Wednesday, May 22, 2013 - Throwing Ben From the Chopper

Throwing Ben From the Chopper

by Sinclair Noe

DOW – 80 = 15,307
SPX – 13 = 1655
NAS – 38 = 3463
10 YR YLD +.08 = 2.03%
OIL – 1.53 = 94.65
GOLD – 6.30 = 1370.70
SILV - .16 = 22.37

Federal Reserve Chairman Ben Bernanke went to Capitol Hill this morning and that was followed by the release of the Federal Open Market Committee, or FOMC, minutes from their May 1^st meeting and that was followed with a big swing lower for stocks on very heavy volume and a big swing lower for bonds and everything was just rocking and rolling.

Bernanke was appearing before the Joint Economic Committee this morning; the gavel fell; Bernanke delivered some prepared remarks: "A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further."

So, that sounded like no tapering off of QE anytime soon. Stocks and bonds inched a little higher. Bernanke went on to say that fiscal policy continues to be a drag on the economy. Right, we've heard it before.

Then, Bernanke stressed that slowing asset purchases would not be the automatic beginning of the exit. The flow of purchases could be ramped up depending on the data. Now, the markets were trying to figure out which direction he's going.

Asked when the Fed will slow down asset purchases, Bernanke says it could come in "next few meetings”, but he won't give a date. Then he says financial stability is biggest risk of asset purchase program, but a weak economy comes with its own stability concerns. Then he says the Fed does not have to sell any agency mortgage-backed securities when the central bank exits its easy policy stance. The markets start to tank.

Is the Federal Reserve doing too much to stimulate the economy, or not enough? Many of the questions directed at Bernanke this morning were about the risks of the Fed doing too much and whether their monetary policy was hurting savers and creating asset bubbles. An equally valid question is whether the Fed is pushing hard enough, given that the economy is growing more slowly than the Fed wants it to and the jobs market remains stagnant and inflation is running well below its target.

Helicopter Ben, the student of the Great Depression willing to throw cash out of a helicopter; that Fed Chairman was nowhere to be found; replaced by a Chairman willing to stand pat despite failing to achieve the Fed’s own self-imposed targets.

Bernanke isn’t ruling out stronger action. In his testimony he said that depending on incoming data, “we could either raise or lower our pace of purchases.” But raising purchases is clearly not Plan A. As the outlook for the labor market “improves in a real and sustainable way, the committee will reduce the flow of purchases,” the chairman said, without specifying a time.

Bernanke says for the record that the Fed could do more if necessary, but he is behaving as if he believes monetary policy is at or near its limit. He testified: “Monetary policy does not have the capacity to fully offset an economic headwind of this magnitude.”

That doesn't really sound like Helicopter Ben. Has he lost his swagger? Hang on. He's saying the Fed is willing to hold on to all the Mortgage Backed Securities they've been buying, maybe just stick them in the vault and wait; that is not an acknowledgment of failure in monetary policy, but it is looking like an acknowledgment of asset bubbles.

And then we got the FOMC minutes.

The FOMC minutes showed they were still waiting for more progress before they would slow Quantitative Easing, but they were thinking about an exit plan; they discussed the old plan form 2011, debated whether it was still valid or needed updating, talked about the possibility of slowing asset purchases as early as June, that didn't fly, and then the punchline– assett bubbles.

The FOMC minutes say, in writing: "a few participants expressed concern that conditions in certain U.S. financial markets were becoming too buoyant.... One participant cautioned that the emergence of financial imbalances could prove difficult for regulators to identify and address, and that it would be appropriate to adjust monetary policy to help guard against risks to financial stability."

The big question is whether the Fed will actually have a mutiny and throw Bernanke from the helicopter and abandon super-easy monetary policy? So, let's dig a little deeper into the minutes: “Regarding the composition of purchases... ,in light of the substantial improvement in the housing market and to avoid further credit allocation across sectors of the economy, the Committee should start to shift any asset purchases away from MBS and toward Treasury securities.”

Where do we go from here? The Fed holds on to its existing asset purchases; they won't shy away from ZIRP, the Zero Interest Rate Policy; they are getting closer to using some new tools, and it's probably more than just a shift from MBS to Treasuries. What tools? We didn't really get a clue today, but we did get some acknowledgment that they recognized the limitations of the tools they've been using. So, we should be looking for new tools, or look for Bernanke to be tossed from the helicopter – it could go either way.

The latest poll of Morgan Stanley's top clients from across the world says it all. Not a single investor at the bank's Florence forum thought the world economy would rebound with any strength later this year.

Just a quarter expect a return to trend growth. Some 57pc think there will be no escape from the "twilight" conditions afflicting the western world, and 20pc expect an full-blown global recession. That is a remarkably bearish set of views. Yet the same investors are overwhelmingly bullish on stocks and property.

This schizophrenic exuberance seems entirely based on the assumption that QE and central bank largesse will keep the game going, flooding asset markets with liquidity. Indeed, 80pc think the ECB will cut rates again, and half think it will have to swallow its pride and join the QE club in the end.

Eighty percent think equities will gallop on upwards over the next year. Complacency is rife. It became very clear, and many investors were quite explicit about this, that markets are lulled by the lure of liquidity resulting from negative real interest rates and global QE. When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.

Yesterday, shareholders at JPMorgan Chase decided to keep Jamie Dimon as chairman and CEO. The shareholders trying to take away Dimon's chairmanship weren't trying to take the job of running JPMorgan away from him. They just wanted to give the board's oversight function to somebody else -- they didn't want Dimon being his own boss. But even this minor tweak to Dimon's job function would have been such an outrageous affront to Dimon's royal personage that he might have taken his indispensable skills away from the bank forever, causing the stock price to collapse, or so the bank told shareholders, at least in private. Jim Cramer said it publicly: "If you voted for Dimon to lose chairmanship, you voted for a lower stock."

The Office of the Comptroller of the Currency cut it's rating of the bank's management and says it need simporvement, but shareholders weren't buying it. Last weekend I heard one analyst explain that concerns about out of control trading, and the trading losses of the London Whale, and allegations of money laundering, institution wide regulatory violations, and auditors that are on the verge of throwing up their arms; for a complete list of violations, there is a report entitled “JPM – Out of Control” , which basically describes a criminal enterprise. Any way, the analyst over the weekend was saying that shareholders should forget about all that because Dimon delivers record profits, and that's all that really matters. Rather than humbling Dimon, JPMorgan shareholders have declared, loudly, that Dimon alone should hold their fate in his hands. They had better hope it doesn't go to his head.

Hurricane Sandy was the deadliest and most destructive hurricane since Katrina. It caused 285 total fatalities and was the second-costliest hurricane in United States history.

During the immediate aftermath of this act of Nature, Senators Inhofe and Coburn from the state of Oklahoma, were among many who decided to use the disaster as a political platform. They voted against a full FEMA / Army Corp of Engineer reconstruction, and repeatedly delayed votes to fund any for of rescue. The Republican Governor of New Jersey went postal against the GOP House members as well as these two Oklahoma Senators. Eventually, federal aid for Hurricane Sandy was passed. A big chunk of the Sandy emergency package replenished FEMA, which had been underfunded by the usual suspects. The Sandy relief package replenished its coffers. The votes in favor of Sandy Aid ironically funded FEMA, and it is helping with the rescue and clean up efforts in Oklahoma. Now Coburn is insisting that any federal aid to deal with the tornado in his home state must be offset by budget cuts, but he says that “as the ranking member of Senate committee that oversees FEMA, I can assure Oklahomans that any and all available aid will be delivered without delay.”

Thursday, September 20, 2012 - QE3 to 5.5, Bad Banks, Bad Politicians

QE3 to 5.5, Bad Banks, Bad Politicians

by Sinclair Noe

DOW + 18 = 13,596
SPX – 0.79 = 1460
NAS -6.66 = 3175
10 YR YLD unch = 1.78%
OIL + .51 = 92.93
GOLD – 1.20 – 1769.50
SILV - +.07 = 34.74
PLAT – 16.00 = 1633.00

So, we know the Federal Reserve has committed to buy mortgage-backed securities at the rate of $40 billion a month until the employment picture gets better; that's the plan behind QE3 to infinite and beyond. So, when will they stop? Narayana Kocherlakota, president of the Federal Reserve Bank of Minnesota, gave the answer in a speech today. Kocherlakota says that as long as inflation isn’t a problem the Fed should keep its foot all the way on the gas pedal until unemployment drops from its current 8.1 percent down to 5.5 percent. Koacherlakota is not the ultimate decision maker for the Fed, but now we have a target. Why did it take so long?

An interesting graph today from the Department of Labor showed the fastest growing industries for new jobs over the next 10 year; the top 4 are Services for elderly, Home health care services, offices of mental health, and masonry contractors.

Bank of America has a plan to cut back on expenses by $ 8 billion dollars in annual savings by 2015. How can they possibly find that much in savings? By firing 16,000 by the end of the year, and more than 30,000 total. See how that works? Bank of America keeps the unemployment rate high and they are guaranteed low interest rates and MBS purchases from the Fed.

The Fed released its Flow of Funds report today. Household mortgage debt has declined by almost $1 trillion following the housing bust. Most of the decline is not because people were paying down their mortgages but rather because they were defaulting. Five years ago, a few of the analysts at different banks tried to estimate how bad the losses from the subprime-mortgage meltdown might be. An analyst at Merrill Lynch estimated $500 billion. An analyst at Barclays estimated losses of $700 billion; the newspapers described that as a bloodbath that would top the GDP's of all but 15 nations. We're at $1 trillion in losses and counting.

American households accumulated debt at the fastest rate in the second quarter in more than four years, and total domestic debt grew at the quickest rate in 3 1/2 years. Household debt grew at a seasonally adjusted annual rate of 1.2% in the second quarter, marking only the second increase in 17 quarters. Mortgage debt fell 2.1% in the second quarter and has shrunk in 16 out of the 17 quarters. Consumer credit by contrast grew 6.2%, driven both by student debt (lots of people going back to school to learn masonry contracting) and by auto loans to fund American car purchases.

At the same time, corporate stockpiles of cash fell slightly to $1.73 trillion from $1.75 trillion. State and local government debt rose for the first time since the fourth quarter of 2010. Federal government debt meanwhile shot up 10.9%; which nonetheless was the slowest pace of growth since the second quarter of 2011. Total domestic debt - which includes household, business and government debt - grew 5% to $39.06 trillion, or roughly 2.5 times the size of the U.S. economy.

The Justice Department recently asked several banks to sign “tolling” agreements, in which the companies promise they won’t challenge any enforcement action on the grounds that the alleged wrongdoing occurred beyond the statute of limitations. The requests were sent to all the major banks under investigation, including Citigroup, Deutsche Bank, JPMorgan, RBS, and UBS.

According to a group of international securities regulators, the same lack of oversight that enabled traders to manipulate the London interbank offered rate plagues other benchmarks around the globe. Less than half of the benchmark interest rates surveyed in the US, Europe and Asia were based on actual transactions. Instead, the rates were calculated by methodologies that were unclear, not transparent and only rarely subject to specific regulatory standards or obligations. In other words, people make them up as it suits them.

Spain and Italy are bracing for downgrades. Debt investors are positioning for potential fallout in the countries' $250 billion corporate debt markets. Even with the prospect of aid from the European Central Bank, Spain and Italy could still face credit downgrades. The main focus is on Spain and Moody’s has said it may cut Spain to junk status, a move that would likely be followed by a cascade of cuts of its banks and several companies to junk. Such a move would likely trigger a wave of selling from investors who can only own bonds with investment-grade ratings. Some ratings-sensitive investors are selling ahead of the move. Others are getting ready to buy.

Ireland has already been down the road that Spain and Italy are now on. Ireland has tried to raise money in the markets to avoid a debt restructuring. Lots of austerity has failed to kick-start the economy. The head of European economics for Citigroup says “Ireland faces an almost impossible task to get back to fiscal balance,” and that visits to the country showed “life is tough, very tough and not getting that much better anytime soon.”

The Federal Energy Regulatory Commission has accused J.P. Morgan Ventures Energy Corp. of misleading regulators and said its authority to sell electricity might be suspended. The agency is investigating JPMorgan’s power trading in California and the Midwest. That investigation came to light when FERC went to court seeking internal e-mails from JPMorgan, saying the bids from the company might have resulted in at least $73 million in improper payments to generators.

The latest Reuters/Ipsos poll shows Obama leads Romney among likely voters by a margin of 48 percent to 43 percent; that is outside the margin of error. Other polls over the past couple of days have indicated similar results. A Pew Research Center poll showed Obama ahead of Romney 51% to 43% among likely voters. That's the biggest margin in a September survey prior to a presidential election since Clinton led Dole in 1996. Obama led Romney by double-digit margins on a range of personal attributes, from likability to whether he will protect American jobs to whether he appears presidential. Romney only led on the question of whether he was a "man of faith," by 43 percent to 34 percent. Obama's lead hasn't changed much over the past week, rather Romney has slipped. Other polling shows Obama with similar leads in key states of Virginia, Florida, and Ohio. It's still a long way to the election.

Senate Republicans prevented a veterans' jobs bill from coming to a vote yesterday by forcing a budget point of order vote. Democrats came up 2 votes short of the 60 needed to defeat the GOP's budget measure.

The Veterans Jobs Corps bill - which is part of President Obama's push to secure jobs for veterans, would have provided $1 billion over five years to hire 20,000 young veterans for public lands jobs and prioritize vets for first responder jobs such as police, firefighter, or EMT. The measure would have also provided young vets access to the infrastructure with which to assist in job searches, such as access to computers, internet and career services advisers.

The Iraq and Afghanistan Veterans of America, a vets group that supported the legislation, called the failure "a huge disappointment," adding, "Today, politics won over helping vets."

While only five Republicans voted with the Democrats to waive the GOP budget point of order measure, Sen. Tom Coburn (R-OK) led the GOP opposition. He said, "When we find ourselves in $16 trillion of debt and we pay for a five-year bill over 10 years, we make the problem worse.” Senator Coburn is an asshole of the first order, willing to put partisan politics ahead of his sacred duty. We have a debt to the men and women of the armed forces, and that debt is far greater than any other debt this country may incur. War costs money but that is the cheapest thing it costs. And it is a national disgrace that these damned rat bastards voted against the veterans.