Wednesday, October 09, 2013 - Scum in the Steam Room

Scum in the Steam Room

by Sinclair Noe

DOW + 26 = 14,802
SPX + 0.95 = 1656
NAS – 17 = 3677
10 YR YLD + .01 = 2.65%
OIL – 2.03 = 101.46
GOLD – 11.90 = 1308.00
SILV - .40 = 21.99

We'll get to Janet Yellen in a bit. First, I'm getting sick and tired of this stupidity oozing out of Washington; you are too, I know. Americans’ confidence in the economy has deteriorated more in the past week during the partial government shutdown than in any week since Lehman Brothers collapsed on Sept. 15, 2008, which triggered a global economic crisis. Gallup’s Economic Confidence Index tumbled 12 points to -34 last week, the second-largest weekly decline since Gallup began tracking economic confidence daily in January 2008. And that poll was taken at the end of last week. Since then, we've hit a new low.

The government is still shut down. I don't know why. John McCain delivered a speech on the Senate floor; he said: “To think that we were going to repeal Obamacare, which would have required 67 Republican votes, of course, was a false premise.” So, I really don't know why we are still having a shutdown. He then went on to recognize the five families of US soldiers killed last weekend in Afghanistan; 21 soldiers have died since the shutdown started.

When a soldier is killed in battle, the family receives about $100,000 in death benefits. A month ago, the Pentagon warned the politicians on Capitol Hill that this would happen. The politicians did nothing. Pentagon officials said the shutdown restrictions have also halted reimbursements for families traveling to Dover Air Force Base in Delaware to witness the return of fallen troops, paying for memorial services and burial expenses, and traveling to visit wounded troops. Today, the politicians scrambled to pass a bill reinstating the death benefit for families of the soldiers. Too late. Too damn late.

If you think the US is looking at a possible default on October 17, think again. The default happened yesterday. When the United States fails to pay the family of a fallen soldier to come and take that hero's body; when the government fails to pay for that soldier's burial we have defaulted. Forget about bond holders, forget about the markets. The first and most basic requirement of this government is to keep our promise to those who make the ultimate sacrifice of blood and life for their country. We have failed.

Senator McCain said: "I'm ashamed. I'm embarrassed. All of us should be." Yep, but that doesn't begin to tell the story of the abysmal failure we just witnessed. The House of Representatives has determined that it is essential to pay money to keep the House gym open; the gymnasium is essential. The politicians have to have their swimming pool, basketball courts, sauna, and steam room, or as Representative Don Young from Alaska said: “This job is stressful...” and he needs a place to vent.

They are scum, pure and simple – scum! (As I write this I am saying far, far worse but you don't need to read my cursing. You are probably cursing on your own and I hope you find some relief.)

No veterans, no America. You forgot didn't you. Patriots blood is not spilled to keep the House gym open. Here's the deal; we made a promise that if a soldier dies in battle, we will not leave him or her behind. Never. We will make certain they are returned home. We will take care of the family.

We have defaulted, not a fiscal default but a moral default. Disgusting, embarrassing, and inexcusable.

Everything else is the meaningless stupidity of the politicians. The debt ceiling is getting closer and closer. For now, the politicians are slow walking to the edge of default. They're acting like it's safe to stand on the edge and look over; some even claim that if we went over the edge, gravity might not kick in. That's dangerously stupid. Some people think that if the debt ceiling is not raised it would not result in default. It will; the Treasury has said that it does not have the authority to pay the nation's debts.

There are options. The president could still enlist the aid of the Ben Bernanke to monetize debt under the “unusual and exigent circumstances” authority of the Fed. Undoubtedly that would lead to threats of impeachment and the options for monetizing the debt would probably not kick in until the default turned into an emergency. The president could ignore the debt ceiling and order the Treasury to pay the debt. He could rely on Section 4 of the 14th Amendment to the Constitution, which says the “validity of the public debt of the United States, authorized by law … shall not be questioned.” The debt itself is clearly “authorized by law” because it’s the direct result of laws authorizing the US to spend and to tax. The showdown over the debt ceiling is over payment of the debt, not the legality of the debt itself. Arguably, what the Constitution requires trumps any law governing the debt-ceiling.

So, the stupid, scum politicians are slow walking up to the edge of fiscal default. What could go wrong?

For the answer, to that question we look to Japan, where it is reported a worker at the Fukushima nuclear plant accidentally pushed a button turning off power to the four badly damaged reactors yesterday. Japan's Nuclear Regulation Authority said that a worker carrying out inspections had turned off pumps injecting cooling water into the unstable reactors.

The plant operator, Tokyo Electric Power Co, or Tepco, pours hundreds of tons of water a day over the reactors to keep them cool after a devastating earthquake and tsunami in March 2011 triggered meltdowns and explosions. Despite the employee's blunder, officials say a backup system kicked in immediately. It is just the latest in a string of worrying mishaps which reveal just how vulnerable the power plant still is, two years on from the disaster. Earlier this year, Tepco lost power to cool spent uranium fuel rods at the plant after a rat tripped an electrical wire. And just last week the company also found that hundreds of gallons of highly radioactive water had leaked from one of the hastily built storage tanks.

The tank lacked a gauge designed to warn people when it is dangerously full, meaning workers overfilled it. TEPCO said the water spilled out of a concrete barrier surrounding the tank and believed that most of it reached the sea via a ditch next to the river. A further 300 tons of contaminated water leaked into the ocean back in August, which is on top of the 300 tons of groundwater which the company admitted could be seeping into the ocean per day. But don't worry, because nuclear is safe and clean. Or as Tepco says, “everything is under control.”

Next on the list: Janet Yellen. 

President Obama has nominated Federal Reserve Vice Chair Janet Yellen to replace Ben Bernanke as head of the Fed starting next year. Obama praised current Fed chairman Ben Bernanke for leading the US through “some of the most daunting circumstances of as lifetime. He has truly been a stabilizing force –not only for our country, but for the entire world,” Obama said.

Obama described Yellen’s nomination as “one of the most important economic decisions that I’ll make as president.” He said Yellen was one of the world’s leading economists and had a proven track record at the Fed, where she is currently vice-chair. She actually does have a good record for her economic forecasting. A study of 700 economic predictions made by 14 Fed policymakers from 2009 to 2012 found Yellen was the most accurate forecaster overall. She also scored in the top four for her forecasts on inflation, labor, and growth. Yellen  sounded the alarm bell early about the housing market bubble and excesses in the financial markets before the recession.

She was the head of the Council of Economic Advisors for 2 years during the Clinton administration, but she does not seem to be a political insider. She has taught at Harvard, the London School of Economics, and UC-Berkley. She is married to Nobel Prize winning economist George Akerloff. She would be the first woman to head the Fed, but not the first woman to head a central bank. She is expected to support monetary stimulus. In other words, if Yellen heads the Fed, there would be no rush to taper; although most of the FOMC is leaning toward taper. Still to be determined is whether Yellen will be a tough regulator.

Today, the Fed released minutes of the last FOMC meeting. The Fed surprised economists last month when it decided to continue its stimulus at current levels. Bernanke had previously signalled that the Fed could start “tapering” the size of the bond-buying scheme by the end of the year.

But the Fed’s members were concerned about the economy, with a row over the debt ceiling and the federal budget on the horizon. “Questions were raised about the effects on the housing sector, and on the broader economy of the tightening in financial conditions in recent months, as well as about the considerable risks surrounding fiscal policy,” according to the minutes.

“The announcement of a reduction in asset purchases at this meeting might trigger an additional, unwarranted tightening of financial conditions, perhaps because markets would read such an announcement as signalling the committee’s willingness, notwithstanding mixed recent data, to take an initial step toward exit from its highly accommodative policy,” the minutes said.

As a result, “ a number of participants” thought a cautious approach was needed and “it would be prudent to await further evidence of progress before reducing the pace of asset purchases.”

The decision to keep buying at the same rate “was a relatively close call”.

Thursday, October 03, 2013 - Don't Underestimate the Idiocy

Don't Underestimate the Idiocy

by Sinclair Noe

DOW – 136 = 14,996
SPX – 15 = 1678
NAS – 40 = 3774
10 YR YLD - .02 = 2.61%
OIL – 1.22 = 102.88
GOLD + .40 = 1317.70
SILV - .04 = 21.80

Well, we won't be able to sift through the jobs report tomorrow, due to the government shutdown. There are lots of things that won't happen tomorrow, but next week, the International Monetary Fund and the World Bank will meet in Washington. Ahead of the meeting, Christing Lagarde, the IMF Director delivered an assessment of the global economy. It's subdued. Lagarde says “In many of the advanced economies, however, we are finally seeing signs of hope. Growth is looking up, financial stability is returning, and fiscal accounts are looking healthier.”

The impact of a slowdown on US Federal Reserve asset purchases had been expected to dominate this year’s annual meetings but the Fed’s decision to hold off on tapering has removed that focus. And attention will now turn to the spectacle of a government shutdown and impending debt ceiling default. Lagarde called the debt ceiling “mission critical”, because “the normalization of monetary policy affects so many markets and people across the globe, the US has a special responsibility: to implement it in an orderly way, linking it to the pace of recovery and employment; to communicate it clearly; and to conduct a dialogue with others.”

Late yesterday, President Obama was interviewed by CNBC and he warned that investors should be worried, saying “This time's different. I think they should be concerned.”

It was a pretty clear message to political opponents that even their Wall Street benefactors are growing weary of this mess, saying “I think Wall Street can have an influence. CEOs around the country can have an influence. This is going to have a profound impact on our economy, their bottom line, employees and shareholders unless we start seeing a different attitude around that faction of Congress.”

Today, the Treasury Department released a report warning of catastrophic damiage if Congress fails to raise the debt ceiling. The report states: "A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse."

The Treasury report mentioned that even the prospect of default can cause economic problems, including lower consumer confidence, stock market volatility and higher interest rates on business loans and mortgages. An actual default could have consequences for years to come. The US has never defaulted on its debt, but the cost of insuring one-year Treasury bonds against default has quintupled in the past 10 days.

So, the president says there is cause for concern; the Treasury warns of a catastrophe; and the IMF says the debt ceiling is mission critical, and Wall Street slips a little, but apparently they haven't yet figured out how to turn this into a full fledged panic. There is an air of complacency that might linger until the last minute. Warren Buffett says, “We will go right up to the point of extreme idiocy, but we won’t cross it.” Maybe, but I think Warren underestimates the idiots.

If the debt-limit isn’t lifted, the Treasury will face the prospect of violating one of three laws: The World War I-era statute that created the debt limit, the ban on direct lending to the Treasury from the Federal Reserve, or the 14th Amendment declaring that the legitimacy of U.S. debt must go unquestioned.

There may be some ways to circumvent default, but those options are all “iffy”, at best. The most widely discussed strategy would be for President Obama to invoke authority under the 14th Amendment and essentially order the federal government to keep borrowing, an option that was endorsed by former President Bill Clinton during an earlier debt standoff in 2011. Other potential October surprises range from the logistically forbidding, like prioritizing payments, issuing i.o.u.’s or selling off gold and other assets, to more fanciful ideas, like minting a trillion-dollar platinum coin.

President Obama will not invoke a constitutional amendment to unilaterally increase the nation’s debt limit if  an  impasse with House Republicans causes that ceiling to be breached in two weeks. White House press secretary, Jay Carney, said: “We do not believe that the 14th amendment provides that authority to the president.” The president, he added, “completely” agrees with his advisers’ legal reasoning. More specifically, this removes the idea of an impeachable offense. Of course, that doesn't mean the debt-ceiling will be lifted; again, we should not underestimate the idiots.

But it all goes back to the complacency of Wall Street, which hasn't hit panic stage but has been drifting lower. The Dow Industrials have quietly dropped 9 of the last 11 sessions, shedding 720 points along the way, to close under 15,000. Wall Street is concerned but not yet convinced of a catastrophic default, but also cognizant that the possibility of default forces the Federal Reserve to avoid the taper.

Earnings estimates have been slow in coming down. And the stock market, supposedly forward looking and focused on corporate revenues and earnings, has been completely blind to them. Fundamentals no longer matter. All that matters is the Fed. A shift that has become the Fed’s most glorious accomplishment. And the Fed continues to feed Wall Street with $85 billion a month. Step right up and gorge.

Yet in this infinite QE environment where there is no gravity for stocks and even junk bonds, the smart money is selling hand over fist, unloading whatever they can, however they can. Record junk bond issuance is just one aspect. Another aspect: IPOs. They have gone haywire.There were 23 IPOs in May, 20 in June, 17 in July, 19 in August, and 21 in September. But last week alone, there were 12 IPOs – more than two per day. And today, with all the dire warnings, Twitter announced its IPO. Generally, IPOs are scheduled apart to avoid overloading the market. But now the smart money is scrambling to issue paper while it still can and stuff it into the portfolios of retail investors at current “out of whack” valuations, stocks and bonds alike, before the Fed turns off its crazy money spigot, and before investors will finally open their eyes to the grim earnings reality.

Meanwhile, junk bond issuance hit a record high in September, at more than $47 billion. Year to date, issuance amounted to $255 billion, blowing away last year’s volume for this period of $243 billion. The year 2012, already in a bubble, set an all-time record with $346 billion. This year, if the Fed keeps the money flowing and forgets about that taper business, junk bond issuance will beat that record handily.

Junk-bond funds got clobbered in July and August as retail investors briefly opened their eyes and realized what they had on their hands and fled, and they went looking for yield elsewhere, but there was still no yield in reasonable places, and so they held their noses and picked up these reeking junk-bond funds again. Cash inflow doubled over the last week to $3.1 billion, the most in ten weeks.

These retail investors were fired up by the Fed’s refusal to taper even a little bit, giving rise to the hope that it might actually never taper, that this is truly QE to Infinity, Wall Street’s dream come true. 

The theory is that the Fed is mortally afraid that any taper would pop the asset bubble it has inflated over the last five years. Toss in the threat of a debt default and the Fed must have felt like a porcupine in a room full of balloons. Functionally, the Fed believes that the only cure for a burst bubble is a bigger bubble, so this comes as no surprise. They appear to be willfully blind that, in an era of plutocratic concentration of wealth, the old supply-side nostrums don’t work.

What else? Well, you'll remember that in 2012, a coalition of 49 states and the US reached a settlement with five of the country’s largest mortgage servicers, Wells Fargo, Bank of America, JPMorgan, Citi, and Ally in an effort to stop abuses such as “robosigning” of documents used in foreclosure proceedings and to lower barriers to modifications of loans. 

Now hold onto you hat; the banks are still behaving badly. Wells Fargo was sued by New York state over claims the bank failed to uphold terms of a $25 billion mortgage-servicing settlement aimed at helping distressed homeowners avoid foreclosure. Wells and BofA were accused by New York Attorney General Eric Schneiderman of violating the provisions of the national accord by continuing to impose unnecessary delays on borrowers seeking to modify the terms of their loans. BofA has agreed to mend its evil ways, but Wells Fargo just couldn't get their act together.

Wells Fargo is one of the most difficult banks for distressed homeowners to deal with, Schneiderman said at the press conference. The bank sends “incomprehensible communications” to borrowers; he even read a letter from the bank to a homeowner; it was pure goobledygook. After months of discussions with both banks, Wells Fargo “refused to acknowledge there’s a problem.” 

Subsidizing Bad Behavior

by Sinclair Noe

DOW + 18 = 13,507
SPX – 1 = 1470
NAS – 8 = 3117
10 YR YLD - .02 =1.86%
OIL + .64 = 94.20
GOLD + 5.10 = 1668.80
SILV + .64 = 31.18

This morning, President Obama held the final news conference of his first term. The debt ceiling was a major topic. The President demanded lawmakers raise the nation's $16.4 trillion federal debt limit quickly, warning that, "Social Security benefits and veterans' checks will be delayed" if they don't and cautioning Republicans not to insist on cuts to government spending in exchange.

Republican congressional leaders repeated their demand that increases in borrowing authority must be accompanied by spending cuts. Obama, flat out rejected that, saying: "They will not collect a ransom in exchange for not crashing the economy. The full faith and credit of the United States of America is not a bargaining chip. And they better decide quickly because time is running short."

The president opened his news conference with a statement by saying that a vote to increase the debt limit "does not authorize more spending. It simply allows the country to pay for spending that Congress has already agreed to. These are bills we've already racked up and we need to pay them." Obama said he was willing to consider future deficit cuts, but only if they are done independently from a vote to raise the $16.4 trillion debt limit.

The debt limit must be raised to prevent a default, a series of across-the-board spending cuts is to kick in on March 1, and funding for most government programs will run out on March 27. There has been a lot of talk about an end run around the debt ceiling, including the quite good but a little wild idea of minting a $1 trillion dollar platinum coin. Voila, problem solved. Some people still don't understand the concept, but it is really quite clever. Still, the White House says it is not the answer.

On Friday, Senate Democratic leaders told Obama to be ready to take "any lawful" steps to ensure that the United States did not trigger a global economic crisis. The debt limit only allows the Treasury to borrow funds to pay for existing obligations that Congress and the president have already agreed upon. Although Congress has routinely increased the limit since it was established in 1917, it has become more contentious since annual federal budget deficits have been topping $1 trillion, with conservatives in Congress using it as leverage to demand spending cuts.

With fears that Congress will not act in time, the 14th Amendment provision has surfaced as a backup plan.The 14th Amendment is best known for extending civil rights protections in the wake of the Civil War. The amendment's fourth section was designed to guarantee Union debt incurred during the war, including compensation due to Union soldiers and their widows. The clause states: "The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned." So, the idea is to act as if the debt ceiling doesn't exist.

 Federal Reserve Board Chairman Ben Bernanke delivered a speech at the University of Michigan today; he echoed the president's call for Congress to raise the debt ceiling. Bernanke also downplayed fears expressed by some more hawkish Fed officials and investors that the Fed's bond-buying program will lead to higher inflation or future asset bubbles in the future. "I don't believe significant inflation is going to be the result of any of this." Whether Fed policy will lead to asset bubbles in the future is "a difficult question," Bernanke said. The Fed is monitoring markets and toughening supervision to guard against financial instability. And he said, “The worst thing for the Fed to do would be "to raise interest rates prematurely." So, the Fed has options and they're not afraid to use them. This means ongoing central bank intervention in the bond markets, and you would have to imagine that it applies to the stock markets.

Temporary success does not imply permanent success or even continued success of intervention. The positive effects of the Federal Reserve’s Quantitative Easing programs are diminishing both in duration and market pricing. The market soared for months on end after QE1, but the rally quickly fizzled after QE4. This reveals the decay factor in intervention: Each intervention must be larger as its efficacy decays.

How do you like the attack on the deficit so far? You're probably just starting to feel the pinch. Paychecks across the country have shrunk over the last week due to higher federal tax rates, and workers are already cutting back on spending, which will drag on the economy this year. For most workers, rich and poor alike, taxes went up on December 31 as a temporary payroll tax cut expired. That cut - a 2 percentage point reduction in a levy that funds Social Security - was put in place two years ago to help the economy. For a refresher this is what happened: Congress temporarily lowered the Social Security tax withholding rate to 4.2% from 6.2% for 2011 and 2012. But amid continued hand-wringing about deficits and revenue, lawmakers let it expire for 2013. What that means for most workers is 2% less money in their paychecks. The tax caps out at $113,700. Which means that you only pay the payroll tax up to that amount; so if you earn $113,700 and someone else earns $1 million a year, you pay the same payroll tax.

About 160 million workers pay this tax, and the increase will cost the average worker about $700 a year, according to the Tax Policy Center. The payroll tax hike will reduce household incomes by a collective $125 billion this year. That alone could reduce economic growth this year by about 0.6 percentage point. Most economists see economic growth of roughly 2 percent this year. Consumer spending, which drives more than two thirds of the economy, will likely grow at a mere 1 percent annual rate in the first quarter, and 1.5 percent in the second.

Last week we talked extensively about the various penalties being imposed on various banks for a multitude of sins, including: $8.5 billion for ten banks to deal with shoddy mortgage practices; $10 billion for Bank of America; $1.9 billion for HSBC for money laundering. The list goes on and on. Who pays those multi-billion dollar fines?

Think about it. Don't answer too quick. The correct answer is..., you pay. That’s because some or all of these payments will probably be tax-deductible. The banks can claim them as business expenses. Taxpayers, therefore, ultimately foot the bill. There is nothing new about corporations reaping tax benefits from payments made to remedy wrongdoing. Every so often, though, the topic stirs outrage. After the Gulf of Mexico oil spill, for example, BP received a $10 billion tax windfall by writing off $37.2 billion in cleanup expenses.

With multibillion-dollar mortgage settlements making headlines this year and last, the question has come to the fore again. Why should taxpayers subsidize corporations that are paying to right sometimes egregious wrongs? That is a particularly weighty question, given the urgent need for tax revenue to offset the federal budget deficit.

Under federal law, money paid to settle a company’s actual or potential liability for a civil or criminal penalty is not deductible. But, this being taxes, the issue is complicated. The tax deduction for business expenses is broad enough to include most settlements and judgments. Unfortunately, the government rarely specifies what the tax treatment of a settlement should be, leaving enforcement to the Internal Revenue Service; the SEC is the one notable exception. A report from the Government Accountability Office suggests that tax benefits in settlements are prevalent. Examining more than $1 billion in settlements made by 34 companies, the G.A.O. found that 20 had deducted some or all of the money from their tax bills. In other words, we subsidize bad behavior.

Speaking of banks behaving badly, whatever happened to the Libor rate rigging scandal? This was supposed to be the mother of all bad bank behavior. Now there’s another wrinkle in the private Libor litigation: On Wednesday, the counties of San Diego and San Mateo, the city of Riverside and the municipal utility district of Oakland filed simultaneous antitrust complaints in three different federal courts in their home state of California. And a lawyer from the firm that filed all of the new cases is hoping more California cities and counties will join in.

The allegations in the California suits will be familiar to anyone who has followed the burgeoning Libor scandal, in which banks supposedly falsified reports of interbank borrowing rates to a British banking authority in order to improve trading positions or avoid damaging their reputations. The new complaints aren’t even the first to mine documents released by British and U.S. regulators in connection with UBS’s $1.5 billion settlement in December. And there is already a class action underway in New York, but there might be an advantage to peeling off from the New York class action and having California juries hear the case. More individual suits by municipalities that issued and invested in billions of dollars of securities with Libor-tied rates means more headaches for bank defendants.