Monday, February 10, 2014 - Set the Tone

Set the Tone

by Sinclair Noe

DOW + 7 = 15,801
SPX + 2 = 1799
NAS + 22 = 4148
10 YR YLD + .03 = 2.69%
OIL + .12 = 100.00
GOLD + 7.90 = 1276.00
SILV + .07 = 20.18

A little bit of follow up to last Friday’s jobs report, which you recall came in at 113,000 jobs added in January and the unemployment rate dropping to 6.6%. There was a huge discrepancy between the household survey and the business establishment survey; the household survey showed 616,000 new jobs. The household survey can be a bit volatile and is considered less reliable. There is also a discrepancy between the establishment survey and a couple of earlier reports from ISM and ADP. The Institute for Supply Management services index came in at 56.4% in January, indicating a strong month for service jobs. The ADP, or Automatic Data Processing, employment report indicated 160,000 private sector service jobs were created in January, or about 100,000 more jobs than the government reported. It will be very interesting to watch revisions to the jobs report next month.

The major stock indices just loved the lousy jobs report, and this is a head scratcher for many people. Why would bad news on jobs be good news for stocks? Well, a weak job market gives employers the upper hand because most workers will accept lower wages, which translates into higher profits for corporate America. I know that is short sighted because the workers are also customers, but in the short term world of Wall Street, it makes sense.

The other reason is the Fed; and the Fed will likely continue its Zero Interest Rate Policy (ZIRP) as long as the labor market is lethargic. Continued low interest rates encourage corporations to borrow money to buy back their own shares, pushing up values and prices. Buy backs are the last refuge of innovation challenged companies unwilling to invest in research and development in favor of short-term stock performance.

The low interest rate environment also leads to a fairly straightforward comparison between stocks and bonds, with the nagging idea that low rates don’t pay anything now, and when rates go up, prices will go down. And finally, in a bad job market the Fed will be slower to back away from quantitative easing, and Wall Street just loves to see the free flow of easy money.

And so, we’ll all be watching the new Fed Chair, Janet Yellen this week as she goes before Congress for her first Humphrey Hawkins testimony tomorrow before the House and Wednesday before the Senate, and we’ll try to determine if the need for extraordinary measures has abated or not. Likely, we’ll hear something along the lines of, steady as she goes. Don’t expect any big changes, but as a new Fed Chair, she may set the tone a bit.

Before Yellen’s testimony tomorrow, House Republicans will hold a meeting tonight to address raising the debt ceiling. House Republican leaders will try to use the meeting to sell their members on voting for a bill that raises the debt limit but also reverses changes to military retirement benefits. Reversing these changes would add to the deficit, so Republicans would have to find ways to pay for it. One way Republicans are considering paying for the change is to extend the sequester for mandatory spending for one more year. Senate and House Democrats have been firm in demanding a clean debt limit bill — one without additional policy concessions.

There isn’t much time. On Friday, Treasury Secretary Jacob Lew said extraordinary borrowing measures aren’t likely to last past Feb. 27. And the House adjourns Wednesday so Democrats can go to their annual issues retreat. Lawmakers don’t return for a full workday until Feb. 26.

Earnings season has moved into its latter stages, with 54 S&P 500 companies expected to report results this week. Of 343 companies in the S&P index that have reported earnings through Friday, 67.9% beat Wall Street expectations against 67% over the last four quarters, and ahead of the 63% rate since 1994.

Of course, when you hear anything about earnings, you must take it with a grain of salt, or maybe you should just buy a great big salt lick. Public companies are notorious for lowering earnings guidance so they can claim to beat the easier targets. Toss in little tricks like stock buy backs and the earnings season looks less and less like a buying signal and more and more like a management ruse to increase already lofty pay levels.

The dark side of earnings season can be found in the revenue growth numbers. For 2013 it looks like the healthcare sector led the way for revenue growth, up 7.6%; consumer discretionary grew revenue by 3.8%; consumer staples grew revenue by 1.9%.  Industrials up 2.3% and utilities up 4.2%. Technology, the high-growth sector where American ingenuity is still leading the world, revenues rose just 5.4%. And telecom services eked out a barely visible 2.2% revenue gain. Not exactly breath-taking growth figures. Then there were the third and fourth largest sectors: revenues in the energy sector dropped 3.4%; and in the financial sector, they plunged 11.4%.

So, while inflation was 1.5%, the S&P 500 companies that have reported so far, all put together, triumphed with year-over-year revenue growth of 1%. Revenue growth was negative when considering inflation. And don’t forget that last year the S&P 500 was up nearly 30%; it was a great year, as long as you don’t look at top line growth, or lack thereof. Ingenious accounting is one element, financial engineering another. Corporations can borrow nearly unlimited amounts of money in the short-term markets and through bond sales, at little cost, thanks to the Fed’s policies, and load up their balance sheets with borrowed cash, that they then plow into share buybacks.

The doctored EPS growth, and particularly the analysts’ estimates for doctored EPS growth for distant future quarters is bandied about as illusory justification for the gravity-defying ascent of stocks. Eventually the double digit estimates for future quarters is ratcheted down right before earnings are reported, and then the companies can beat the diminished expectations.

Business success, as defined by growth in revenues and net profits and not by financial engineering and fabricated EPS, is crucial to the economy. But for a quarter of a century, corporate profits have been rising at a faster rate than GDP and are now “dangerously elevated by all reasonable measures.

Remember that $13 billion settlement JPMorgan Chase worked out with the Justice Department last November? At the time, we raised some questions about how the deal was worked out between JPMorgan CEO Jamie Dimon and Attorney General Eric Holder. The $13 billion was a record fine for a bank, but just a fairly small fine compared to JPMorgan’s profits, and even though the settlement does not release JPMorgan from potential criminal liability over the mortgages it packaged into bonds, Jamie Dimon seemed eager to act like the matter was a thing of the past; the board of directors at JPMorgan even voted him a big fat bonus, apparently for navigating the legal challenges.

Well, now the non-profit group Better Markets has filed a lawsuit against the Justice to block what it called an "unlawful" $13 billion settlement with JPMorgan Chase over bad mortgage loans sold to investors before the financial crisis. They say they are appalled that the settlement gave the bank "blanket civil immunity" for its conduct without sufficient independent judicial review. In effect, the DOJ acted as investigator, prosecutor, judge, jury, sentencer, and collector, without any check on its authority or actions. And because the DOJ has declared its intention to use the Agreement as a “template” in future similar cases, it is imperative that the DOJ’s unlawful and secretive approach in the settlement process be subjected to judicial review.  

In its complaint, Better Markets alleges the settlement with the bank lacks critical facts that can help justify the deal, such as failing to name any individuals responsible for the wrongdoing, how much damage investors suffered or even "which specific laws were violated."

Of course, this is not the only bad behavior by JPMorgan Chase. A confidential email has emerged that shows a top Chinese regulator directly asked Jamie Dimon, the bank’s chief executive, for a “favor” to hire a young job applicant. The applicant, a family friend of the regulator, now works at JPMorgan. The email was one of several documents that JPMorgan recently turned over to federal authorities as part of an investigation into hiring at the bank. Federal authorities are now investigating whether the hiring at JPMorgan and at least six other big banks, was done explicitly to win business from Chinese companies. The authorities could decide to bring charges against individuals or a bank if they find such activity to be in violation of anti-bribery laws, in connection with the Foreign Corrupt Practices Act.

In recent months five top insurance companies with headquarters in mainland China or Hong Kong have become JPMorgan clients, although there is no direct link between the hiring and the new deals. Until now, it was unclear whether any well-connected job applicants ever met JPMorgan executives in New York.

Meanwhile, the really big investigations are still underway. Remember the Libor rate rigging scandal?  Well maybe something will eventually happen there, but already the investigations have moved over to the Forex, foreign currency exchange markets. The British FCA, or Financial Conduct Authority, are heading up that investigation, as the Forex is centered in London; the FCA says 10 banks are now cooperating in the investigation into how Forex traders colluded in setting certain key exchange rates in the $5.4 trillion a day forex market. The FCA says the allegations are every bit as bad as they have been with Libor.  

Thursday, February 06, 2014 - Waiting on the Friday Jobs Report

Waiting on the Friday Jobs Report

by Sinclair Noe

DOW + 188 = 15,628
SPX + 21 = 1773
NAS + 45 = 4057
10 YR YLD + .04 = 2.70%
OIL + .57 = 97.95
GOLD + .20 = 1258.80
SILV + .05 = 20.05

The number of Americans filing new claims for unemployment benefits fell more than expected last week. Initial claims for state unemployment benefits declined 20,000 last week to a seasonally adjusted 331,000. There have been some interesting reports this past week on jobs, including the controversial research from the CBO and the other from the New York Fed.

Competition for jobs is still fierce. Although it varies with the company and the job, on average 250 resumes are received for each corporate job opening. In addition, out of every 1000 people who view an online job posting, 100 people will apply, 4 – 6 will be selected for an interview, 1 – 3 will be invited for a final interview, 1 will be offered the job, and 80% of those who get a job offer accept it.

The Wall Street Journal shows how the very backbone of the labor market, men in their prime (for measurement purposes, 25 to 54), are out of work to an unprecedented degree. More than one in six men ages 25 to 54, prime working years, don’t have jobs—a total of 10.4 million. Some are looking for jobs; many aren’t. Some had jobs that went overseas or were lost to technology. Some refuse to uproot for work because they are tied down by family needs or tethered to homes worth less than the mortgage. Some rely on government benefits. Others depend on working spouses.

The trend has been building for decades, according to government data. In the early 1970s, just 6% of American men ages 25 to 54 were without jobs. By late 2007, it was 13%. In 2009, during the worst of the downturn, nearly 20% didn’t have jobs. Although the economy is improving and the unemployment rate is falling, 17% of working-age men weren’t working in December. More than two-thirds said they weren’t looking for work, so the government doesn’t label them unemployed

The monthly jobs report comes out tomorrow morning. We’ll wait and see.

The largest decline in exports since October 2012 helped widen the trade deficit by 12% in December to $38 billion. When adjusted for inflation, the trade gap rose to $49 billion. In its first estimate of fourth-quarter GDP last week, the government said trade accounted for 1.33 percentage points of the economy's 3.2% annual growth pace during the period. However, the deficit in December was bigger than the government had assumed, and that means fourth-quarter GDP growth will likely be lowered when a revision is published later this month.

A separate report showed US productivity rose at a strong 3.2% rate in the fourth quarter, that follwos a 3.6% increase in the third quarter productivity as businesses managed to step up output sharply while keeping a lid on hiring and hours worked.  For all of 2013, productivity rose just 0.6%, the smallest gain since 2011.

The rise in fourth-quarter productivity helped keep down unit labor costs, which is a measure of the labor-related cost for any given unit of output. They fell at a 1.6% rate, showing no wage inflation pressures in the economy. For the year as a whole, unit labor costs were up just 1.0 percent, the weakest reading since 2010.

A Manhattan jury convicted former SAC Capital Advisors portfolio manager Mathew Martoma of what prosecutors described as the most lucrative insider-trading scheme ever. After more than two days of deliberation, the jury found Martoma guilty of getting secret tips from a neurologist about the results of a clinical trial involving an Alzheimer’s drug, enabling SAC to make about $275 million in profits or avoided losses.

In recent years, US Attorney Preet Bharara has exacted guilty pleas or convictions from seven former portfolio managers or research analysts accused of illegal trading while at SAC. Six of the hedge fund’s former employees have pled guilty to insider trading charges for activities that took place from 1999 through at least 2010. Michael Steinberg, another SAC executive fought similar charges in court and he was also convicted last November. And so this raises the question of why Steven Cohen, the founder of SAC, hasn’t been criminally charged; there is an unbroken string of convictions or guilty pleas against everyone except the big target. There was some question going into the trial about whether Martoma would turn on Cohen, but Martoma did not point a finger at his old boss.

Cohen has not been accused of criminal wrongdoing, but the Securities and Exchange Commission brought a civil case against him in July, alleging that he failed to supervise Steinberg and Martoma. That case is pending. In November, SAC agreed to pay $1.2 billion to settle charges of insider trading, but Bharara indicated he might still pursue Cohen and the agreement does not provide criminal protection or immunity for any individuals.

Last week a judge in New York approved most of an $8.5 billion settlement between Bank of America and a group of mortgage securities investors. At issue in this case are 530 mortgage-backed securities involving troubled loans issued by Countrywide Financial. A group of the largest investors in the bonds agreed to settle their claims with Bank of America, which bought Countrywide in 2008.

But another big investor in the bonds, including and led by AIG (the insurance company), refused to sign the pact, arguing that the settlement was a fraction of the overall losses. AIG also argued that the trustee for the bonds, Bank of New York Mellon, shirked its responsibility to push for more money in the settlement. One of the Countrywide bond investors, Triaxx, has argued that the claims could potentially affect $31 billion of loans. Now, a new judge in the case, has put the settlement on hold and will hold another hearing on the case in a couple of weeks.

New York state's top financial regulator has demanded documents from more than a dozen banks including Barclays, Deutsche, Goldman Sachs and RBS as part of a probe of trading practices in the $5.5 trillion a day forex, or global foreign currency exchange markets. Regulators are stepping up their investigation following the banks' decision to fire or suspend at least 20 traders following reports that employees at some firms had shared information about their currency positions with counterparts at other companies.

Standard & Poor’s lowered Puerto Rico’s credit rating to junk status on Tuesday; maybe you didn’t notice. Puerto Rico’s bonds traded lower, but there was nothing close to the kind of mass sell-off that might indicate a panic. The Governor of Puerto Rico says they will try to renegotiate almost $1 billion in debt deals; they might even issue a couple of billion in new bonds. Bankruptcy is not an option because Puerto Rico is not considered a state or a municipality; it is a territory and as such it falls in a kind of legal limbo. Hedge funds are smelling blood in the water but waiting for more carnage before stepping in; bond prices have dropped to 65 cents on the dollar; the hedge fund sharks are waiting for prices to drop under 50 cents.

The Senate failed to move forward on a three-month extension of assistance for the long-term unemployed that would allow people who have exhausted their unemployment insurance to continue receiving benefits as long as the government offset the $6 billion cost. The vote was 55-to-42, falling short of the 60-vote threshold to break a Republican filibuster effort. Ultimately, how to pay for the program proved too big a hurdle for senators to overcome.

It appears that immigration reform is dead. House Speaker John Boehner cited executive actions by the Obama administration that have changed or delayed implementation of the president’s health care law, saying: “The American people, including many of my members, don’t trust that the reform that we’re talking about will be implemented as it was intended to be. There’s widespread doubt about whether this administration can be trusted to enforce our laws, and it’s going to be difficult to move any immigration legislation until that changes.” So, if we’re waiting on the GOP to trust Obama before they’ll pass immigration reform.., well it’s just dead as a doornail.

Apparently trust was not an issue in passing a farm bill this week. The Senate signed off on the Federal Agriculture Reform and Risk Management Act of 2013 and has sent it to the President for his signature. The “reform and risk” part of the legislation refers to a change in direct cash payments to farmers under a subsidy system, which is being replaced by crop insurance. Time will tell whether that is risky or prudent.

For the past 2 years, European Central Bank President Mario Draghi has been saying he’ll do “whatever it takes” to get the Eurozone back on a growth path; just not today. The European Central Bank today left its benchmark interest rate unchanged, choosing to wait for additional data before deciding whether to address evidence that the euro zone is sliding into deflation. For the past 4 months, consumer prices in the EU have been below 1% and in January prices slipped to 0.7%. Draghi insisted there is no deflation. 

Friday, January 24, 2014 - Bulls, Bears, and Bonuses

Bulls, Bears, and Bonuses

by Sinclair Noe

DOW – 318 = 15,879
SPX – 38 = 1790
NAS – 90 = 4128
10 YR YLD - .04 = 2.73%
OIL - .41 = 96.91
GOLD + 4.40 = 1270.00
SILV - .11 = 20.01

The Dow has fallen every day this week, leaving it down more than 3%. That decline is the Dow's worst weekly performance since mid-May 2012. Meanwhile, the S&P 500 is down 2.5% since last Friday. That's the index's worst weekly slide since early November 2012.

All of the sudden, everybody seemed concerned about political and economic problems in Turkey, Argentina, and of course, China. The Turkish lira hit a record low and the South African rand fell to five-year low against the dollar. The Argentine peso had its sharpest decline in 12 years, going back to the 2002 financial crisis in that country; and the government abandoned its long standing policy of intervening to support the peso currency. Such moves are crucial factors for big, institutional foreign investors because exchange rate losses can easily wipe out any gains in stocks and bonds of emerging countries.

Right now, the losses haven’t turned into a rout, but there is concern that the turn may push big institutional investors to cut losses and run as the effect of falling currencies becomes too painful to bear. Every emerging market crisis is first-and-foremost a currency crisis. For example, South African government debt was slightly positive in rand terms in 2013. But in dollars terms, it lost more than 18%. Fund tracker EPFR estimates emerging equity and bond funds have seen outflows of almost $5 billion so far this year, on top of $58 billion of losses seen in 2013. EM equity funds have had 13 consecutive weeks of outflows, the longest run in 11 years.

What we haven't seen in emerging markets is major currency devaluation, a run on government debt or ratings downgrades. Any combination of those would suggest a major move where developing countries could experience sudden stops in their access to global capital, or some event that throws economies into a balance of payments or financial crisis. What we have seen and might continue to see is emerging market currencies falling, possibly big drops, as the yield on the 10 year Treasury note moves higher; which is expected to happen as the Fed cuts back QE3.

For several years, the world’s emerging markets seemed to be the main beneficiaries of two global trends: very rapid growth in China and the Federal Reserve’s various accommodative monetary policies, which injected huge amounts of capital into global markets. Since the Fed officially announced in December that it would ease its bond-buying stimulus, investors in emerging markets have been cautious. There are fears that rising interest rates will choke off growth in countries dependent on foreign lenders.

And for many years emerging markets have been able to sell resources to China, as China emerged as the world’s biggest producer and biggest market for everything from steel to coal to cars, the demand from China for raw materials soared year after year. Investors have committed tens of billions of dollars to emerging market projects aimed at meeting China’s voracious demand, and now Chinese demand is softening. Chinese economic growth slowed to 7.7 percent last year and the latest surveys of manufacturers in China show that with the exception of a few exporters, expectations about future sales are falling. The result in recent days have been waves of cash flowing out of emerging markets and into industrialized countries, notably the United States; but the  money has been going into the safe haven of Treasuries, rather than into the stock market.

It was just a few days ago that most people were bullish. Even the Fed’s taper at the December meeting was hailed as proof that the economy was improving. Earnings season has been less than exciting but we haven’t had massive misses, except for maybe IBM, Best Buy, Coach, Intel, Citigroup, and a few others; but nothing out of the norm. For the most part, Wall Street continues to pump up expectations, and there are still a few high flyers like Netflix, even if they are selling at 326 times earnings with almost zero in actual free cash flow. The Fed FOMC meets next week to determine their next moves on monetary policy and they are expected to continue with more tapering. Equities on Wall Street seem to have been shaken by the same fears that have hit the global equity markets; or maybe that’s just an excuse for a long overdue pullback. Your guess is as good as anybody.

In a TV interview today, Attorney General Eric Holder said no American financial institution is too large to indict and no bank executive immune from criminal prosecution. Holder cited the case of JPMorgan, which in November agreed to a civil settlement under which it would pay $13 billion to end a series of government investigations into its sales of toxic mortgage backed securities. It was an interesting case for Holder to cite because you may recall JPMorgan was not indicted and no major JPMorgan bank executives have faced criminal prosecution.

In December, Holder said the Justice Department plans to bring civil mortgage fraud cases against several financial institutions early in 2014, using the JPMorgan case as a template. Civil not criminal. Today, Holder said: "There are no institutions that are too big to indict," and "There are no individuals who are in such high level positions that they cannot be indicted, criminally investigated." Holder’s timing is delicious.

Jamie Dimon, JPMorgan’s chief executive, just got a big raise. Dimon’s pay increased to $20 million for 2013, up from $11 million the year before. The bank’s board of directors approved the increase even though a steady stream of scandals and a raft of regulatory actions have in recent months cast doubt on Dimon’s leadership at the nation’s largest bank. The big raise for 2013 came in the face of opposition from a vocal minority of board members.

Over the course of the year, the bank agreed to a series of high-cost legal settlements, including the $13 billion claim. Dimon led JPMorgan while it committed what government investigators have identified as over 15 frauds, most of them massive. These frauds represent the greatest financial crime spree the government has ever identified. In January of last year, the Federal Reserve and the Office of the Comptroller of the Currency imposed sanctions on the bank for weak risk and financial controls, as well as deficient safeguards against money laundering and violations of the Bank Secrecy Act, over the 2012 derivatives loss; total legal expenses topped the $20 billion mark.

The bigger the frauds committed by JPMorgan under Dimon’s watch, and the larger the settlements, the greater the value that Dimon brings by way of getting the government to settle cheap, and not tear down the bank and put people in jail. JPMorgan’s board must be really satisfied with Dimon’s ability to negotiate a deal with regulators. The directors don’t bear the cost of Dimon’s bonuses. Dimon negotiations with the government ensure that the shareholders bear all the losses of the obscenity of giving Dimon a raise to reward the crime spree that occurred while he was both the CEO and chairman of the board of JPM.

The regulatory and prosecutorial response to JPM’s crime spree has failed to hold a single senior officer or director personally accountable either civilly or criminally. The officers who control the bank are delighted to use bank funds to negotiate deals in which there are large fines, but the government does not prosecute the officers or seek to claw bank their compensation and seek damages from them. The DOJ treats JPM as “too big to fail.” This means that the DOJ will never require JPM to pay the full cost of its frauds and disgorge the full extent of its fraud proceeds if doing so could even come close to creating a concern that JPM would lack adequate capital. This gives Dimon a crushing negotiating leverage.

Holder has zero prosecutions of the elite bankers whose frauds drove the worst financial crisis since the Great Depression. Holder has zero civil cases, and the banking regulators have zero enforcement actions, that bankrupted an elite bank officer or director whose frauds helped drive the crisis. JPMorgan, Washington Mutual, and Bear Stearn’s boards of directors made the officers who led the frauds wealthy for over a decade through their compensation and bonus deals.

So, I’m not sure what Attorney General Holder was really talking about. There are no criminal indictments; JPMorgan has violated multiple laws with impunity; Jamie Dimon gets a big bonus.

Meawhile, the Financial Stability Board, which coordinates regulation for the Group of 20 leading economies, is reported investigating manipulation in the foreign exchange markets, or Forex, and is working on a reform of interest rate benchmarks after the Libor interbank rate-fixing scandal. Britain's Financial Conduct Authority (FCA) and the US Department of Justice have been investigating allegations that traders at some of the world's biggest banks manipulated the largely unregulated $5 trillion-a-day foreign exchange market. In the foreign exchange probe, groups of senior traders are alleged to have shared market-sensitive information relevant for London fix, which is set at 4 p.m. London time, using actual trades.

Just a reminder that so far, we haven’t fixed anything, and everything, every market is rigged. 

Deficits, Militarization, Privatization, Financialization

by Sinclair Noe

DOW – 126 = 14,995
SPX – 13 = 1612
NAS – 36 = 3400
10 YR YLD + .03 = 2.23%
OIL + .38 = 95.76
GOLD + 10.20 = 1389.40
SILV + .10 = 21.89

Pretty much all markets looked a little weak today, except maybe precious metals, but its hard to call that market strong right now. Quantitative easing, the $85 billion per month shelled out by the Federal Reserve, comes down to the purchase of two kinds of securities: Treasury paper and mortgage-backed securities. The Fed buys the Treasury paper from the federal government and the mortgage-backed securities from commercial banks. The first is a direct form of monetization (money printing); the second is an indirect form since a good portion of those funds is in turn also used by the banks to purchase Treasury paper. The two together comprise the bulk of what appears on the Fed's balance sheet as "reserve bank credit"; that figure stands at just over $3.2 trillion; up about $2.4 trillion since late 2008. At first glance, it looks like reserve bank credit and the gold price are correlated, but what is really going on with this tandem is that they are both being pushed by the same force - a bad economy. It causes the Fed to print money and investors to buy gold.

The government reported Wednesday that the US budget deficit widened in May by $139 billion. But the annual deficit stayed on track to finish below $1 trillion for the first time since 2008. With the May increase, the deficit through the first eight months of this budget year totaled $626 billion, according to the Treasury. That's down $218 billion lower than the same period last year. And that means we are on track to the smallest deficit in 5 years.

Many analysts believed the huge revenue gains seen in the first few months of 2013 would fade away as we moved into spring. Higher taxes, and a big increase in dividends which were pushed forward to beat the fiscal cliff, and other income in 2012 helped create huge tax liabilities that people had to pay in the early months of 2013. Yet in May, revenues again rose sharply from May 2012. They came in at $197 billion, compared with $180 billion in May 2012, or up 9.1 percent. Through the year thus far, revenues are up 15 percent from the year before.

The spending side was a little different. In general, the trend so far this year has been for spending to be down a bit, thanks to the sequester, and less spending on defense and unemployment benefits. Thus far this year, spending is up about 1 percent.

Next, consider that for the next four months, assuming no big shocks or great changes, the government will essentially break even. That hasn’t been done in well over a decade. In the first eight months of the fiscal year the deficit was $626 billion, down about 25 percent from the first eight months of fiscal 2012. But the Congressional Budget Office is predicting that’s all the red ink we’ll print this fiscal year. It is projecting the deficit for the entire fiscal year will be $642 billion.

One area of government that is growing is data collection, the amount of surveillance information that the government collects is enormous and growing really fast; in fact the new name for it is metadata, and we have no idea how it is used by the government, how long it is held and which agencies, or companies, have access to it. The culture of secrecy that pervades Washington borders on the absurd. American officials say they cannot discuss “classified” U.S. counter-terrorism tactics that are well-known worldwide, including data mining.

From drone strikes to eavesdropping to torture, the American public is not allowed to know the rules and results of U.S. counterterrorism policies. At the same time, a sprawling secrecy industrial complex does. More than 4.9 million Americans now have government security clearances, and another 1.4 million have top secret clearance.  Major U.S. civilian government agencies — from the CIA to State Department — have become dependent on contractors to operate. Today, the federal government pays contractors $300 billion a year, according to the Project on Government Oversight, a watchdog group. Many are believed to operate in intelligence agencies.

Contracting has become a huge profit center for defense contractors and Wall Street alike. Ed Snowden is the guy who leaked the most recent info about the government's data mining. Snowden worked for a private contractor, Booz Allen, which was purchased by the Carlyle Group in 2008. Last year, 99 percent of the Booz’s $3.8 billion in revenue came from government contracts. Booz Allen, which employs 24,500, had a net profit of $219 million on revenue of nearly $5.8 billion for the fiscal year ended March 31. For the same period ending in 2010, the year the company went public, the company earned $25 million on $5.1 billion in revenue. Whatever they do, they've figured out a way to improve the margins. Unfortunately, the margins are paid with tax dollars.

Snowden is now believed to be somewhere in Hong Kong, and he keeps releasing info; the latest is that the US government has been hacking the Chinese since at least 2009. The National Security Agency, Central Intelligence Agency and Defense Intelligence Agency, for example, all rely heavily on contractors to operate. Roughly 480,000 — one-third of the 1.4 million people with security clearances — are contractors.

Of course, private sector and public sector work in different ways. The major motivation for the private sector is profit. How does a firm increase profit? Do they mine more data? Do they promote more fear? Surely, complacency would be bad for business. You wouldn't want to make a mistake with your biggest client, which is what Booz Allen Hamilton did in the case of Snowden. But government contracting is a different ballgame. When a company screws up, the government delivers a slap on the wrist—and then awards the company with new contracts.

This is the way the government has grown the military industrial complex, and it doesn't seem to matter if Lockheed Martin overcharges for fighter jets, or if Boeing goes over budget on helicopters, or if Haliburton builds latrines for soldiers in Iraq and happens to electrocute a few in the process; in these cases, the new contracts continued to flow.

The reality is that these contractors have become part of the government. The national-security and defense apparatus needs them to carry out essential operations as much as the private companies need their federal benefactor to deliver returns to the shareholder. Government agencies these days simply lack the resources, permissions, and wherewithal to hire all the people they need to conduct operations. Using contractors is a necessity. At least that's the argument of the contractors.

On the one hand, it is a fiercely competitive industry in which big firms compete with one another. On the other hand, the fix is in. The government spreads its contracts around between large companies. Small businesses and start-ups have a tough time competing for the biggest of the contracts. And there is a limited number of domestic large players, especially in sensitive defense areas. Lobbying also plays an important role. Big contractors hire lobbyists and make campaign donations in order to work the system.

In its recent annual report, Booz Allen said that the main risks to its business includes changes to “U.S. government spending and mission priorities” (like the sequester) and “mishandling or the perception of mishandling of sensitive information, such as our failure to maintain the confidentiality of the existence of our business relationships with certain of our clients or a failure to maintain adequate protection against security breaches,” which “could harm our relationship with U.S. government agencies.”

Ed Snowden, the guy who leaked the stories, is a 29-year old, reportedly making $122,000 a year at Booz Allen, until they fired him this week. That means this guy made more than most Army Colonels.

Maybe another risk to the profits of these companies is that the public reconsiders the price we pay for privatization of national defense, and maybe we just get tired of paying companies to snoop into our phone calls and emails.

Yesterday I talked about the financialization of the economy, and how an ever-growing financial sector was actually hurting the economy and hurting the prospects for jobs growth. So, let's go back just a little bit; remember the Libor rate rigging scandal? About a year ago we heard that there was widespread manipulation of the London Interbank Offered Rate, which is the benchmark interest rate that affects borrowing costs around the world. A handful of big banks have already paid fines in that case, and some traders have been fired. Given that set of fairly manageable consequences, it's understandable that traders would continue to find different things to manipulate for fun and profit.

And then we heard about credit swap derivatives being manipulated via something called the ISDA Fix; then there was the gold and silver markets, and the British natural gas market, and the crude oil market. This is going to shock you; it's hard to believe, but there is even more manipulation. Bloomberg is reporting that the Forex market, which is where currency is traded, has been manipulated for at least the past ten years. One trader compared it to the Wild West, which I think is an insult to the Wild West.

One thing that makes the alleged currency-market manipulation especially unpleasant is that this apparently involved front-running client trades. So, they are literally stepping in front of someone's trade and stealing a little. And traders allegedly worked together with traders of other banks to do this, in order to spread the wealth around -- to everybody but the poor dumb clients, that is.