Monday, March 03, 2013 - Carry On

Carry On
by Sinclair Noe

DOW – 153 = 16,168
SPX – 13 = 1845
NAS – 30 = 4277
10 YR YLD - .05 = 2.60%
OIL + 2.20 = 104.79
GOLD + 21.70 = 1351.30
SILV + .18 = 21.51

Manufacturing expanded at a faster pace than projected in February. The Institute for Supply Management’s (ISM) manufacturing index rose to 53.2 from 51.3 in January. A reading above 50 indicates expansion in manufacturing activity.

Consumer spending in the US climbed more than forecast in January, reflecting the biggest increase in services in over 12 years. Household purchases rose 0.4%, after a 0.1% gain the prior month. Disposable income, or the money left over after taxes, rose 0.3% after adjusting for inflation. It dropped 0.2% in the prior month and was up 2.8% from January 2013. The saving rate was 4.3% in January, unchanged from the prior month. Wages and salaries increased 0.2% after dropping 0.1% in December.

The big economic report this week will be the monthly jobs report on Friday.

Faster than you can say “the Russians are coming”, they invaded Ukraine. Moscow now has operational control of the Crimean Peninsula, with about 6,000 airborne and ground troops. Russia has military bases on the Red Sea, but the troops have gone off base. The Russians have just taken over without any real fighting; indeed, many Crimeans are sympathetic to Russia.

Ukraine has a large Russian ethnic minority, which it inherited mainly as the result of Soviet policies, including a re-drawing of the inner map of the Union by giving members like Ukraine territories, which historically had little connection to Ukrainians. The end result is that roughly one in four Ukrainian citizens speaks Russian as their mother language. Given that these people were there before an independent state of Ukraine emerged, they are what is considered an historic minority.

 The new government in the Ukraine says the Russians have demanded that Ukrainian forces in Crimea surrender within the next couple of hours or face an armed assault. The Russians deny any ultimatum, but they are in control in Crimea.

Investors sought safe havens in government bonds, pushing down yields of US and German government debt. The dollar gained against the euro and against the British pound, while the yen gained against the dollar as Japanese investors sold overseas investments and repatriated their funds. The Russian central bank announced a temporary 1.5% increase in its benchmark interest rate target, to 7%; the Russian ruble took a big hit, along with the Russian stock market, which dropped about 10%.

Global stock indices were down today with the Nikkei 225 stock average dropping 1.3%. The Hang Seng Index in Hong Kong fell 1.5%. The Euro Stoxx 50 index of euro zone blue chips closed down 3%, while the London benchmark FTSE 100 ended the day 1.5% lower. Companies that have business relationships with Russia and Ukraine were down today. European banks with exposure to Ukraine also fell. UniCredit, the Italian lender, fell 5%, while BNP Paribas of France declined more than 3%.

The MSCI Emerging Markets Index lost 1.7%.

The interim Ukrainian government is negotiating with the European Union, the United States and the International Monetary Fund for a bailout of as much as $35 billion to get it through the next two years. Ukraine has some fairly serious debt problems, and there is concern the International Monetary Fund will seek haircuts on the value of Ukrainian government debt, forcing bond holders to take big losses. 

Ukraine makes up only about 0.2% of global gross domestic product, but we know GDP is an imperfect measure of an economy. For example, it does not take into account that Russia has major pipelines that run through Ukraine, and the Ukrainians get half their natural gas supply from Russia, which has been offering the cash strapped Ukrainians a big discount. That could end or Russia could just cut off the supply altogether; and that could also cut supplies to the European Union. Gazprom supplied about 30 percent of Europe’s gas last year. Out of the roughly 14 trillion cubic feet the EU consumes per year, about 5 trillion cubic feet comes from Russia, and a large volume still flows through Ukraine, with no prospect of this changing for some years to come. If Russia ends contracts to supply Ukraine, it may have a knock-on impact on European supplies.

Secretary of State John Kerry will fly to Kiev on Tuesday, to meet Ukraine’s new government and display “strong support for Ukrainian sovereignty” Kerry, Obama and other senior officials spent the last 24 hours frantically attempting to rally an international coalition of countries to condemn Moscow over the Crimea invasion, and commit to economic sanctions in order to prevent a further advance into other pro-Russian parts of Ukraine. Obama spoke by phone with the British Prime Minister, David Cameron, Polish president Bronislaw Komorowski and the German chancellor, Angela Merkel.

The EU is saying that it will revise its relations with Russia if there is no de-escalation. European foreign ministers threatened to freeze visa liberalization and economic cooperation talks with Russia and boycott a Group of 8 summit in Sochi if Moscow did not take steps to “de-escalate” the situation by the Thursday summit. On the flip side, Moscow is so dependent on gas revenue that it will have little choice but to try to keep the fuel flowing; for the EU it would be foolish to see this escalate to conflict because it’s hard to fight with the lights and the heat turned off.

Entire countries can be paralyzed if the gas stops flowing for a prolonged period. There are no new projects meant to further lessen EU dependence on gas transiting through Ukraine coming on line for the next few years, and there are few viable alternatives to replace such a large volume of gas. The only option that remains if and when this gas flow is lost is to suffer the consequences. Given the EU's fragile economy, the consequences of taking another major hit would be disastrous.

It is expected that 2014 will be the year when the EU economy will finally return to sustained steady growth. It is not much, but given the economic environment of the past few years, growth in the 1-2% per year became something to be celebrated. Such a fragile economy cannot hope to withstand even minor energy supply disruptions.

Things could further escalate, and an economic war can easily take shape between Russia and the West. What this means for the global economy is potentially the loss of as much as 6 million barrels per day of Russian fuel. Russia will be hurt by it for sure, but so will the global economy.

And that’s just the Ukraine today. Look around the rest of the world: Venezuela, Turkey, Thailand, Syria, Libya, Sudan. It seems like a big disorganized mess. So, how will it be resolved?

Here’s the answer;

Vladimir Putin will do something belligerent. (Already done.)

Republicans will demand that we show strength in the face of Putin's provocation. Whatever it is that we're doing, we should do more.

President Obama will denounce whatever it is that Putin does. But regardless of how unequivocal his condemnation is, Bill Kristol will insist that he's failing to support the democratic aspirations of the Ukrainian people.

Journalists will write a variety of thumbsuckers pointing out that our options are extremely limited, what with Ukraine being 5,000 miles away and all.

John McCain will appear on a bunch of Sunday chat shows to bemoan the fact that Obama is weak and no one fears America anymore. (Already done.)

Having written all the "options are limited" thumbsuckers, journalists and columnists will follow McCain's lead and start declaring that the crisis in Ukraine is the greatest foreign policy test of Obama's presidency. It will thus supplant Afghanistan, Egypt, Libya, Syria, Iran, and North Korea for this honor.

In spite of all the trees felled and words spoken about this, nobody will have any good ideas about what kind of action might actually make a difference. There will be scattered calls to impose a few sanctions here and there, introduce a ban on Russian vodka imports, convene NATO, demand a UN Security Council vote, etc. None of this will have any material effect.

Obama will continue to denounce Putin. Perhaps he will convene NATO. For their part, Republicans will continue to insist that he's showing weakness and needs to get serious.

This will all continue for a while.

In the end, it will all settle down into a stalemate, with Russia having thrown its weight around—just like it always has—and the West not having the leverage to do much about it.

Ukraine will....

Actually, there's no telling. Maybe Ukraine will choose (or have foisted on them) a pro-Russian leader that Putin is happy with. Maybe east and west will split apart. Maybe a nominally pro-Western leader will emerge. Who knows? What we do know is that (a) the United States will play only a modest role in all this, and (b) conservative hawks will continue to think that if only we'd done just a little bit more, Putin would have blinked and Ukraine would be free.

Keep calm and carry on.

Thursday, August 29, 2013 - Pre-Labor Day GDP

Pre-Labor Day GDP

by Sinclair Noe

DOW + 16 = 14,841
SPX + 3 = 1638
NAS + 26 = 3620
10 YR YLD - .01 = 2.76%
OIL – 1.30 = 108.80
GOLD – 10.60 = 1408.20
SILV - .52 = 23.97

No new war yet. The British parliament voted against military action in Syria. Britain was considered a key ally in any US-led coalition. PM David Cameron said the government would respect the decision of parliament which means that Britain will not take part in military strikes against Syria.

Initial claims for state unemployment benefits slipped 6,000 to a seasonally adjusted 331,000. Claims for the prior week were revised to show 1,000 more applications received than previously reported. So, modest strengthening in the labor market. Next week, we'll get the monthly jobs report.

Meanwhile, the US economy accelerated more quickly than expected in the second quarter thanks to an increase in exports. Gross domestic product grew at a 2.5 percent annual rate, according to revised estimates, up from the initial guess of 1.7% growth. The second quarter’s growth rate followed gains of 0.1 percent in the fourth quarter and 1.1 percent in the first three months of this year.

The trade deficit in the second quarter was smaller than previously estimated, reflecting the biggest gain in exports in more than two years.  Gross domestic income, which reflects all the money earned by consumers, businesses and government agencies climbed at a 2.5 percent annualized rate in the second quarter, matching the gain in GDP. Corporate spending grew at a 9.9 percent annualized rate, exceeding the 9 percent gain previously reported. This reflected a $62.6 billion gain in stockpiles that was larger than first estimated. Investment in housing accounted for nearly a fifth of the economy's growth during the period. However, other reports have suggested that housing began to look more shaky toward the end of the quarter. Expectations that the Fed could reduce bond buying as early as next month have driven mortgage rates sharply higher since May.

The bond-buying program is one of America's last major economic stimulus programs, as the federal government's fiscal austerity began dragging on the economy in late 2010. In the second quarter, higher taxes appeared to hold consumers back. Consumer spending slowed to a 1.8 percent growth pace after rising at a 2.3 percent rate in the first quarter.

Problems remained in the US economy and the revision in GDP also highlighted some of those weaknesses. Consumer spending remained unchanged in the quarter and state and local government spending fell in the quarter as compared to being up in the initial estimate.

It's still just a 1.6% rise year over year, and that's soft. We are still down 2 million jobs and unemployment is still 7.4% and we are seeing significant drag from tax increases and spending cuts.

The GDP figures come amid a looming clash in Washington over the "debt ceiling"; the limit set by Congress on the US's ability to borrow. Treasury secretary Jack Lew warned earlier this week that if Congress fails to act soon, the US would hit its debt limit by mid-October.

Even with upward revisions to 2Q GDP, there has been a sea change in the composition of the global economies. For the first time ever, the combined gross domestic product of emerging and developing markets, adjusted for purchasing price parity, has eclipsed the combined measure of advanced economies. Purchasing price parity adjusts for the relative cost of comparable goods in different economic markets.

According to the International Monetary Fund—the supplier of this data—emerging and developing economies will have a purchasing price parity-adjusted GDP of $42.8 trillion in 2013, while that of emerging economies will be $44.4 trillion. In other words, emerging markets will create $1.6 trillion more value in goods and services than advanced markets this year. Another way to consider it is that the emerging markets have emerged, sort of, kind of.

It’s worth keeping in mind that the emerging economies have strength in numbers. Not only are there more emerging and developing nations; those nations also boast a larger combined population. As such, emerging and developing economies trail far behind advanced economies in per-capita terms. Their aggregate per-capita purchasing price parity-adjusted GDP is $7,415, while the same measure for advanced nations totals $41,369.

Those per capita numbers can be a bit deceptive for both emerging-markets and developed-markets. The Federal Deposit Insurance Corp. says the banking industry earned $42.2 billion in the second quarter, up 23 percent from the second quarter of 2012. CNNMoney reports that the nation’s biggest banks are expected to hand out more in compensation in 2013 than they did in 2009 including $23 billion in bonuses. Banks' losses on loans were down 30 percent from a year earlier to $14.2 billion, the lowest in six years. The biggest banks, with assets exceeding $10 billion make up only 1.5 percent of U.S. Banks, yet they accounted for about 82 percent of the industry's earnings in the April-June quarter.

Meanwhile, low wage workers kicked off the Labor Day holiday early in more than 50 cities, striking fast food restaurants. The demands are largely the same as in the past; a minimum wage of $15 per hour and protections against retaliation for joining a union.

Determining GDP numbers and most economic data is sketchy business at best, in part because the financial world is often sketchy at best. For example, the Tax Justice Network estimates that wealthy individuals are hiding between $21 trillion and $32 trillion in offshore accounts. Further, it's estimated that about 80% of the top 100 US companies are sitting on more than $1.2 trillion offshore to avoid paying taxes on it. How do you count that?

In 2009, UBS, the Swiss financial services company, reached a landmark deferred prosecution agreement with the US government and agreed to turn over the names of more than 4,000 American account holders. In the aftermath, the Internal Revenue Service has netted more than $5 billion from 38,000 Americans who came forward under a voluntary disclosure program.

Since then, US authorities have aggressively pursued Swiss banks they suspect of sheltering American tax cheats. A pending deal between U.S. and Swiss authorities could provoke another surge of recovered tax dollars. The agreement would require Swiss banks to disclose records showing outgoing transfers from American account holders. Authorities likely will use that information to pressure financial institutions in other popular offshore destinations.

A new report shows the last 30 years have been good for a few. CEOs saw their total compensation climb by 876 percent between 1978 and 2012. During that same period, worker compensation grew by 5.4%. And it doesn't seem that the so-called economic recovery is going to give workers a boost anytime soon. In June, the Bureau of Labor Statistics reported that hourly wages fell 3.8% during the first quarter of 2013 -- the biggest quarterly drop since the BLS started tracking wage growth in 1947.

A new report by the Institute of Policy Studies, called “Bailed Out, Booted and Busted” has come out with a listing of the 241 highest paid CEOs of the past two decades. An astonishing 38% of these titans of finance and industry have either been kicked out of their jobs, put in jail or had to have their companies be rescued from bankruptcy.

A poster child for overpaid CEOs performing poorly would be Richard Fuld, who raked in $466 million in salary and stocks in seven years as CEO of Lehman Brothers, the Wall Street investment bank, before the company collapsed in September 2008, precipitating global financial crisis. I don't mean to pick on Fuld; we could also look at the case of Dennis Kozlowski, or Eckhard Pfeiffer, or Ken Lay; Fuld is just one of 112 such CEOs whose companies were given a total of $258 billion in taxpayer bailouts, which means we all paid a little smidge of his paycheck.

It's easy to argue that there are a couple of bad apples in every cart, but if 38% of the apples are rotten, that indicates a problem. Shareholder activism doesn't seem to help, largely because shareholders are looking for the best returns and the thinking is that they can buy better returns, even though the results don't bear that out. Boards of directors are not going to change this. They are mostly made up of other CEOs who says if you scratch my back, I'll scratch yours. One idea is to change the makeup of the Boards. Another possible solution is  governments can eliminate taxpayer subsidies for excessive executive pay and encourage reasonable limits on total compensation by not giving out contracts to companies who pay excessive CEO salaries (effectively subsidized by the taxpayer) and rewarding those who pay their workers well.

Spare a thought this Labor Day holiday, when you fire up the barbecue for the last weekend of the summer and raise a beer for the workers in this country, and don't forget the almost 20 million who are unemployed or underemployed. 

Happy Labor Day.

Monday, December 10, 2012 - The Fed After the Twist, Italy After Monti, China After 2030, Warming After Doha

The Fed After the Twist, Italy After Monti, China After 2030, Warming After Doha

by Sinclair Noe

DOW + 14 = 13169
SPX +0.48 = 1418
NAS + 8 = 2986
10YR YLD -.01 = 1.62%
OIL -.25 = 85.68
GOLD + 8.10 = 1713.60
SILV + .16 = 33.37

Economic reports due this week are not likely to be market movers. Tomorrow we'll see data on wholesale trade, plus the trade deficit; a report on how many new job opening exist. Later in the week, we'll find out about retail sales. The big event this week is the Federal Reserve FOMC meeting Tuesday and Wednesday. The Fed will be looking at the unemployment numbers from Friday. The unemployment rate fell to 7.7% from 7.9%, but that was because more people dropped out of the labor force. Usually that’s not a good sign because it means jobs are harder to find. Ultimately the Fed wants to see the jobless rate fall to 6% or less, the same levels that prevailed before the 2008 meltdown.

Nobody seems to think there will be a big uptick in new jobs. Lackluster hiring means consumer spending is unlikely to rocket higher. Too many people remain out of work and the growth in the average worker’s paycheck isn’t even keeping up with the low increase in annual inflation. Business are waiting for the consumer to spend, consumers are waiting for businesses to hire. Something needs to happen to kick start the economy, a jolt of stimulus, but don't hold out for any major announcements from this week's FOMC meeting. Bernanke should be able to point to the fact that a much-needed recovery in the housing sector has taken hold. And that's partly due to the Fed's effort to reduce mortgage rates and keep them low. Hiring has continued at a modest pace; in other words, nothing that would cause the Fed to do anything dramatic.

The Fed will need to make a decision on Operation Twist. The policy, set to end this month, let the Fed sell short-term Treasuries it already owns in order to buy longer-term bonds. The basic goal of Twist has been to lower long-term interest rates without having to increase the dollar amount of the assets on its books. Here's the problem though. The central bank is quickly running out of short-term bonds available for it to swap in a one-for-one exchange. So, the Fed might just look at some kind of an outright bond purchase program.

The Fed could double down on its purchase of mortgage-backed securities, which currently totals $40 billion a month. That program puts downward pressure on mortgage rates. The Fed announced this third round of quantitative easing, or QE3, in September.

Or, the Fed might say it will buy more Treasury bonds as a way to keep longer-term interest rates low, maybe $45 billion a month in bond purchases. Treasury purchases without offsetting sales would expand the Fed's bond portfolio, pumping more cash into the economy but also making it more difficult to eventually sell the bonds to head off inflation.

Or, the other option is the Fed waits until the new year and to see how Congress handles the fiscal cliff, and then they'll know whether they need to do something dramatic or not.

President Obama and House Speaker Boehner held closed door meetings at the White House yesterday. No announcements were made; your guess is as good as mine. President Obama traveled to Michigan today to push for his proposed extension of tax cuts for middle class earners. The president's message in Michigan will be that the economy is rebounding and Congress should not risk that progress to save tax cuts for the rich. Meanwhile, there is a political battle in the state about union recognition.

President Obama threw his support behind labor unions opposed to a Republican-led drive for "right-to-work" laws in Michigan, saying efforts to pass such measures were not about economics but about politics. Obama used a visit to an auto plant to weigh in on the controversial push in the state legislature to impose new restrictions on unions.

Obama told a crowd of workers at the Daimler Detroit Diesel plant in Redford, Michigan: "What we shouldn't be doing is trying to take away your rights to bargain for better wages and working conditions. These so-called right-to-work laws, they don't have to do with economics, they have everything to do with politics. What they're really talking about is giving you the right to work for less money."

Union members and others opposed to Michigan becoming a right-to-work state plan major protests in the state capital, Lansing, this week. Organizers expect thousands at a rally tomorrow when the state legislature reconvenes. With Republicans in control of the legislature and the Republican governor committed to sign the laws, Michigan could become the 24th right-to-work state by the middle of the week.

The rest of the world watches to see if the fiscal cliff can be resolved, and with the International Monetary Fund's managing director Christine Lagarde warning of "zero growth" in the US as a worst case scenario: The International Monetary Fund has already lowered its growth estimate for next year for the United States to 2.1%, and Lagarde reiterated that the implications of going over the cliff would be precipitous. She said, "If the US economy was to suffer the downside risk of not reaching a comprehensive deal, then growth would be zero."

Italian equities and bonds sank after Prime Minister Mario Monti's decision to resign stoked concern about who will lead the euro zone's third biggest economy out of its debt crisis. The euro initially weakened on the news out of Italy, but it managed to rebound against the dollar and pared most losses versus the yen; the reaction to Monti's resignation may have been overdone. Monti announced over the weekend he would resign once the government's 2013 budget is approved, potentially bringing forward an election due early next year. Monti became an investor favorite over the past year as he spearheaded a reform agenda to rescue Italy from the threat of a Greek-style collapse.

Commodities markets rose on data that showed factory output in China, the world's No. 2 economy accelerated to an eight-month high in November. Copper prices hit their highest level in almost two months.

A new intelligence report says that by 2030 Asia will overtake North America and Europe combined in global power based on gross domestic product, population, military spending and technological investment.

China alone will probably have the largest economy, surpassing that of the United States a few years before 2030. Meanwhile, the economies of Europe, Japan, and Russia are likely to continue their slow relative declines.

The report, "Global Trends 2030: Alternative Worlds,"  www.dni.gov/nic/globaltrends. was issued by the National Intelligence Council, an analytical arm of the U.S. government's Office of the Director of National Intelligence. The report says that despite the economic power of China, the United States is expected to retain its superpower status because it still is the only country able to pull together coalitions and mobilize efforts to deal with global challenges.

The report claims China isn't going to replace the US on a global level,and while being the largest economic power is important, it isn't necessarily the largest economic power that always is going to be the superpower.

China recognizes that it cannot play that role of organizing across regions and across state-nonstate boundaries. The health of the global economy increasingly will be linked to progress in the developing world rather than the traditional West.

HSBC is apparently ready to settle money laundering charges for $1.9 billion. The settlement with HSBC stems from accusations that the British banking giant transferred billions of dollars on behalf of sanctioned nations like Iran and enabled Mexican drug cartels to launder money through the American financial system. The deal will force the bank to forfeit more than $1.2 billion in ill-gotten gains and pay additional penalties.

Since January 2009, the Justice Department, Treasury and the Manhattan prosecutors have charged six foreign banks, including Credit Suisse and Barclays. In June, ING Bank reached a $619 million settlement to resolve claims that it had transferred billions of dollars in the United States for Cuba and Iran.

Earlier today, federal and state authorities announced a $327 million settlement with Standard Chartered. The British bank, which in August agreed to a larger settlement with New York's top banking regulator, admitted to processing thousands of transactions for Iranian and Sudanese clients through its American subsidiaries. To avoid having Iranian transactions detected by Treasury Department computer filters, Standard Chartered deliberately removed names and other identifying information

The Doha Climate Change Conference wrapped up this week. As Doha kicked off, we had just seen the effects of Hurricane Sandy, meanwhile environmental groups were prepared with a lineup of grim studies on just how far the world has fallen short on its environmental efforts. Carbon dioxide emissions hit a record high last year. Yet nations around the world, despite a formal treaty pledging to limit warming, and 20 years of negotiations aimed at putting it into effect, have shown little appetite for the kinds of controls required to accomplish those stated aims. There were no new emissions targets up for discussion at Doha. Commitments of monetary aid have been drying up.

Monday, July 30, 2012 - A Convergence of Central Bankers

A Convergence of Central Bankers
-by Sinclair Noe


DOW – 2 = 13,073
SPX – 0.67 = 1385
NAS – 12 = 2945
10 YR YLD -.05 = 1.50%
OIL - .11 = 89.95
GOLD – 1.70 = 1622.90
SILV +.39 = 28.28
PLAT + 5.00 = 1422.00


This week features a convergence of central bankers: the ECB, the BOE, and the Fed; toss in a jobs report to finish the week and the fate of the global economy hangs in the balance. Maybe, maybe not;what we can say is that the game of kick the can down the road is running out of road. A quarter point rate cut from the ECB will not satisfy anybody. ECB President Mario Draghi has promised to do whatever it takes; now he is being put to the test. Germany will be required to step up; the ECB will be required to function as a global central bank and throw off its limitations. If Draghi and the ECB can't control the downward spiral of the debt debacle in Spain and Italy, the entire global economy could start to crumble. Too dramatic? Consider China, India and Brazil are facing slower economic growth and a broken credit cycle; the US is facing the prospect of a fresh round of QE or some other tool to lift us out of a downturn – and let's not even spend time today on the fiscal cliff. 


The International Monetary Fund issued this warning:  “the euro area crisis has reached a new and critical stage … raising questions about the viability of the monetary union itself. The adverse links between sovereigns, banks, and the real economy are stronger than ever.”


So far, we've seen the playbook of how not to rescue the Euro-zone. Draghi tried a trillion dollar lending program directly to the banks; the idea was for the banks to buy sovereign debt; the results resembled a drowning man flailing in the water and dunking the lifeguard sent to rescue him. The ECB has set up various funds, such as the ESM and the EFSF but those bailout funds haven't been funded; it is hard to take them seriously. Hedge funds know how much funding the rescue funds hold, and they are willing to push the limits. Underfunding is just like handing over a bet to the hedge funds. So, one idea is to really fund the rescue funds. We'll see. 


Spain and Italy will need about $1.5 trillion dollars over the next couple of years but the problem is that the money doesn't really exist. Germany will be asked to step up but there might be some hesitation; call it bailout fatigue in Germany, Holland and France. Germans would not have joined the EU without assurances that their hard-won prosperity would remain in their control. The idea of a "transfer union" has loomed large in the German psyche for years, and not in a good way. Likewise, there are limits to the discipline Spain and Italy might be willing to accept from the German paymasters; Greece has already reached its limits. 


Today, US Treasury Secretary Tim Geithner met with German Finance Minister Wolfgang Schauble and then they issued a statement: Both expressed confidence in Euro area member states' efforts to reform and move towards greater integration. They discussed the considerable efforts undertaken by Spain and Italy, to pursue far-reaching fiscal and structural reforms. 


Both the ECB and BOE will release their policy prescriptions Thursday. Draghi has promised he'll do whatever it takes. He has vowed that action is coming and we should believe him – it will be enough. Now we hear that whatever Draghi up his sleeve will likely take a while to implement, at least a month, maybe more. And we're most likely talking about bond purchases; which does nothing to solve the fundamental economic problems. Spain has unemployment of more than 25%.  Bond purchases will not create new jobs. Draghi has done better at resisting the austerity hawks than his predecessors. Europe needs to reverse its austerity policies, to take shared responsibility for dealing with the legacy debt of its weaker members, and to turn the ECB into a true central bank. None of this is likely to happen. Draghi does not have the leverage or the will to reverse Europe's larger economic systemic flaws and prevent a slide into depression.




What this means is that the Euro probably won't disintegrate this week. The central bankers have an uncanny ability to kick the can down the road for much longer than it seems possible – it's what they do.


And then on Friday, we get the monthly jobs report. Net hiring likely rose by about 110,000 last month. It is modest but it is still a positive number. The biggest source of economic growth is consumer spending, but Americans have cut back over the past few months. The latest reading on personal spending and income, released Tuesday, is expected to show barely any increase at all in July. The economy cannot grow much faster until businesses step up hiring, but companies won’t add workers unless customers boost purchases of their goods and services. The result: a shackled economy unable to break free and expand rapidly and unemployment hovering around 8.2%. 


Of course, part of the Federal Reserve's mandate is for maximum employment. So, what is the Fed going to do to help the jobs picture? The Federal Reserve is holding a two day meeting this week. Will they make some announcement, such as a reduction in what they pay member banks to park excess reserves? How about a pledge to keep rates in the zero range until the cows come home? Will that be enough? Will it actually change the jobs picture? Probably not. So the Fed will likely hold off on major stimulus such as more asset purchases, to get a better sense of whether the economy is in a soft patch or in deeper trouble.


There is no clear consensus on how the central bankers will respond. It seems increasingly likely that the ECB and the Fed will not act with bold moves and only the disappointment will be big.  Policy makers are predisposed to incrementalism. Most problems will fade away or self-correct if they are ignored. Policy makers always assume that they can do more if needed, but they can never undo what they’ve already set in motion. The IMF says the problems in Europe will be prolonged and costly – in other words, the banks will be sucking money out of the economy for as long as they can get away with it.  Political compromise naturally leads to small steps. That is usually true, remarkably and infuriatingly true – right up until the instance it fails. 










It is my sincere hope that one day we will be able to see the banksters repent for the wrongs they have committed and then go forth and sin no more. Today, the Hong Kong and Shanghai Banking Company was repenting. HSBC apologized for  "shameful" systems breakdowns that failed to stop the bank from laundering money for terrorists and drug barons as it set aside $700 million for potential fines in the US and another $1.3 billion for mis-selling financial products in the UK.


The bank insisted that those responsible for the rule breaches in the US and Mexico had left the business and that bonuses had been clawed back from staff who allowed billions of illegal dollars to be funneled through the financial system. The bank is also caught up in the Libor rigging scandal but did not make a provision for any potential fine or legal cases.


Edward Yardeni of Yardeni Research in this week’s Barron’s:
“The problem with banks is that they tend to blow up on a regular basis. That’s because bankers are playing with other people’s money (OPM). They consistently abuse the privilege and shirk their fiduciary responsibilities. Whenever they get into trouble, government regulators scramble to bail them out first and then scramble to regulate them more strictly. Without fail, the bankers respond to tougher rules by using some of the OPM to hire financial engineers and political lobbyists to figure out ways around the new regulations.


“...banks are the Achilles’ heel of capitalism. They really do need to be regulated like utilities if their liabilities are either explicitly or implicitly guaranteed by the government, i.e., by taxpayers. Banks should be permitted to earn a very low utility-like stable return. Bankers should receive compensation in the middle of the pay scale for government employees, somewhere between the pay of a postal worker and the head of the FDIC. It should be the capital markets, hedge funds, and private-equity investors that provide credit to risky borrowers instead of the banks.”