Thursday, October 10, 2013 - Goodbye Jamaica

Goodbye Jamaica

by Sinclair Noe

DOW + 323 = 15,126
SPX + 36 = 1692
NAS + 82 = 3760
10 YR YLD + .03 = 2.68%
OIL + 1.35 = 102.96
GOLD – 20.60 = 1287.40
SILV - .21 = 21.78

Over the past few days we've been hearing that a government default wouldn't be a big deal; that a default wouldn't actually mean default. But it turns out that avoiding a default is a very good thing indeed. Hope over a deal in Washington put the bid back in stocks; and for right now it is just hope for a deal on the debt ceiling, not an actual deal yet; and quite possibly no deal on the government shutdown. We may not get the government running again but the politicians finally realized that they can't strap a suicide bomb vest on US Treasuries.

We may have a bunch of idiot politicians in Washington...,

Yeah, we do have a bunch of idiot politicians in Washington. And they still have a lot of work to do. Republicans in the House of Representatives offered a plan to postpone the default for 6 weeks; President Obama has indicated that if a clean debt limit bill is passed, he would sign it, even if the government remains shut down. That might be a stumbling point. In another potential wrinkle, the GOP plan might permanently ban the Treasury Department from using extraordinary measures to avoid default; so in some ways it isn't a truly clean bill; plus it is very short-term, meaning we get to go through this again around Thanksgiving.

The possible extension means there is the possibility of broader budget talks, including possible deficit reduction. The prospect of broad budget talks is reviving worries among some liberals that Mr. Obama would agree to steps to trim Social Security or Medicare benefits to win Republican concessions, and one area in particular seems ripe – the chained CPI. That remains to be seen.

Bloomberg is reporting on a conversation between Obama and John Podesta, an informal adviser and former chief of staff to President Clinton; just before Obama was re-elected, he vowed to Podesta that he would never again bargain with Republicans to extend the debt limit. The precedent, set in the agreement that ended a 2011 budget standoff, “sent a signal that this was fair game to blackmail over whether the country would default.” According to Podesta, “He feels like he has to end it and end it forever.”

The stand Obama has taken on the latest fight over the government shutdown and borrowing limit -- refusing to tie policy conditions to raising the debt ceiling -- is an attempt to repair some of the damage that he and his aides believe he sustained by making concessions to Republicans to avert a default two years ago.

The Republicans will renew their attack on Obamacare. Heritage Action, the Koch brothers funded, conservative group leading the charge against the health care law has agreed to raising the debt limit but maintains that any measure re-opening the government would be met by demands for killing Obamacare. Just in case you were wondering why something is happening now, it's because the big money players from Wall Street and Big Oil were getting worried, and they started pulling the strings. We may have a bunch of idiot politicians in Washington, but they're the best idiot politicians money can buy. And this is why it is too early to say the deal is in the bag. Conservative Republicans might not throw their support behind Boehner's plan. Boehner made no mention of Obamacare this morning during his remarks.

So, we get a possible, temporary impasse on the debt ceiling, and no movement on the government shutdown, and the Dow industrials jump 300 points. Just imagine the temper tantrum Wall Street would have thrown if we had defaulted.

And then the cherry on top is that all of the fiscal dysfunction means the Federal Reserve FOMC is less likely to take action when they meet October 29-30, especially in light of the damage done by the shutdown. Then you also can consider the nomination of Janet Yellen, a dove, likely to prefer monetary stimulus to backsliding. Yesterday, the Fed released minutes of the September FOMC meeting and one of the concerns dealt with the “considerable risks surrounding fiscal policy.”

There are risks to fiscal policy. Today, a report that initial claims for unemployment benefits jumped 66,000 last week to 374,000. Exactly how much economic damage results from the shutdown will be hard to determine. Pollster Nate Silver, the guy who actually got the numbers right on the election, says the media is probably overstating the magnitude of the shutdown's political impact. Remember Syria? The fiscal cliff? Benghazi? The IRS scandal? The collapse of immigration reform? All of these were hyped as game-changing political moments by the news media. Yeah, not so much. Of course, if the not-yet-done deal doesn't get done and we go into default or if the shutdown lasts a long time, then the magnitude of the impact is being understated.

And all those polls you're seeing suggesting that the GOP is cratering with regards to public approval, and pulling the Democrats down with them, well all those polls probably won't translate in changes in the re-election efforts of incumbents, or the makeup of the House or Senate. And according to Silver's analysis the degree of polarization in Congress is higher than at any point since the Great Depression by a variety of measures, and is possibly at its highest point ever. It is very partisan, and that means there is a great amount of uncertainty. And so the Fed FOMC minutes were correct, there are risks to fiscal policy.

So, the markets bounced today, but it's not a done deal.

Something else I wanted to cover today. With all the political insanity, you might have missed an important story in the journal Nature. Try to think back to the hot days of summer. Now try to remember the hottest summer of the past 20 years. It's tough to put the exact date on it but we can all remember some brutal heat in the desert southwest; a hot spell where temperatures topped 110 or 115 for several days in a row. Well, there will come a time when we'll look back on those days as the good old days. Within a generation, whatever climate we were used to will be a thing of the past. The hottest, most extreme weather will be the average.

According to the new study, the mean annual climate of the average location on Earth will slip past the most extreme conditions experienced during the past 150 years and into new territory by between 2047 and 2069, depending on the amount of climate-warming greenhouse gases that are emitted during the next few decades. Once a location reaches the transition point, the average temperature of its coolest year will be greater than the average temperature of its hottest year for the past 150 years. Even more strikingly, the study found that the oceans, which have absorbed about half of the man-made carbon dioxide (CO2) emissions since the dawn of the industrial revolution 250 years ago, exceeded their historical bounds of pH measurements back in 2008. In other words, the oceans are becoming highly acidic.

Even with aggressive cuts in greenhouse gas emissions, the study found, the projected near-surface air temperature of the average location on Earth will move beyond historical variability in about 56 years from now. A business-as-usual scenario in which emissions continue on their current upward trajectory would see an unprecedented climate occurring 20 years sooner than that, in 2047. And they even break it down by city. New York will reach a tipping point by 2048; Los Angeles will get to the point of no return in 2048; Mexico City in 2031; Phoenix is 2043; and Kingston Jamaica will be there in 10 short years.

The boundary of passing from the climate of the past to the climate of the future really happens surprisingly soon. The study shows that tropical areas, which contain the richest diversity of species on the planet as well as some of the poorest countries, will be among the first to see the climate exceed historical limits — in as little as a decade from now — which spells trouble for rainforest ecosystems and nations that have a limited capacity to adapt to rapid climate change.

According to the study, conducted by a team from the University of Hawaii, about 1 billion people currently live in areas where the climate will exceed historical bounds of variability by 2050. This number would rise to 5 billion people under a business-as-usual emissions scenario, which is the emissions path the world is currently on. We could slow down, by cutting emissions we might buy more time until we hit the tipping point, but according to the new study, we will hit it.

The study is hardly the first to document the steady march toward hotter temperatures around the globe. Less than two weeks ago,the Intergovernmental Panel on Climate Change (IPCC) released its fifth report, describing a planet that is warming at an accelerated pace because of human activity. The past three decades have been the hottest since 1850, according to the panel established by the United Nations, which added that warming and sea-level rise will continue through the 21st century.

But by predicting the tipping point when traditional climates will be replaced by hotter futures, the new study provides a fresh way to look at the problem. There are several things we can start to look for, including changes in food production, especially from the tropics; water scarcity due to drought; and the prices will be affected as big agriculture responds, and much more, right down to specific locations.

Sorry Jamaica.

Wednesday, April 10, 2013 - The Real Question on the Economy

The Real Question on the Economy

by Sinclair Noe

DOW + 128 = 14, 802
SPX + 19 = 1587
NAS + 59 = 3297
10 YR YLD +.06 = 1.80%
OIL +.35 = 94.55
GOLD – 25.70 = 1560.30
SILV - .33 = 27.75

The Federal Reserve released the minutes of their Federal Open Market Committee meeting held March 19-20. The minutes leaked out 5 hours early. The Fed inadvertently sent the report to congressional aides and trade organizations yesterday, and since the details are actually trade-able information, they had to make it public quicker than not. Make no mistake, this was a serious breach of protocol.

Once the minutes were made public, it depressed bond prices, mainly because of disagreements among the Fed's 19 policymakers about carrying on with buying $85 billion in Treasury and mortgage bonds per month to stimulate the economy. Of the 12 officials who have a vote on monetary policy this year, "a few" expected to taper the purchases around midyear and to end them later this year. "Several others thought that if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and to stop them by year-end.” Proving once again that the prognosticating skills of the Federal Reserve are roughly equal to the singing skills of a fish on a bicycle.

Just like the release of the minutes, their ideas about exiting QE seem a bit premature, especially in light of last week's jobs report, which you recall, was a stinker. And yesterday we talked about job cuts at the big banks; here's the actual quote from a Bloomberg news article: “Rising stock prices, rebounding profits, restored dividends and a growing economy are signaling to US banks it's time for more job cuts.”

The FOMC did have a revelation; for the first time they recognized that $1.1 trillion in unpaid student loans might just constitute a wee bit of a problem for the economy. Rates on the majority of student loans taken out by undergraduates from the Education Department have remained since 2006 fixed by law at 6.8 percent. The spread between the two, which is an appropriate way to measure relative rates, since student loans are generally repaid in about 10 years, has ranged from 4.5 percentage points to 5.27 percentage points since August 2011, the highest gap on record.

And the final report from the FOMC is to stay the course of Quantitative Easing until unemployment hits 6.5% or inflation hits 2.5%; so, nothing really changed. What it reveals is the Fed is getting nervous about watching their balance sheet balloon to $4trillion or more; they're nervous about asset bubbles; they're nervous about how to exit without crashing the party; and they're nervous because this really is a grand experiment in central banking.

Anyway, the stock market moved higher today, and perhaps the best reason I can offer for the big, record breaking day on Wall Street is just that the trend is up.

President Obama sent a $3.8 trillion budget to Congress today calling for more tax revenue and slower growth for Social Security benefits. The president is proposing to replace across-the-board sequester cuts with $1.8 trillion in additional specific deficit reduction over 10 years that includes collecting more taxes from the wealthy and trimming some federal programs. For the first time, Obama is including in his budget an offer made last year to congressional Republicans to change the cost-of-living calculation to a Chained CPI formula for Social Security and tax brackets, which would increase benefits more slowly and subject more income to taxation.

The president’s plan to raise taxes on wealthy individuals and to close loopholes for corporations drew immediate condemnation from Republicans. Actually, the Republicans are licking their chops at the Chained CPI on Social Security. They're already characterizing the President's plan as a way to "save” Social Security, they're just not going to go along with his tax increases. And the plan to change the Social Security formula drew fire from fellow Democrats. I'm not sure what classes Obama actually took at Harvard, but I think he missed Negotiating 101. He apparently wants to show a willingness to compromise, but the Republicans seem unwilling to take yes for an answer.

Now, I'm thinking back to maybe last week, when Obama sent new Treasury Secretary Jack Lew to Brussels to tell the Europeans to ease up on austerity because its bad for growth; or at least it's bad for growth in Europe but apparently it's good for the US. Austerity is an anti-growth policy. It frequently makes the debt-to-GDP ratio larger because it causes such a large fall in GDP, but it's bad for Europe and good for the US. Must have missed that class on Consistency 101.

Now, if you're neck brace hasn't already gone flying off due to the tremendous torque exerted by today's news, let's put a cherry on top. Obama is proposing a new $2 billion infrastructure investment or jobs program that can overcome the damage to the economy caused by austerity in the form of a combined $300 billion in reduced spending and increased tax revenues.

Anyway, let's get back to the Federal Reserve minutes on how they will continue to juice the economy and the president's budget, which nobody likes and is likely DOA, and let's ask – what's wrong with this picture?

If the economy is getting better, then why does poverty in America continue to grow so rapidly?  Yes, the stock market has been hitting all-time highs recently, but also the number of Americans living in poverty has now reached a level not seen since the 1960s.  Yes, corporate profits are at levels never seen before, but so is the number of Americans on food stamps.  Yes, housing prices have started to rebound a little bit, but there are also more than a million public school students in America that are homeless.  That is the first time that has ever happened in U.S. History. Do we measure our economic progress by the false stock market bubble that has been inflated by the Fed's money dump on their Wall Street cronies, or should we measure our economic progress by how the poor and the middle class are doing?

Even as the markets hit new highs, the most explosive growth is in poverty; now at the highest levels since the 1960s. One out of every six Americans now live in poverty; 146 million are considered poor or low income; one in every five children live in poverty; one in five households with children are considered food insecure – meaning the kids are going hungry; and nearly 3 million children in this country live on less than $2 dollars a day, which is the global standard for extreme poverty.

At some point, maybe the President and the Republicans and the Federal Reserve could just stop for a moment and ask the question: What's the economy for anyway?

A side note: I've been talking about cyber attacks as a major trend for a couple of years now. Obama's budget proposes to boost Defense Department spending on cyber efforts to $4.7 billion, $800 million more than current levels, even as it plans to cut the Pentagon's overall spending by $3.9 billion; the idea is to protect computer networks from internet base attacks. Intelligence officials said last month that cyber attacks and espionage have supplanted terrorism as the top security threat facing the United States.

This was one of the trends I talked about at the recent Wealth protection Economic Conference. If you would like to hear the entire Conference, including nine CDs, or the MP3 recordings are now available. Contact Resource Consultants at 800-494-4149 for purchase information. 

Monday, April 08, 2013 - Cat Food Futures Soar on Chained CPI

The Wealth Protection Conference was a bundle of fun. The whole thing was recorded on 9 CDs. You can order the CD recordings (or MP3 recordings are less expensive). Call Resource Consultants at 800-494-4149.

Cat Food Futures Soar on Chained CPI

by Sinclair Noe

DOW + 48 = 14,613
SPX + 9 = 1563
NAS + 18 = 3222
10 YR YLD + .04 = 1.79%
OIL +.82 = 93.52
GOLD – 9.60 = 1573.70
SILV - .05 = 27.40

The S&P 500 fell 1 percent last week as US payrolls had the smallest gain in nine months in March. The economy added 88,000 jobs in March, even though prior month job gains were revised higher; the unemployment rate dipped to 7.6%, mainly because more people left the labor market and are no longer counted for one reason or another. The idea is that some people just retire, or other people just can't find a job, so they drop out of the workforce.

One reason that so many people are just dropping out of the workforce now is the shortening of the period of extended unemployment benefits. As long as people are receiving unemployment insurance they have to be looking for work. When their period of eligibility ends, most people just drop out of the labor force. The period of extended benefits was shortened in most states at the end of 2012. As a result, many people went from being classified as unemployed (no job, but looking for work) to being out of the labor force (no job and not looking for work). They are still unemployed; they still need a job; most of them would still like to get a job; some of them have moved into an underground economy; but you know, we just stop counting some people.

There are a large number of people who do not respond to the Bureau of Labor Statistics' Current Population Survey (CPS), the standard survey used to measure labor force participation. In recent years the non-response rate overall has been close to 12 percent, as opposed to just 5 percent three decades ago. The non-response rate varies hugely by demographic group. For older white men and women it is 1-2 percent. By contrast, for young African American men it is close to one-third.

The Bureau of Labor Statistics effectively assumes that the people who don't get picked up in the CPS are just like the people who do. This assumption may not be plausible. The people who don't respond may be more transient or may have legal issues that make them less willing to speak to a government survey taker. For these reasons they may be less likely to be employed than the people who do respond to the survey.

The earnings reporting season kicks off today; it needs to be strong to support the recent run-up in the equities market. Alcoa kicks off the earnings reporting season, alphabetically it leads the pack among the Dow Industrial stocks. After the close, Alcoa reported an increase in quarterly profit , but revenue fell short, and share prices dipped in after hours trade.

JPMorgan, Wells Fargo, and Bed Bath & Beyond are among nine companies in the S&P 500 scheduled to report earnings this week. Analysts project profits at S&P 500 companies fell 1.8 percent in the latest quarter, which would the first year-over-year drop since 2009. Analysts had predicted a 1.2 percent increase when surveyed in January. They'll revised estimates even more, and probably downward.

Meanwhile, President Obama is sending his budget to Congress on Wednesday. We know that the controversial part of the budget includes a reformulation of the way Social Security payments are calculated. In general, the chained CPI would lower the cost of living adjustment increases for Social Security recipients. The way chained CPI works, is when inflation increases, the government figures that the American people are mighty clever, and we'll just roll with the flow and we'll adjust our spending.

For example: if you used to spend $3 for a hamburger and french fries, but the price goes up to $5, you might not be able to afford that, so you'll switch to a hot dog and chips; if the price of gasoline goes up, you'll start riding a bicycle; of the price of your medications goes up, you'll either get healthy or maybe you'll die – in which case you Social Security payment is completely eliminated. The chained CPI would result in about 3% less benefits for Social Security beneficiaries, and that is each year going forward. A little quick math and we see that in 24 years, there won't be any payouts, and Social Security will be saved. Brilliant! Cat food futures are soaring on this news.

Obama's budget also calls for cuts in Medicare by reducing payments to health-care providers and drug companies and imposing more costs on high-income beneficiaries. While the White House hasn’t yet released specific dollar figures for the budget, administration officials said the plan puts the country on a path toward lower deficits, cutting the gap by $1.8 trillion over the next 10 years.

In exchange for cutting Social Security and Medicare, Obama is calling for tax increases; the quid pro quo is being called the Grand Bargain. Among the tax proposals: a limit of $3 million in an IRA or 401k or other qualified retirement account, a new tax on cigarettes and other tobacco products, a cap value of itemized deductions. Normally a taxpayer multiplies their top tax rate by the amount of a deduction to calculate the taxes saved. But Obama would cap that rate at 28%, which is below the top two income tax rates. Also, Obama is calling for an increased tax rate on investment fund manager income: Managers of private equity, venture capital and hedge funds are taxed 20% on the portion of their compensation known as carried interest, essentially paying the long-term capital gain rate. Obama would like carried interest to be treated as ordinary income, which means those managers would pay a rate as high as 39.6%, or more than 2.5 times the rate they pay now. And the other idea is to close loopholes, which sounds good but we don't have details on that yet.

How this all plays out will be fun to watch. South Carolina Senator Lindsey Graham on Sunday became the first prominent Republican to publicly praise the budget proposal. Actually, Graham said the plan is overall bad for the economy, but "there are nuggets of his budget that... are optimistic."

On Friday, House Speaker Boehner said: “If the President believes these modest entitlement savings are needed to help shore up these programs, there's no reason they should be held hostage for more tax hikes.”

Meanwhile, the Democrats hate the entitlement cuts offered up. There is a chance nobody will vote for the budget. So, when Obama's budget hits Congress on Wednesday, the fun part will be to see which side shreds it first.

Meanwhile, last week we told you about the Japanese monetary stimulus plan. You recall that Japan has been dealing with a banking crisis since the 1990's, its economy stuck in a generation of economic stagnation and low-level but persistent deflation.

A new government took office the day after Christmas, led by prime minister Shinzo Abe, pledging to, in effect, go whole-hog on the Keynesian remedies for Japan’s long recession, particularly by pushing for a combination of fiscal stimulus on a mass scale, and, through appointment of Haruhiko Kuroda as governor of the Bank of Japan; he has pledged to do “whatever it takes” to get annual inflation to 2 percent in a country where inflation has averaged -0.3 percent since 2000. The Japanese stock market is on a tear and the yen has been falling steeply on currency markets, exactly the kind of reaction the BOJ hopes to see.

If everything works as planned, Japan’s industries will rebound on the back of a weaker yen, an improving economy will improve its deficit picture, and the nation will soon have a seamlessly balanced economy of prices rising about 2 percent a year and debt to GDP levels coming down. If things go bad, we could soon be staring at the mother of all sovereign debt crises. Whatever path the Japanese economy takes, it is one that will have lessons and implications for all of us.

Meanwhile, on the continent of Europe, austerity impoverished countries aren't waiting for the results from Japan. Spanish prime minister Mariano Rajoy has called for the European Central Bank to follow other central banks with extra stimulus measures. Portugal's constitutional court rejected part's of the country's austerity budget and issued a ruling that recent deficit cuts to payments for pensioners, civil servants and unemployment benefits were unlawful and should be reversed. US treasury secretary Jack Lew used a visit to Brussels to urge top officials to relax austerity programs and drive growth. Two of Greece's biggest banks risk being nationalized after admitting they were unlikely to raise enough cash from private investors and seeing their merger blocked by the country's international lenders. Greek government officials have said deposits in the banks will not be touched; this is a big concern in light of the recent Cyprus Bank Heist; where the banks robbed the depositors.

Plenty to watch and it's just Monday.