Tuesday, February 25, 2014 - Dumb Luck

Dumb Luck

By Sinclair Noe

DOW – 27 = 16,179
SPX – 2 = 1845
NAS – 5 = 4287
10 YR YLD  - .05 = 2.70%
OIL - .76 = 102.06
GOLD + 5.00 = 1342.60
SILV - .07 = 21.99

Just a couple of economic reports to start. The S&P/Case-Shilller home Price Indices for December were posted today. Nationally home prices closed the year of 2013 up 11.3%, while posting a fourth quarter decline of 0.3%. After 26 months of consecutive gains, Phoenix posted -0.3% for the month of December, its largest decline since March 2011. Phoenix once led the recovery from the bottom in 2012, but Las Vegas, Los Angeles and San Francisco were the top three performing cities of 2013 with gains of over 20%.

Another sign that the housing market slowed down during the fourth quarter: Fannie Mae, the nation’s largest mortgage guarantor, saw demand for foreclosed properties dip at the end of the year. Fannie reported last week an $84 billion annual profit for 2013 on the backs of large home-price gains and a series of one-time legal and accounting benefits. The report also showed that its inventory of foreclosed homes increased for the second straight quarter as it begins to take back more properties in Florida and other states where foreclosures have been tied up in courts. The report showed that the prices Fannie received on those properties, as a share of the underlying mortgage balances, declined slightly from the prior quarter for the first time in 2½ years.

The Conference Board’s Consumer Confidence Index decreased to 78.1 in February from a revised 79.4 in January.  Fewer Americans projected business conditions would improve over the next 6 months, dropping from 80.8 to 75.7 fueling anxiety over the outlook for jobs and income that risks restraining consumer spending. The most important thing that would get consumers feeling better about the outlook is if the labor market improves more substantially. Apparently people who work feel better about the economy and are more likely to spend money than people who don’t have jobs. Who knew?

Even if you have income from work, you might still be holding tight to your coin purse. The Labor Department reports that payrolls in December and January showed the smallest back to back gains in 3 years.

White House economist Jason Furman said today the economy could be in a period of slower potential growth, a development that puts greater urgency on longer-run investments. Gains in worker productivity have eased since the recession began compared with the technology-driven improvement of the prior two decades. Without new policies, the country could face slow productivity growth similar to that recorded in the 1970s and 80s.

Weaker productivity gains during that period was offset partially by a rapidly expanding workforce due to the baby boom and more women taking jobs. Over the next two decades, demographic shifts instead will present an impediment to growth. The workforce is projected to expand at less than a third of the pace it did between 1974 and 1992 because the average American is getting older.

Furman laid out six longer-run initiatives the White House will be pushing on the economic front in the forthcoming 2015 budget:

1. The so-called “Opportunity, Growth and Security” proposal would make investments in research, job training and education beyond what’s possible under the budget framework Congress agreed to late last year. Closing tax loopholes and trimming other spending would pay for the new investments.

2. Expand infrastructure investments, ranging from roads to wireless broadband networks. The spending would create jobs in the short run, with the longer-run effect of improving business productivity.

3. Overhaul the business tax system with the long-stated goal of lowering the top rate to 28% while removing loopholes. Furman says, “By developing a system that is more neutral, corporate decision makers can act for business reasons, not tax reasons, which would create an environment in which capital will flow to the most efficient purposes.”

4. Provide universal preschool education. The investment will improve students’ performance as they advance through the education system and ultimately provide employers with higher skill workers.

5. Change the immigration system to make it easier for workers to obtain green cards and clear the way for foreign students to stay in the U.S. once they earn degrees. Immigrants will not simply expand the labor force, but engage in innovative or entrepreneurial activity that further elevates the economy’s potential.

And idea number 6:  Complete free-trade agreements with countries in Asia and Europe. Those deals would make the U.S. more attractive for foreign investment and open markets for domestically produced goods abroad.

Mt. Gox has disappeared. I know, we’re all shocked, shocked I tell you. There is nothing but a blank page on the Mt. Gox website. There was a brief notation on the website saying there might be something happening, maybe an acquisition, or something, then that disappeared and the website was blank again.

Mt. Gox, once the world's biggest bitcoin exchange, abruptly stopped trading today. Several other digital currency exchanges, including Bitstamp and BTC-E, issued statements attempting to reassure investors of both bitcoin's viability and their own security protocols.

Bitcoin investors deposit their holdings in digital wallets at specific exchanges, so the Mt. Gox shutdown is similar to a bank closing its doors - people cannot retrieve their funds. Released in 2009 by an anonymous creator known as Satoshi Nakamoto, the Bitcoin program runs on the computers of anyone who joins in, and it is set to release only 21 million coins in regular increments. The coins can be moved between digital wallets using secret passwords.

While Bitcoin fans have said the technology could provide a revolutionary new way of moving money around the world, skeptics have viewed it either a Ponzi Scheme or an investment subject to potential fraud or just a bad idea. Bitcoin was supposed to be a new, subversive alternative to a financial system that had been exposed as fragile, dangerous and too big to fail in the financial crisis of 2008. If you’re confused by what that is supposed to be, don’t worry, you are still sane; the bitcoin world is the crazy one in this story.

Tokyo-based Mt. Gox began as a venue for trading cards; the name stands for Magic the Gathering Online Exchange. No, I did  not make that up. Mt. Gox had surged to the top of the bitcoin world, but critics, from rival exchanges to burned investors, said the digital marketplace operator had long been lax over its security. Mt. Gox halted withdrawals earlier this month after it said it detected "unusual activity on its bitcoin wallets and performed investigations during the past weeks." The move pushed bitcoin prices down to their lowest level in nearly two months.

This morning, Mt. Gox CEO Mark Karpeles told Reuters in an email: "We should have an official announcement ready soon-ish. We are currently at a turning point for the business. I can't tell much more for now as this also involves other parties." He did not give any other details.

A document circulating on the Internet purporting to be a crisis plan for Mt. Gox, said more than 744,000 bitcoins were "missing due to malleability-related theft", and noted Mt. Gox had $174 million in liabilities against $32.75 million in assets. It was not possible to verify the document or the exchange's financial situation. If accurate, that would mean approximately 6 percent of the 12.4 million bitcoins minted would be considered missing.

But at the same time that the news about Mt. Gox was emerging, a New York firm announced plans to create an exchange that could draw the world’s largest banks into the virtual currency market for the first time. It could still happen, or not. This might be the death knell for bitcoin, or not. Imagine the lunacy of a private entity, printing money out of thin air, thinking that people would accept it as real currency, despite having no inherent value, based on nothing more than the beneficence of the issuer; subject to meltdown and freeze up, where massive amounts of value just disappear in the blink of an eye. The whole idea is the height of lunacy; unless, you’re the Federal Reserve of course.

There is more to it of course. A sovereign government that issues its own “nonconvertible” currency cannot become insolvent in terms of its own currency. It cannot be forced into involuntary default on its obligations denominated in its own currency. It can “afford” to buy anything for sale that is priced in its own currency. It might be able to buy things for sale in foreign currency by offering up its own currency in exchange, but that is not certain. If, instead, it promises to convert its currency at a fixed price to something else (gold, foreign currency) then it might not be able to keep that promise. Insolvency and involuntary default become possible. This seems to be where bitcoin failed; the convertibility part, or at least the part where you could actually buy something with bitcoin.

Speaking of the Fed and failure. Last week we finally saw the transcripts from the Fed from back in the crisis year of 2008. Now, Tim Geithner has a book coming out, titled “Stress Test”.  Geithner has a number of attention-grabbing takeaways. Among them: “We saved the economy from a failing financial system, though we lost the country doing it,” he writes in the book, due out May 13. Geithner led the Federal Reserve Bank of New York at the onset of the meltdown. He served as the Obama administration’s top economic official from January 2009 until January 2013.

On the book’s website, Geithner says: “We made mistakes, it was messy, and the damage was devastating and long-lasting. And yet, at the moments of most extreme peril, the United States was able to design and execute a remarkably effective strategy.” Actually, what we’ve been learning from the transcripts of the Fed in 2008, is that the remarkably effective strategy was more like a drunkard managing to survive a stroll through a landmine; i.e., persistence and dumb luck.