signals

Mark your calendar - April 5 & 6 - and make your reservations for the 2013 Wealth Protection Conference in Tempe, AZ. For conference information visit www.buysilvernow.com or click here or call 480-820-5877. This year's conference features Roger Weigand, Nathan Liles, David Smith, Mark Liebovit, Arch Crawford, Ian McAvity, Bill Tatro, and I will speak on Friday. There is an expanded Q&A session with all speakers on Saturday. I hope you can attend.

Smoke Signals

by Sinclair Noe

DOW + 2 = 14,450
SPX – 3 = 1552
NAS – 10 = 3242
10 YR YLD -.03 = 2.02
OIL – 1.84 = 90.22
GOLD + 10.90 = 1593.70
SILV + .16 = 29.25

Today we will communicate with smoke signals, the same as the Vatican, which started its conclave to elect a new Pope with black smoke. Wall Street was blowing black smoke out of its chimneys for most of the day, and then near the end of trading, a little wisp of white smoke pushed the Dow iIndustrial Average into positive territory, and another record high close.

President Obama travels to Capitol Hill to try to sell his grand bargain on the deficit. GOP blows black smoke from its chimney. Anyway, it appears that no one wants to listen to the president, meaning a grand bargain may be no easier to strike now than it was in 2011 or 2012 or any other time Obama has failed to do it. Paul Ryan responds by trotting out the Ryan Plan, which we've seen before; but this one was updated and slightly more regressive. Ryan's budget is presented as nothing but a sober-minded effort to make "tough choices" and solve practical problems. It turns Medicare into a voucher plan, slashes spending on Medicaid and food stamps, repeals Obamacare, and cuts taxes for the wealthy.  In response, the White House blows black smoke from its chimney.

The National Federation of Independent Business says its small business optimism index improved slightly in February; up 1.9 points to 90.8. Apparently, that is still a pretty low level on the scale of optimism indices; on Main Street, earnings are depressed, sales are down quarter over quarter, and there's not much to lift spending, don't look for a boost in hiring, and small business owners report that lending options remain closed. Black smoke on Main Street.

A new Reuters/Ipsos poll finds two-thirds of Americans say they are cutting their monthly spending and almost all of the rest say their spending is little changed

The biggest reason given by those who said they are cutting spending - 72 percent of those polled - was increasing savings and paying off debts. The second biggest was higher gas prices, cited by 63 percent.

Of those cutting back specifically because of gas prices or tax increases, 81 percent said they are cutting down on meals at restaurants, 73 percent are reducing entertainment costs such as movies and concerts and 62 percent are spending less on travel and vacations.

At the same time, affluent consumers are showing signs of increased confidence, according to at least one recent survey. This bifurcation may play into concerns about income inequality and could add to pressure in Congress to resist any budget deficit cutting deal that reduces spending on the social safety net and doesn't include further taxes on the wealthy.

Mohamed El-Erian, Pimco CEO says the Fed will not tolerate a big selloff in risk assets; two, the Fed has been forcing other central banks to be more aggressive; and third, investors can shrug off political issues. El-Erian says the Fed has been "artificially altering prices" and changing investor behavior; but he doesn't think the Fed's winding down from $85 billion a month in bond purchases, aggressive forward guidance, and near zero interest rates will "come for quite a while." But when it does happen: "It's going to be incredibly complex." With the Dow at record highs, El-Erian says he doesn't see a “great rotation” from bonds to stocks, rather the money is flowing into stocks from cash and money markets. White smoke from the chimney of Pimco.

The advance to new highs on the Dow is a direct result of never-before-seen manipulation by the Federal Reserve. The next question is whether the Fed can engineer a new era of prosperity in America. Bernanke has long claimed that he can't do it alone, so we might be looking at an example of where the stock market will not predict the nation's economic future. It seems that way, but more likely, we're just seeing a lag in the smoke signals.

Historically the stock market tends to act three to six months ahead of the economy in both directions. That pattern has not gone away. The 2007-2009 bear market bottomed in March 2009 when the current bull market began. The 2008-2009 recession was proclaimed to be officially ended three months later in June, 2009.

The stock market has been factoring in the economic recovery since, and has already recovered to its pre-crisis levels, the Dow and S&P 500 now back to their peaks of 2007. Meanwhile, the economy is merely catching up to what the stock market has been predicting for it.

But as the economy catches up to the market's expectation, the market will continue to focus on what lies ahead, and at this point it may not be a continuation of what it has anticipated for the last four years. Through those years the economy has been fueled by extreme easy money policies, record low interest rates, and massive government fiscal and monetary stimulus.

The government already began reversing the fiscal stimulus last year with cutbacks in federal payrolls, and is significantly stepping up that reversal this year, with the 2% payroll tax increase in January, and now the upcoming automatic "sequester" cuts in government spending, or some negotiated form of the automatic cuts.

Meanwhile, the Federal Reserve has promised to keep its easy money policies and QE programs, including record low interest rates, going well into 2014 - unless the economy improves faster than expected or inflation heats up.

And already we're hearing hints that the Fed may also begin to remove the QE punchbowl sooner than currently expected. I don't mean to scare you. The Fed won't be taking away the punch bowl because they're scared of screwing up everything. But the politicians act like it's their job to screw things up; they roll around in dysfunction like pigs in mud. And the stronger the stock market the more they are encouraged to take away the punch bowl. Then, we head into April and May, which marks the end of the markets' best six months. It's amazing how things synch up. However, there is a chance that sly investors will try to step in front of the “Sell in May” strategy, and sell a bit early.

Consider: The quality of the recent rally seems dubious; it's based on the Fed's loose money policy. Money market and savings accounts earn next to nothing, and that is forcing investors to accept the risks of stock ownership or get paid almost nothing. This is dangerous.

The quality of the "recovery" also seems dubious. Despite a good jobs report on Friday, the economy is fragile. The housing market has shown signs of strength, but again much of the rally can be traced back to the Fed, which now controls the market for mortgage backed securities.

And there are still major risks outside the US. The Euro-zone appears to have stabilized, but it is still in a downward glide due to austerity. And the Eurobeatings will continue until morale improves. That is the consensus of the IMF and the European Council, and almost everyone in a position of power, except Beppe Grillo.

If a bank is forced to pay $54 million to regulators over bad loans should the public be made aware of it?

Probably. If for nothing else than for the sake of transparency in the post-2008 world. But since 2007, the independent US agency responsible for maintaining public confidence in the US financial system has preferred to settle wrong-doing by banks outside of court while also keeping news of settlements private.

That’s according to a report in the Los Angeles Times which obtained more than 1,600 pages of FDIC settlements from 2007 with banks and individuals accused of wrongdoing. The cases involve reckless loans to homeowners, falsified documents and among other things inflated appraisals, according to the report.

Instead of pursuing the cases in court the FDIC has been settling with defendants for a fraction of the losses incurred. But perhaps the more controversial finding is that the FDIC has agreed in “scores of settlements” to a so-called “no press release” clause that would prevent it from voluntarily making the agreements public. In other words, the agency would apparently avoid issuing news around settlements.

Restoring trust frequently requires symbolic, as well as merely effective, change to take place. One insight from the tradition of penitence and forgiveness is that it is often not enough to put matters back to where they were before things went wrong; some demonstration of a change of heart by means of restitution and a visibly robust refusal to let the same failings occur again, is necessary before a bad situation can be made good. Exactly what kind of action by the banks, or by the government, would be necessary to restore trust in this way would probably emerge if the debate about banking ethics were to take place openly in the public realm. To achieve this is not just a matter of technical “fixes” but may require public, corporate, contrition for past failings, demonstrably robust structures to ensure that old mistakes are not repeated, and possibly some symbolic steps to assure the public that the corporate culture has changed.

And from the FDIC and the banks, black smoke. And for systemic corrections and trust in public institutions - black smoke.