bank-o-meter.com

March, Thursday 01, 2012

2012-03-01T18:41:00.000-08:00

DOW +28 = 12,980
SPX + 8 = 1374
NAS + 22 = 2988
10 YR YLD +.06 = 2.04

OIL + 1.53 = 108.60
GOLD + 21.00 = 1718.70
SILV + .87 = 35.61
PLAT + 22.00 = 1705.00

So, a big question lingering from yesterday was, what happened to gold? And there probably isn't a good answer. The first temptation is to blame Fed Chairman Bernanke, but if you own gold, really, we should all be thanking Bernanke; no one has done more for the price of gold than Helicopter Ben. Here's the thinking. Quantitative Easing, or QE and the sequel, QE2, and the next sequel, Operation Twist, swapping short-term bonds for long-term bonds; these are all just different names for printing money out of thin air, and that is generally bullish for gold prices. Yesterday, Bernanke is talking to Congress and he acts like there isn't a QE3, even though we know the Fed is buying mortgage backed securities, even though the ECB is throwing currency out of helicopters over in Europe. Remember, yesterday the ECB handed out 530-billion-euro in the Long Term Refinance Operation. So even though it isn't officially QE3, there is still $700 billion dollars worth of money injected into the global financial system, and this isn't enough to satisfy the wags, and they go running for the exits, and that triggers sell orders, and the next thing you know, gold is down 4%; which in the grand scheme of things, 4% is not much. Stay calm. Pay attention but stay calm. If we see some consolidation and a slow but steady retrenchment of the position, then all is well. Remember, gold prices had been moving higher at a fast clip; up 10% year to date heading into Bernanke's testimony. And then following the drop, we've see prices inching back, indicating that investors used the dip as an excuse to get back into gold. I can't see that the move did any psychological damage. The trend is in place.

Never before have the world's central banks sent so much money sloshing through the global financial system. From slashing interest rates and buying government debt to dangling cheap loans to banks and taking on their risky assets, central banks have taken extraordinary steps since the 2008 financial crisis to nurse the international banking system back to health. Over the past 3 1/2 years, the central banks of the United States, Britain, Japan and the 17 countries that use the euro have pumped out so much money that their balance sheets have reached a combined $8.76 trillion. That's a record, by far. The infusion of money has eased borrowing costs and raised confidence in banks, governments and companies. Central banks are separate banking facilities and responsible for various elements of their country's economies, but we are now seeing that monetary policy is being coordinated worldwide.

In Europe, the central bank is pursuing a policy similar to the Fed's; the Bank of England is also using the Fed playbook. Earlier this month, the Bank of Japan strengthened its asset purchase program. Everyone is following the Federal Reserve's example of printing money to get out of this economic slump. Of course, injecting so much capital into the financial system devalues the money already there; this is the process of inflation and it leads to price inflation, and we are seeing some signs, and in the US there are estimates that the real rate of price inflation is around 9%. Meanwhile, in Europe, the fiscal response is a demand of more austerity, and the counter-balance to austerity is more monetary stimulus, at least that is the Euro-banks preferred counter-balance.

And so every now and then it is necessary for the Fed Chairman to talk down the risk-on, inflationary aspects of all this money printing. And so lately we've been hearing Bernanke talking about the improving economy and the possibility the Fed would soon tighten credit and stop the printing press. It almost sounds a little crazy to even suggest the Fed will stop injecting liquidity into the financial system. I really don't think the central bankers have a tool in their tool belt for draining money out of the system, and if they tried, the result would be deflationary, and if they drain money aggressively, the result would be a global depression, a severe global depression. That is the only possible exit from all this stimulus; there is no other exit plan. And so, for now the central bankers around the world try to control the inflationary aspects of stimulus, and one way is jawboning; talking down the markets, diminishing expectations.

Now, the next question you are probably asking right now is why is the stock market continuing to move higher and higher? If the Fed is jawboning that they won't be injecting liquidity into the market, why are stocks still moving higher? Today, Bloomberg reports the Bank of Israel is investing in US stocks, and so is the Swiss National Bank.

Now, let's turn our attention to Europe, where the International Swaps and Derivatives Association made the proclamation that Greek debt did not default and credit default swaps will not be forced to pay for losses on Greek debt held by the European Central Bank. The ECB wants to avoid losses on its own Greek debt, and they are leaving private investors with a 70% haircut, possibly a little more. So, the question today was whether this constitutes the type of “subordination” for non-E.C.B. bondholders that would prompt a payout on Greek credit-default swaps. Subordination describes the process of relegating a creditor’s claim below that of others.

Greece's debt restructuring deal is voluntary. But Athens has already approved a law with so-called Collective Action Clauses (CACs), which, if needed, allows it to impose the same conditions on all bondholders — willing or not. Essentially, this means that next week, we'll find out whether the ISDA considers the Greek default a credit event that will pay off for people who bought CDS insurance. What it is looking like is that the people that wrote the Credit Default Swaps were in the premium collection business, and not in the claims payment business; which is exactly what the insurance companies do.

In the financial crisis of 2008, banks feared that their trading partners might not be able to meet their obligations on derivatives and other financial arrangements. The situation set off a chain reaction that paralyzed global markets until governments and central banks provided enormous financial support.

To prevent a similar disaster from happening again, finance ministers in the United States and Europe committed in 2009 to move derivatives like credit-default swaps onto clearinghouses. These organizations, if they work properly, can sharply reduce the chances that a large bank will not make good on such contracts.

So, the idea that CDS won't have to pay, may seem like a calming event for the market, but the bigger question is can the market work and function without the risk controlling safety net of CDS, because if there is no payout, what's the point – you're not really controlling risk. The big question is whether this is going to kill the CDS market. If it does, it might actually be a good thing. At least then we don't have to worry about side bets crashing the financial system.

The nationwide price of gas is $3.73 a gallon; it is averaging $4.23 a gallon in California. So fill up in Quartzsite or just before you cross the river. Gas prices typically go up 20 cents a gallon as we head into the summer driving season. On Wednesday, the price of the benchmark American crude settled at $107.07 a barrel, up to 108.60 today. That is about four dollars higher than on the same day in 2008. As a rule of thumb, a penny a gallon is worth a bit over $1 billion in consumer purchasing power if it is maintained a whole year. A dollar more would be something in excess of $100 billion. Today, there was a report of a fire at a pipeline in Saudi Arabia. By the way, if you wanted to design a vulnerable infrastructure for energy, it would be pipelines. Saudi Arabia denied the explosion, despite the pictures on TV. Prices spiked up to $110 a barrel for a short time.

Of course, the bigger question deals with tensions in the Middle East. Is war imminent? Both the US and UK military commands ask for more funding to increase the preparation and deployment of military arms and personnel in the Persian Gulf. The US has already added to the number of aircraft carriers it has stationed in the area, sending both the USS Abraham Lincoln and the USS Carl Vinson, along with a number of warplanes and tens of thousands of troops. The warships will be modified with antitank weapons and rapid fire machine guns, all specially designed for dealing with the Iranian fast attack boats. The Pentagon has also requested $82 million in order “to improve its largest conventional bunker-buster bomb, designed to take out bunkers like those used by Iran to protect its most sensitive nuclear development work.”

Right now, it is all in the saber rattling phase. Any actually attacks, and it really doesn’t matter who starts it, would result in a massive spike in oil prices.

Economic news today: the Institute for Supply Management' manufacturing index declined to 52.4% in February from 54.1% in January. A reading above 50 means the manufacturing sector is expanding but not real strong.

Initial claims for unemployment benefits fell by 2,000 to a seasonally adjusted 351,000 in the week ended Feb. 25. So we have a modest improvement in hiring trends.

Personal income rose 0.3% in January after a 0.5% jump in December. Consumer spending edged up 0.2% after no movement at all in December. Wages and salaries grew 0.4% in January after a 0.4% advance in December. Last year, Americans saw their biggest gains in income since 2007, income was up 5.7%, and spending grew by 5.1%.

About 18.6 percent of Americans, almost one out of every five, told Gallup pollsters that they couldn't always afford to feed everyone in their family in 2011.

Goldman Sachs and Wells Fargo received "Wells notices" from the Securities and Exchange Commission. A Wells notice indicates SEC staff plan to recommend that the agency take legal action and gives a recipient a chance to mount a defense.

Goldman received its Wells notice on Feb. 24, relating to a $1.3 billion subprime mortgage-backed securities deal in late 2006 that the bank underwrote. Goldman also received inquiries from governmental, regulatory bodies and self-regulatory entities concerning certain transactions Goldman entered with MF Global prior to the brokerage firm's bankruptcy filing. Wells Fargo said it is also facing investigations related to home loan origination practices. Last week, Bank of America filed its annual report which included information that it had "received a number of subpoenas" from regulators and other authorities about the bank's underwriting and issuance of mortgage-backed securities.

Remember a few months ago when Bank of America was trying to gouge customers, or I should say they were trying to improve revenue by gouging customers with a monthly fee to use their debit card. And remember how people were so angry that BofA finally had to back down form that idea. Bank of America pilot programs in Arizona, Georgia and Massachusetts now are experimenting with charging $6 to $9 a month for an “Essentials” account. Other account options being tested in those states carry monthly charges of $9, $12, $15 and $25 but give customers opportunities to avoid the payments by maintaining minimum balances, using a credit card or taking a mortgage with Bank of America, according to a memo distributed to employees. So, what is a Bank of America “Essentials” account? It is an account that has been labeled “Essentials”. Which is another way of saying it is a smaller account that BofA isn't making money on.

So, clearly we are seeing that the bigger a bank the less efficient the bank. In fact, every study of bank efficiency ever done in the US has found that bigger banks have HIGHER costs per dollar of assets once a certain size threshold is passed (and that is usually pretty low, between $1 and $5 billion in assets). That means there is no economic justification for mega banks, since smaller ones could do the job more cheaply.

Oh, and remember, back in 2008, when BofA nearly collapsed, and the taxpayers were forced to bail them out? I'm just saying, if they ever come back with their hands out, with a sad story about needing another bailout, I'm just saying – remember.

February, Wednesday 29, 2012

2012-02-29T23:03:00.001-08:00

DOW – 53 = 12,952

SPX – 6 = 1365
NAS – 19 = 2966
10 YR YLD +.05 = 1.98%
OIL +.32 = 106.87
GOLD -87.20 = 1697.00
SILV – 2.29 = 34.74
PLAT – 40.00 = 1685.00

I really don't know much. I'm not Nostradamus. I can't see into the future. I do not operate a shadow CIA. I just read a lot and try to make sense of what I read, and that is sometimes a fool's errand, and when all else leaves me awash in chaos I just follow the trend. The trend is your friend. And a trend in place is more likely to continue than it is to reverse, until it reverses. Right now, the trend says the US economy is improving.

The US economy grew 3% in the fourth quarter, so says the Commerce Department; that is up from an earlier estimate of 2.8%. There was an increase in commercial construction, higher consumer spending and lower imports, and a large buildup in business inventories. It doesn't sound sustainable but the trend is up.

The Federal Reserve published its Beige Book, in which they proclaimed the economy continues to expand at a modest pace, and consumer spending is generally positive, and manufacturing is expanding at a steady pace nationwide.

And then, Federal Reserve Chairman Bernanke went to Capitol Hill to ask lawmakers to dust off the old relic known as fiscal policy, and take it for a spin. Also, as part of Bernanke's semiannual testimony he said, “The recovery of the U.S. continues, but the pace of expansion has been uneven and modest by historical standards.” He did not say he would dump free money out of his helicopter. Wall Street loves it when the Fed tosses out free money. Wall Street is hooked on free money; if they don't get it, they get cranky. Today they got cranky. The Fed is still buying Mortgage backed securities. The Fed is still injecting massive liquidity, especially into the housing market, but Wall Street was not satisfied.

And in the precious metals market, someone felt they had a good reason to go short, absent an announcement of QE3. And boom, they knocked the floor out from under precious metals prices. And then Ron Paul talked to Ben Bernanke and said the government is lying about inflation and the Fed will self-destruct when the money is gone. And then Ron Paul held up a silver coin, and Bernanke hissed like a vampire confronted with a cross.

So, I can see it makes no sense at all. And I revert to default setting: What is the trend? The trend is that the US economy is showing slight signs of improvement. The stock market has been on a roll, in large part because the Federal Reserve has been dumping trillions of dollars on Wall Street. Precious metals have been in a secular bull market because the Fed is dumping trillions of dollars on Wall Street. There is no way for the Fed to exit its Zero Interest Rate Program. There is no way the Fed will abandon its monetary easing; I mean its not like Congress is going to pick up the slack with fiscal policy. And so the big trend is that the Fed will continue to be accommodating, despite the fears of the market today.

Maybe somebody was hoping Bernanke would announce QE3 and sprinkle magical liquidity dust and flip the switch to “risk on”, but that wasn't going to happen, especially not while the European Central Bank had just opened up its trading window for the second tranche of the Long Term Refinance Operation which racked up more than 530-billion euros in the first few hours, roughly $700 billion-dollars. Bernanke did say the ECB was well capitalized, which is interesting because the ECB now has more than 3-trillion on its balance sheets and only about 80-billion in reserves. The Euro-crisis has not been resolved and it is soaking up a whole bunch of money.

Which takes us back to Greece. Tomorrow, the Greek parliament is supposed to sign off, for the umpteenth time, on the bailout. The ECB has sprinkled its magic pixie dust on Greek sovereign bonds and said that a default isn't really a default. The International Swaps and Derivatives Association will meet on Thursday to decide whether a certain aspect of the deal will indeed trigger default and make the default payments necessary. So, today, when the ECB was passing out free money in the form of LTRO, they were really buying the banks compliance regarding the credit default problem on Greek bonds. Don't trigger the credit default and you can have some money on the side.

There is a chance that the quid pro quo might fall apart. For example, in Greece there is the pesky problem of democracy, which was taken from the people and replaced by a technocratic government. The Greek people have not been comfortable with this arrangement. Tomorrow, the Greek parliament will almost certainly endorse the debt plan with bondholders, which must be completed by March 12^th, prior to the March 20^th deadline when a $20 billion debt payment is due. Part of the debt plan calls for increased taxes, and privatizing certain assets that used to belong to the government, that is to the people. And the thing is that the people aren't happy, and so they are refusing to play the bankers' game. Merchants are refusing to charge and collect and pay the VAT, the value added tax; tollbooths have been shuttered; public facilities refuse to charge fees; there is widespread tax avoidance. All those austerity measures will fall flat if the people refuse to supply the revenues to pay off the bankers. It is an elegant act of civil disobedience.

Now in light of all that, it would have been most unseemly for Fed Chairman Bernanke to announce QE3, and my guess is that somebody figured this out before me; and my guess is that the overall trends haven't changed. Precious metals took a significant hit today but I think it was a trade, not a change of trend. Stocks moved higher again today. I think this is a trend. Apple moved higher today. Apple has market capitalization of more than $500 billion, almost double the market cap of Microsoft, and 25% more than Exxon Mobil. At some point I have to think that trend will change but not today.

Demand for oil has decreased and the inventories have increased, but today, the price of oil moved higher. Why? Because that is the trend. Someday the depression will be over, and someday wars will end. Someday the Federal Reserve will stop passing out free money to bankers but for now, that is the trend, despite what Bernanke says to Congress. In the next few days, the market will probably realize any pause in helicopter flights is just temporary, and the Fed will get back to doing what the Fed does.

Leopards don't change their spots. The sun will come out tomorrow, the moon will wax and wane, the tide will rise and fall. A trend in place is more likely to continue than it is to reverse – so it makes sense to ride the trend. Eventually, the trend will reverse, and when the trends end, I will probably be a little late in getting out. And that's okay.

FEBRUARY, TUESDAY 28, 2012

2012-02-28T23:13:00.001-08:00

DOW + 23 = 13,005
SPX + 4 = 1372
NAS + 20 = 2986
10 YR YLD +.01 = 1.93%
OIL – 1.96 = 106.60
GOLD + 15.80 = 1784.90
SILV +1.47 = 37.03
PLAT + 11.00 = 1723.00

Dow at 13,000 for the first time since May of 2008.

I never really liked the Conference Board's Consumer Confidence Index. First, it reduces people to the role of consumers. I consume, but I do much more. I don't consider myself a consumer, at least not first and foremost. Second, it isn't really trying to measure our confidence, it is trying to determine if we will loosen our steadfast grip on the purse-strings, and if we will buy something. Apparently we will. The Consumer Confidence Index jumped to 70.8 from 61.5 in January. A nationwide average of $3.78 a gallon was trumped by a stronger jobs market and a mild winter that left many people with more work and lower heating bills. Consumer confidence resulted in a 3% increase in chain store sales for the week. Meanwhile, the durable goods orders dropped 4.5% in January. Part of the drop may be the expiration of a tax break which pushed demand forward into December.

The Case-Shiller report on sales of homes in 20 major metropolitan areas across the country shows that house prices continued to drop in December, down 1.1%, for the 4^th quarter, prices dropped 3.8%, and for the year, prices dropped 4%. For the Phoenix market, prices have been going up the past couple of months.

So, while we are seeing some signs of improvement in the economy, and confidence is up and the jobs market is showing very modest signs of improvement, the housing market, nationally is still in a mess. Purchases of new homes are down 77 per cent from their 2005 peak. They dropped another 0.9 per cent in January. Home sales overall are still dropping, and prices are still falling – despite already being down by a third from their 2006 peak. January’s average sale price was $154,700, down from $162,210 in December.

For most people, their home is their largest purchase. The house is a large component of net worth, and one in three homeowners are underwater on their mortgages. Nationally, home inventories are declining in relation to sales, but there may still be about 5 million houses with delinquent mortgages or in the foreclosure process that will soon be added to the inventory. And the inventory numbers don't include 3 million or so vacant houses. Vacancies are up one million from 2006. Some of those vacancies will never be filled.

Phoenix may have hit bottom but we still face challenges. Last year we had the sixth highest foreclosure rate in the nation. Those properties are still moving into the inventory pipeline. Half of all Arizona homes with mortgages are underwater; that compares with about 25% nationally. For investors, the inventory is tighter and demand is growing. Normal resales in the Phoenix market aren't seeing higher prices, not yet.

The negative wealth effect, homeowners who are underwater, combined with a lethargic labor market and declining real wages means the economy has not truly recovered. We are seeing signs of improvement but I believe the economy is still in a small 'd' depression. The implication is that the housing market is one of the big spots that could still use a jolt of economic stimulus. Actually, the housing market has been neglected. While the Fed has a Zero Interest Rate Policy, that rate hasn't filtered to the typical homeowners; so, monetary policy has stopped with the Wall Street banks, and fiscal policy – well, if it wasn't for dysfunctional fiscal policy, there wouldn't be any fiscal policy. Today, the FHA announced it would increase upfront mortgage insurance premiums by 75 basis points on new financing, not refi's.

Homeowners have been hung out to dry, but this is an election year, and there are changes. The biggest is the HARP refinance program, which should allow underwater homeowners to refinance at lower rates. On January 4, the Federal Reserve released a white paper titled, “The U.S. Housing Market: Current Conditions and Policy Considerations,” which offered ideas for fixing the housing mess. Almost 6 years into the housing bust and this was the first such report from the Fed. The Fed report falls woefully short of addressing the housing market problems in a rich and robust manner. Many of the suggestions seem designed to benefit the bankers as opposed to the homeowners.

I know a lot of you guys like Warren Buffett; there's no question he is a successful investor but he is also a banker, the biggest shareholder of Wells Fargo, the largest mortgage lender in the country. In this role, he tends to be shameless or perhaps clueless or possibly just mercenary. In the annual letter from Berkshire Hathaway, Buffet says banks were victimized by some homeowners who refinanced their loans before getting evicted.

Buffett writes: “large numbers of people who have ‘lost’ their house through foreclosure have actually realized a profit because they carried out refinancings earlier that gave them cash in excess of their cost.” Buffet claims that: “In these cases, the evicted homeowner was the winner, and the victim was the lender.”

While I don't doubt that some people scammed the system in this way, Buffett doesn't give us a number, and the reason he doesn't give the number is because it is inconsequential. And whatever the number is, it would pale compared to the number of homeowners victimized by the banks. Buffett blaming people who lose their homes to foreclosure is kind of like Satan complaining that jaywalkers are evil.

Last July, Berkshire Vice Chairman Charlie Munger criticized bankers for contributing to the housing bubble. Munger blamed the boom on megalomania, insanity, and evil in investment banking and mortgage banking. Charlie got it right last summer, Warren got it wrong this week. The banks are not the victims.

The housing market is going through a radical and fundamental change. For many years, the home was the main component of a family's net worth. What will replace houses as the major investments of the middle class? Will anything? If the housing market can be revived, it will go a long way to lifting the entire economy. This is the plan of the Federal Reserve; this is the plan of the administration; this is the game plan for economic stimulus this year. Hold on, it promises to be an interesting ride.

A combination of unusual and unsustainable forces has pushed the cost of borrowing as low as it has ever been, so low that many investors effectively are paying to lend money to the government.

Investors buying five-year federal debt are accepting such low interest rates that inflation is on pace to reduce the value of their investments by more than 1 percent each year. Yet demand for United States Treasuries remains much greater than the supply.

The glut of cheap money has allowed the government to keep its annual deficits much smaller than it had expected, holding down the growth of the federal debt.

The Treasury may start issuing debt with negative interest rates, making investors pay for the privilege of lending money to the government.

The average rates that the government pays to investors in its debt have declined in each of the last five years, from 4.92 percent at the end of 2006 to 2.24 percent at the end of 2011. Rates have edged even lower so far this year. Adjusting for inflation, the government is borrowing at virtually zero cost.

As a result, while the size of the public debt more than doubled over the last five years, from less than $5 trillion to more than $10 trillion, the government’s annual interest payments remained about the same. In 2006, the bill was $226.6 billion. Last year, the bill was $227.1 billion.

The basic reason to expect higher rates is that investors usually demand compensation as a borrower’s debts increase. And the government projects that its debt will grow rapidly in coming years. At some point the party has to end, right? Maybe, but for now, the bull run in Treasuries continues unabated.

The United States also has benefited from concerns about the health of European governments. The International Monetary Fund estimates that the benefits of investors fleeing Europe to buy Treasuries have roughly offset any other damage to the American economy from the struggles of the euro zone.

So while Europe fiddles, Treasury debt remains hot. It's a flight to safety, and investors are willing to pay for protection. This month, when the government auctioned off one-year debt, Treasury agreed to pay 14 cents for every $100 that it borrowed, or 0.14 percent. Last week at the most recent auction of five-year debt, it agreed to pay 88 cents a year for every $100 that it borrowed. At a 2 percent inflation rate, investors would need to be paid $2 for every $100 they lent just to keep pace.

Maybe risk aversion has gone too far. Would you pay to park money with the Treasury? Of course, at some point, the pendulum will swing, investors will demand higher rates, bond prices will drop; nothing lasts forever. And when the low rate position unwinds, it will be ugly, but not today. Maybe not today. The problem is that there is no exit strategy from a Zero Interest Rate Policy. How does the Fed back out of this parking lot without destroying the bond market? The simple answer is that they can't.

The World Bank warns that China is headed for collapse. Imagine China crashing. The country holding over a trillion of America’s debt. The World Bank warns that China must essentially overhaul its entire economic structure if it wants to avoid a "crisis". It all sounds very urgent, but it is a part of a report of what might happen over the next 20 years.

The export-driven, state-investment model is producing diminishing returns. According to the World Bank, China's growth rate will slow to 5 percent by 2030 unless China changes its strategy. Remember, South Korea and Japan both went through severe financial crises in the 1990s. And China is already displaying some of the telltale symptoms: A fragile banking sector, companies engorged with debt, and unwise investments in real estate.

The World Bank is calling for a sweeping overhaul, but then the World Bank always calls for sweeping overhauls. That's what they do. Still, BusinessWeek came out with an editorial comparing the situation in China with the years running up to the 2008 meltdown.

The National Association for Business Economics forecasters have raised their expectations for employment, new home construction and business spending this year. But they held on to their average prediction that America’s gross domestic product, or GDP, will grow at a rate of 2.4 percent. That’s a slight improvement from 2011, when economists believe the economy grew 1.6 percent. Final economic growth numbers for 2011 are due out tomorrow. NABE economists see the unemployment rate sticking at 8.3 percent this year, matching January figures. Panelists are also still forecasting strong business spending growth this year. They’ve slightly raised their forecast to 8.1 percent growth this year.

Yesterday, we told you about the Wikileaks dump of Global Intelligence Files from StratFor, the private, intelligence firm that operated as a kind of shadow CIA. Wikileaks claims to have more than 5 million emails that were apparently hacked from StratFor; so far, they have published about 200. It will take some time to go through those emails, but we are already finding some interesting stuff. Osama bin Laden was in routine contact with several senior figures from Pakistan's military intelligence agency while in hiding in the country. Apparently this info came to StratFor after the killing of bin Laden. The e-mail, from a Stratfor analyst, suggested that up to 12 officials in Pakistan's Inter-Services Intelligence (ISI) agency knew of bin Laden's safe house.

The internal email did not name the Pakistani officials involved but said the US could use the information as a bargaining chip in post raid negotiations with Islamabad.

Other e-mails included the suggestion that Hugo Chavez, Venezuela's president, may have less than a year to live after his cancer spread to the colon and bone marrow. Other revelations were statements that Israel had last year carried out a successful covert attack on Iran's secret nuclear facilities.

Apparently the key to intelligence gathering is to state the obvious after the fact.

http://www.bloomberg.com/news/2012-02-27/wealthier-people-more-likely-than-poorer-to-lie-or-cheat-researchers-find.html

http://www.zerohedge.com/news/guest-postthe-existential-financial-problem-our-time

February, Monday 27, 2012

2012-02-27T22:12:00.001-08:00

DOW – 1 = 12,981
SPX + 1 = 1367
NAS + 2 = 2966
10 YR YLD -.06 = 1.92%
OIL – 1.07 = 108.70
GOLD – 5.50 = 1769.10
SILV +.05 = 35.56
PLAT – 3.00 = 1711.00

Let's look at the price of a gallon of gas and the factors that have been pushing prices higher. You may recall that last May, oil prices moved up to $114 per barrel. So one of the first considerations is that this is a seasonal move. You will also recall that last spring, the oil production in Libya was disrupted. After a while, Khadafi was deposed and by last October, prices had dropped to $75 a barrel.

Now the concern is Iran, and any disruption in Iranian oil supply would be considerably larger than Libya, and might lead to even more widespread disruption of oil transportation through the Strait of Hormuz. Iran produces about 4.3 million barrels per day. So, now we are looking at the imposition of sanctions on Iran. What are the implications? The most likely result of sanctions is that the countries participating in the sanctions would have to cut back demand and find new sources, and the countries not participating could buy the oil from Iran. China and India would buy more oil from Iran, while Europe would buy more oil from Saudi Arabia. There would still be the same amount of oil in the global market, just have to buy it from different sources.

Maybe sanctions could alter global production, or maybe the situation deteriorates and we end up with disruptions; what happens then? Well, we can look back to the Iran-Iraq War in 1980, the first Gulf War in 1990; these wars disrupted oil supply, taking out 4-7% of net world production and resulting in oil price increases of 25% to 70%. What follows a sharp spike in oil prices? Recession in the United States. Some people theorize the US is less susceptible to oil price shocks than in the past. If the Strait of Hormuz is closed, even if for a day or two, we'll get a good test of that theory.

The Murdoch Street Journal speculates that monetary policy is to blame. “Oil staged its last price surge along with other commodity prices when the Fed revved up its second burst of "quantitative easing" in 2010-2011. Prices stabilized when QE2 ended. But in recent months the Fed has again signaled its commitment to near-zero interest rates first through 2013, and recently through 2014. Commodity prices, including oil, have since begun another surge, and hedge funds have begun to bet on commodity plays again. John Paulson says he's betting on gold, the ultimate hedge against a falling dollar.”

There might be something to this argument, loose monetary policy tends to lead to inflation; oil is priced in dollars. The reality is that most commodity prices haven't moved much in the past six months. Oil was up 22% in the 4^th quarter of 2011; copper gained 4% in that time. Most of the agricultural commodities were largely unaffected by the Federal Reserve. The Fed's efforts to stimulate the economy probably have some effect and they might even swing out of control, but we're not seeing that right now.

I don't quite follow this argument I've been hearing about the Fed causing higher oil prices. In order for that to be true, wouldn't the markets have to expect a fall in the value of the dollar? And doesn't that imply inflation? If the oil markets expect inflation, then why don't the bond markets? The dollar Index is pretty much where it was last October, and pretty much where it was in October 2010. I doubt the Murdoch Street Journal is trying to claim the Fed has stimulated the economy so much that demand is now smashing available supply.

While there is evidence the economy is improving, one of the twists is that gasoline demand is waning. There are three explanations for this anomaly. First, as the economy has improved we have seen an increase in car sales and those new cars are much more efficient – Second, as the price at the pump has increased Americans have cut back driving (we've done this before and we are learning how to improve our efficiencies), and third, the improvements in the economy aren't real and the economy is contracting rather than growing. Take your pick.

As best I can figure, economic activity is improving in the US but not by much, still that might account for a modest increase in oil prices except that demand for gasoline has dropped in the US. So, let's toss in an improving outlook for economic activity in Asia. Aside from production disruptions, or fear of them, global economic activity has to be the key driver of oil price changes. A very small change in outlook for the next five years would justify a significant change in current oil prices. The reality is that since 2005 we have seen virtually no increase in global crude oil production and total petroleum liquids. You should expect that prices would rise over time. Demand has increased a little and supply has been flat, but that is the long term outlook.

Still, that doesn't explain the jump in prices that we've seen since October. Gas prices are back to levels that we last saw in the summer of 2008. Remember when oil hit $147 a barrel? Today, we only – ONLY – see prices pushing up against $110 per barrel. And that brings us to a major inefficiency that is pushing prices at the pump much much higher.

As prices for oil have moved higher, domestic demand for gasoline has dropped to a 15 year low. The result is a squeeze on refineries. Since December, the U.S. Has lost 4 percent of its refining capacity. Two major refineries in Pennsylvania shut down, so there has been a significant impact on refined supplies, especially in the East. Still, domestic oil production has increased over the past three years, and the offshore oil rig count is now 2.5 times higher than the previous 10 year high, and refineries are exporting gas, one of our major exports now in the U.S.

So, let's only presume that prices are impacted when non-North American oil supplies are threatened or there is the threat of a threat.

Then markets wisely react to possible supply reductions as opposed to ongoing domestic and North American supply restrictions. Which further makes the case for reducing North American oil production because such production is irrelevant to oil prices and can only cause all of the ground water in North America to be contaminated.

No wait. There must be a better answer. Speculators hold 70% of the open interest in oil futures. If the CFTC actually enforced it's rules, speculators would only be allowed to hold 30% and the price of oil would reflect supply and demand.

And if you want to know the real reason why we can't seem to get a serious commitment to sustainable, renewable energy the answer is that the bankers haven't figured out how to control it and take their cut.

In December, Anonymous may have hacked into security data of Stratfor, a Texas-based intelligence and threat analysis firm, that has been described as a shadow CIA. Today, Wikileaks dumped 5-million Stratfor emails; they call them the “Global Intelligence Files”. According to Wikileaks, the emails “reveal the inner working of a company that fronts as an intelligence publisher, but provides confidential intelligence services to large corporations.” Wikileaks name-checks several Fortune 500 corporations as well as U.S. government agencies

Wikileaks claims the emails”show Stratfor’s web of informers, pay-off structure, payment laundering techniques and psychological methods,” adding that the emails “expose the revolving door that operates in private intelligence companies in the United States” and alleging that government-related sources around the world give Stratfor political scoops in trade for cash.

WikiLeaks founder Julian Assange told Reuters: "Here we have a private intelligence firm, relying on informants from the U.S. government, foreign intelligence agencies with questionable reputations and journalists. What is of grave concern is that the targets of this scrutiny are, among others, activist organizations fighting for a just cause."

Among the more disconcerting emails, one involving a Goldman Sachs Managing Director looking to utilize the intelligence to form a hedge fund and trade on what I think might be considered insider information. Another email indicates that Stratfor attempts to use financial, psychological, or sexual control of informants or possibly people being investigated. Which makes the story of Julian Assange all the more intriguing.

I'm still waiting on the Wikileaks dump on the big banks. Assange has been promising that for almost two years, during which time, the infrastructure for funding Wikileaks has broken down. I don't know whether Assange is a saint or a sinner but it sure looks like some very powerful people have been trying to put a lid on his work.

The potential drag from fiscal restraint contributed to the rationale behind Federal Reserve policy makers’ reduced forecasts for growth this year and in 2013, that is part of what we learn from the minutes of the January FOMC meeting. Put another way, the fact that we have a dysfunctional fiscal policy is a contributing factor to why we have such extraordinarily accommodative monetary policy. Fed Chairman Bernanke returns to Capitol Hill on Wednesday to deliver his semiannual report to the House Financial Services Committee. There are several programs that are set to expire around the end of the year. Bernanke's expected to tell Congress to pursue a long-term outlook on balancing spending and revenue, but no sudden moves.

The Federal Reserve Bank of New York issues a quarterly report on Household debt and credit. The latest finding from the fourth quarter show most households are continuing to delever. Aggregate consumer debt dropped $126 billion to 11.53 trillion. Consumers’ non-real estate indebtedness now stands at $2.635 trillion. The report finds that $1.12 trillion of consumer debt (or 9.8 percent of outstanding debt) is currently delinquent, with $824 billion seriously delinquent (at least 90 days late). So, I think I understand; foreclosures and delinquency tends to decrease outstanding debt.

And when you decrease outstanding debt, you increase net worth. So, if you're looking for a quick way to increase your net worth - I'm just saying, you do the math.

February, Friday 24, 2012

2012-02-24T17:17:00.001-08:00

DOW - 1 = 12,982
SPX + 2 = 1365
NAS + 6 = 2963
10 YR YLD - .01 = 1.98%

OIL +1.86 = 109.69

GOLD – 6.50 = 1774.60
SILV +.04 = 35.51
PLAT – 13.00 = 1717.00

We've almost made it through the first two months of the year and if you haven't noticed, things are getting better. This is not to say that everything is good or even great, just that things are getting better. And of course, there is the caveat that things might get worse and that could happen fast and it could be severe, but for this specific moment in time, things are getting better. Some people would like to deny this; they claim this getting better notion is a false meme; we're being manipulated into believing that things are getting better when they are not. Despite the presence of bright sunlight, we know that the darkness of night is right around the corner; and even cold, hard numbers are unconvincing. Let's look at the numbers: the S&P 500 has doubled in less than 3 years, and it's up more than 8% year to date; just this week home sales showed strength and inventories dropped, the unemployment rate has been steadily dropping and the initial claims for jobless benefits fell to the lowest level since March, 2008; and consumer confidence in January moved to its best level in a year.

Maybe these numbers don't apply to you personally; fair enough. And it's easy to claim the markets are flying blind because the economic numbers are distorted; which is true, but this is not the first month or even the first year that the numbers have been distorted. If you can move past the politics of denial the numbers tell a story and rather than deny the facts (however imperfect), let's dig for deeper understanding. What is the source of this move? How might this all play out?

For several months we've been telling you that the European sovereign debt crisis would follow the Federal Reserve's Playbook from 2008. I can now say with some confidence that QE3 has begun. Check the Fed's balance sheet and you will see unadjusted M2 (money supply plus “near money” savings, cd, money market) is jumping higher. The Fed has been buying and there are new assets appearing on their balance sheet. It isn't being called QE3 and several Fed leaders have stated that no stimulus is needed because the US economy is improving, but the reality is that the real reason the economy is improving is because we have QE3.

Remember last November, when the Super Coalition of Central Bankers announced their coordinated actions to enhance capacity to provide liquidity support to the global financial system. The ECB, the Bank of England, Bank of Japan, Bank of Canada, and the Swiss National bank and the Fed all agreed to pump cash into the Euro-banks. They did this by way of unlimited dollar swaps.

Right before Christmas, the ECB gave another nice gift to the Euro-banks in the form of the LTRO, the Long Term Refinance Operation, which handed over close to 500-billion-euro. And don't forget that the next tranche is scheduled for this coming week and it could be up to 1-trillion-euro.

Meanwhile, the Federal Reserve buys 90% of all 20 and 30-year maturity US bonds; and the Fed is the backstop for mortgage backed securities and they have been increasing their purchases of MBS. The Fed has made clear they will prop up the mortgage market. And don't forget the Fed's ZIRP, Zero Interest Rate Policy, now in its fourth year and headed to an unprecedented 6 year engagement.

Do you really think we would have near record low interest rates on 30 year mortgages without the Fed's Operation Twist program? And if we didn't have record low mortgage rates, wouldn't we have much higher default rates in housing, and wouldn't that lead to much higher toxic assets on the balance sheets of US banks big and small?

And what do you think would have happened if Bernanke and the FOMC had not committed to two more years of zero interest rates? Of course, part of the problem is that the market latches on to zero interest rates and refuses to let go. There is no exit strategy at this time for the Fed.

And if the Fed and its foreign counterparts had not juiced the Euro-banks, there is a strong probability we would have seen a liquidity crunch by now.

So, even if we don't come out and call it QE3, there has been a huge dose of central bank intervention and the economy has received a massive injection of stimulus. It is difficult to measure the exact impact of the stimulus on the market's positive performance since the start of the year. Is it 50%? 80%? 95%? Without the latest round of Fed stimulus, we wouldn't be talking about the market's positive performance; we might be talking instead about the crash of 2012. You may disagree with the concept of central bank intervention but it works – at least in the short term.

Over the long term, the results aren't quite as positive. There is a price to pay for juicing the economy. We've heard this refrain before..., boom-bust-boom-bust – it's a rhythm unique to central banking. Unfortunately we can't cure debt with more debt. There is a problem with debt; it grows though compounding, which means it grows exponentially. The only thing in nature that grows exponentially is cancer, and eventually it consumes the host. As debt grows exponentially it is manifest through inflation and if inflation grows significantly faster than economic growth, the result is hyper-inflation. When hyper-inflation happens, money stops being an effective medium of exchange and commerce grinds to a halt.

We're already starting to see signs of inflation, and the problem is that the economy must now grow faster than inflation, which means that the Fed must juice the economy and it is doing that – and the unpleasant side effect is inflation. And so we have a vicious cycle. I don't claim to know the intent of Chairman Bernanke but any central bank intervention must ultimately seem as futile and absurd as Sisyphus rolling a boulder up a hill.

On the flip side is deflation. When people expect falling prices, they become less willing to spend, and in particular less willing to borrow. When prices are falling, just sitting on cash becomes an investment with a positive real yield and borrowing, even for a productive investment, means the loan will have to repaid in dollars that are worth more than the dollars you borrowed.

And the economy may stay depressed because people expect deflation, and deflation may continue because the economy remains depressed. That’s the deflationary trap. Everything just freezes. A new approach is to cut everything – the austerity move; which means economic contraction surpasses falling prices. The trick is to have economic growth greater than price growth. The typical central bankers' response to a credit freeze is to inflate with wild abandon.

Of course, this process is not so easy. Someone must pay for someone to collect. In this case, the taxpayers pay and the bankers have their hands out. And the stimulus is addictive.

The ink is barely dry on the deal to enslave Greece and the International Monetary Fund is begging for more money. The G20 is meeting this weekend in Mexico and the IMF wants to raise as much as $600 billion-dollars in extra resources to help deal with the fallout from the Euro-zone debt crisis. And this is on top of the ECB's bailout funds.

We've seen the playbook. We know how the story ends.

Let's go to the Mail bag:

First, thank you for the finest financial program I've ever heard. If there is a solution to today's banking - investment woes it must begin with defining the problem. Education is the key, and you provide the fundamentals so well.

I've concluded that unfunded liabilities will amount to broken promises or be re-negotiated. What I am not sure of (and neither is anyone else that I have talked to) is am I personally and legally obligated to pay my part of the national debt? Back when I purchased I bonds I noticed the term "Public Debt" at the top of the document instead of National debt.

Am I personally accountable for not reigning in career professional political hacks who run up a debt "in my name?"

There are many different ways to categorize debt, including secured or un-secured debt. For example, I borrow money to purchase a shiny new bicycle, the lender might hold the title to the bicycle as collateral on the debt. If I don't pay, they take my bike. With bonds there are sometimes fees, revenues, or taxes pledged to pay the debt, or it may simply be a general obligation to pay which means they are backed by the full faith and credit of the United States or municipality or whoever the issuer might be, that means the bond is backed by all legally available funds of the issuer and the debt can be paid from the issuer's general fund but not necessarily from ad valorem taxes.

Are you personally responsible for public debt? It depends on how the issuer feels about it. For example, we recently have seen municipalities that have issued full faith and credit bonds, and now they can't pay. Jefferson County Alabama decided to stop paying on their general obligations because they were draining cash for essential services. Meanwhile, Rhode Island put bondholders ahead of its citizens.

So, if a government doesn't pay its debts, then they won't have credit in the future. For example, going back to the 1820's, Greece has defaulted on its debt six separate times. Something the European Union failed to consider when they were writing the Maastricht Treaty. In Greece, it looks like bondholders will take a hit and citizens will take an even bigger hit.

The quick answer is that you are not personally liable for public debt. The US Treasury will not itemize the debt and send you a bill to pay a bond when it comes due. Likewise, if you own a bond, you can't go around to various citizens and demand payment. Conversely, if you own a stock and the company collapses, you do not have personal liability for debts incurred by the company. But of course, the public must pay debt, and we do pay debt by replenishing the general fund of the issuer – usually by paying taxes or cutting services.

So you are publicly accountable for the debt, but you are not personally accountable.

February, Thursday 23, 2012

2012-02-24T05:03:00.001-08:00

DOW + 46 = 12,984
SPX + 5 = 1363
NAS +23 = 2956
10 YR YLD -.02 = 1.98%
OIL +2.41 = 108.69
GOLD +4.30 = 1781.10
SILV + 1.11 = 35.47
PLAT – 2.00 – 1728.00

How much does it cost you to get to work each week? How much do you spend on gasoline? Is it $10 a day? $50 a week? Maybe a couple of hundred a month? Maybe more? For a whole lot of people, when the price of gas starts to go up, it has a definite impact on their budgets and on their lifestyles. Last year, the average American family spent 8.4% of their incomes on gasoline; that percentage has doubled over the last ten years.

And the price of gas doesn't just affect people who drive long miles; the price of energy gets factored into almost everything because almost everything we buy has to be transported. When the price of gas goes up, it tends to push prices up on everything. The strength of the economy is largely predicated on cheap oil. When the price of oil goes higher, we tend to cut back to compensate.

Americans are using less gasoline; as the price has increased, demand has dropped; we drive less, and still the price at the pump moves higher. The average price across the country is now up to $3.53 a gallon. In California, the average price is 3.96. The price is up 25 cents a gallon since the start of the year. The Oil Price Information Service is projecting an average price of $4.25 a gallon by the end of April.

There is a standoff between the US and Iran over Iran's nuclear program. Iran has already stopped selling oil to the UK and France. China and India are more than happy to buy from the Iranians. Approximately 20 percent of all oil sold in the world passes through the Strait of Hormuz. Any disruption could result in massive shortages and scary price spikes. You may remember when oil hit $147 a barrel in the summer of 2008.

Last night at the republican debate in Mesa, Newt Gingrich said he had a plan to bring the price of oil down to $2.50 a gallon – unfortunately, the plan involves time travel and something called a “Way Back Machine”. Actually, the ideas being tossed out mainly center around more drilling and tapping the strategic petroleum reserves.

Today, President Obama said, “That's not a plan, especially since we're already drilling. That's a bumper sticker, it's not a strategy to solve our energy challenge.” Oil and gas production has increased during the Obama administration, continuing the trend of the Bush presidency. The increase has reversed a decline that began in 1986, and the US Energy information Agency projects that by 2020 oil production will reach a level not seen since 1994. Today, President Obama promoted an energy agenda of oil, gas, wind, solar, nuclear and biofuel energy. Of course, if we go back to 2008, we'll see that the response to high prices was a global financial crisis that resulted in a major recession, you might even call it a depression; and as the economy came to a grinding halt, the demand for gasoline dried up.

The United States imports as much as 10 million barrels per day when the economy is humming along, and we import 8 million barrels per day when the economy slams on the brakes. Even if we drill like crazy, it isn't enough. The Bakken oil fields produce about 500,000 bpd, and they might be able to turn out 2 million bpd. The Bakken isn't the solution. It is expensive to get oil out of shale. The cost to produce a unit of energy is much higher in the Bakken case than in traditional, historical oil plays. The technology and expertise to squeeze oil out of the formation should be telling us that the days of cheap oil are over. If we are lucky, tapping into the domestic supplies will allow us to break our dependence on foreign oil, not by relying on domestic production but using it as a bridge to sustainable, renewable energy. If we don't make that transition we can almost certainly look forward to an economy that gets pounded by booms and busts riding on the price of a gallon of gas, or worse yet – war. What can be done to bring down short-term prices? Probably not much beyond jawboning. If the president were to announce an investigation into speculative trading in oil futures and price collusion among the major refiners, along with a new commission to consider price freezes on oil prices – hmm, yea, I got to think it's looking more and more like war.

Elsewhere;

The Greek parliament approved a plan to swap old Greek bonds for new Greek bonds. European Central Bank President Mario Draghi tried put it in perspective, he said: “It's hard to say if the crisis is over.” I think I know the answer to this – it's not over.

Americans filed 351,000 initial claims for state unemployment benefits last week, the same as in the prior week. So, there are some signs of strength in the labor market but there are still around 24 million people who are either unemployed or underemployed.

Over the past 3 years more than 400 federally insured banks have collapsed and this has resulted in costs of more than $87 billion to the FDIC deposit insurance fund. Over the past 18 months, the FDIC has filed 22 lawsuits targeting personal finances of former executives, their insurance policies, and sometimes their spouses' assets, in an attempt to claw back some of the money, and to deter reckless banking practices in the future. Of the lawsuits filed so far, none has gone to trial yet, and three have been settled. A look at the three deals suggests the FDIC is prepared to accept a fraction of the alleged damages as a settlement while some former executives deny wrongdoing and escape significant financial responsibility for bank failures. Last year, the FDIC says it collected $240 million from professional liability claims, a figure that represents most of such collections by regulators so far in the aftermath of the financial crisis. Most of that was paid by insurance companies.

The FDIC's biggest settlement so far targeted Washington Mutual. The FDIC sued several former executives, accusing them of gross negligence in pursuing high-risk lending that eventually caused the bank to lose billions of dollars and collapse in 2008. The FDIC sought $900 million in damages, but last December settled for $95 million, most of it covered out of insurance, with several executives contributing less than $500,000 between them. So, the lesson we learn from the FDIC's deals is that crime pays and bank executives can beat the system. What this really says is that the system is completely broken; it is not what you think it is.

As we look in the file marked “Things are not as they appear” we find the story of American International Group. Today, AIG reported net income was $19.8 billion, or $10.43 per share, compared with a year-earlier profit of $11.18 billion, or $16.60 per share. Part of that was an accounting determination that AIG is likely to post future profits that might allow it to release a valuation allowance against tax assets. What does that mean?

Well it means that AIG hired a whole bunch of accountants and attorneys, and then they hired lobbyists who bribed politicians and that means that AIG will get a big tax break, or as Reuters explained it: “The move essentially means AIG will not pay tax on tens of billions of dollars of income in the coming years, thanks to benefits that stem from its financial crisis-era losses.” So, this means that AIG, which is still primarily held by the U.S. Treasury, Is in the process of repaying the bailout by using accounting gimmickry to stop paying taxes on future profits. It still doesn't make sense? O.K., let me break it down to the most base explanation; they're paying for the bailout by cheating on their taxes.

And no, I couldn't make this stuff up if I wanted to.

SEC Chairman Mary Schapiro says a large portion of equities trading has little to do with “the fundamentals of the company that’s being traded.” She said it had more to do with “the minuscule aberrational price move” that computer-assisted traders with direct connections to the exchange can “jump on” in fractions of a second. Basically, this is what used to be called “scalping” and “front-running”. And it's really nothing more than a video game based on the bid and offer on a trading platform. It does nothing to improve liquidity or, as Schapiro says, “the fundamentals”. One solution would be forcing high-frequency traders to pay for the canceled trades that make up nine-tenths of all orders; what this is leading to is a financial transaction tax.

Last year the S&P 500 was flat, declined a fraction of a point. And last year, the majority of hedge funds underperformed the S&P 500, meaning they lost money. So far this year, the S&P 500 has gone from 1277 to 1363, a gain of just over 8%. The typical hedge fund has generated a 3% gain for 2012 through February 10^th. Only 10% of the hedge funds have outperformed the S&P, which is to say that 90% have failed to beat the broader market.

Silver is up 23% year-to-date, and gold up 13%. Remember gold fell below $1,600 an ounce in mid-December, breaking below its 200-day moving average for the first time since January 2009. Gold spent four weeks below it's 200-day moving average, after having been up above it for two, almost three years; at the time we told you that it looked like a buying opportunity; I told you the long term trend in gold looked to be intact; I also told you that silver under 30 was an opportunity.

February, Wednesday 22, 2012

2012-02-22T23:15:00.000-08:00

DOW - 27 = 12,938
SPX – 4 = 1357
NAS – 15 = 2933
10 YR YLD -.04 = 2.00%
OIL -.30 = 105.95
GOLD + 15.50 = 1776.80
SILV - .09 = 34.36
PLAT + 12.00 = 1727.00

So, the Euro-Union bailed out Greece and the thinking is that the lazy, shiftless, socialists in Greece can roll around in the cash. The reality is that Greece won't be getting any cash. The bailout money will go into an escrow account and most of the money will ultimately go to the European banks; the creditors have senior claims over any bailout cash. The Greek citizens will never see a penny of the bailout cash. All the money will be used to fund debt interest and maturity payments. Now anybody who has ever had a mortgage will probably remember that there are fees associated with establishing an escrow account. So, not only do the Greek citizens not get a single penny, they have to pay for the bailout. It's a negative bailout.

Remember a couple of months ago, I told you the Europeans were going to follow the Federal Reserve Playbook for dealing with debt crises. The playbook called for privatized profits and socialized losses. So, where is the bailout money going? The banks. The socialists are the banks.

And then let's put some salt on the wound. Fitch downgraded its credit rating on Greece to Triple-C. Which is just one step above default, and is basically very dangerous, very speculative junk status.

The Greek parliament still has to approve legislation that swaps out the old debt or new debt. Greeks are protesting in the streets of Athens. Maybe there will be a few politicians that will display a spine and the intestinal fortitude to say no to the bankers, but the deal will probably go through tomorrow. Still, the US Treasury is less than sanguine. Treasury officials say it is critical that Europe put up a convincing firewall against the risk of financial contagion. In other words, we'll believe it when we see it and we haven't seen it yet.

President Obama announced a corporate tax overhaul plan that would lower the corporate tax rate to 28 percent from the current 35% rate and it would also eliminate some loopholes and subsidies. The gaping question is why not just eliminate the loopholes? There is plenty of talk about corporations paying high taxes but the reality is that corporate federal taxes paid last year dropped to 12.1 percent of profits earned from activities within the United States. That’s a gigantic drop from the 25.6 percent, on average, that corporations paid from 1987 to 2008; that's according to the Congressional Budget Office. Corporations don't pay as much as they used to, overall. In 1953, corporate taxes accounted for one-third of the total of federal revenues. Today, corporate taxes account for just 10% of the total.

Rick Santorum wants to cut the rate to 17.5 percent and eliminate corporate taxes for manufacturers. Newt Gingrich wants to cut the rate to 12.5% and let companies write off all capital investments immediately. Mitt Romney wants to reduce the corporate tax rate to 25% before eliminating loopholes. Romney also proposed cutting individual income rates across the board by 20 percent, to lower the top tax rate to 28 percent from 35 percent. And of course, nothing is going to happen this year, no legislation will be passed. So, it's just rhetoric and political posturing. Tax cuts for everybody, and a chicken in every pot. The debate kick off tonight at 5:45 from Mesa, the last republican debate before Super Tuesday.

It was just about two weeks ago that the $25 billion dollar multi-state mortgage abuse settlement was disclosed, and we are learning more with time. The purpose of the settlement was to resolve abuses of federal and state mortgage laws and help some of the borrowers and provide aid to some of the people who actually lost their homes because mortgage servicers working for the banks filed incomplete, and fraudulent foreclosure documents. However it is looking like the deal will not provide much relief for the borrowers but it should provide the big banks with loss mitigation.

The problem is that the program leaves it up to the banks to determine who gets the money and how the money is allocated. Further, it appears that the settlement's provisional agreement contained a clause which allows the banks to count loans made under the taxpayer-subsidized federal modification program toward compliance with the new settlement. If that provision is indeed part of the final settlement, it means that the banks would be eligible to receive taxpayer-financed incentives for making loan modifications under a settlement intended to resolve allegations that they broke federal and state laws. But that means the banks may receive financial incentives simply for agreeing to pay for their alleged wrongdoing.

Another part of the settlement requires "comprehensive reforms of the mortgage servicing industry," which includes the overhauling of servicing standards. One of the new servicing standards is that "information in foreclosure affidavits must be personally reviewed and based on competent evidence." Another: "Holders of loans and their legal standing to foreclose must be documented and disclosed to borrowers." Sounds great. But why wasn't this already standard operating procedure at these five banks? This might actually be a big problem for the banks moving forward because the just can't make apples out of applesauce.

At the Wealth protection Conference last April I talked about some of the large economic trends I thought might develop. One of those trends was an increase in farmland prices. The Federal Reserve Banks of Kansas City and Chicago have come out with their 4th Quarter 2011 farmland price/credit conditions reports, and they reported the highest average gain in farmland prices since 1976, up a 19% inflation adjusted average for the year.

They attributed the rise to commodity gains, as follows, according to the USDA: Corn, soybean, and wheat prices averaged 57 percent, 26 percent, and 45 percent, respectively, higher in 2011 than in 2010. Milk, hog, and beef cattle prices rose 23 percent, 21 percent, and 21 percent, respectively, although producers faced costlier feed as well.

Net farm income in 2011 was up 24% over the previous year.

Meanwhile, resales of existing homes increased 4.3% in January; that's a 1 ½ year high, and that pushed inventory to the lowest level in almost 7 years.

And then there is the price of oil. The United Nations suspects Iran of building a nuclear weapon. Iran denies that, but the U.S. and the European Union insist that Iran prove it. They have frozen assets of Iran's central bank, and the EU will implement an oil embargo in August to force Iran to open its nuclear program for inspection. Refineries want to lock in supplies now. And the longer this standoff continues the greater the possibility of some sort of confrontation.

Maybe you've noticed the move in precious metals. Maybe this has something to do with the fact that the European Central Bank's balance sheet is increasing by about 20% thanks to the latest round of bailouts. Gold still has a way to go before it gets back to the record highs, but in the past year, the total central banks balance sheets have grown by more than $2 trillion dollars. And that is one of the reason s to own gold. The S&P 500 is up about 8% since the start of the year. Gold is up about 13%.

February, Tuesday 21, 2012

2012-02-21T23:09:00.001-08:00

DOW +15 = 12965

SPX +0.98 = 1362
NAS – 3 = 2948
10 YR YLD +.04 = 2.05%

OIL +2.64 = 105.88
GOLD + 26.20 = 1761.30
SILV + .74 = 34.45
PLAT + 44.00 = 1694.00

The European Union has approved a $170 billion-dollar bailout package for Greece. No surprise; they had to come up with a deal, they were running out of time. The Euro-crisis is now officially under control; at least for a couple of days. There is still the little problem of making sure the ring-fences hold. The Euro-Union has set up massive pools of money to make emergency loans. The ECB has loaned more than $600 billion to Euro-banks. It still remains to be seen if the loans do anything more than allow the Euro-banks to kick the can down the road. Meanwhile, the Euro-zone is in a recession and the prescribed medicine is austerity. The cure may be worse than the affliction.

And when all is said and done, the cure may not actually cure anything. Part of the plan is to bring down Greek debt to 120% of GDP within the next 8 years, but if Greece misses a few economic assumptions, they might end up with debt to GDP at 160%. And the truth is that whether it is 120% or 160%, the debt is going to bury Greece, and the bailout won't stop it.

Countries like Germany might demand even tougher conditions on loans. Politics and democracy might destabilize the markets. Part of the deal was an attempt to push back elections in Greece. There is a good chance that the current political powers will be swept out in an election; polls indicate that far left parties are going to be swept in. These parties want nothing to do with simply taking on more debt to satisfy old debt holders.

The bailout model is not a sustainable model. Nobody thinks it's a good idea to make Greece a template. The Greek Prime Minister spoke of a choice between “austerity” and “disorder”. He got both. There is still a concern that private sector investors might dump European government bonds if they fear more debt write downs; and that might set off another round of financial woes.

So, there was a Greek bailout but the Euro-crisis is only under control for a couple of days; it is not resolved; it is not over.

So, now that we've relegated Europe to back burner status for a couple of days, what else can we worry about?

Well, the US economy is copacetic. Just don't stop at the gas station. There is a station in L.A. Charging $5 a gallon for premium. Iran apparently didn't get the memo that they were supposed to drop to their knees, trembling at the thought of sanctions. Instead, Iran just sent two warships through the Suez Canal. Brent crude just hit $121 per barrel. West Texas Intermediate hit $105. Iran is cutting off oil deliveries to the UK and France, but that wasn't much to begin with. Sudan has halted oil exports, Syria's uprising has cut oil production by 400,000 barrels a day. Saudi Arabia has not been able to compensate by ramping up production. India continues to buy from Iran. China is is the process of working out a deal to buy Iranian oil. Turkey wants to work out a deal. So, really, except for the saber rattling, the sanctions against Iran haven't had much effect. But the oil market is full of jittery traders, or at least traders who are willing to act jittery if it will drive prices higher. And the same people that complain that the US response to Iran hasn't been strong enough are also complaining about the higher prices at the pump.

Over the past couple of weeks, US demand for gasoline has dried up. Normally we start to see a season increase in driving but not this year; maybe this is an indicator of future consumer behavior; maybe consumers are tightening their collective belts once again. We'll have to wait and see. Consumers’ assessment of the labor market was also less positive. Those saying jobs are “plentiful” decreased to 6.1 percent from 6.6 percent, while those claiming jobs are “hard to get” increased to 43.5 percent from 41.6 percent.

So, except for the high price of energy, everything is copacetic. The Dow Industrials made a run at the 13,000 level. The last time was May 2008. We hit 13,005 and the market drifted lower. That 13,000 level is nothing special; it's just a number, a round number. The Dow has generally been rising since the beginning of 2012, and is up by more than 6 percent. The S&P is up more than 8 percent in the year to date.

So, let's see if we can find any elephants that left footprints in the sand; in other words, where is the big money? Many hedge funds think the European Central Bank’s long-term refinancing operations (LTRO), which flooded markets with $644 billion of cheap cash in December and provide more this month, are a turning point in propping up the region’s battered banks. They are also betting that China, which is facing a fifth successive quarter of slowing economic growth, will experience a so-called ‘soft landing’, while the U.S., which saw its fastest growth in one-and-a-half years in the fourth quarter, is firmly on the recovery path.

The blended earnings growth rate for the S&P 500 for Q4 2011 currently stands at 5.5%. If this is the final earnings growth rate for the quarter, it will mark the end of the streak of consecutive quarters of double-digit earnings growth at eight. However, the streak of consecutive quarters of overall earnings growth will extend to nine. Looking ahead to the current quarter, what is the projected earnings growth rate for Q1 2012? Are analysts expecting the streak of consecutive quarters of earnings growth for the S&P 500 to continue? Based on the current estimates, the answer is no. As of today, the estimated earnings growth rate for the S&P 500 dropped to 0.0%. The growth rate has steadily dropped from 8.0% on September 30 to 3.0% on December 30 to 0.0% today. I know that doesn't sound great, but the markets aren't acting scared. Everything is copacetic, at least for now.

February, Monday 20, 2012

2012-02-20T21:17:00.000-08:00

What would happen if the Federal Reserve was shut down? Most Americans don’t really think about the Fed much. Most Americans think the Federal Reserve is just another government agency that sets our interest rates. But that is not the case at all. Most Americans don't realize the Fed isn't really a government agency, and that we haven't always had a central bank.

The Federal Reserve's stated mission is to conduct the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates; to supervise and regulate banking and financial systems to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers; and to maintain the stability of the financial system and contain systemic risk that may arise in financial markets.

The truth is that the Federal Reserve is a private banking cartel that has systematically destroyed the value of our currency, diminished the wealth of the American public and subjects the federal government to perpetually expanding debt.

The Constitution states that Congress has the responsibility to conduct the nation's monetary policy, but the Federal Reserve has usurped that authority. Any honest review of the past 30 years would conclude that the Fed has failed in its mission. The Fed's monetary manipulations led to the worst unemployment since the Great Depression, price volatility, excessive swings in interest rates, extremely low rates for member banks, and usurious for the general public, along with almost non-existent regulation of financial institutions, massive bank failures, and systemic risk that threatened to meltdown the global financial system. The Fed's manipulations did succeed in making the rich richer and the poor poorer. If you were trying to devise a corrupt monetary system, the Fed could be used as a blueprint.

During this election year, the economy is the number one issue that voters are concerned about. But instead of endlessly blaming both political parties, the truth is that most of the blame should be placed at the feet of the Federal Reserve. The Federal Reserve has more power over the performance of the U.S. economy than anyone else does. The Federal Reserve controls the money supply, the Federal Reserve sets the interest rates and the Federal Reserve hands out bailouts to the big banks that absolutely dwarf anything that Congress ever did. If the American people are ever going to learn what is really going on with our economy, then it is absolutely imperative that they get educated about the Federal Reserve.

The Federal Reserve is not a government agency.

The Fed is a privately owned central bank. It is owned by the banks that are members of the Federal Reserve system. We do not know how much of the system each bank owns, because that has never been disclosed to the American people.

The Federal Reserve openly admits that it is privately owned. In a recent response to a Freedom of Information Act request, the Federal Reserve stated in court that it was “not an agency” of the federal government and therefore not subject to the Freedom of Information Act.

In fact, if you want to find out that the Federal Reserve system is owned by the member banks, all you have to do is go to the Fed's website and this is what you could read:

“The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation’s central banking system, are organized much like private corporations–possibly leading to some confusion about “ownership.” For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year. “

As long as the Federal Reserve System exists, U.S. government debt will continue to go up and up and up.

The way our system works, whenever more money is created more debt is created as well. Or, when more debt is created, money is created.

For example, whenever the U.S. government wants to spend more money than it takes in (which happens constantly), it has to go ask the Federal Reserve for it. The federal government gives U.S. Treasury bonds to the Federal Reserve, and the Federal Reserve gives the U.S. government “Federal Reserve Notes” in return. Usually this is just done electronically.

So where does the Federal Reserve get the Federal Reserve Notes?

It just creates them out of thin air.

Wouldn’t you like to be able to create money out of thin air?

Instead of issuing money directly, the U.S. government lets the Federal Reserve create it out of thin air and then the U.S. government borrows it.

Here's how it works: Treasury bonds are sold at auctions; the bonds are usually purchased by big banks. The money that is used to purchase the bonds is sent into the Treasury and the Treasury distributes the money to pay for various government programs. Sometimes, the Federal Reserve buys the bonds from a bank. To do this, the Fed simply transfers money in the amount of the bond to the other bank and the Fed takes possession of the bond. The bond is exchanged for money.

Where did the Fed get the money to buy the bond? They created the money, out of thin air. Newly created money is always exchanged for debt. I know it sounds a little crazy. Maybe you think there has to be more to it, but it really is pretty simple. The government creates debt and the Fed creates money to buy the debt.

This doesn't mean the Fed is literally cranking up the printing press; most of the money created is just an electronic transfer. OK, the Federal Reserve's own publication entitled “Putting it Simply” describes the process; "When you or I write a check, there must be sufficient funds in our account to cover the check, but when the Federal Reserve writes a check, there is no bank deposit on which that check is drawn. When the Federal Reserve writes a check, it is creating money."

When this new debt is created, the amount of interest that the U.S. government will eventually pay on that debt is not also created.

So where will that money come from?

Well, eventually the U.S. government will have to go back to the Federal Reserve to get even more money to finance the ever expanding debt that it has gotten itself trapped into.

It is a debt spiral that is designed to go on perpetually.

The important concept to remember is that all dollars are backed by debt. That dollar bill in your pocket is a promissory note – an IOU. At the local bank level, all new money is loaned into existence. At the central bank level, the money is created out of thin air and exchanged for interest paying government debt. The constant is that all dollars are backed by debt, and don't forget that interest must be payed on that debt.

Where does the money come from to pay the interest on the debt? The Federal Reserve creates the money out of thin air. Each year, new money must be loaned into existence to pay the interest on all of the past outstanding debt.

You see, the reality is that the money supply is designed to constantly expand under the Federal Reserve system. That is why we have all become accustomed to thinking of inflation as “normal”.

At the very minimum, our outstanding debt must compound by the amount of interest due on the outstanding debt. This means that the debt is growing exponentially.

And at some point, the debt will become unsustainable, the interest due will be more than we produce as a nation. We're seeing this play out in Europe, but the US has a debt to GDP ratio that is higher than many Euro-countries facing a debt crisis right now.

Most Americans today don’t understand how any of this works, but many prominent Americans in the past did understand it.

For example, Thomas Edison was once quoted as saying:

“People who will not turn a shovelful of dirt nor contribute a pound of material will collect more money from the United States than will the people who supply the material and do the work. That is the terrible thing about interest. In all our great bond issues the interest is always greater than the principal. All of the great public works cost more than twice the actual cost, on that account.

But here is the point: If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good.”

And Henry Ford said: “It is well enough that people of the nation do not understand our banking and money system, for if they did, I believe there would be a revolution before tomorrow morning.”

We should have listened to men like Edison and Ford.

But we didn’t.

Did you know that the dollar has been devalued. There have been a couple of examples of formal devaluation under FDR and then later by Richard Nixon; unofficially, the Fed has robbed 97% of the value of the dollar. Over the past 100 years, the dollar has lost 97% of its value. Because the money supply is designed to expand constantly, it is guaranteed that all of our dollars will constantly lose value.

The American people got so upset about the bailouts that Congress gave to the Wall Street banks and to the big automakers, but did you know that the biggest bailouts of all were given out by the Federal Reserve?

Thanks to a very limited audit of the Federal Reserve that Congress approved a while back, we learned that the Fed made trillions of dollars in secret bailout loans to the big Wall Street banks during the last financial crisis. They even secretly loaned out hundreds of billions of dollars to foreign banks.

A total of $16.1 trillion in secret loans were made by the Federal Reserve between December 1, 2007 and July 21, 2010.

Loan recipients included well known names like Citigroup - $2.5 trillion, Morgan Stanley - $2 trillion, Merrill lynch, Bank of America, Goldman Sachs, and even foreign banks, such as Barclays received $868 billion, Societe Generale borrowed $124 billion, Deutsche Bank took more than $350 billion. And some of the loans ended up in the hands of Moammar Khaddafi. If it seems strange that the Fed would be lending money to foreign banks – well, it is strange.

But it gets even stranger: Not only did the Federal Reserve give 16.1 trillion dollars in nearly interest-free loans to the “too big to fail” banks, the Fed also paid them over 600 million dollars to help run the emergency lending program. According to the GAO, the Fed paid $659 million in fees to the very financial institutions which caused the financial crisis in the first place.

So, the banks made money servicing their own loans. And then the Fed pays the banks not to make loans to you. It's true. Section 128 of the Emergency Economic Stabilization Act of 2008 allows the Federal Reserve to pay interest on “excess reserves” that U.S. banks park at the Fed.

So the banks can just send their cash to the Fed and watch the money come rolling in risk-free.

The amount of “excess reserves” parked at the Fed has gone from nearly nothing to about 1.5 trillion dollars since 2008….

But shouldn’t the banks be lending the money to us so that we can start businesses and buy homes?

You would think that is how it is supposed to work.

Unfortunately, the Federal Reserve is not working for us.

The Federal Reserve is working for the big banks. The Federal Reserve is owned by the big banks, and that's who they work for.

Another example is the government debt carry trade.

Here is how it works. The Federal Reserve lends gigantic piles of nearly interest-free cash to the big Wall Street banks, and in turn those banks use the money to buy up huge amounts of government debt – which pays a much higher interest rate – the bankers pocket the difference. It doesn't take a clever banker to make a profit on that deal – any dolt could do it.

Over the past several decades, we have seen bubble after bubble. Most of these have been the result of the Federal Reserve keeping interest rates artificially low.

For example, the housing crash would have never been so difficult if the Federal Reserve had not created such ideal conditions for a housing bubble in the first place. But we allow the Fed to continue to make the same mistakes.

Right now, the Federal Reserve continues to set interest rates artificially low. This is causing a tremendous misallocation of economic resources, and there will be massive consequences for that down the line.

The Federal Reserve is the most undemocratic institution in America.

The Federal Reserve has become so powerful that it is now known as “the fourth branch of government”, but there are less checks and balances on the Fed than there are on the other three branches.

The Federal Reserve runs the U.S. economy but it is not accountable to the American people. We can’t vote those that run the Fed out of office if we do not like what they do.

Yes, the president appoints those that run the Fed, but he also knows that if he does not tread lightly he won’t get the money from the big Wall Street banks that he needs for his next election.

According to Article I, Section 8 of the U.S. Constitution, the U.S. Congress has been given the responsibility to “coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures”.

So why is the Federal Reserve doing it?

How would the U.S. economy function without the Fed? Something has to take its place, right?”

No, the truth is that we don’t need anyone to “manage” our economy.

The U.S. Treasury could be in charge of issuing our currency; just like it says in the Constitution.

We don’t need to have a centrally-planned economy.

We aren’t China.

And it goes against everything that our founders believed to be running up so much government debt.

For example, Thomas Jefferson once declared that if he could add just one more amendment to the U.S. Constitution it would be a ban on all government borrowing….

I wish it were possible to obtain a single amendment to our Constitution. I would be willing to depend on that alone for the reduction of the administration of our government to the genuine principles of its Constitution; I mean an additional article, taking from the federal government the power of borrowing.

There's another quote form Jefferson:

“If the American people ever allow private banks to control the issue of their currency, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered.”

February, Friday 17, 2012

2012-02-17T18:59:00.000-08:00

DOW +46 = 12950
SPX + 3 = 1361
NAS – 8 = 2951
10 YR YLD +.02 = 2.01%
OIL +1.75 = 104.06
GOLD – 5.00 = 1724.80
SILV -.24 = 33.38
PLAT + 11.00 = 1638.00

The stock market is looking great. The S&P 500 hit a nine-month high. The Dow is back at levels from the beginning of 2008, (record high was 1517 for SPX) (14,198 for Dow). At least it's looking decent. The market was cruising along with triple digit gains, but couldn't hold into the close. Confidence is one thing, but going long heading into a holiday weekend.., well, let's not get carried away.

Optimism was high that there would be some sort of deal worked out to rescue Greece by burying the country under unsustainable debt. Euro-zone finance ministers will be meeting over the weekend to hammer out details. The big challenge is to cut Greece's debt down to 120% over the next 8 years; to do this, the Greeks will have an orderly default of debt, paying off bonds at about 30 cents on the dollar for private sector investors and about a 50% haircut for the central bankers that hold Greek bonds. And nobody is quite sure if the private sector investors are going to accept the haircut. In return for the discounts, the Greeks would accept, maybe, harsh austerity measures that will contract the economy. And they keep saying they will have a deal, probably by Monday. And all I can think of is that Homer is now writing the press releases for the Euro Union.

But as years went by, there came a time when the gods settled that Ulysses should go back to Ithaca; even then, however, when he was among his own people, his troubles were not yet over; nevertheless all the gods had now begun to pity him except Germany, who still persecuted him without ceasing and would not let him get home.

The euro-zone financial mucky-ups claim they know how to handle the problems; they think they can contain the debt problems to Greece; they'll build a ring fence around Greece. As best I can figure, a ring-fence means they will throw a whole bunch of money at the bankers to make sure they don't fail and to avoid a credit freeze. And the markets love it when the central bankers are tossing around free money. This economics stuff isn't so complicated.

Yesterday, Moody's warned of credit downgrades on 17 global and 114 European financial institutions. As bank ratings slide, bank trading counterparties may demand more collateral to compensate for an increasing credit risk. Such increased capital costs would come at an inopportune time for investment banks and lenders with a significant exposure to the capital markets, which are in the midst of a big drop in trading and deal activity in 2012 to follow a weak second half of 2011. Ratings downgrades that make many of those businesses more expensive to run would be a double indemnity, as earnings suffer from a slow market. So, you might think the credit rating warning would be bad news.

Today, the markets brushed off the warnings and pushed bank shares higher. Something the egghead, bean counters at Moody's haven't quite figured out is that when the central banks toss out free money, it doesn't end up in my pockets, it goes straight to the bankers.

This doesn't always have a happy ending, though.

Remember, back in 2008, back before the central banks had figured out this ring-fence, firewall thing. Well apparently, JP Morgan had some money with Lehman Brothers and they wanted to get that money out before the inevitable collapse. In the days leading up to Lehman's September 15, 2008, bankruptcy filing JP Morgan may have had unparalleled access to Lehman's finances, and they might have used that access to extract the collateral. And that access may have been at least partially granted by the then President of the New York Federal Reserve bank, Turbo -Timmy Geithner. So, now Lehman's restructuring plan, approved by a bankruptcy court in December, figures to pay creditors roughly $65 billion. The company hopes to officially emerge from bankruptcy and begin paying back creditors in the coming weeks. And as they try to figure out how much collateral JP Morgan “extracted”, the Lehman lawyers want to talk to Geithner. Geithner doesn't want to talk. JPMorgan has filed a counter-lawsuit in the matter, saying Lehman left it with $25 billion in unpaid loans secured by undesirable assets Lehman traders referred to as "goat poo." And how is it that the JP Morgan attorneys determined that undesirable assets were goat poo as opposed to some other form of animal excrement?

Seriously, I can't make this stuff up.

As we learn more and more about the Lehman mess, suddenly the MF Global mess seems to make more and more sense. It is starting to look like this. If you have money with JP Morgan, and if they think the money is in danger. JP Morgan will extract an amount they deem appropriate. The money just disappears, poof, like it was …, I don't know, it just gets vaporized.

Of course, one way to avoid the long arm of Jamie Dimon is to print your own money. Today, Italian police announced they had seized about $6 trillion dollars worth of fake U.S. Treasury bonds and other securities in Switzerland; they arrested 8 Italians. It began as a investigation into mafia loan-sharking, but gradually expanded as prosecutors used telephone and computer intercepts to unearth evidence of illegal activity surrounding Treasury bonds. The fake securities, worth more than a third of U.S. national debt, were seized in January from a Swiss trust company where they were held in three large trunks.

Remarkably, treasury prices did not rally on the news, despite reduced supply.

So, what's up with that? Possibly there are others trying to play counterfeiting games in the bond markets.

A group of traders and brokers successfully managed to manipulate an interest rate that affects loans around the world. In a court filing in Canada, an unidentified bank told investigators that people involved in the alleged scheme “were able to move” interest rates. People familiar with the situation said the “cooperating party” is UBS AG. The Swiss bank has said it is assisting regulators in a sprawling interest-rate probe in North America, Europe and Asia, which has led to a score of individuals being fired or suspended by major U.S. and European banks and leading brokers.

February, Thursday 16, 2012

2012-02-16T16:38:00.001-08:00

DOW + 123 = 12,904
SPX + 14 = 1358
NAS + 44 = 2959
10 YR YLD +.06 = 1.99%
OIL +.55 = 102.35
GOLD +.70 = 1729.80
SILV +.02 = 33.62
PLAT – 10.00 = 1629.00

The number of people seeking unemployment benefits fell to the lowest point in almost four years last week, the latest signal that the job market is steadily improving. Weekly applications for unemployment benefits dropped 13,000 to a seasonally adjusted 348,000. It was the fourth drop in five weeks and the fewest number of claims since March 2008. The US economy is showing signs of strength.

New construction of houses rose 1.5% in January. Part of the increase can be attributed to unseasonably warm weather, however part of it is that the economy is showing signs of strength.

The Philly Fed Index of manufacturing hit a four month high in February. US manufacturers just had their best month of growth in five years. As manufacturing has increased it has rippled through the economy, increasing demand in other industries, such as shipping and transportation. Part of the increase may be attributed to pent-up demand; individuals and businesses postponed purchases over the past three years. Now companies are investing in machinery and computers. Individuals are once again starting to make purchases of certain discretionary items, and even cars.

Two years after emerging from bankruptcy GM unveiled record profits of $7.6 billion for 2011. It's been a great year for GM. Although its European business is still in reverse and it is unlikely ever again to dominate the world as it once did, the car giant is clearly on the mend. Once more GM is the largest automaker in the world. Ford and Chrysler are still alive and kicking. Ford made a profit of $8.8 billion last year, the third year in a row profits had increased. Chrysler posted a $183 million profit earlier this month, its first full year of profit since 2005.In 2000 the US auto industry employed 1.13 million people. In July 2009 that number had fallen to 500,000. Now, employment is rebounding and the auto industry is expected to employ 750,000 within the next couple of years.The auto industry might never get back to 1 million jobs, but it is showing some strength, and as Lee Iacocca once said, “As GM goes, so goes the nation.”

And yet the forecast is not quite that simple, the scenario is far from rosy. The credit rating firm, Moody's is warning it may cut the ratings on more than 100 European financial institutions, and another 17 banks and securities firms. It might cut the long-term credit rating of UBS, Credit Suisse and Morgan Stanley by as much as three notches. Among the banks that might be downgraded by two notches are Barclays, BNP Paribas, Credit Agricole, Deutsche Bank, HSBC Holdings, and Goldman Sachs. Bank of America and Nomura were included in those that might be downgraded by one notch.

Moody's cut the insurance financial strength ratings (IFSR) by one or two notches of several insurance companies, which it said related to their investment and operating exposures to Spain and Italy.

These included Unipol Assicurazioni SpA, Mapfre Global Risks, Assicurazioni Generali SpA and Allianz SpA. It affirmed the IFSR of Allianz SE, AXA SA, Aviva Plc and their subsidiaries, but cut the outlook on the rating to negative from stable.

So, in Europe, the situation is slightly less than sanguine. The latest word from Greece is that a deal to seal the $170 billion dollar bailout and avoid a disorderly default – the deal will be sealed on Monday. Which is what we heard last week, and what we heard last November. And even if there is a deal, there is still a huge question mark about the viability of Greece moving forward. So, the bailout deal is back on track – that's nice.

The news stories today said the markets moved higher because it looked like a deal was close on the the Greek debt problem. I've never been smart enough to figure that out. No one really understands what drives the daily swings of the stock market. J.P. Morgan perhaps summed it up best when he was asked what the market would do. He responded simply, “It will fluctuate.”

Sometimes it is easy to believe the financial system is unsustainable. Enter, former Vice President Al Gore; after inventing the internet and global warming, he is now focusing his attention on “sustainable capitalism”. Gore has teamed up with David Blood of Generation Investment Management and they have developed a blueprint for the financial industry to adopt to support lasting economic growth.

Gore said, "While we believe that capitalism is fundamentally superior to any other system for organizing economic activity, it is also clear that some of the ways in which it is now practiced do not incorporate sufficient regard for its impact on people, society and the planet."

David Blood said capitalism has been blighted with short-termism and an obsession with instant investment results, which had ramped up market volatility, widened the gap between rich and poor and deflected attention from the deepening climate crisis.

They are presenting ideas on cleaning up capitalism, including: ending quarterly earnings guidance from companies, which incentivize executives and investors to base decisions on short-term factors at the expense of longer-term objectives.

Companies have also been encouraged to integrate financial reporting with insight on environmental, social and governance policy so investors can clearly see how performance in the latter can contribute to the former.

Blood said, "Today the average mutual fund in the U.S. turns over its entire portfolio every 7 months; 20 years ago it was every 7 years. Something has fundamentally changed and the problem with that is it means we're not making good investing decisions... and not delivering proper and efficient wealth creation." And he brings up a good point; there is a difference between liquidity and churning. John Bogle, the founder of Vanguard and the S&P Index fund has been talking about this topic for years.

It is a difficult proposition to try to change the business climate. Innovation sounds good in business school but in the market place it usually means someone is getting axed. At the same time, we should be able to look at ways to improve business models, even the big model of capitalism. When we stop getting better, that's when you know capitalism is dead.

From today's copy of Institutional Risk Analytics, a fairly quick explanation of why the MERS system of electronically registering titles is a bad thing: "What none of the experts are analyzing (in specific terms) is the destructive effect that the MERS system will have on 400 years of recorded property rights in the United States. Most articles mention lost chain of title but stop short of explaining what this means, or how these problems will affect homeowners with or without mortgages in the MERS system. These problems deal with determining (1) property boundaries (senior and junior property rights) and (2) proof of ownership in order to obtain title insurance and financing. Because MERS is utilized for transferring title and these transfers are not publicly recorded (thereby imparting constructive notice), MERS does not comply with race (first in time) or (constructive or actual) notice statutes and therefore, senior/junior property rights cannot be determined when a discrepancy arises in property boundary lines."

Yep, the past 400 year of property rights were tossed out. Good luck in getting those back.

MBIA has a breach-of-contract suit against Countrywide in the New York State Supreme Court. They have just asked for Countrywide to produce discovery on an internal fraud-tracking database "which MBIA had not previously known to exist." MBIA said it needs the discovery to prepare for upcoming depositions of former Countrywide employees who tried to expose its allegedly fraudulent mortgage underwriting practices.

In addition to records of the mortgage-fraud database, known as FACTS, MBIA wants Countrywide to turn over the employment files of "two former Countrywide loan officers whose fraudulent activities were initially covered up due to their profitability," and records of senior executive committee meetings that "should show that Countrywide deliberately passed on riskier loans to the secondary market while retaining safer loans for itself, again in violation of its representations and warranties."

Last week Bank of America agreed to pay $1 billion to resolve the Justice Department's claims that it defrauded the government by underwriting Federal Housing Administration mortgages to unqualified borrowers. We probably missed that story in the light of the big multi-state mortgage fraud settlement announcement last week. MBIA is making similar mortgage-origination allegations about the loans underlying securities it agreed to insure. And in the process it's demanding discovery that could be of use to all the other monolines and investors clamoring for a pound of the bank's flesh. Can Bank of America really afford to let this case continue?

“Investors’ belief that the worst is over for the U.S. housing market is fueling renewed interest in once-toxic mortgage bonds that were at the heart of the financial crisis. Prices of some distressed bonds backed by subprime home loans—those issued before the crisis to borrowers with sketchy credit histories—have chalked up double-digit percentage gains this year, with one prominent market index rising 14%.

The rally has drawn investors back to a corner of the credit markets that was pummeled from 2007 to 2009 and has been volatile since . . .

The recent resurgence in battered mortgage bonds that were left for dead during the crisis reflects how investors’ appetite for risk is returning, even after many banks and hedge funds lost money last year on similar assets. But this time around, investors say many subprime bonds are looking attractive because their prices reflect a doomsday scenario that may not materialize, even though the housing sector remains in the doldrums.

Bonds that yielding 7% to 9% are attractive if you can buy them at a price that appropriately reflects the risk of loss.

And so we come back around to the idea that the economy is showing some strength, except where it is still weak, and except where it has been brutally gouged. We may gloss over the gaping wounds inflicted in the global meltdown, or we may try to address the underlying malinvestment. I bet a bunch of you guys were kind of giggling when I mentioned that Al Gore wants to reinvent capitalism, but the reality is that capitalism has already been reinvented. It was reinvented by the banks that decided 400 years of property rights didn't apply to them, they could fore-go the proper recording of a title to land. It was reinvented by the people who bundled up toxic mortgage bonds, it was reinvented by the people who figured out how to churn stocks with high frequency trades, it was reinvented by people who figured out they could rewrite the laws of states and the nation to legalize their previously illegal activities, it was reinvented by the bankers that revalued Greek debt in order to allow Greece entry into the EU, and it was reinvented by the technocrats that have now assumed super-economic powers in the Euro-zone. Maybe the end of the credit bubble should mean lower profits, more boring businesses, smaller bonuses on Wall Street, less influence peddling, and maybe even a little soul searching. Maybe the boom-bust-boom-bust of the markets is not really the best and most productive part of capitalism. Maybe there is a way to be profitable without skirting an ethical line. At the very least, isn't this something we should be thinking about?

February, Wednesday 15, 2012

2012-02-15T19:11:00.000-08:00

DOW – 97 = 12,780
SPX – 7 = 1343
NAS – 16 = 2915
10 YR YLD +.01 = 1.93
OIL + 1.15 = 101.89
GOLD + 7.00 = 1729.10
SILV -.08 = 33.60
PLAT + 7.00 = 1637.00

The Greek debt crisis has not been resolved. Euro-zone finance officials have been meeting in Brussels and trying to figure out some deal that would avoid a disorderly default on Greek bonds, and at the same time they are trying to impose ever-harsher austerity measures on the Greek people, and the Greeks are finally growing a little backbone and telling their northern neighbors to ease up. And there is an election in Greece scheduled for April, and the Euro-zone finance officials would like to postpone everything until after the election because the mobs, err, the democratic process might yield unexpected results.

A new report released today shows the economy of the Euro-zone shrank by 0.3% in the fourth quarter of 2011. France eked out a smidgen of growth. The German economy contracted slightly. The Greek economy remains in shambles despite imposed austerity; five years of recession and the economy still contracting at a 7% annualized rate. The European economic plan isn't working.

One thing the Euro-debt crisis has done is remind us that bonds are not risk free. Granted, Greek and Italian bonds are in a different league than US Treasuries, but there is still a decent chance the United States could lose its Triple-A credit rating. Meanwhile, the big multi-national blue chip stocks have been solid performers. What would you rather own. A European bond that implodes, or a US Treasury bill that is losing value to inflation, or a global franchise that is expanding its brand in emerging markets and pays a dividend of about 3 percent? It is worth noting that many countries are struggling under debt while many corporations are thriving. The deleveraging process has already come and gone for corporations, and it has a long way to go for countries.

Iran now claims it has developed its nuclear program to the point where they can enrich uranium much faster. Israel says the Iranians have targeted Israeli diplomats around the world for assassination. The Iranians say the Israeli's have targeted nuclear scientists for assassination. Iran has long refused to negotiate curbs on its nuclear program, saying it is intended to produce electricity for civilian uses.

The United States and Israel have not ruled out military action against Iran if diplomacy and sanctions fail, but today, Defense Secretary Leon Panetta said there are no plans for attacking Iran. Iran's Oil Ministry denied a state media report that it had cut off oil exports to six European Union states. The EU ban on Iranian crude is due to take effect in July. The top three importers of Iranian oil are India, China, and Japan.

Here's the short-form on the Volker Rule, named after former Federal Reserve Chairman Paul Volker. The Dodd-Frank Act’s Volcker Rule would prohibit banking entities from engaging in proprietary trading of securities, derivatives and certain other financial instruments for the entity’s own account. The SEC has been accepting comments on the Volker Rule. A sub-group of the Occupy movement has come up with a 325-page letter to the SEC, and this may be the best thing to come out of the Occupy movement. Meanwhile, the big banks and their lobbyists have been claiming that if the rules become law, it will destroy liquidity in the markets and there will be significant costs to the economy. Let's break down these two major arguments.

First, a bit of liquidity in the markets is a good thing; we want to match buyers and sellers in the market; too much liquidity is not a particularly good thing; a proprietary trading desk may be nothing more than a high speed computer scalping pennies by front-running trades. There is no benefit to a flash crash. And does all that computerized trading really add anything? Or is it just gambling?

The second argument is that breaking up prop trading will come at a cost to the economy. I don't buy it. There may be some costs to the big banks, specifically Goldman Sachs, Bank of America, JP Morgan, Citigroup, and Morgan Stanley. So what? The big banks are not the economy. And the whole idea is to make these mega-banks a little smaller. And the problem is that the big banks keep the profits from prop trading but when they lose, they slough off the losses onto the taxpayers. The bank lobbyists don't consider those costs but the rest of us should. And if it means the big banks get smaller – all the better. I wrote a book “Eat the Bankers” and part of the premise is that the big banks must be cut into smaller banks, so that if they fail, they may still be easily digested without destroying the economy. What is the cost if they just ramp back up and crash the global financial economy?

Much of the debate about the Volker Rule has centered around the distinctions between market making and proprietary trading, and I believe this is the major problem with the Rule; it doesn't go far enough. Prop trading should not be allowed on the same balance sheet as depository banking. We used to have a rule for that – it was called the Glass-Steagall Act and it worked quite well.

The Federal Reserve released the minutes of their January 24^th, and 25^th FOMC meeting. The general idea is that the Fed is taking a wait and see approach to another round of bond buying, in other words, no official announcement of QE3, unless the economy starts to falter. Several members said they anticipated that unemployment would still be well above their estimates of its longer-term normal rate, and inflation would be at or below the Committee's longer-run objective, in late 2014. Even if we don't see a QE3 proclamation, make no mistake, the Fed is active, buying gobs and gobs of mortgage-backed securities.

February, Tuesday 14, 2012

2012-02-15T07:24:00.000-08:00

02142012

DOW + 4 = 12,878
SPX – 1 = 1350
NAS +0.44 = 2931
10 YR YLD -.07 = 1.92%
OIL +.29 = 101.20
GOLD - .80 = 1722.10
SILV - .14 = 33.68
PLAT – 26.00 = 1635.00

Over the weekend, the unelected technocrat Greek Prime Minister warned that if the terms of the second Greek bailout were not approved, there would be a "disorderly bankruptcy that would create conditions of economic chaos and social explosion. The savings of the citizens would be at risk. The state would be unable to pay salaries, pensions, and cover basic functions, such as hospitals and schools, and … the country - public and private sector alike - would lose all access to borrowing and liquidity would shrink. The living standards of Greeks would collapse. The country would drift into a long spiral of recession, instability, unemployment and prolonged misery. These developments would lead, sooner or later, to exit from the euro."

And so the Greek parliament voted to accept a plan to impose austerity on the already austere Greek economy in exchange for a 130-billion euro bailout needed to pay 14-billion in bonds that are set to be redeemed in March. If there is a default on the bonds, it would likely start a process of national bankruptcy which in the first order would mean state pensions, wages, contracts and medical bills not being paid. From there, the insolvency would multiply outwards into the already deeply impaired private sector, where many businesses would find it impossible to stay afloat.

To exit the euro would further wipe out the private savings market through a combination of devaluation and waves of bankruptcy. Then there would be an economic contraction, followed in short order by heavy duty inflation, really nasty inflation, because Greece imports most of what it needs to get by. Devaluing the currency would lead to inflation, then people who are still working would demand better wage compensation and that would result in another wave of inflation and then central bankers would emerge from under their bridge to monetize the deficits.

And so, faced with these prospects, the Greek government decided to submit to the austerity program in exchange for bailout money. But the money doesn't go to the Greeks, it goes into a fund to pay the bankers. And so the Greek people have been protesting. There have been riots. They burned buildings. The police fired back with tear gas. The ordinary Greeks are being punished for the mismanagement and corruption of the politicians and the banksters and the business elite.

And the European paymasters, mainly Germany, keep making the deal tougher and tougher on the ordinary Greek citizen. Late today, the Greek parliament defied violent street protests and voted for even more austerity, but fully implementing the measures is likely to prove an impossible task given the political divisions and deep-seated social unrest. The package includes public sector layoffs, sharply cutting the minimum wage and already dwindling pensions, as well as widespread tax increases.

But late today, there was word the Greek government signed off on the austerity measure, and then later the euro ministers said the paperwork had not yet been received and there was more technical details to be worked out and more assurances were required from the Greek politicians.

The question we still have to ask is if the markets have already priced in a Greek default, and the possible contagion, or if the market is still living in a land of make believe. Today, Moody’s Investors Service cut the debt ratings of six European countries including Italy, Spain and Portugal and revised its outlook on the U.K.’s and France’s top Aaa ratings to “negative”.There had been no indication the U.K.’s outlook was necessarily in danger based on how other ratings firms view U.K.’s debt. Both S&P and Fitch have a stable outlook on their U.K. rating.

Spain was downgraded to A3 from A1 with a negative outlook, Italy was downgraded to A3 from A2 with a negative outlook and Portugal was downgraded to Ba3 from Ba2 with a negative outlook. Moody’s also reduced the ratings of Slovakia, Slovenia and Malta.

What Greece has in essence committed itself to is an internal devaluation lasting years, if not decades into the future. There is no discernible end to the austerity; year after year, it grinds remorselessly on. Even if everything goes according to plan, which seems unlikely, it takes until 2020 to reduce the national debt to 120% of GDP, a level still far too high to be remotely sustainable.

Greece also faces a massive hit to wages and living standards as it seeks to impose competitiveness on an economy. There is not a hope of Greece growing its way back to debt sustainability while still in the euro. Even if that were the right thing to be doing from an economic perspective, it seems intolerable from a political and social one, as we are already seeing from the mini-revolution on the streets of Athens. Public support for the political establishment is going up in flames. The euro is destroying Greek democracy.

There is a long history of countries that have defaulted on their debt; most recently Iceland and Argentina and other countries that have both devalued and defaulted; the result is an economic shock that is relatively short lived. Once competitiveness has been restored by devaluation and default, growth prospects improve dramatically. This is probably a better path for Greece than to become the whipping boy of Europe.

As Greece struggles to meet Europe’s strict terms for receiving its next round of bailout money, the lesson of Portugal might bear watching. Unlike Greece, Portugal is a debtor nation that has done everything that the European Union and the International Monetary Fund have asked it to, in exchange for the 78 billion euro (about $103 billion) bailout Lisbon received last May.

And yet, by the broadest measure of a country’s ability to repay its debts, Portugal is going deeper into the hole.

The ratio of Portugal’s debt to its overall economy, or gross domestic product, was 107 percent when it received the bailout. But the ratio has grown since then, and by next year is expected to reach 118 percent.

That’s not necessarily because Portugal’s overall debt is growing, but because its economy is shrinking. And economists say the same vicious circle could be taking hold elsewhere in Europe.

Two other closely watched countries on the debt list, Spain and Italy, now also have rising debt-to-G.D.P. ratios — even though they, like Portugal, have adopted the budget-slashing and tax-raising measures that the European officials and the I.M.F. continue to prescribe.

And on Tuesday, new figures showed that the Greek economy shrank even more than expected last year, as Greece struggles under ever heavier austerity demands by its European lenders.

Without growth, reducing debt levels becomes nearly impossible. It is akin to trying to pay down a large credit card balance after taking a pay cut. You can cut expenses, but with lower earnings it is hard to set aside money to pay off debt.

Mario Monti, the Italian prime minister, has warned of the dangers of pushing governments too far, and fearing contagion to his own country, has asked for Europe to go easy on Greece. The Euro-powers-that-be argue that there is no alternative, they must impose harsh discipline on Greece. And if contagion does spread through Europe, it will be well deserved because there is always an alternative. Right now the Euro-zone economy is being run by and for the bankers. There was a time when Europe was torn apart by war, and after the war, the victors rebuilt the vanquished. Economics without compassion is a losing game.

Yesterday was the last day to submit comments on the Volker Rule No less than Paul Volcker himself was roused from 25 years of slumber to submit his own comment, and while he was up he laid a gleeful smackdown on European governments. You may recall that some clients had some concerns about the Volcker Rule reducing liquidity, with some of those concerns being less sympathetic than others, and foreign sovereigns were among the noisiest complainers. Volcker is having exactly none of it:

“There is a certain irony in what I read. In Europe, there are plans to introduce a financial transaction tax, justified in part by officials because it puts “sand in the wheels” of overly liquid, speculation-prone securities markets. … How often have we heard complaints by European governments about speculative trading in their securities, particularly when markets are under pressure?”

The financial services industry wants to revise the “Volcker Rule.” I know, it's shocking. The Securities Industry and Financial Markets Association, or SIFMA, teamed up with the American Bankers Association, the Financial Services Roundtable and the Clearing House Association to deliver a 173 page letter detailing their objections to the Volker Rule and how it goes about setting up the ban on proprietary trading. The groups, the major trade associations for the financial world, also filed separate letters on other aspects of the rule.

The trade groups write:“The potential costs to the financial markets, investors and corporate issuers from incorrectly implementing the Volcker Rule are enormous.” I doubt it, but just to refresh my memory, what was the cost to allowing the banksters to take crazy risks and nearly drive the entire global financial system over the edge and into a dark abyss? How many trillions were paid out in the form of bailouts, and free money? And how much of that money has been spent to lobby for even less regulation for a broken system?

Just curious.

The California Public Employees' Retirement System, or CALPERS has about $234 billion under management. The pension fund estimates that it has about 75 percent of the money it needs to cover promised benefits. That differs from a Stanford University report that said Calpers was only 58 percent funded. That's a pretty significant difference. And to come up with those conclusions they have to make certain assumptions. CALPERS assumes they can earn 7.75% on the funds. Stanford assumes that CALPERS can only earn 6.2%.

About 2 weeks ago, The California State Teachers’ Retirement System, with $133 billion of assets, agreed to lower its assumed returns to 7.5 percent from 7.75 percent. The teacher’s fund had 71 percent of what it needs to pay future benefits as of June 30, 2010. The lower rate added $5.9 billion to a $56 billion shortfall projected at the time So, now you're thinking Calpers is crazy for making such aggressive assumptions, or maybe they are pretty good at investing. Which is it?

In the fiscal year ended June 30, Calpers earned 20.7 percent, its best result in 14 years, led by stocks and private equity. Since then, the fund has dropped 4.5 percent. It lost almost a quarter of its value in 2009 as the global recession dragged down stock prices and real-estate values. Through Dec. 31, Calpers earned almost 5.1 percent over a decade and 7.5 percent the past 20 years. hat 20-year return will rise to 8.36 percent when results through June 30, 2011, are included. The fund uses such fiscal year results in its calculation of employer contributions.