Friday, January 31, 2014 - January Out

January Out

by Sinclair Noe

DOW – 149 = 15,698
SPX – 11 = 1782
NAS- 19 = 4103
10 YR YLD  - .03 = 2.67%
OIL - .76 = 97.47
GOLD + 2.80 = 1246.90
SILV + .03 = 19.27

The Dow started the year and the month at 16,572 (-926). The S&P 500 started the month at 1845 (-63). The Nasdaq Comp, for the month, went from 4160 (– 57).

For the week, the Dow fell 1.1 percent, the S&P 500 slipped 0.4 percent and the Nasdaq dropped 0.6 percent. In January, the Dow slumped 5.3 percent, the S&P 500 lost 3.6 percent and the Nasdaq fell 1.7 percent. January marked the worst month for the Dow and the S&P 500 since May 2012, and the worst for the Nasdaq since October of that year.

Yield on the 10 year Treasury note dropped from 2.99% to (- 32bp). And this is a little telling, the Vix, the volatility index went from 14.32 to 18.22    (-3.9)

The Vix might be indicating that the market is not sufficiently scared of the emerging market contagion; certainly the Vix is higher than the start of the month, but remember that December saw record highs for the major indices, and a really scary Vix reading would be around $49, for those of you who remember the beginning of 2009. In other words, there are a whole bunch of people who haven’t figured out that we’re in a downturn in the markets. So far the US markets are just experiencing a small move, but the rest of the world is taking a bigger hit. About $17 billion has poured out of emerging market funds this month.

Right now, there is growing angst regarding the emerging markets. The Dow was down more than 200 points to start the session today. And really, none of this should be a surprise. We know that emerging markets have been struggling with the Fed’s taper and other stimulus plans of developed economies. Things tend to unravel slowly and then all at once. It’s hard to figure out where we are in the unravelling. When will this little downturn end? I don’t know but I’m guessing the Vix will be higher than today.

A new State Department report on the proposed Keystone XL oil pipeline finds that the project would have a minimal impact on the environment, an assessment likely to increase pressure on the White House to approve it. But the report sets no deadline for doing so. The proposed pipeline would carry crude derived from oil sands in Canada to refineries in the United States. The evaluation fell to the State Department because the proposed $7 billion project by TransCanada Corp would cross the US-Canada border.

A New York State judge has approved an $8.5 billion agreement by Bank of America to settle most of the claims by nearly two dozen mortgage securities investors.  In a 53-page decision, Justice Barbara R. Kapnick of State Supreme Court in Manhattan ruled that the 2011 settlement was reached in good faith.

The settlement had been challenged by the American International Group, an investor in the mortgage securities, which contended that the trustee overseeing the bonds did not push aggressively enough for more money from Bank of America. AIG argued that the settlement shortchanged investors and accused the trustee, Bank of New York Mellon, of conflict of interest and of shirking its duties. The judge determined that the trustee did not abuse its discretion in entering into a settlement.

There’s something rotten in Denmark, and it’s Goldman Sachs. Denmark gave the global financial giant Goldman Sachs the go-ahead on Thursday to buy a stake in its state utility. Some members of the Socialist People’s Party were so upset, they withdrew their ministers from the country’s governing coalition. Some party members said the deal ceded too much power to Goldman. Thousands of people have taken to the streets in recent weeks to protest the deal; a prominent banner featured the vampire squid that has become a symbol for Goldman Sachs. Nearly 200,000 Danes signed an online petition against the deal, a record.

Under the terms of the deal, Goldman would invest about $1.45 billion for an 18% stake in Dong Energy, the state utility. Dong Energy has a number of businesses, including offshore wind farms, drilling for oil and gas in the North Sea. The utility has about one million gas and electric customers and operates coal and biomass power plants. The deal does not buy Goldman a controlling share, but the minority stake would come with special privileges. Goldman would get a seat on the utility’s board. And the bank, along with two Danish pension funds, would have veto power over changes in the utility’s strategy or its executive suite; specifically the utility’s chief executive or chief financial officer. The Danish pension funds are investing about $550 million.

Among the questions about the deal is whether it is being structured to avoid taxes. Goldman’s investment will be made through a company based in Luxembourg. And that Luxembourg company is then owned in part by companies in Delaware and the Cayman Islands. So, the deal boils down to either a big tax evasion scheme by Goldman or a significant investment in renewable, green energy. Time will tell but I’m guessing it’s a bit of both.

Officials in California said that for the first time in the state’s history, they won’t be able to provide any water to contractors that supply two-thirds of the population and a million acres of farmland. The California Department of Water Resources, which had predicted it would be able to supply about 5 percent of the amount requested, said it now projects that it won’t be able to provide any of the 4 million acre-feet of water sought by local agencies.

The reduction means that agencies will have to rely on existing water supplies such as ground water or what is in storage behind dams. The Los Angeles-based Metropolitan Water District, serving 19 million people in Southern California, and the San Francisco Public Utilities Commission, which supplies much of the Bay Area, have built up water reserves and won’t be as hard hit as places such as Sacramento and the Central Valley farming region. About two-thirds of Californians get at least part of their water from northern mountain rains and snow through a network of reservoirs and aqueducts known as the State Water Project. State Department of Water Resources Director Mark Cowin said: "Simply put, there's not enough water in the system right now for customers to expect any water this season from the project."

Farmers and ranchers throughout the state already have felt the drought's impact, tearing out orchards, fallowing fields and trucking in alfalfa to feed cattle on withered range land.  Agricultural production accounts for most of the state's water use and is expected to be hit the hardest by the reduction. At the same time, many cities have ordered severe cutbacks in water use.

If you watched the State of the Union address this week, you might rightly assume that Congress can’t do anything, which would only be partially correct. The House this week passed a Farm Bill. Big whoop. The Farm Bill is normally the most uncontroversial bit of legislation Congress deals with. Not anymore. The bill is 959 pages long and would cost $956 billion.

That cut is twice what the Senate originally proposed, but a fraction of the nearly $40 billion the GOP House voted to cut last year. Those cuts didn't go into effect, but a cut of $5 billion in the current fiscal year was implemented via Congressional inaction last November. The bill budgets $16 billion less than what would have been spent under current law, with the Food Stamp program absorbing almost half those cuts, or right at $8 billion. In a great big federal budget, that might not sound like much but it worls out to 21 fewer meals per month for a family of 4.

The bill also makes some policy changes for famers. It’s a neat little bait and switch. What the bill takes from the ag lobby with one hand, it largely gives back with the other. Of $41 billion in projected savings (over 10 years) from eliminating direct payments to farmers, the bill restores $27 billion via enhanced crop insurance subsidies and a new program that “insures” against adverse price movements. Supposedly necessary to secure the nation’s food supply at a time of record farm, this federal largess flows almost regardless of how much money its recipients already have. People making up to $900,000 per year in adjusted gross income can qualify for payments. The total commodity-program take for any individual “actively engaged” in farming is capped at $125,000, or 2½ times the national median household income. But your definition of actively engaged is probably different than the definition in the farm bill.

Farm prices and farm revenues and net profits had been at record highs, so old-style farm prices that put the floor under prices were no longer effective. So they racheted up the guarantees, converted into a kind of revenue insurance, allowing the money to continue to flow. The insurance scheme also preserves the current incentive structure of large-scale US agriculture, which is to grow as much corn and soybeans as possible. That's great for the corporations that supply inputs to industrial-scale farmers—seed and pesticide companies like Monsanto, DuPont, and Dow. And in the event of floods or drought, the results could get shaky. Depending on the payouts, any savings from cuts in the Farm Bill could be wiped out.

Thursday, January 30, 2014 - Where Water Flows

Where Water Flows
by Sinclair Noe

DOW + 109 = 15,848
SPX + 19 = 1794
NAS + 71 = 4123
10 YR YLD + .02 = 2.69%
OIL + .59 = 97.95
GOLD – 24.60 = 1244.10
SILV - .57 = 19.24

Gross domestic product grew at a 3.2% pace in the fourth quarter of 2013, which was down from the 4.1% growth in the third quarter. Consumer spending rose at a 3.3 percent rate, the strongest since the fourth quarter of 2010. Inventories increased $127 billion, the most since the first quarter of 1998. That added 0.42 percentage point to GDP growth. Inventories had risen $115 billion in the third quarter, contributing 1.67 percentage points to output. Excluding inventories, the economy grew at a 2.8% rate, up from the third-quarter's 2.5% rate. We might reasonably expect inventories to decline again in the first quarter.

Consumption in the fourth quarter came at the expense of saving. The saving rate slowed to 4.3% in the fourth quarter from 4.9 % in the prior period. Income at the disposal of households after accounting for inflation rose at a tepid 0.8% rate. That was a sharp slowdown from the 3.0% pace in the third quarter. Income is one of the biggest constraints on growth.

Exports rose at their fastest pace in three years. Exports combined with declining petroleum imports helped narrow the trade deficit. Business spending on equipment accelerated at a 6.9% rate in the fourth quarter after rising at only a 0.2% pace in the prior three months, and there was a decline in business spending on nonresidential structures. Government spending contracted at a 4.9% pace, reflecting the 16-day government shutdown in October; and so austerity at the federal level subtracted 0.98 percentage points from 4Q growth. Overall, GDP growth of 3.2% seems pretty good, not really enough to propel the economy into escape velocity but decent.

In a separate report, the Labor Department said new applications for state unemployment benefits rose 19,000 last week to 348,000.

In another report, the National Association of Realtors (NAR) reported their pending homes sales index fell 8.7% to 92.4 in December. This is a forward looking indicator based on contract signings. The polar vortex likely contributed to the lower number, at least in the Northeast, but other parts of the country also posted declines.

We are still in earnings reporting season and we’ll touch on a couple of reports. Exxon Mobil posted lower than expected quarterly profits, blaming declining production and more expense to find fresh reserves. Fourth quarter profit still was just over $8.3 billion, but that was down from $9.9 billion a year earlier.

Facebook posted a 63% jump in 4Q revenue and better than expected profit of 31 cents per share. Pulte Homes posted net income of $220 million, up from $58 million a year ago. Companies in the S&P 500 probably increased their earnings by 6.6% in the fourth quarter and revenue likely increased by 2.6%; that’s the most recent guesstimate.

More than $7 billion flowed from ETFs investing in developing-nation assets in January, the most since the securities were created. The iShares Emerging Market ETF (EEM) is down 11%; Vanguard’s emerging market ETF will have the biggest monthly redemption since the fund’s inception in 2005, and the Wisdom Tree emerging market ETF will post its eighth consecutive month of redemptions.

Much of the problem for emerging markets starts with the Federal Reserve’s tapering; as the Fed cuts back its asset purchases there is less hot money searching out higher yields overseas. And it is now clear the Fed will continue with taper for the rest of the year, barring some big change. And after taper, we can reasonably expect that at some point the Fed will start to raise interest rates. That is also troublesome for US equities. Valuations expanded so much last year in anticipation of better earnings growth and in combination with very, very easy Fed policy. As Fed policy reverses, that could very easily increase volatility substantially and really compress the multiple.

The Fed seems to have come to the realization that QE didn’t really have much positive impact on the economy anymore, if it ever did. You could argue that QE was hurting by lowering interest payments on safe assets, while pushing the hot money in search of higher yield and exacerbating inequality. Now the regulators must think the banks are healthy enough to stand on their own, the economy is growing fast enough (even if it is not robust growth), and the emerging markets…, well the Fed apparently doesn’t give a hoot. Unfortunately, the Fed’s timing is on top of the slowdown in China and their efforts to constrain the shadow banking system, which may be an even bigger shock  to emerging markets than the Fed turning off the stimulus. The reality is that the taper, or the unwinding of QE will be painful, even if the Fed slowly removes the Band-Aid from the wound.

It has been volatile for emerging markets and Wall Street this month, the wildest market has almost nothing to do with central bankers, and much more with Mother Nature. For the natural gas market, volatility doesn’t even start to describe the action. Last week, nat gas prices jumped 20% - in one week. Prices broke through the $5 dollar level and ran as high as $5.68 per million btu; the highest close since June 2010.

We are now looking at prices in a condition known as backwardation, which means prices on the forward month futures contracts are higher than forward futures. Today, for example Nat Gas Futures for March closed at $4.92, the April contract at $4.36, and the May contract at $4.34. Backwardation occurs during periods of peak demand, either in cold periods during the winter or a long heat wave during the summer when gas-fired power plants run at near capacity in large parts of the country. The idea is that there are shortages now, but things will get back to normal in time.

Of course, much of the world would love to buy nat gas under $5. The low price of US natural gas has caused demand to creep up. In 2014, demand will likely be over 20% higher than it was in 2005, the year of the record price spike when natural gas reached $15.40 per MMBtu. The low prices of late caused many drillers to write off many projects and many billions of dollars.

During the years of the glut, much of the big money was lined up on the short side. But it has switched over to the long side, and those who got in early, say, in April 2012 near the decade-low of $1.92 per MMBtu, had a ferocious, vertigo-inducing rollercoaster ride during which the price of natural gas nearly tripled. Short sellers that underestimated demand growth and Mother Nature got crushed in an epic short covering supply squeeze. And winter is far from over. The meteorologists say we could see a few more weeks of freakishly cold weather. Energy traders are actually forced to look out their windows because they’re all betting on the weather.

But the Polar vortex and the frozen freeways around Fulton County might not be the biggest weather story of 2014. Seventeen rural communities in drought-stricken California are in danger of a severe water shortage within four months. Wells are running dry or reservoirs are nearly empty in some communities. Others have long-running problems that predate the drought.

The San Jose Mercury News reports that most of the water districts facing near term peril are small districts, with too few customers to collect enough revenue to pay for backup water supplies or repair failing equipment. In Cloverdale, where 9,000 get water from four wells, low flows in the Russian River have prompted the City Council to implement mandatory 25 percent rationing and ban lawn watering. The city raised water rates 50 percent to put in two new wells, which should be completed by July. Now they just have to hope they can make it through the summer. So far, larger urban areas haven’t really been impacted by the drought.

Today, Governor Jerry Brown met with experts across Southern California. The best ideas seem to be old fashioned conservation. Brown says people shouldn't flush more than necessary or shower too long, and to turn off the water while shaving or brushing teeth.

The 2013 calendar year was the driest in 119 years of record-keeping. Today, the US Department of Agriculture’s Drought Monitor ratcheted up the concern, designating 9 counties throughout the Central Valley as “D4: Exceptional Drought”. More than 94 percent of the state is at least in some level of drought. January and February are often among the wettest months in California, but this month has been parched. The Bay Area has seen less than 10 percent of the rainfall it ordinarily sees by this point in the season. A storm system has been moving through Northern Cal but rainfall amounts have been tiny. It would have to rain every day through May to bring conditions back to normal. Mountain snow, which normally melts to feed the state's waterways and reservoirs, is at 20 percent of its normal level.

The California Department of Public Health is working to relieve some of the problems from the drought by constructing more wells, identifying additional sources such as nearby water systems or hauled water, and implementing other methods of water conservation.  The $45 billion agriculture business is also at risk. If you have ever driven along I-10 through Blythe, you may have seen a sign that reads: Food grows where water flows.

The drought, like the cold weather in other parts of the country, really shouldn't shock anybody, but it should make us wake up to the absolute necessity of being proactive. We've seen the price shocks from cold weather and poor planning on the price of nat gas; the result was extreme volatility. A similar story for Western waterways wouldn’t just result in volatility but in outright chaos.

Wednesday, June 26, 2013 - Still Some Work to be Done

Still Some Work to be Done

by Sinclair Noe

DOW + 149 = 14,910
SPX + 15 = 1603
NAS + 28 = 3376
10 YR YLD - .05 = 2.54%
OIL + .17 = 95.49
GOLD – 52.40 = 1226.20
SILV – 1.12 = 18.62

Today we'll cover the Supreme Court decisions, but first the economic news.

As you know, the Commerce Department reports the Gross Domestic Product, or GDP of the nation on a quarterly basis. They issue an initial guesstimate, then they settle on a revised number; for example, they said the first quarter GDP was 2.4%; and then today, they revised the revision of the guesstimate. The economy did not grow at 2.4% in the first quarter, instead it was just anemic 1.8% growth.

The latest numbers show that both consumer spending and trade were weaker than the earlier estimates showed. Consumers did not increase spending on health care, foods, hotel, travel, legal or personal care; big ticket purchases such as autos and electronics were flat. Investment in business structures including office buildings and plants dropped 8.3%; worse than the earlier estimates of 3.5%. Exports dropped 1.1% in the Q1; imports were down 0.4%.

Now, the GDP numbers will be revised yet again. Every five years the Commerce Department overhauls GDP data to try and provide a more accurate picture of the economy; they'll conduct that overhaul next month.

And you may be wondering why this is important; after all, we're talking about 1Q GDP and we're almost finished with the second quarter. The GDP data means that it is less likely the Fed will see a drop in the unemployment rate any time soon; and that means the talk of taper might be premature. In Wall Street's perverse thinking, the bad news on GDP was actually a positive because it might mean the Fed will back away from taper. Funny, huh?

Overall growth has hit a soft patch that economists expect to be temporary — but might end up lasting a lot longer than anybody would like. GDP growth during the past 12 months was just 1.6%, including the latest revision. That’s about the expected pace of growth in the current quarter, and it’s actually a slowdown from the pace in 2010 and 2011. The good news is that growth immediately after the recession ended in 2009 was driven by government spending and other fiscal stimulus measures. Those programs have now faded and government spending is now acting as a drag on the economy.

The Fed expects growth to pick up in the second half of 2013, as the effects of “fiscal drag” fade. But the lower numbers for the start of the year, especially the signs that consumers are still struggling, could prompt downgrades in growth estimates for the rest of the year. The row just got a little harder to hoe.

If you have heard any news today, you are surely aware the Supreme Court has issued two landmark decisions. In the US v. Windsor, the court ruled 5-4 that  a provision of the Defense of Marriage Act (DOMA) is unconstitutional, making it illegal to deny federal benefits to married same-sex couples.

Also in a 5-4 decision, in Hollingsworth v. Perry the Supreme Court opted against a constitutional ruling on California's same-sex marriage ban, Proposition 8, in favor of a deferring to a district court that previously outlawed the measure.

The rulings leave in place laws banning same-sex marriage around the nation, and the court declined to say whether there was a constitutional right to such unions.  So, the debate about same sex marriage is not finished; maybe it's just begun. But in clearing the way for same-sex marriage in California, the nation’s most populous state, the court effectively increased to 13 the number of states that allow it.

The ruling striking down the federal Defense of Marriage Act will immediately extend many benefits to couples in the states where same-sex marriage is legal, and it will give the Obama administration the ability to broaden other benefits through executive actions.

The decision on the federal law was decided by 5 to 4, with Justice Anthony Kennedy writing the majority opinion. He was joined by the four members of the court’s liberal wing. He said the law was motivated by a desire to harm gay and lesbian couples and their families, demeaning the “moral and sexual choices” of such couples and humiliating “tens of thousands of children now being raised by same-sex couples.”

The California case was also decided by 5 to 4, but with a different and very unusual alignment of justices. Chief Justice Roberts wrote the majority opinion declining to rule on the constitutionality of Proposition 8. He was joined by Justice Scalia and Justices Ruth Bader Ginsburg, Stephen G. Breyer and Elena Kagan.

Chief Justice Roberts said the failure of officials in California to appeal the trial court decision against them was the end of the matter. Proponents of Proposition 8 had suffered only a "generalized grievance" when the ballot initiative they had sponsored was struck down, the chief justice wrote, and they were not entitled to represent the state's interests on appeal. The ruling in the case,Hollingsworth v. Perry, erased the appeals court’s decision striking down Proposition 8.

As a formal matter, the decision sent the case back to the appeals court, the United States Court of Appeals for the Ninth Circuit, in San Francisco, “with instructions to dismiss the appeal for lack of jurisdiction.” 

Lawyers for the two sides had different interpretations of the legal consequences of the Supreme Court’s ruling. Supporters of Proposition 8 said it remained the law in California, while their adversaries said the trial court's decision struck it down. As a practical matter, Gov. Jerry Brown instructed officials there to start issuing marriage licenses to same-sex couples as soon as the Ninth Circuit acts.

If, or rather when, California becomes the 13th state to allow same-sex marriage, about 30 percent of Americans will live in jurisdictions where it is legal.

The case on the federal Defense of Marriage Act of 1996,United States v. Windsor, concerned two New York City women, Edith Windsor and Thea Clara Spyer, who married in 2007 in Canada. Ms. Spyer died in 2009, and Ms. Windsor inherited her property. The 1996 law did not allow the Internal Revenue Service to treat Ms. Windsor as a surviving spouse, and she faced a tax bill of about $360,000 that a spouse in an opposite-sex marriage would not have had to pay. Ms. Windsor sued, and last year the United States Court of Appeals for the Second Circuit, in New York, struck down the 1996 law.

After celebrating the Supreme Court’s decision, same-sex couples may want to phone their accountants. In addition to having implications for Social Security benefits, child care rights and retirement planning, the high court’s ruling that the Defense of Marriage Act is unconstitutional might mean a check from Uncle Sam. Couples may be able to amend prior years’ tax returns to receive bigger refunds now that their marriages are recognized by the federal government. 

Income tax filing has been frustrating for many couples, some of whom had to file as many as four separate returns because of the conflicting state and federal rules. And since they were unable to file joint returns, same-sex couples lost out on some of the deductions and credits allowed for heterosexual couples, such as breaks offered to those selling a home and child-related tax credits.

Generally, the IRS allows taxpayers to amend returns for up to three years after the filing deadline or up to two years after the taxes are paid. The timeline may be different at the state level, and some couples may have more time if they filed protective claims for previous tax years that would give them an extension for amending returns.

To be sure, the decision leaves some question marks. The court cases did not address how the government should treat civil unions between same-sex couples. Also, the ruling does not mean states that currently prohibit same-sex marriage now have to permit it.

After talking to an accountant, same-sex couples might want to talk with an estate planning attorney, as the estate tax was at the heart of the case of US v. Windsor. Estate planning should be a little easier for same-sex couples. Without federal recognition, many couples were not able to pass assets to their spouses after death, as straight couples could. Some couples that set up trusts to avoid double taxation on assets being passed along to their partners may want to update their trusts to give their spouses tax-free access to the trust’s income or principal. The ruling could also make it possible for married same-sex couples to share assets without being subject to gift taxes.

After talking to an accountant and an estate planning attorney, some same-sex couples might want to talk to their health insurance agent. While more employers are allowing same-sex spouses to be added to their employees’ health plans, it was provided as a taxable benefit—costing those couples an additional $1,069 a year in taxes. Now that taxes should no longer be a factor, some couples may want to re-evaluate their health insurance choices. One spouse may now be able to move onto the other’s more generous plan, which may also be more affordable.

Today's rulings still require individual planning, so there's still some work to be done.

But I remember that I grew up in a time of anti-miscegenation laws, which were overturned in 1967 with the Supreme Court decision of Loving v. Virginia. In my own family I remember when a Mormon married a Jew, and the rabbi that refused to perform the marriage ceremony because he claimed he wouldn't marry a “mixed couple”. My view is that if two people love each other, that's not mixed up, that's good. The one thing this world definitely needs is more love, and there is still some work to be done.

Thursday, January 10, 2013 - California As A Role Model

California As A Role Model

by Sinclair Noe

DOW + 80 = 13,471
SPX + 11 = 1472
NAS + 15 = 3121
10 YR YLD + .04 = 1.89%
OIL + .77 = 93.87
GOLD + 16.80 = 1675.80
SILV + .50 = 30.96

So, those are the closing numbers. At least, we think those are the closing numbers; give or take; kinda, sorta. It could be off a bit. The stock exchanges have a bit of a problem with something called the consolidated tape, which provides trade data. Seems it went out for about an hour at the New York Stock Exchange Tuesday, making it tough to see in anyone had traded in 165 securities. And the NYSE's screw up follows a similar snafu last week at the Nasdaq. The consolidated tape at Nasdaq went totally blank last week. The consolidated tape is the record of securities transactions across all US exchanges. If you're keeping track, the exchanges have recently had to admit they can't always run IPO's competently, there are some problems with faulty data and trade data. So, that's the closing numbers, more or less.

The World Economic Forum is underway in Davos, Switzerland. The annual gathering of the wealthy and influential includes the publication of a survey which outlines the concerns of about 1,000 experts. This year's report seemed to focus on the interplay between the environment and the economy, saying: “A sudden and massive collapse on one front is certain to doom the other’s chance of developing an effective, long-term solution.

That diagnosis underscores several points of contention in the United States, where there is a push for increased domestic energy production despite concerns from green groups about environmental impacts.The report said governments should invest in infrastructure upgrades to bolster resiliency to climate change and associated natural disasters.

Even if policymakers can recover to handle climate change, the report said experts wondered if we have "already passed a point of no return and that Earth’s atmosphere is tipping rapidly into an inhospitable state.”

While recognizing climate change is happening, the report said policymakers will need to become more comfortable making decisions without a conclusive set of data. At the same time, governments must boost research funding to gather more complete information.

The report also highlighted the income divide between rich and poor, ballooning government deficits, water shortages and aging populations as causes for concern.

For the past three years, the focus of Davos was the Euro-zone debt crisis. There seems to have been a shift away from worries about Euro-land and back to the political and budgetary process in the US, and whether the dysfunction will devolve into a political fistfight. Of course, it doesn't really matter what the rich folks think in Davos; the Forum isn't an official anything, just a lot of talk.

When it comes to most of the major political disputes in Washington, congressional Republicans insist Democrats focus on reducing the debt Republicans built up during the Bush/Cheney era. It underpins everything from the budget fight to the debt ceiling to efforts to expand public investments. What the debate tends to ignore is the debt reduction that's already happened; nearly $2.4 trillion in deficit reduction scheduled for the next ten years has already been signed into law. Roughly three-quarters of the deficit reduction has come is in the form of spending cuts.

As we enter the new year, the nation's most pressing economic problem remains the slow recovery, particularly the job market. Unemployment is still far too high and the rate at which we are creating new jobs is far too low. At the present rate of job growth, we are still several years away from full employment. The ability of monetary and fiscal policymakers to combat the slow recovery is constrained by three things: fear that aggressive monetary policy will drive up inflation to an unacceptable level; fear that tax cuts or increases in spending will worsen our long-run debt problem; and political disputes over taxes and the size and role of government.

There is debate that fiscal and monetary policymakers should do more to push an economic recovery, but the recent minutes from the last FOMC meeting indicate some reticence on the part of the Fed, and the question then becomes whether the Fed will try to increase rates and exit quantitative easing before the economy can enter a virtuous circle of growth. From the fiscal side, the best we can hope for is that the political standoffs over the deficit don't become disruptive.

Exactly how to avoid a political brawl remains to be seen. The debt ceiling will be breached some time in February. If nothing is done, the government will soon be unable to pay all of its bills in a timely manner. This unprecedented event would profoundly damage the government’s credit rating and send the financial system into a tailspin. So far, President Obama isn't giving in. Last week, he said he: “will not have another debate with this Congress over whether or not they should pay the bills that they've already racked up through the laws that they passed.”

So, what are the options? Well, one idea floated is the $1 trillion dollar platinum coin. And I'm sure we'll talk more about this plan in coming days and weeks; it's really a pretty good idea in some ways, and far too fantastic in others. The President could ignore the debt ceiling and direct the Treasury to issue more bonds to cover its obligations; a move that would likely result in even more political acrimony. And another plan has been used on multiple occasions in the nation's history, and as recently as 2009 – print IOU's.

The President could threaten to issue scrip — “registered warrants” — to existing claims holders (other than those who own actual government debt) in lieu of money. Recipients of these I.O.U.’s could include federal employees, defense contractors, Medicare service providers, Social Security recipients and others.

The scrip would not violate the debt ceiling because it wouldn't constitute a new borrowing of money backed by the credit of the United States. It would merely be a formal acknowledgment of a pre-existing monetary claim against the United States that the Treasury was not currently able to pay. The president could therefore establish a scrip program by executive order without piling a constitutional crisis on top of a fiscal one.

To avoid any confusion with actual Treasury debt, and to be consistent with the law governing claims against the United States more generally, the scrip would not pay interest in most cases. And unlike debt, it would have no fixed maturity date but rather would become redeemable in cash only when the secretary of the Treasury was able to certify that there’s enough money available in the Treasury’s general fund to cover it.

The idea may sound crazy, but remember that California did it in 2009; the state issued registered warrants, totaling $2.6 billion to individual and business claimants, including recipients of aid programs, recipients of tax refunds and government contractors. Those holders who needed immediate cash were usually able to sell their registered warrants to banks at face value, though some institutions limited such purchases. Eventually a budget was worked out and the scrip was redeemed for cash. California continued to pay its public debt service in cash and on schedule and never lost an investment-grade credit rating.

California is expected to post a budget surplus of $851 million for the fiscal year that begins July 1. The solution was a combination of deep budget cuts and billions in new taxes approved by voters last year. Schools will be the big winner in the governor's new spending plan, receiving $56.2 billion in state funds, an increase by $2.7 billion over the last year. That funding is set to jump to more than $66 billion by 2016. The budget also dedicated an additional $350 million to the state’s public insurance program, Medi-Cal, to help implement President Obama’s healthcare law. This is a tentative surplus, and there is plenty of debt, but this is another small positive step. The plan in California is to increase spending slightly, about 5%, in the upcoming year after several years of budget cuts. California as a role model; go figure. 

Nearly a third of the nation's homeowners have no mortgage at all, according to an estimate released by real estate website Zillow. The free-and-clear class includes, predictably, retirees who have chipped away at their debts for decades, but also a surprisingly high percentage of young people and those who live in relatively affordable regions. Zillow found that the nation's most elderly were the most likely to own their homes, with 77% of those older than 85 owning their homes outright, followed by those ages 74 to 84, at about 62%. One outlier was those homeowners ages 20 to 24. Out of that relatively young demographic, about 34% owned their homes outright.

As the economy picks up, regions with high percentages of free-and-clear owners probably will get a boost. That means there is a lot more disposable income, and that is positive for the local economies. Out of the nation's largest metro areas, Pittsburgh, Tampa, New York, Cleveland and Miami had the highest percentages of mortgage-free homeowners. Washington, Atlanta, Las Vegas, Denver and Charlotte, N.C., had the lowest.