Thursday, September 05, 2013 - Mustering Support

Mustering Support

by Sinclair Noe

DOW + 6 = 14,937
SPX + 2 = 1655
NAS + 9 = 3658
10 YR YLD + .08 = 2.98%
OIL + 1.23 = 108.46
GOLD – 23.90 = 1368.70
SILV - .25 = 23.31

The war hasn't started, yet.

President Obama is in St. Petersburg Russia for the G-20 summit, he received a cordial but cool greeting from Russian President Vlad Putin, however Putin had harsh words for Secretary of State John Kerry, calling him flat out a “liar”, referring to his testimony regarding Syria, a close ally of Russia.The United States has given up trying to work with the U.N. Security Council on Syria, accusing Russia of holding the council hostage. Russia, backed by China, has used its veto power three times to block council resolutions condemning Assad's government and threatening it with sanctions. 

Yesterday, a Senate panel authorized military action in a “limited and specified manner”. A full vote is expected next week. Syria is dominating a summit with an official agenda focused on economic growth, monetary policy and global banking and tax rules. Obama began meeting with other leaders of the Group of 20 nations, trying to persuade allies to give the US a measure of political cover even if they withhold military support. Obama has already met with Shinzo Abe of Japan, Francois Hollande of France – who may be the only US ally taking part in a strike against Syria, and also a meeting with Dilma Rousseff of Brazil.

Brazil won't be part of any military action, and Rousseff might even cancel a planned trip to the White House in October 23^rd; the reason has nothing to do with Syria. Rather the Brazilian President is a bit ticked off about information leaked by Edward Snowden that shows the US spied on communications between Rousseff and her top aides. Brazil’s Senate is creating a committee to probe the spying allegations and seek federal police protection for Glenn Greenwald, the journalist who revealed the documents from Snowden. Brazil's foreign minister said: “This represents an inadmissible and unacceptable violation of Brazilian sovereignty. This kind of practice doesn’t live up to the type of trust needed to have a strategic partnership.”

Indeed, the pressure for military action in Syria will find reluctance from several countries as it follows in the footsteps of the Snowden allegations. And if Obama can't muster international support for military intervention in Syria, it will make the job of Congressional support more difficult. Various handicappers believe the resolution would go down to defeat if the vote were held today. So far, the Administration has been unable to make much of a case, beyond moral outrage. In a post Iraq world, people are actually asking pertinent questions like: how long will it last? What is the objective? How much will it cost? So far these are unanswered or inadequately answered questions. It's interesting that they can always find money for military action isn't it?

It is entirely possible that we could soon witness the amazing spectacle of Congress defeating a war resolution backed by the president and every top elected leader.

Of course, a resolution can be defeated and not killed outright. Remember TARP? The first vote for TARP was defeated and it took a market swan dive, a second TARP vote, and the addition of lots of pork to reverse the initial vote. But also bear in mind that the reason TARP was initially voted down was the barrage of voter phone calls and e-mails against it, reportedly 99% opposed until financial services firms started getting employees to call in favor of the bill, which shifted the tally to a mere 80% or so of callers opposed.

Even if the President musters enough votes to strike Syria, at what political cost? Any president has a limited amount of political capital to mobilize support for his agenda, in Congress and, more fundamentally, with the American people. Time and again we have seen domestic agendas succumb to military adventures abroad — both because the military-industrial-congressional complex drains money that might otherwise be used for domestic goals, and because the public’s attention is diverted from urgent problems at home to exigencies elsewhere around the globe.

We've mentioned before that Syria is a minor player in the oil markets, but geographically any action there would have an affect on oil prices. The rarely noticed reason is that Syria is closely allied with Iran, and indeed this whole Syria thing may have more to do with Iran than Syria. Anyway, if something happens, we'll likely see a spike in oil prices. We've been seeing oil over $100 a barrel and gasoline above $3.40 a gallon for much of the last 3 years. Those prices would have shocked many Americans a few years ago, but have now become the new normal.

What changed? Well, Americans are breaking their addiction to driving, at least a little. We own fewer cars per household than just a few years ago. Unfortunately, some of the reduction in motor gasoline consumption directly relates to massive under-employment, especially among those under 25, as well as lower wages among the employed. And the cars we own are more fuel efficient. The average fuel efficiency for new cars sold in the US just six years ago was only 20.8 miles per gallon; today it's 24.8 MPG. That may not sound like much, but it's about a 20% improvement.

Higher domestic production and lower American consumption have meant declining imports of crude oil and petroleum products-- a reversal of another once seemingly inexorable trend. The economic burden of imported oil is represented not by the number of barrels, but instead by the real value of the resources we must surrender in order to obtain the oil. The dollar value of petroleum imports as a share of GDP has come down a little as a result of recent gains in production and conservation, but still remains significantly elevated relative to the levels of a decade ago.

Let's get back to economic news.

Tomorrow we'll see the monthly jobs report for August. We got some clues today. Jobless claims declined by 9,000 to 323,000 in the week ended Aug. 3. Employers seem to be holding the line on dismissals. Meanwhile, ADP, the private payroll processing firm issued their monthly report which showed companies increasing employment by 176,000 workers in August. The ADP report does not always match with the government report, but folks like to use it for guesstimates anyway. It's widely expected the economy added 175,000 to 180,000 jobs last month, up from July's gain of just 162,000. Anything over 200,000 would tilt the odds heavily in favor of the Fed beginning to taper QE security purchases at the FOMC meeting in two weeks.

 

Bill Gross, the head of PIMCO, in his September letter to investors says that central banks' easy money policies have become less effective in generating economic stability, and that zero-bound interest rates have threatened finance and investment in the "real economy."

Gross writes: "Why invest in financial or real assets if bond prices could only go down, and/or stock prices could no longer be pumped up via the artificial steroids of QE?"

Gross added that liquidity will be "challenged" when policymakers start to tighten easy money policies and stocks may also be "at risk" when the Fed ends its bond-buying program. In other words, the Fed's exit from QE might not be baked into the cake just yet.

If you've been listening to the Financial Review for more than a day or two, you know that I think the banking system poses a systemic threat to the economy. A few years ago I wrote a book called “Eat theBankers”, and you can follow these daily broadcasts at the website EattheBankers.com. So, it is reassuring for me when I hear others jumping on the bandwagon. I'm not going to go into detail, but Simon Johnson, the former chief economist for the International Monetary Fund, recently wrote an article for Bloomberg, and I'm posting the link: The title is: Bank Leverage is the DefiningDebate of Our Time.

The basic idea of the article is that excessive leverage could bring down the world economy again. And the next financial collapse could be even worse than what we experienced in the fall of 2008. The debate is between the Too Big to Fail Banks that want to take more risks precisely because they can draw on implicit or explicit government guarantees, and on the other side are sane people who realize that the banks could destroy the economy.

The banks don't want to set aside safe, reserves, they'd rather take that money and gamble. Letting banks calculate their own risk weights or develop their own methodologies makes no sense -- conflicts of interest predominate when you are too big to fail. But asking rating companies or government officials to come up with meaningful risk weights also is doomed to fail. They lack the information, motivation and compensation incentives to do this right.

We've had this debate before; at the beginning of the 20^th century Teddy Roosevelt brought a case against JPMorgan's Northern Securities Company as part of the anti-trust movement. The case was ultimately decided by the Supreme Court in the government's favor. Had the monopolists won, instead of enjoying a vibrant competitive economy and a century of unprecedented growth that made the U.S. the world’s greatest power, we would have likely ended up like other unfortunate countries where a few oligarchs rule to the disservice of the broader public and the greater good of the economy.