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.