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.