Friday, May 24, 2013 - Where the Puck Will Be

Where the Puck Will Be

by Sinclair Noe

DOW + 8 = 15,303
SPX – 0.91 = 1649
NAS – 0.27 = 3459
10 YR YLD - .01 = 2.01%
OIL - .38 = 93.87
GOLD – 5.20 = 1387.30
SILV - .24 = 22.39

The S&P 500 is now down for 3 consecutive days and the major stock indices posted their first negative week in more than a month. For the week, the Dow slipped 0.3 percent, while the S&P 500 and the Nasdaq each lost 1.1 percent.

The Federal Reserve left many people mildly dazed and slightly confused this week, what with Bernanke speaking before the Joint Economic Committee and the release of the FOMC minutes. It used to be easier to figure out the Fed; it was a fairly straightforward cost/benefit analysis of inflation versus employment and inflation was usually at the top of the list. Then all of the sudden financial instability suddenly became the main concern. So, people were rethinking monetary policy; probably thinking too much.

I don't think the Fed is ready to step away from its easy money policies, but they are likely to change the composition. Maybe a little less mortgage-backed securities purchases and a little more Zero Interest Rates; maybe they'll look toward some other areas altogether. How about jumping into the Muni-bond market? Or something else that might be a bit more direct? Maybe the Fed could make some direct injections of capital for infrastructure.

America has dropped in the World Economic Forum's global rankings of economic competitiveness for each of the past four years, falling from first in the world to seventh, in part because of its sagging infrastructure. Its global ranking in terms of "quality of overall infrastructure" has dropped from ninth to 25th in the world.

The American Society of Civil Engineers estimates that we are spending $157 billion less per year on infrastructure than we need to. And instead of ramping up that spending, we are slashing it. Infrastructure spending as a percentage of GDP has tumbled to its lowest level in at least 20 years. In March 2009 the country spent $325 billion on public construction; that amount has dropped to $258 billion.

It's still not entirely clear what caused I-5 bridge over the Skagit River in Washington to collapse Thursday night. Nor is it clear, despite media reports, how strong the bridge was before it broke. What is clear is that, had the state needed to repair it, getting federal money to do so would be an uphill climb. By the way,there are reportedly 750 bridges in Washington state that are in worse condition than the one that collapsed last night. The ASCE estimates there are more than 150,00 structurally deficient or functionally obsolete bridges in the country.

And bridges are probably not even the worst aspect of American infrastructure: The ASCE report card gives U.S. bridges a "C+" grade. Our aviation system, dams, levees, drinking water, waste water disposal, hazardous waste disposal, roads, mass transit, schools and energy systems all received "D" grades. The ASCE estimates that under-spending on infrastructure will cut $3.1 trillion from our gross domestic product by 2020.

Meanwhile, the bond market followed the advice of Wayne Gretzky; skate to where the puck will be, not where it is. In this case, it means that expectations for QE are just as important as actual QE. So if the Fed signals QE will continue at a slower pace than investors expected, it will ultimately buy less than expected and yields should go up. But what we really learned is that Fed policy is not set in stone. This isn’t that surprising; the Fed always reserves the freedom to respond to the data and hates feeling boxed in by market expectations. Yet trying to get the market to believe the path isn’t predetermined is probably futile. After all, the Fed will slow QE according to its view of how the economy progresses; or maybe they'll ramp it up again if the economy heads south.

And after all, we don't know which way it will go, because, after all, there is financial instability. And when I think financial instability, I think of the usual suspects – the banksters. As long as they're running the show, what could go right?

Wall Street Lobbyists are still plying their trade, rolling back finance reform, again. During a week where attention was focused on IRS scandals and AP scandals and whatever the scandal du jour, the banksters found bipartisan support for a series of deregulatory bills dealing with derivatives trading and the Commodities Futures Trading Commission and watering down the already soggy Dodd-Frank legislation.

The latest move involves wiping out a little clause that would have prevented bailouts for bankers playing with derivative swaps, specifically federally insured banks would have a safety net so long as the swaps gambling was done as a bona fide hedge, or in “certain structured finance swap activities” which means basically any trade they happen to make. Which basically means the bank lobbyists have now removed the threat of not getting a bailout if or when they screw up again.

And then they managed to push through the “Swaps Jurisdiction Certainty Act”, which basically says that they can move their derivatives trading operations offshore and not have to comply with US requirements on trading swaps. And then the lobbyists managed to wipe out requirements to provide some sort of transparency to prices and quotes on swaps, which means the derivatives markets will continue to operate with all the transparency of a black box.

What could go wrong? I'm sure we'll find out in the richness of time. And yes, the legislation working its way through Capitol Hill is bipartisan. The Republicans and Democrats can't agree on much but they can agree to sell out to the banksters. High minded political ideology tends to vaporize in the presence of campaign donations.

According to the New York Times, one bill that through the House Financial Services Committee, allowing more of the very kind of derivatives trading (bets on bets) that got the Street into trouble, was drafted by Citigroup -- whose recommended language was copied nearly word for word in 70 lines of the 85-line bill. The lawmakers who this month supported the bills championed by Wall Street received twice as much in contributions from financial institutions compared with those who opposed them.

And so far, not one single banker has been prosecuted for the actions that lead up to the country's financial meltdown. Remember the Occupy movement, those protesters who were ticked at all the damage done by Wall Street? Well, they haven't disappeared, but quite a few were arrested. Since September of 2011, approximately 7,736 Occupy protesters in 122 cities nationwide have been arrested. Earlier in the week a few hundred members of Occupy Our Homes, an organization supporting homeowners facing foreclosure, protested outside the Justice Department. Seventeen former homeowners were arrested.

Meanwhile, New York Attorney General Eric Schneiderman says there is more evidence that Bank of America Corp, Wells Fargo and other banks violated the terms of a settlement designed to end mortgage servicing abuses.

Schneiderman plans to sue Bank of America and Wells Fargo for failing to live up to their obligations under the deal, and now he says other states had found similar problems. The $25 billion settlement was brokered last year between five banks and 49 state attorneys general. The other banks are JPMorgan Chase, Citigroup, and Ally Financial. The banks agreed to provide relief to homeowners and comply with a set of servicing standards to atone for foreclosure misconduct.

In a letter to the monitor for the settlement Schneiderman says: "Several other states have identified similar recurring deficiencies by the participating servicers." In his letter, Schneiderman did not identify which other states had provided evidence of banks failing to abide by the settlement. Nor did he identify the banks with recurring deficiencies.

In Thursday's letter, Schneiderman said there had been "inordinate delays" in reviewing loan modification applications at Wells Fargo, so applicants had to resubmit documents. He cited evidence of piecemeal requests for additional documents in one modification application at Bank of America, and said more than three months passed without a request for more information or a decision on another application.

So, you're listening to this and probably thinking that the banksters are a little bit lousy but how does it really affect you. And besides, you're probably already planning you're Memorial Day barbeque. Turns out that Goldman Sachs is also thinking about the food on your plate. Last year, Goldman made an estimated $400 million from speculating on food. The World Bank estimated in 2010 that 44 million people were pushed into poverty because of high food prices, and that speculation is one of the main causes.

In 1996, speculators held 12% of the positions on the Chicago wheat market, with most of the market being made up of the legitimate users of food – from farmers to producers. But the legitimate hedging element of commodity markets has virtually disappeared in the intervening years. By 2011, pure speculators made up a staggering 61% of the market. Of course, Goldman Sachs isn't the only player, but it is certainly the largest.

For several years, it was hotly debated whether speculation in food commodities drives up prices. But the evidence now firmly says it does, and that there's little correlation between rising prices and actual supply and demand. There are now well over 100 studies which agree (pdf), from sources as varied and valuable as Harvard University, the Food and Agricultural Organisation and the United Nations; and it appears that food prices have less to do with supply and demand than speculation. The knock-on effect of increased speculation has meant price spikes are now more and more common. In November 2012, the World Bank declared a new era of food price volatility.