Monday, March 31, 2014 - Hope for the Best, Prepare for the Worst

Hope for the Best, Prepare for the Worst
by Sinclair Noe

DOW + 134 = 16,457
SPX + 14 = 1872
NAS + 43 = 4198
10 YR YLD + .01 = 2.72%
OIL - .18 = 101.49
GOLD – 10.10 = 1285.80
SILV - .06 = 19.86

Wrapping up the first quarter let’s go to the scorecard. The Dow Industrials lost 121 points in the quarter but gained 136 points in the month of March; the S&P 500 finished the quarter up 24 points and up 13 points in March; the Nasdaq Comp gained 22 points in the quarter and lost 110 points in March; oil prices are up $3.50 a barrel since the start of the year and down .42 in March; gold gained $74.80 for the quarter but lost $41.90 the last month; silver added .33 for the quarter but down $1.44 for the month of March.

The first quarter marked the fifth straight quarter of gains for the S&P 500 and the Nasdaq Composite indices. Last week’s drop of 2.8% in the Nasdaq Comp was the first such drop since October 2012, or the first time the Nasdaq dropped by 2.8% in 77 weeks.

Did you see 60 Minutes last night? They interviewed Michael Lewis, who is an excellent financial writer; he has a new book called “Flash Boys” and it deals with high frequency traders on Wall Street. They tried to present the idea that they had just discovered the market is rigged. It is rigged, and it has been rigged for quite some time; this is not a new discovery. The high frequency traders scalp as many trades as possible; they add no value; they do not make markets; they do not provide liquidity; they steal from everyone who buys and sells stocks. Good for Michael Lewis for writing a book about this, but it is not new.

And it is not the only market that’s rigged. Switzerland’s Competition Commission announced today that it had begun a formal investigation into eight financial institutions, over potential collusion to manipulate the currency markets. The regulator opened a preliminary investigation into the foreign exchange market last year. Regulators in Britain, the United States and other countries have begun investigations into whether traders tried to manipulate benchmark currency rates. The financial institutions being investigated include: UBS, Credit Suisse, Zurcher Kantonalbank, Julius Baer, Royal Bank of Scotland, JPMorgan Chase, Citigroup and Barclays.

And of course, this follows investigations into the Libor rate rigging, ISDAfix derivatives rigging, gold rigging, mortgages backed securities rate rigging, robo-signing, and the shorter path is to find markets that haven’t been rigged and manipulated. Earlier today, a district judge said shareholders could pursue a securities fraud lawsuit against JPMorgan for the London Whale trading scam. The financial sector dips its beak into everything, everywhere. The Bank of England recently admitted in its Quarterly Bulletin that banks don’t actually lend the money to the depositors; they lend bank credit created on their books. In the United States the finance charges on this credit amounts to approximately 30% to 40% of the economy. So, in effect, everything is rigged.

Janet Yellen, made her first public speech as the new Federal Reserve chairwoman, today in Chicago. Perhaps the takeaway line from Yellen’s speech was when she said: “There remains no doubt that the economy and the job market are not back to normal health. The recovery still feels like a recession to many Americans and it also looks that way in some economic statistics.”

And this is the very reason why the economy is not experiencing normal health; the Fed has been pushing money to Wall Street, so the Wall Street bankers and traders can dip  their beak into everything, but QE1, 2, 3, and the Twist, and ZIRP haven’t produced jobs, because the money never made it to Main Street; and because the money never made it to Main Street, there is only weak demand, not enough demand to spur the economy into a virtuous cycle of growth and prosperity. 

Employers don’t hire people to save the American economy; they don’t hire people because the Fed is buying Treasury bonds. Employers hire people because if they didn’t, they wouldn’t be able to meet the demand for goods and services they produce, and they’d be leaving profit on the table, and some competitor would step in and take that profit. Employers hire because of demand, not QE.

Consumers create demand and demand creates jobs and the steady income from a job creates consumer demand; if that sounds like a death spiral, well it can be, unless there is some way to spur demand. What we have learned over the past 6 years, is that QE is not the answer; allowing the financial sector to dip their beaks and suck out finance charges to the tune 40% of the economy is not the answer.

Simply growing corporate profits is not the answer. US companies outside of the finance industry are holding more cash on their balance sheets than ever, with $1.64 trillion at the end of 2013. The profits have been growing for the past 5 years but income has dropped and employment growth, while steady has been anemic. Typically, profits recover before jobs, but the money doesn’t seem to be trickling down. One way corporations have been maximizing profit is by cutting labor expenses. And compensation has dropped to just over 60%, the lowest level since 1951.

So today Chairwoman Yellen talked about how the economy and job market are not back to normal health; she said the Fed had an “extraordinary” commitment to boosting the economy and adding jobs and that commitment will be needed for some time to come. The problem is that the Fed has been prescribing the wrong medicine.

The United Nations Intergovernmental Panel on Climate Change, the IPCC, issued its report on climate change today, and as we talked about on Friday, the report concludes that climate change is already having effects including: melting sea ice and thawing permafrost in the Arctic, killing off coral reefs in the oceans, and leading to heat waves, heavy rains and mega-disasters. And the worst is yet to come. Climate change poses a threat to global food stocks, and to human security.

The report is a three year project. The volume of scientific literature on the effects of climate change has doubled since the last report in 2007, and the findings make an increasingly detailed picture of how climate change poses a much more direct threat to life and livelihood. The warning signs about climate change and extreme weather events have been accumulating over time, but this report struck out on relatively new ground by drawing a clear line connecting climate change to food scarcity, and conflict.

"We're now in an era where climate change isn't some kind of future hypothetical," said the overall lead author of the report, Chris Field of the Carnegie Institution for Science in California. "We live in an area where impacts from climate change are already widespread and consequential."

The report was pretty straightforward and to the point; if the world doesn't cut pollution of heat-trapping gases, the already noticeable harms of global warming could spiral "out of control". Here are some of the key points of the report:

Climate change is already taking a sizeable chunk out of global food supply and it is going to get worse. Increases in crop yields – which are needed to sustain a growing population – have slowed over the last 40 years. Some studies now point to dramatic declines in some crops over the next 50 years – especially wheat, and to a lesser extent corn. Rice so far is unaffected. The shortages, and the threat of food price spikes, could lead to unrest.

Climate change poses a threat to human security, and could lead to increased migration. Potential shortages of food and water, because of climate change, could be drivers of future conflicts. These won't necessarily be wars between states, but conflicts between farmers and ranchers, or between cities and agriculture industry which wants water for food.

Some are more vulnerable than others. Poor people in poor countries, and even the poor in rich countries, are going to bear an unfair burden of climate change. Climate change is going to exacerbate existing inequalities, and it is going to make it harder for people to claw their way out of poverty. Still, no one is immune, or according to another contributing author Princeton University professor Michael Oppenheimer, “We’re all sitting ducks.”

As temperatures rise beyond 2 degrees to 4 degrees – our current trajectory – there are limits to how far society can adapt to climate change. The only way out is to cut emissions now – and buy some time by slowing warming – and at the same time make plans for sea walls, relocations, and other measures that can keep people out of harms' way.

The scientific data is now completely overwhelming. It is not easy or comforting to imagine the negative consequences, and this does not mean we can’t make some very important and meaningful changes. Indeed, this will probably be the most important issue for all of us for the next 30 or 40 years. It will dominate business activity as well as most other aspects of our lives. Hope for the best, prepare for the worst.

Friday, march 28, 2014 - Ukraine, Climate Change, and More

Ukraine, Oil, Climate Change, and More

by Sinclair Noe

DOW + 58 = 16323

SPX + 8 = 1857

NAS + 4 = 4155

10 YR YLD + .04 = 2.71%

OIL  + .30 = 101.58

GOLD + 3.20 = 1295.90

SILV + .13 = 19.92

Consumer spending increased 0.3% in February, but the January reading on spending was revised lower to 0.2%. Disposable income, or the money left over after taxes, rose 0.3% after adjusting for inflation, the most since September. It climbed 2.1% from February 2013. Wages and salaries increased 0.2% after a 0.3% gain. This tells us a few things; consumers are spending what they earn, basically hand to mouth; also incomes and spending are not enough to lift the economy and we will be seeing first quarter GDP estimates revised lower.

Today’s spending report showed purchases of durable goods, including automobiles, increased 0.1% after adjusting for inflation following a 0.4% drop in January. Purchases of non-durable goods, which include gasoline, gained 0.3%. Household outlays on services climbed 0.2% after adjusting for inflation. Today’s data also showed the core price measure, which excludes fuel and food, rose 1.1% from a year ago, the same as in January.

Total prices, which are the ones tracked by Federal Reserve policy makers, were up 0.9% from February 2013, the smallest year-to-year gain since October. That remains well below the central bank’s 2% target.

The Thomson Reuters/University of Michigan consumer sentiment index final reading for March came in at a four-month low of 80, down from 81.6 in February.

Next week’s big economic report will be the Friday jobs report. Unlike the last three monthly employment reports, the March data should be fairly clean of weather effects. And so the forecasts are calling for 200,000 net new jobs, compared to the 175,000 jobs added in February. A reading of 200k or better would confirm the idea that economic activity in the first quarter was slowed by the weather, and stable fundamentals will support strong growth.

US military officials estimate Russia's reinforcement of troops near Ukraine has brought the total forces there to as many as 40,000. The new US estimates of as many as 35,000 to around 40,000 troops are higher than the more than 30,000 total deployments reported earlier this week by US and European sources familiar with official reporting. Ukraine's estimates of Russian forces near the border are far higher than Western figures; the Ukrainians estimate there are 100,000 Russian troops amassed on the border. The military buildup is adding to concerns that Russia may again be readying an incursion into Ukraine following its annexation of Crimea.

The Russian deployments included the establishment of supply lines and a wide range of military forces. These include militia or Special Forces units made up of Russian fighters wearing uniforms lacking insignia or other identifying markings, similar to the first Russian forces to move into Crimea during Russia's recent military takeover there. The Pentagon has said there was no indication that the forces were carrying out the kind of springtime military exercises Moscow has officially cited as the reason for their deployment. Ukraine's government has put its heavily outnumbered and outgunned forces on alert for an invasion from Russia in the east.

President Obama wrapped up a foreign trip today with a visit to Saudi Arabia. The trip started with a visit to The Hague, then an economic summit in Brussels, then a visit to Italy and a meeting with Pope Francis; his time in Europe was dominated by coordinating a response to Russia, despite the original intention of the trip to discuss nuclear security. It is a safe bet that the conversation with the Saudi King included Ukraine.

So here are a few thoughts: it is possible that the US could sustain a sale of 500,000 to 750,000 barrels of oil per day from the Strategic Petroleum Reserves, the SPR. If the US coordinated with the Saudis to ensure that they did not cut back production; indeed, they could even step up production from 9.7 million bpd; the greater supplies could slash prices almost immediately. Russia gets about 70% of its export revenue from oil and gas, so even a modest drop would be a significant blow. It is estimated that a $12 drop in the price of a barrel of oil could potentially cost Russia $40 billion in revenue.

This might have been part of the discussion but don’t count on it. Saudi incentives aren’t exactly in line with such a move. As one the world’s largest oil producers, Saudi Arabia would suffer from a drop in oil prices. And the fiscal breakeven price for Saudi Arabia is rather high, considering its budget necessities. Bank of America Merrill Lynch estimates the Saudis need a global oil price of $85 per barrel for its budget to break-even. That figure has crept higher in recent years, meaning the Saudis are probably not inclined to want oil prices to decline from around $100 a barrel, where they have been for the last few months.

Back in the US, Obama could get an earful from oil producers if he reaches for the SPR spigot. Attempting to saturate the market with SPR oil could lower prices, but that would be pretty damaging to US drillers. The SPR remains a potential weapon in the arsenal against Russia but it is a double edged sword.

A report in The Guardian provides a preview of a UN climate science report due to be published Monday. Government officials and scientists are gathered in Yokohama this week to wrangle over every line of a summary of the report before the final wording is released on Monday; the first update in seven years.

Nearly 500 people must sign off on the exact wording of the summary, including the 66 expert authors, 271 officials from 115 countries, and 57 observers; but governments have already signed off on the critical finding that climate change is already having an effect, and that even a small amount of warming in the future could lead to "abrupt and irreversible changes".

The final report from the Intergovernmental Panel on Climate Change, IPCC, will reportedly say that "In recent decades, changes in climate have caused impacts on natural and human systems on all continents and across the oceans."

"Both warm water coral reef and Arctic ecosystems are already experiencing irreversible regime shifts,” in other words we are already at the tipping point in some areas of the world. The biggest risks are for people living in low lying coastal areas, but there are also risks for inland flooding, as well as extreme heat waves. Drought could put safe drinking water in short supply. Storms could wipe out infrastructure. Climate change will slow down economic growth, and create new "poverty traps". Some areas of the world will also be more vulnerable – such as south Asia and south-east Asia.

The report argues that the likelihood and potential consequences of many of these risks could be lowered if ambitious action is taken to reduce the greenhouse gas emissions that cause climate change, but the report also acknowledged that a certain amount of warming is already locked in, and that in some instances there is no way to escape the effects of climate change.

The administrator of MF Global Holdings' bankruptcy plan has sued the auditor PricewaterhouseCoopers for at least $1 billion over its advice on a $6.3 billion European sovereign debt investment that helped fuel the brokerage's rapid demise.

According to a complaint filed in US District Court in Manhattan, PwC committed professional malpractice by offering "flatly erroneous" advice concerning, and approval of, the off-balance-sheet accounting treatment for the debt by MF Global and its then-chief executive, Jon Corzine. The complaint said PwC knew that the investment would add significant risk to MF Global's already weak finances. It said MF Global would not have taken on the exposure, which allowed it to book immediate revenue, had it received sound advice.

Corzine invested $6.3 billion in debt of countries such as Belgium, Ireland, Italy, Portugal and Spain to advance his strategy of transforming his futures and commodities brokerage into a global investment bank. As Europe's economy weakened, MF Global struggled with worries about the debt, margin calls, credit rating downgrades, and news that money from customer accounts was used to cover liquidity shortfalls, ending in its October 31, 2011 bankruptcy. The complaint said it is the first seeking to hold PwC liable for malpractice over its accounting advice for the sovereign debt. It does not address how customer money was used. Creditors would share in recoveries if the lawsuit succeeds.

General Motors is adding 971,000 cars to its global ignition switch recall, which began in February with 1.6 million vehicles and has been linked to a dozen deaths. GM said the recall is being expanded to include versions of the Chevrolet Cobalt, Chevrolet HHR, Pontiac G5, Pontiac Solstice and Pontiac Sky made during model years 2008-2011. Older versions of those cars, dating back to 2003, were recalled in February, along with the Saturn Ion.

A GM spokesman said "we're not taking any chances" that some of the newer cars could have ignitions that could be switched from "run" to "accessory," shutting down the engine and disabling the cars' power steering, power brakes and airbags. So it looks like GM is finally trying to do the right thing, but only after years of doing the wrong things.

Thursday, March 27, 2013 - Certain Assumptions

Certain Assumptions

by Sinclair Noe

DOW – 4 = 16,246
SPX – 3 = 1849
NAS – 22 = 4151
10 YR YLD - .03 = 2.67%
OIL + 1.02 = 101.28
GOLD – 14.10 = 1292.70
SILV - .05 = 19.79

Stocks fell for the fourth time in 5 sessions. This year's first quarter, which ends Monday, isn't nearly as bullish as last year, when the benchmark Standard and Poor's 500 stock index soared 10% in the first three months of the year on its way to a 29% gain. The broad market is unchanged in 2014.  The losing sectors today included banks and biotech. The Nasdaq Biotechnology Index, up 304% in the last five years, has fallen 11% since the end of February, while the Russell 2000 gauge of smaller companies has slipped 2.7% after rallying more than 230%.

If you really want a great investment, it's hard to beat collecting $7,250 for every $1 you spend. That's the benefit Boeing will reap from a ramped-up lobbying push in Washington state that ended with a massive $8.7 billion tax subsidy. A new analysis of lobbying data shows the tax break came as part of a deal to keep production of a new jet, the 777X, in the Seattle area.

Lobbying data is notoriously difficult to parse because matching individual dollars to specific legislative priorities is often impossible. It's plausible that the company could have achieved the same result with a single phone call, given how terrified state officials were that the company might ship high-paying jobs elsewhere. The governor's office had estimated that Washington would lose an estimated 20,000 jobs and more than $20 billion in economic activity if Boeing took production of the new jets elsewhere.

But the new analysis of the lobbying data shows that Boeing didn't leave anything to chance in pursuit of its goal: that it went about getting what it wanted the old fashioned way, by spending gobs of money on lobbyists to follow lawmakers around, to call them incessantly and otherwise convince them that tax revenue isn't really all that important anyway. Boeing spent about $1.3 million to lobby state lawmakers from 2011 through 2013, according to the findings from the nonprofit National Institute on Money in State Politics. In the previous three-year period, the company spent $450,000. (The $7,250 - to - $1 calculation assumes every lobbying dollar was spent to win the tax subsidy).

About a week ago we reported on the Federal Reserve’s Stress Tests for the 30 biggest US banks. Zions Bank failed. Last week’s test was to determine if banks have sufficient capital to absorb losses and support operations during adverse economic conditions while using a standardized set of capital action assumptions.

 Yesterday, we got the results from the second part of the Stress Tests; to determine if banks could pass the test and expand buybacks and/or dividends, in other words, if the assumptions hold up. There were 5 failures out of 30, including: HSBC North America, RBS Citizens Financial, Santander Holding USA, Zions, and Citigroup. The official punishment is no stock buybacks and no dividend increases. It’s the second time the Fed has failed one of Citigroup’s capital plans. The last rejection came in 2012.

Meanwhile, Bank of America will spend $9.3 billion to resolve a dispute over mortgage securities with the Federal Housing Finance Agency, the regulator that oversees Fannie Mae and Freddie Mac. The FHFA sued 18 financial institutions in 2011 over their sales of toxic mortgage securities to Fannie and Freddie, alleging false representation of the mortgage loans behind the securities. Bank of America said that it will make cash payments of roughly $6.3 billion and also purchase securities from Fannie and Freddie worth more than $3 billion.

Separately, New York's attorney general announced that Bank of America and its former chief executive Kenneth Lewis reached a $25 million settlement to end an investigation into their actions in the 2008 acquisition of Merrill Lynch. The civil fraud lawsuit accused them of failing to disclose Merrill losses and bonuses before the deal closed.

 Credit card companies charge retailers a fee, called a swipe fee, whenever a customer pays with plastic. These fees are determined by the card networks. Wal-Mart has filed a $5 billion lawsuit against Visa, saying the credit card company passed along unreasonable fees when shoppers used credit or debit cards at its stores.

In the lawsuit, Wal-Mart alleged that Visa's swipe fees went against antitrust regulations, and in turn churned up more than $350 billion for issuers over the course of nine years, claiming:  "The anticompetitive conduct of Visa and the banks forced Wal-Mart to raise retail prices paid by its customers and/or reduce retail services provided to its customers as a means of offsetting some of the artificially inflated Interchange Fees.  As a result, Wal-Mart's retail sales were below what they would have been otherwise."

There is a certain amount of irony in Wal-Mart filing a lawsuit based on antitrust regulations.

Applications for unemployment benefits dropped last week to a 6 month low.

The seasonally adjusted pending home sales index dropped 0.8% to 93.9. The index has fallen 10.5% over the past 12 months. Contracts to purchase previously owned homes fell in February for an eighth straight month; the housing data this week has been weak. Higher mortgage rates, rising prices and a limited supply of homes have slowed sales since last summer. Average fixed-rate mortgages edged up slightly from last week; 30-year fixed-rate mortgages averaged 4.40% up from 4.32% on March 20.

The Commerce Department released its third and final estimate of fourth quarter Gross Domestic Product. The earlier estimate was that the economy grew at a 2.4% pace; the revised estimate was increased to 2.6% growth. Consumer spending increased at a 3.3% annual pace, partly on stronger health care outlays, up from the previous 2.6% estimate. Also, state and local government spending and exports rose more rapidly than initially thought.

Business equipment expenditures, a key gauge of companies' appetite for capital spending, also picked up more than previously estimated. A negative behind the growth is that much of the fourth quarter expansion was related to businesses stockpiling inventory; that was followed by bad weather, which means much of the inventory stayed on the shelves, and there will likely not be strong demand in the first quarter. Most estimates for first quarter GDP are coming in around 2%.

Earnings reporting season kicks into gear in about 2 weeks; it could be ugly. Earnings rose 8% in the fourth quarter of 2013, but first quarter earnings are expected to drop to 0.9%. The slashing of earnings forecasts for the first quarter are starting to ripple into the rest of the year. Investors now think earnings will only grow 7.7% for the full year of 2014. That's down from the 10% growth expected at the start of the year.

These rapid decreases in earnings projections leave investors with less reason to pay up with current stock valuations, much less push the market up higher still. Of course, there is a big difference between earnings estimates and earnings reports; there is a game played between companies and analysts, where companies ratchet down expectations and then try to beat diminished expectations.

More than 6 million people have now signed up for private insurance plans under Obamacare. The last-minute boost has exceeded the nonpartisan Congressional Budget Office's estimate that 6 million people would sign up in the program's first year, down from earlier expectations of 7 million enrollees because of problems with websites. It's unclear how many of the more than 6 million signups are people who did not previously have insurance. Also unclear is how many people have paid for their policies, a step necessary for the plans to take effect. Bottom line is that a lot of people signed up and you can’t un-sign all those contracts, so Obamacare is here to stay.

President Obama is in Italy today meeting with Pope Francis at the Vatican, after wrapping up a summit with European leaders. Meanwhile, Russian President Putin announced plans for a G-1 meeting in Sochi in June.

The US Senate and House passed separate bills today imposing additional sanctions on Russian officials for the nation’s annexation of Crimea from Ukraine. The Senate bill, approved on a voice vote, includes about $1 billion in loan guarantees and authorizes $150 million in direct assistance to Ukraine. The House legislation would impose additional asset freezes and visa bans on senior Russian officials and corporations.

The International Monetary Fund announced a $14-18 billion standby credit for Kiev in return for tough economic reforms that will unlock further aid from the European Union, the United States and other lenders over two years, effectively pulling Kiev closer to Europe; in a smothering, debt soaked embrace.

Obama said in Rome today that additional sanctions on Russia would inevitably also hit the economies of the US and Europe. The US and its allies are looking at Russia’s military, energy and finance industries as possible targets if it moves deeper into Ukraine.

Top Ukrainian security officials say that Russia now has 100,000 troops on its side of the Russia-Ukraine border. Other estimates put the number much lower, around 30,000, but still enough to overpower the undermanned and undersupplied Ukrainian armed forces. CNN reported that US intelligence assessments have increased the likelihood that Russia will invade Ukraine in the past week. This has been based on a number of worrying indicators about the Russian military buildup on the Ukrainian border.

Wednesday, March 26, 2014 - Render to Caesar

Render to Caesar

by Sinclair Noe

DOW – 98 = 16,268
SPX – 13 = 1852
NAS – 60 = 4173
10 YR YLD - .03 = 2.70%
OIL + 1.03 = 100.22
GOLD – 5.90 = 1306.80
SILV - .27 = 19.84

Durable goods orders increased 2.2% in February, ending 2 straight months of declines. Durable goods are items like refrigerators, cars, and airplanes that are built to last for several years. But we need to dig into this report just a little; orders for non-defense goods, excluding aircraft, were actually down 1.3%. This might also indicate that first quarter business investment is weak.

The US Census Bureau began releasing data from its 2012 Economic Census, a survey of American businesses taken every 5 years. The enormous boom in domestic oil and gas production helped make the mining, quarrying and oil and gas extraction industry one of the fastest growing sectors of the US economy. The number of businesses rose 26% from 2007 to 2012, employment in the sector rose 24% and revenue surged 34%. Meanwhile, from 2007 to 2012 manufacturing lost 2.1 million jobs, now down to just 11.3 million people employed in manufacturing.

The finance and insurance sector shed 390,000 jobs between 2007 and 2012 and industry revenue fell by $137 billion, nearly 4%. But revenues in 2012 were still up 61% from 15 years earlier. There were one million retail stores operating in 2012. But the retail trade sector shed 65,000 establishments and nearly 778,000 jobs from five years earlier. Internet-based selling was something of a bright spot, with the number of “nonstore retailers” rising 12%, though employment was basically flat. The health care and social assistance sector is the nation’s largest employer, with 18.6 million workers in 2012. That’s up 11% from five years earlier, and revenue for the industry rose 23% to just over $2 trillion.

President Obama said after a summit with top EU officials that Russian President Vladimir Putin had miscalculated if he thought he could divide the West or count on its indifference over his annexation of Crimea. The United States and the European Union agreed to work together to prepare possible tougher economic sanctions in response to Russia's behavior in Ukraine. The sanctions could possibly include the energy sector.

Yesterday, the Supreme Court went back to revisit the Affordable Care Act, hearing the consolidated arguments in Sebelius v. Hobby Lobby and Conestoga Wood Specialties Corp, in which the owners of the for-profit businesses Hobby Lobby and Conestoga claim they should be allowed to deny their employees health insurance coverage for certain types of birth control based on the owners' personal religious beliefs.

 In enacting the ACA, Congress required large employers to provide basic preventive care for employees. That turned out to include all 20 contraceptive methods approved by the Food and Drug Administration. Under the law, religious nonprofits were exempted from this requirement, but for-profit corporations were not. Hobby Lobby's attorneys argue that the law violates the company's constitutional right to religious freedom by forcing it to cover all forms of birth control or pay steep fines.

This is a very interesting case on several levels. The Supreme Court, in business cases, has held that "incorporation's basic purpose is to create a legally distinct entity, with legal rights, obligations, powers, and privileges different from those of the natural individuals who created it, who own it, or whom it employs." In recent constitutional law cases, however, the justices seem to have forgotten this basic principle of corporate law. In Citizens United, the court effectively held that corporations enjoyed the same free speech rights as ordinary individuals.

Now, in the Hobby Lobby case, the owners of the craft store chain want the court to again forget about the basic principles of corporate law and decide that corporate personhood extends beyond free speech to religious freedoms. It seems a bit of a stretch. Hobby Lobby’s owners certainly have constitutionally protected religious rights, but Hobby Lobby's owners aren't required by the law to do anything. The legal duty falls on Hobby Lobby, the company, not its owners. If Hobby Lobby fails to provide the required insurance, the company, not the owners, is responsible.

The Hobby Lobby case would require the Supremes to "pierce the corporate veil"; legalese for looking behind the corporation's legal identity and basing a ruling on the interests and desires of the owners of the firm, but Hobby Lobby's owners only want to pierce the veil for this one issue, birth control, while maintaining the protections of the corporate form for everything else, including limited liability. The whole point of corporations being “people” is that they are distinct from their owners, officers, and employees.

Hobby Lobby should only have the rights of legal personhood that are essential for its operations. Supreme Court Chief Justice John Marshall wrote nearly 200 years ago, "Being the mere creature of law," the corporation "possesses only those properties which the charter of its creation confers upon it either expressly or as incidental to its very existence." In Citizens United, the Supreme Court said this includes some limited speech rights, as we ordinarily expect firms to advertise and communicate with employees and customers.

Not everyone, or even a majority, agree with the Citizens United ruling. A February 2010 ABC News-Washington Post poll found 80% of Americans opposed Citizens United and 72% support the idea of a legislative workaround to reinstate the limits the court lifted. And expanding corporate personhood to religious liberty, well that’s even more of a stretch.

Until 1990, the court applied a tough test to examine laws that disadvantaged people's religious beliefs. Then, the justices changed direction in a case involving penalties for the use of peyote as part of a Native American religious ceremony, the court ruled that as long as a law that applies generally to all citizens is neutrally applied, it is constitutional, even though it may have some unhappy consequences for some believers. 

Congress didn’t like the decision, and in 1993 passed the Religious Freedom Restoration Act. Under the act, if a law imposes a substantial burden on the free exercise of religion, it has to meet a high threshold for justification. Hobby Lobby claims the religious practice of the corporation now faces a substantial burden. And if there is a burden, can the government justify it with a “compelling state interest” and the “least restrictive means” of reaching it.

The case raises some interesting philosophical arguments that began with the liberal justices peppering Hobby Lobby’s lawyers with slippery-slope hypotheticals.  If Hobby Lobby can deny coverage for contraception, why couldn’t a Christian-Scientist-owned company deny health insurance completely?  What if a Muslim-owned company wanted to make employees were burqas on the job? What then?

 “How does a corporation exercise religion?” that was a question posed by Justice Sotomayor yesterday.

Justice Anthony Kennedy, who many expect to be the swing vote in this case, questioned both sides aggressively. Kennedy asked why the company couldn't just choose not to provide health insurance at all, pay a tax and then raise salaries to allow employees to purchase health care on their own. Assuming that would be a financial "wash," Kennedy asked, "Then what would your case be?"

And that may very well be the key question of the day, for two reasons. First, is it a “substantial burden’ for a company to not offer health insurance to its employees? For Hobby Lobby they are looking at about $26 million in taxes, but that is cheaper than the cost of the insurance; a bigger burden is the loss of competitive advantage. Justice Kagan, in particular, effectively said “so what?”  But is that really true? Is it really a trivial thing to not offer a desired benefit to employees?  I guess we’ll see in June. The second reason is that the individual mandate is a tax.

Let’s take the way-back machine to the summer of 2012. And we land on the steps of the Supreme Court in Washington DC. Chief Justice John Roberts has just issued a decision in the case of National Federation of Independent Business v. Sebelius. Surprisingly, Roberts sided with the 4 liberal justices to determine that the Affordable Care Act is constitutional and that the individual mandate is not valid as an exercise of Congress’ commerce clause power but the majority upholds the mandate as a tax. 

Chief Justice Roberts wrote in the controlling opinion: "The individual mandate cannot be upheld as an exercise of Congress's power under the Commerce Clause. That Clause authorizes Congress to regulate interstate commerce, not to order individuals to engage in it. In this case, however, it is reasonable to construe what Congress has done as increasing taxes on those who have a certain amount of income, but choose to go without health insurance. Such legislation is within Congress's power to tax."

Obamacare, or the Affordable Care Act, relies upon the individual mandate, which basically says you get insurance or pay a penalty, and that mandate is a tax. We all have to pay taxes, individuals and corporations alike. There are many ways the government spends tax dollars that I don’t like; you probably feel the same way; someone might even have religious objections to the way the government spends tax dollars. But we all have to pay taxes; that decision was handed down a long time ago: “Render to Caesar the things that are Caesar’s and to God the things that are God’s.” And we’ll see if the Supreme Court can recognize the difference.

Tuesday, March 25, 2014 - Want to Buy a Cookie?

Want to Buy a Cookie?

by Sinclair Noe

DOW + 91 = 16,367
SPX + 8 = 1865
NAS + 7 = 4234
10 YR YLD un 2.73%
OIL - .39 = 99.21
GOLD + 2.10 = 1312.70
SILV + .07 = 20.10

According to the S&P/Case-Shiller home price report, the home price index covering 10 major US cities increased 13.5% in the year ended in January. The 20-city price index advanced 13.2% for the year. Month to month, the 20-city index dropped 0.1%; the drop is not just weather related; from December to January, prices fell in 12 of the 20 cities Case-Shiller tracks.

Taking a look at a few cities: LA was down 0.3% for the month but up 18.9% for the past year, San Diego was up 0.6% for the month and 19.4% for the year, Phoenix was down 0.3% for the month but up 13.8% for the year, San Francisco was up 0.5% for January and 23.1% for the year, the hot spot was Las Vegas up 1.1% for the month and 24.9% for the year, to lead the nation.

The Commerce Department reports new home sales dropped 3.3% from January to February to a seasonally adjusted rate of 440,000. Sales fell in all regions except the Midwest, where they jumped 36.7%. Sales dropped 15.9% month to month in the West. The national median price for a new home was $261,800 last month, up from $260,800 in January. Compared with February 2013, the median price fell 1.2%. At the current sales pace there is a 5.2 month inventory.

A recent Trulia report gauges whether home prices are over or undervalued, and where. Nationally, home prices are still undervalued by about 5%. When home prices hit their bottom at the end of 2011, national home prices were about 15% undervalued. That’s no longer the case, and in some select markets rising prices are coming unchained from their long-term fundamentals. Six of the nation’s ten most overvalued cities were in California. Trulia figures the Orange County metro area is about 16% overvalued, and Los Angeles is 13% overvalued.

The Commerce Department also reported today that nationwide personal income growth slowed to 2.6% last year from 4.3% in 2012. Personal income rose 0.3% in January from a month earlier. Residents in every state saw weaker income growth from a year earlier. The personal income report measures everything Americans receive from all sources, including wages, salaries and property income. Several factors contributed to the slower overall income growth, including the expiration of a 2% payroll tax “holiday” last year. As a result, many people received salary bonuses and personal dividends in 2012, which boosted that year’s incomes. Earnings grew in 2013 in every industry except civilians who work for the federal government. Inflation pressures remained weak over the year, with the price index for personal consumption expenditures rising only 1.1% in 2013 from 1.8% in 2012.

The Conference Board Consumer Confidence Index rose to 82.3, up from 78.3 in February. Overall, consumers expect the economy to continue improving and believe it may even pick up a little steam in the months ahead, but they are feeling less optimistic about their current economic circumstances. Hope springs eternal.

Each year about this time, the Girl Scouts send forth minions to sell cookies for 7 weeks. Katie Francis, a sixth grader from Oklahoma City, set a new sales record of 18,107 boxes, topping the old record of 18,000; that works out to about 370 boxes sold per day; figure 12 hours a day, that works out to a sale every 2 minutes. Her secret to success: time, energy, and asking absolutely everyone she comes in contact with to buy cookies.

The Federal Reserve today published 11 research papers which tend to confirm information we have relayed in the past; big banks get a hidden subsidy in the form an implied bailout, or the idea they are too big to fail. The new research focuses on the primary bond market where banks sell their new debt to investors, instead of measuring the taxpayer subsidy through bank bond “spreads” in the secondary market. And the new research only covers up to 2009, so things may have changed a bit, but the biggest US banks enjoyed an extra $60 million to $80 million of cost savings per average new bond sale over their smaller competitors.

Fed staff wrote in one paper that a greater likelihood of government support leads to more risk-taking at big banks, including impaired lending and net charge-offs. Regulators have shied away from suggestions that they should break up banks, pointing instead to the new rules that require banks to reduce leverage, maintain a supply of assets they could sell quickly, and stop making risky trades with their own money. Officials say they also have made strides to ensure regulators are equipped to resolve big banks in a crisis rather than bail them out.

The Murdoch Street Journal is reporting the SEC is investigating whether a boom in complex new bond deals is being used to hide certain illegal risks. A number of likely cases are in the pipeline. Separately, the government has expanded an inquiry into how Wall Street banks may have been cheating their clients by mispricing certain bond deals.

If you are still trying to figure out what Bitcoin is, you are not alone, but the IRS thinks they have figured it out; it is not legal tender in any jurisdiction; it is property and should be taxed as such. That means that employers who choose to pay wages in Bitcoins will have to report those wages just like any other payment made with property, and Bitcoin income will be subject to the normal federal income withholding and payroll taxes. And the same goes for profits on the sale of Bitcoins, at least the Bitcoins that aren’t lost in the digital wallets of Mt. Gox.

Another study says that you should pay closer attention to annual shareholder meetings, and maybe the most important thing to watch is where the meeting is held. Companies that schedule annual shareholder meetings in unusually remote locations tend to announce bad news fairly shortly thereafter; the more surprising the location, the worse the news, and the harder the company's stock price falls. It’s not a hard and fast rule, just a general indicator.

Global markets have been increasingly concerned about the impact of slowing economic growth on Chinese financial institutions. Apparently the locals are also nervous. Hundreds of Chinese citizens had an old fashion run on the banks, trying to withdraw cash from branches of 2 small Chinese banks in the Jiangsu province after rumors spread about the solvency of one of them.

The Houston Shipping Channel remains closed today because of a weekend oil spill. The closure from this weekend has delayed shipments of crude and refined products in and out of the channel. Roughly 11% of the US refining capacity is transported through the channel. The incident was coincidentally timed around the 25th anniversary of the Exxon Valdez disaster. If the closure lasts much longer, refiners will begin to miss scheduled deliveries and companies expected to have product to load and offload may have to declare force majeure. You know what happens to oil and gas prices if that occurs and continues.

The White House and the House Intelligence Committee have leaked separate proposals that are supposedly aimed at ending the mass collection of Americans’ phone records. The full draft of the House bill is not yet available but it is tentatively named the “End Bulk Collection Act. The plan would have telephone companies hold on to phone data and the government could search data from those companies based on "reasonable articulable suspicion" that someone is an agent of a foreign power, associated with an agent of a foreign power, or "in contact with, or known to, a suspected agent of a foreign power". The NSA’s current phone records program is restricted to a reasonable articulable suspicion of terrorism.

A judge would reportedly not have to approve the collection beforehand, and the language suggests the government could obtain the phone records on citizens at least two “hops” away from the suspect, meaning if you talked to someone who talked to a suspect, your records could be searched by the NSA. A report in The Guardian says that coupled with the expanded “foreign power” language, this kind of law coming out of Congress could, arguably, allow the NSA to analyze more data of innocent Americans than it could before.

The New York Times reports the White House proposal would supposedly end the collection of phone records by the NSA, without requiring a new data retention mandate for the phone companies, while restricting analysis to the current rules around terrorism and, importantly, still requiring a judge to sign off on each phone-record search made to the phone companies.

We still don’t know what would happen to other types of bulk data collection, such as internet and financial records. Also, the NSA has been collecting phone data on people up to three hops away from a suspect so long as it had “reasonable articulable suspicion” that the suspect was involved in terrorism; then they hold that bulk data, dumping it into something they call a “corporate store” where they feel free to conduct further analysis even if they don’t have “reasonable articulable suspicion”.

The existence of the NSA program was disclosed and then declassified last year following leaks by Edward Snowden, the former NSA contractor. The current court order authorizing the collection of data is set to expire on Friday. The FISA court is expected to renew authorization for at least 90 days while changes are considered. The government has been unable to point to any thwarted terrorist attacks that would have been carried out if the program had not existed, but has argued that it is a useful tool.

Monday, March 24, 2014 - Dance With the Devil

Dance With the Devil

by Sinclair Noe

DOW – 26 = 16,276
SPX – 9 = 1857
NAS – 50 = 4226
10 YR YLD - .02 = 2.73%
OIL - .15 = 99.45
GOLD – 25.10 = 1310.60
SILV - .34 = 20.03

Manufacturing activity slowed in March after nearing a four-year high last month, but the rate of growth and the pace of hiring remained strong. The flash Markit US Manufacturing Purchasing Managers Index dropped to 55.5 from 57.1 in February.

China's manufacturing engine contracted in the first quarter of 2014, according to the flash Markit/HSBC Purchasing Managers' Index.

This week’s economic calendar includes the Case Shiller home index, FHFA home prices, and new home sales reports tomorrow; plus the March consumer confidence index; Wednesday includes the February durable goods orders; Thursday brings another revision to fourth quarter GDP, and Friday’s reports include the consumer sentiment report, consumer spending, and an update on personal spending.

Ukrainian troops and their families are evacuating from Crimea, as Kiev effectively acknowledged defeat by Russian forces who stormed one of the last of their remaining bases on the peninsula. President Obama is in Europe to kick off a week-long visit that includes a G-7 meeting. He called for European allies to adopt tougher sanctions against Russia, saying Moscow’s actions must have costs.

Mohamed El-Erian, the former co-chief at Pimco says markets have “brushed aside” concerns about Iran, Iraq, North Korea and Syria, to say nothing of rising tensions in Turkey and Venezuela. With Ukraine, the market had a single day of fear over Russia’s annexation of Crimea. He lists four key reasons for market inaction: the countries involved are less systemically important; there’s little will from outside powers to get embroiled with these situations; the story of a recovering economy in developed markets has been a distraction; and extraordinary central bank support for markets has provided a layer of insulation. El- Erian went on to say things could get much worse. Consider how ugly it would be if there was an outright war between Russia and Ukraine. Or if Russia somehow decided to tap dance around US sanctions on Iran.

The point is that things can get dicey, quick. And suddenly 2014 starts to look a bit like 2008. The long lists of visible stresses in the global financial system and the almost laughably hollow assurances that there are no bubbles, everything is under control; the Fed can exit QE with no repercussions. Yea, sure. Remember when the subprime mortgage meltdown was already visible and officialdom from Federal Reserve chairman Alan Greenspan on down were mounting the bully pulpit at every opportunity to declare that there was no bubble. First, he claimed no one foresaw the crisis, and second, he attributed this failure to a lack of insight into “animal spirits,” the emotional drivers of behavior. There are plenty of indicators we could look at, and then it’s just one little spark that gets the herd running toward the cliff.

So far, sanctions against Russia look very weak, but there has been some effect: the Russian stock market is down, the currency has weakened, and sovereign bond yields are up. Russia’s central bank unexpectedly raised its benchmark interest rate by 150 basis points after the armed takeover of Crimea triggered a rout in the ruble. Even before the standoff with the West, the worst since the Cold War, Russia’s economy was facing the weakest growth since a 2009 recession as consumer demand failed to make up for sagging investment. Russia will probably dip into a recession in the second and third quarters of this year as domestic demand is set to halt on the uncertainty shock and tighter financial conditions.

The US doesn’t have a great amount of trade with Russia, so it is credible to talk about the threat of additional sanctions. The biggest damage to Russia would come from lower oil prices, and lower oil prices might be possible if Russia does anything that might hurt developed markets such as the Euro-Union. If the purpose of sanctions was to get Russia out of the Crimea, that ship has already sailed; if the purpose of sanctions is to restrain Russian proclivity for intervention, there is still a chance.

Of course the Euro-zone economies are far from solid, but the European Commission has a plan; they are apparently willing to dance with the devil. In the immediate aftermath of the financial crisis regulators called for a tough crackdown on the $71 trillion global shadow banking sector that also includes debt market repurchase agreements, securities lending, money market investment funds and some hedge funds.

With the worst of the crisis now over, Euro-commission regulators attention has turned to growth and with it the regulatory mood music has also changed; this Thursday they will publish proposals on how to fund long-term investments to boost Europe’s economies; the plan includes a fundamental shift in how the continent raises money for investment in infrastructure like roads and technology (and maybe even energy) while at the same time moving away from over-reliance on banks for fueling economic growth.

A core element involves reviving securitization, or the bundling of loans into interest bearing bonds; you may recall this market took a hit 7 years ago in the financial crisis. Now, the market for asset backed securities is only about half its pre-crisis size, or about 700 billion euros. The EC estimates that a trillion euros is needed in long term finance for transport, energy and telecoms up to 2020 to boost competitiveness and jobs and hopes that by encouraging market-based financing it can reduce the continent's reliance on banks for raising up to 70 percent of funds for the economy.

The developments in Europe come ahead of leaders of the Group of 20 economies (G20) meeting in November to endorse new rules for shadow banking. A harsh, uniform approach across all sectors has now been ruled out; the new plan is to embrace shadow banking and regulate it a little closer. If it sounds risky, well it probably is, but the Euro-zone now recognizes they need the cash and this is one way to get it, and so they are willing to dance, and put up with the heat.

Meanwhile, the United Nation’s World Meteorological Organization is meeting in Japan, and they reckon 2013 was the 6^th warmest year on record. Thirteen of the 14 warmest years have occurred in the 21st century. The UN weather agency says much of the extreme weather that wreaked havoc in Asia, Europe and the Pacific region last year can be blamed on human-induced climate change. A rise in sea levels is leading to increasing damage from storm surges and coastal flooding, as demonstrated by Typhoon Haiyan, and Australia experienced its hottest year on record, with some temps topping 129 degrees.

The costly weather disasters included $22 billion damage from central European flooding in June, $10 billion in damage from Typhoon Fitow in China and Japan, and a $10 billion drought in much of China.

Only a few places, including the central US, were cooler than normal last year, but 2013 had no El Nino, the warming of the central Pacific that happens once every few years and changes rain and temperature patterns around the world.

If climate change continues, here’s what the panel’s report predicts in terms of consequences.

For the first time, the panel is emphasizing the nuanced link between conflict and warming temperatures. Participating scientists say warming won’t cause wars, but it will add a destabilizing factor that will make existing threats worse. Global food prices will rise between 3 and 84 percent by 2050 because of warmer temperatures and changes in rain patterns. Hotspots of hunger may emerge in cities. About one-third of the world’s population will see groundwater supplies drop by more than 10 percent by 2080, when compared with 1980 levels. For every degree of warming, more of the world will have significantly less water available.

Major increases in health problems are likely, with more illnesses and injury from heat waves and fires and more food and water-borne diseases. But the report also notes that warming’s effects on health is relatively small compared with other problems, like poverty. Many of the poor will get poorer. Economic growth and poverty reduction will slow down. If temperatures rise high enough, the world’s overall income may start to go down, by as much as 2%, but that’s difficult to forecast.

Past panel reports have been ignored because global warming's effects seemed too distant in time and location. This report finds "It's not far-off in the future and it's not exotic creatures: it's us and now. According to the report, risks from warming-related extreme weather, now at a moderate level, are likely to get worse with just a bit more warming. While it doesn't say climate change caused the events, the report cites droughts in northern Mexico and the south-central United States, and hurricanes such as 2012's Sandy, as illustrations of how vulnerable people are to weather extremes. It does say the deadly European heat wave in 2003 was made more likely because of global warming.

Earlier this month, the world's largest scientific organization, the American Association for the Advancement of Science, published a new fact sheet on global warming. It said: "Climate change is already happening. More heat waves, greater sea level rise and other changes with consequences for human health, natural ecosystems and agriculture are already occurring in the United States and worldwide. These problems are very likely to become worse over the next 10 to 20 years and beyond."

Scientists in the past may have created the impression that the main reason to care about climate change was its impact on the environment. The reality is that it's going to affect nearly every aspect of human life on this planet.

Friday, March 21, 2014 - Friday Wrap-up

Friday Wrap-up

by Sinclair Noe

DOW – 28 = 16,302
SPX – 5 = 1866
NAS – 42 = 4276
10 YR YLD - .02 = 2.75%
OIL + .69 = 99.59
GOLD + 6.20 = 1335.70
SILV un = 20.38

The S&P 500 briefly climbed to a record high of 1,883.97, just over its previous record of 1,883.57. We hit resistance and didn’t break through. For the week, the Dow is up 1.8%, the S&P is up 1.6% and the Nasdaq is up 0.9%.

The European Union has added a few more sanctions against Russia, adding 12 names to their list of Russians and Ukrainians facing asset freezes and travel bans. One EU commissioner said the goal is not sanctions, the goal is to get Putin to the negotiating table. The EU doesn’t want anything to rattle their already weak financial situation. In Europe they consider the Spanish “recovery” to be one of their success stories. GDP is projected at 1% growth, double last year’s 0.5% pace, and youth unemployment is still 55%; and this is considered good news. Spain, and several other EU nations are in no condition to fight a sanctions battle with Russia.

A separate order signed by President Obama yesterday expanded sanctions and authorized potential future penalties. Yesterday’s sanction expansion included Bank Rossiya, not one of the largest Russian banks, but it starts to pull the financial sector into the equation. The EU cancelled a summit in Russia planned for June. US bankers are now considering whether they participate in a scheduled May investor’s conference in Russia.

Several US banks have a presence in Russia; Citigroup has about 1 million Russian customers. Goldman Sachs has made at least $1 billion in investments in Russian companies and won a three-year contract last year to advise the Kremlin on improving the nation’s image overseas and to help the country attract more investors. Seriously, I can’t make this stuff up.

Euro leaders also vowed to wean the EU off oil and gas imports from Russia; you may recall a similar pledge made in 2008 after Russia invaded Georgia. And the EU did cut back on oil and gas imports, a little, but they still rely on Russia for nearly a third of oil and gas imports. This time, the leaders set a deadline for mid-year to come up with a comprehensive plan. A summer time plan is quite different than actual gas in the tank to heat the kitchen in winter.

Any cutbacks in Euro-zone energy imports will likely push Russia to export energy to the East, and as we mentioned a few days ago, they have a pipeline to the Pacific. Putin is scheduled to visit China in May, apparently for final negotiations on a natural gas supply deal. The next logical question is, why would the world’s largest oil exporter and the world’s most populous nation need Western banks when they have each other?

On Wednesday the Federal Reserve FOMC wrapped up a policy session and Chairwoman Janet Yellen was asked when the Fed might consider raising rates and she said it would be after asset purchases were completed and then she said a “considerable” time and then she was pressed to explain and she said a considerable time was about 6 months. And Wall Street traders did the math and computed that rates would start to go up in May of 2015, and they had a minor freak out. That was Wednesday, and the question was whether Yellen and her Fed colleagues would walk back that timeline. Today, the answer is no, they will stick with it.

St. Louis Fed President James Bullard today said Yellen was simply echoing prevailing market expectations when she said made the reference to 6 months. Dallas Federal Reserve President Richard Fisher echoed the idea that asset purchases would end around October and interest rate policy would come under consideration soon thereafter, describing the timeline as “sound”. So, Yellen didn’t have a slip of the tongue, she did make a fairly concrete policy signal.

This does not mean there is unanimity among Fed policy makers. Today, Minneapolis Fed President Narayana Kocherlakota said that raising interest rates to head off a potential financial crisis is simply not worth it, and he thinks the odds of a crisis are low, so there is little benefit to trying to reduce the probability of a crisis with tighter monetary policy.

Of course, the Fed is already in the process of tightening monetary policy, that’s what the taper is. This will cause long-term interest rates to rise -- and the worst is still to come. For instance, the yield on the 10-Year note jumped to 2.77%, from 2.68% on the same day of FOMC's decision to reduce asset purchases by another $10 billion. And short-term rates are rising to an even greater extent, despite the fact that the Fed is still posting a bid of $55 billion each month for these debt instruments. The Fed’s quantitative easing asset purchase plan was the only reason the yield on the 10-year note has been so low for so long. Well, not the only reason; the weak economy was part; but QE was the primary reason.

The Fed and the markets are generally acting like exit from QE and the Zero Interest Rate Policy will be easy. It won’t, but QE and ZIRP have mainly been a benefit for the bankers and the wealthy. Loose monetary policy is just another policy benefiting the rich… bringing undesirable consequences.

This is a moment where you might hear the phrase: “Well, don’t throw the baby out with the bath water.” Meaning we would still need loose monetary policy while we deal with other policies that directly benefit the rich. Well, loose monetary policy not only directly benefits the rich, it reinforces the other policies being criticized; and if you look closely, that isn’t a baby in the bath, it is a rich person acting like a baby.

And that brings us to today’s edition of Banks Behaving Badly, again. The banking industry was already bludgeoned by accusations that it “robo-signed” its way through mortgage default paperwork, shuttling struggling homeowners closer to foreclosure without giving them their due process. Now, fresh accusations that banks engaged in similar practices with credit card customers.

The latest development comes in the form of a lawsuit filed last week by Miami resident Ruth Moya against JPMorgan Chase.  According to her, she fell behind on her credit card payments after her husband’s business failed in late 2008. So the following year, JPMorgan filed two collection lawsuits against her.

The problem, Moya says, is that her paperwork, and that of thousands of other customers, got hurried through JPMorgan by bank employees who were less-than-concerned about getting things correct. Her lawsuit alleges that the bank’s collection lawsuits against credit card customers have contained numerous errors and are often missing relevant information, such as bankruptcies or consumer disputes. It describes an office of nine or 10 employees in San Antonio, Texas, who were FedExed paperwork for 50 to 100 collection actions per state per day. The employees, the lawsuit says, signed affidavits attributing to the papers’ accuracy without reading through them.

The lawsuit claims the “affidavits were executed by Chase employees en masse, often thousands at a time, one-after-the-other, without the affiant reviewing or verifying the information attested to in the affidavits.”

California and Mississippi have sued the bank over the way it collects credit-card debt.  The Mississippi lawsuit accused the bank of pursuing consumers for debts that had already been paid. The California lawsuit said that JPMorgan had committed “debt-collection abuses” against some 100,000 California credit-card borrowers over about three years.

Yesterday, the Consumer Financial Protection Bureau released a report on debt collection complaints. Consumers told the agency they had been hounded for debts they did not owe, or told they would be arrested or thrown in jail if they did not pay. The CFPB received more than 30,300 complaints about debt collectors in the second half of last year alone.

Fitch Ratings today upgraded its outlook for the US AAA credit rating, removing the nation from a downgrade watch after politicians put off another debt limit battle until next year. The company, one of three major credit rating firms, changed the outlook for the rating to stable from a negative watch put in place in October. Fitch said at that time political brinkmanship over raising the debt limit had increased the risk of a government default, raising the probability of a rating downgrade.

Last month's debt limit deal was a key reason for upgrading the outlook.  Fitch also cited the improved federal fiscal situation, including the shrinking budget deficit and brightening economic picture.

When you hear claims that government spending is out of control, you might want to consider that there has been a big shift, including 4 major pieces of deficit-reduction legislation enacted since the fall of 2010 were the Budget Control Act of 2011, the American Taxpayer Relief Act of 2012, the Bipartisan Budget Act of 2013, and this year’s farm bill.

Altogether, they cut projected deficits over 2015-2024 by $4.1 trillion: about $3.2 trillion from program cuts, including the associated interest savings; and $950 billion from higher revenues, including the interest savings. Program cuts outweigh revenue increases by 77% to 23%, or about 3 to 1. In fact, total federal spending has already fallen from 23.9% of gross domestic product (GDP) in 2009, at the bottom of the recession, to a projected 20.2% of GDP in 2013.  While total federal spending will remain high throughout the coming decade under current policies, that’s mostly because of a marked increase in interest payments.  In particular, as the economy recovers, interest rates will also rise, simultaneously increasing the interest we must pay on any given amount of debt.