Monday, April 01, 2013 - April Comes in Like a Lamb

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.

April Comes in Like a Lamb

by Sinclair Noe

DOW – 5 = 14,572
SPX – 7 = 1562
NAS – 28 = 3239
10 YR YLD - .01 = 1.84%
OIL - .25 = 97.39
GOLD + 1.80 = 1600.40
SILV - .28 = 28.12

This week's economic special is the March jobs report on Friday morning. Another 200,000 or so gain in hiring would lend further support to the idea that the economy is gaining traction despite fiscal cliffs and sequesters, higher taxes and gasoline prices, a still-soft global economy and divided government in Washington . The jobs picture has shown steady improvement over the past 3 years, steady but also lackluster; and while that's better than massive losses, it still isn't enough to lift the economy. Job gains have come in fits and starts followed by long lazy naps.

The March jobs report should show us the first effects of the sequester. Government has cut more than 800,000 jobs since 2008 while the private sector has added over 5 million jobs. Many of the cuts from the sequester will be furloughs, which mean fewer hours but not a job loss. Hiring has accelerated sharply since last fall, averaging about 205,000 new jobs a month since November. The unemployment rate has drifted a bit lower to 7.7%, though no change is expected in March. The current guess is for a net gain of 190,000 jobs in March.

There are a few reports we can watch to refine the estimate on Friday's report. Today, the Institute for Supply Management's manufacturing index came in worse than expected, with a reading of 51.3%, down from a February reading of 54.2%. Any reading above 50 indicates expansion in manufacturing; today's number would indicate modest growth. The biggest bright spot in the ISM report was the employment gauge, a index of hiring intentions. It climbed to 54.2% from 52.6% to mark the highest rate since last June.

Stockton is broke; more specifically it is insolvent by any measure; so says a federal bankruptcy judge in declaring the city is eligible for bankruptcy protection. Creditors had argued that Stockton was not truly insolvent when it sought bankruptcy protection and had improperly failed to seek concessions. The city's creditors had argued the city could have done more to cut costs and raise revenues.

Stockton is the largest US city to have ever filed for bankruptcy. Its case is being closely watched in the $3.7 trillion municipal bond market as it is likely to have key implications for other municipal and county governments, their employees and their bondholders.

Since at least the 1930s, bondholders in most major municipal bankruptcies consistently have been repaid their entire principal. But Stockton is expected - along with Jefferson County in Alabama and San Bernardino in California - to break with that tradition.

Meanwhile, a federal judge in Manhattan has dismissed a big block of claims filed against several big multinational banks for their involvement in the Libor rate rigging scandal. The multi-billion dollar case is being brought against the banks by private plaintiffs. The judge dismissed antitrust claims and RICO counts, the Racketeering and Corrupt Organizations. The judge acknowledged in her opinion that the dismissal might be “unexpected” in light of the settlements that brought large fines and admissions of wrongdoing.

A major focus is on the claim that the banks colluded to artificially depress Libor, costing investors in swaps and issuers of securities billions of dollars because interest rates tied to the benchmark did not reflect the true market. Under the antitrust laws, it is illegal for competitors to take concerted action that affects the price of goods and services for their own benefit.

The key to Judge Buchwald’s decision is her finding that the banks were not acting as competitors but instead were cooperating when submitting interest-rate information to the British Bankers Association, which in turn set Libor based on that data. To prove an antitrust violation, any financial harm suffered by private plaintiffs must be traceable to the negative effect on competition from the collusion. Thus, she concluded, the “injury would have resulted from defendants’ misrepresentation, not from harm to competition.”

The judge dismissed that claim of racketeering, because RICO cannot be used in cases involving securities, based on a provision of the Private Securities Litigation Reform Act adopted in 1995 to curb abusive lawsuits.

So, a victory for the banks but it's not over yet. The judge did not dismiss all claims. Regulators can still push for their own convictions – Sorry, I had to have one April's Fool prank. Regulators won't really push for convictions, they'll try to reach a slap on the wrist settlement. And the big banks still face the prospect that the judge's dismissal will have to work its way through the appellate process, possibly a case that could end up before the Supreme Court.

A new report by Harvard public policy professor Linda J. Bilmes estimates the wars in Iraq and Afghanistan are set to be the most expensive military conflicts in history, expected to cost as much as $6 trillion.

So far, $2 trillion has been spent on the wars in Iraq and Afghanistan since the conflicts began in 2003 and 2001. That figure could triple, with the largest percent going to cover long-term medical care for service members and veterans, and is expected to dominate future federal budgets for decades to come.

In 2006, Professor Bilmes, along with Nobel Prize winning economist Joseph Stiglitz, predicted that the wars would cost between $1–2 trillion but then they pushed that estimate up to $3 trillion. And then revised again to nearly $4 trillion. Again, she is revising her estimate. Though President Obama is moving to decrease troop levels in the two regions, the costs associated with the conflicts are only expected to rise. That's because a large chunk of that figure doesn't result from Pentagon spending but comes from covering medical expenses and disability benefits for current service members and those who are wounded in the wars.

So far, $135 billion has been spent since 2000 on veterans health care and disability compensation and that number will only grow over the next 40 years, to more than $800 billion.

More than half of the 1.56 million troops who have been discharged to date have received medical treatment at VA facilities and been granted benefits for the rest of their lives. An estimated one-third of veterans returning from deployment have been diagnosed with mental health issues and 253,000 troops have suffered a traumatic brain injury (TBI), to name just two of the major medical issues confronting those returning from the battlefield. 

Other major costs contributing to the $6 trillion number include military replenishment and social and economic costs. Additional funds are committed to replacing large quantities of basic equipment used in the wars and to support ongoing diplomatic presence and military assistance in Iraq and Afghanistan.

Plus, significant cash will be needed to finance the conflict since $2 trillion of the $6 trillion debt accrued since President Obama took office, accounts for the war. The Treasury Department announced in early March that total public debt of the U.S. government topped $16.687 trillion. It's estimated there is already $260 billion interest owed on the $2 trillion borrowed for the wars.

The actual cost of war though has been difficult to estimate. It is possible this new report overestimates the costs, but I have a feeling it is more accurate than the early estimates back in 2002, when members of the Bush administration pegged cost at $50 to 60 billion.

The high price of the conflicts results, in part, from increased benefits that were enacted in 2001 to entice new recruits to the military. Since 2001, the US has expanded the quality, quantity, availability and eligibility of benefits for military personnel and veterans. This has led to unprecedented growth in the Department of Veterans Affairs and the Department of Defense budgets. The bad news is that the veterans are often forced to wait, sometimes for more than 2 years for their benefits. It seems the VA often has a plan to reduce benefits through attrition. Of course, not honoring commitments to veterans comes with a big price tag, one that we could never afford.