Tuesday, March 25, 2014 - Want to Buy a Cookie?

Want to Buy a Cookie?

by Sinclair Noe

DOW + 91 = 16,367
SPX + 8 = 1865
NAS + 7 = 4234
10 YR YLD un 2.73%
OIL - .39 = 99.21
GOLD + 2.10 = 1312.70
SILV + .07 = 20.10

According to the S&P/Case-Shiller home price report, the home price index covering 10 major US cities increased 13.5% in the year ended in January. The 20-city price index advanced 13.2% for the year. Month to month, the 20-city index dropped 0.1%; the drop is not just weather related; from December to January, prices fell in 12 of the 20 cities Case-Shiller tracks.

Taking a look at a few cities: LA was down 0.3% for the month but up 18.9% for the past year, San Diego was up 0.6% for the month and 19.4% for the year, Phoenix was down 0.3% for the month but up 13.8% for the year, San Francisco was up 0.5% for January and 23.1% for the year, the hot spot was Las Vegas up 1.1% for the month and 24.9% for the year, to lead the nation.

The Commerce Department reports new home sales dropped 3.3% from January to February to a seasonally adjusted rate of 440,000. Sales fell in all regions except the Midwest, where they jumped 36.7%. Sales dropped 15.9% month to month in the West. The national median price for a new home was $261,800 last month, up from $260,800 in January. Compared with February 2013, the median price fell 1.2%. At the current sales pace there is a 5.2 month inventory.

A recent Trulia report gauges whether home prices are over or undervalued, and where. Nationally, home prices are still undervalued by about 5%. When home prices hit their bottom at the end of 2011, national home prices were about 15% undervalued. That’s no longer the case, and in some select markets rising prices are coming unchained from their long-term fundamentals. Six of the nation’s ten most overvalued cities were in California. Trulia figures the Orange County metro area is about 16% overvalued, and Los Angeles is 13% overvalued.

The Commerce Department also reported today that nationwide personal income growth slowed to 2.6% last year from 4.3% in 2012. Personal income rose 0.3% in January from a month earlier. Residents in every state saw weaker income growth from a year earlier. The personal income report measures everything Americans receive from all sources, including wages, salaries and property income. Several factors contributed to the slower overall income growth, including the expiration of a 2% payroll tax “holiday” last year. As a result, many people received salary bonuses and personal dividends in 2012, which boosted that year’s incomes. Earnings grew in 2013 in every industry except civilians who work for the federal government. Inflation pressures remained weak over the year, with the price index for personal consumption expenditures rising only 1.1% in 2013 from 1.8% in 2012.

The Conference Board Consumer Confidence Index rose to 82.3, up from 78.3 in February. Overall, consumers expect the economy to continue improving and believe it may even pick up a little steam in the months ahead, but they are feeling less optimistic about their current economic circumstances. Hope springs eternal.

Each year about this time, the Girl Scouts send forth minions to sell cookies for 7 weeks. Katie Francis, a sixth grader from Oklahoma City, set a new sales record of 18,107 boxes, topping the old record of 18,000; that works out to about 370 boxes sold per day; figure 12 hours a day, that works out to a sale every 2 minutes. Her secret to success: time, energy, and asking absolutely everyone she comes in contact with to buy cookies.

The Federal Reserve today published 11 research papers which tend to confirm information we have relayed in the past; big banks get a hidden subsidy in the form an implied bailout, or the idea they are too big to fail. The new research focuses on the primary bond market where banks sell their new debt to investors, instead of measuring the taxpayer subsidy through bank bond “spreads” in the secondary market. And the new research only covers up to 2009, so things may have changed a bit, but the biggest US banks enjoyed an extra $60 million to $80 million of cost savings per average new bond sale over their smaller competitors.

Fed staff wrote in one paper that a greater likelihood of government support leads to more risk-taking at big banks, including impaired lending and net charge-offs. Regulators have shied away from suggestions that they should break up banks, pointing instead to the new rules that require banks to reduce leverage, maintain a supply of assets they could sell quickly, and stop making risky trades with their own money. Officials say they also have made strides to ensure regulators are equipped to resolve big banks in a crisis rather than bail them out.

The Murdoch Street Journal is reporting the SEC is investigating whether a boom in complex new bond deals is being used to hide certain illegal risks. A number of likely cases are in the pipeline. Separately, the government has expanded an inquiry into how Wall Street banks may have been cheating their clients by mispricing certain bond deals.

If you are still trying to figure out what Bitcoin is, you are not alone, but the IRS thinks they have figured it out; it is not legal tender in any jurisdiction; it is property and should be taxed as such. That means that employers who choose to pay wages in Bitcoins will have to report those wages just like any other payment made with property, and Bitcoin income will be subject to the normal federal income withholding and payroll taxes. And the same goes for profits on the sale of Bitcoins, at least the Bitcoins that aren’t lost in the digital wallets of Mt. Gox.

Another study says that you should pay closer attention to annual shareholder meetings, and maybe the most important thing to watch is where the meeting is held. Companies that schedule annual shareholder meetings in unusually remote locations tend to announce bad news fairly shortly thereafter; the more surprising the location, the worse the news, and the harder the company's stock price falls. It’s not a hard and fast rule, just a general indicator.

Global markets have been increasingly concerned about the impact of slowing economic growth on Chinese financial institutions. Apparently the locals are also nervous. Hundreds of Chinese citizens had an old fashion run on the banks, trying to withdraw cash from branches of 2 small Chinese banks in the Jiangsu province after rumors spread about the solvency of one of them.

The Houston Shipping Channel remains closed today because of a weekend oil spill. The closure from this weekend has delayed shipments of crude and refined products in and out of the channel. Roughly 11% of the US refining capacity is transported through the channel. The incident was coincidentally timed around the 25th anniversary of the Exxon Valdez disaster. If the closure lasts much longer, refiners will begin to miss scheduled deliveries and companies expected to have product to load and offload may have to declare force majeure. You know what happens to oil and gas prices if that occurs and continues.

The White House and the House Intelligence Committee have leaked separate proposals that are supposedly aimed at ending the mass collection of Americans’ phone records. The full draft of the House bill is not yet available but it is tentatively named the “End Bulk Collection Act. The plan would have telephone companies hold on to phone data and the government could search data from those companies based on "reasonable articulable suspicion" that someone is an agent of a foreign power, associated with an agent of a foreign power, or "in contact with, or known to, a suspected agent of a foreign power". The NSA’s current phone records program is restricted to a reasonable articulable suspicion of terrorism.

A judge would reportedly not have to approve the collection beforehand, and the language suggests the government could obtain the phone records on citizens at least two “hops” away from the suspect, meaning if you talked to someone who talked to a suspect, your records could be searched by the NSA. A report in The Guardian says that coupled with the expanded “foreign power” language, this kind of law coming out of Congress could, arguably, allow the NSA to analyze more data of innocent Americans than it could before.

The New York Times reports the White House proposal would supposedly end the collection of phone records by the NSA, without requiring a new data retention mandate for the phone companies, while restricting analysis to the current rules around terrorism and, importantly, still requiring a judge to sign off on each phone-record search made to the phone companies.

We still don’t know what would happen to other types of bulk data collection, such as internet and financial records. Also, the NSA has been collecting phone data on people up to three hops away from a suspect so long as it had “reasonable articulable suspicion” that the suspect was involved in terrorism; then they hold that bulk data, dumping it into something they call a “corporate store” where they feel free to conduct further analysis even if they don’t have “reasonable articulable suspicion”.

The existence of the NSA program was disclosed and then declassified last year following leaks by Edward Snowden, the former NSA contractor. The current court order authorizing the collection of data is set to expire on Friday. The FISA court is expected to renew authorization for at least 90 days while changes are considered. The government has been unable to point to any thwarted terrorist attacks that would have been carried out if the program had not existed, but has argued that it is a useful tool.

Thursday, January 09, 2014 - A World Of Central Bankers

A World Of Central Bankers

by Sinclair Noe

DOW – 17 = 16,444
SPX + 0.64 = 1838
NAS – 9 = 4156
10 YR YLD - .03 = 2.96%
OIL - .67 = 91.66
GOLD + 1.80 = 1228.70
SILV + .02 = 19.65

If it's not one central bank, it's another. Today the European Central Bank and the Bank of England met to determine monetary policy. Back in November, the ECB cut interest rates to 0.25%, so there were no expectations of further rate cuts in today's meeting. In Britain, which is outside the euro zone, the Bank of England left its benchmark interest rate unchanged at a record low of 0.5 percent.

As the US Federal Reserve has been creating new dollars at the rate of $85 billion a month under Quantitative Easing, the Fed's balance sheet has been growing, even as the ECB's balance sheet has been shrinking. And even though the Fed announced it would scale back those purchases by $10 billion a month, that just means the Fed balance sheet will continue growing, just not as fast. Or the bottom line; the Fed is creating money and the ECB is not.

Today, Mario Draghi, the president of the ECB said he wanted to “strongly emphasize” his earlier promise to keep monetary policy easy for as long as necessary. And Draghi said the ECB was “ready to consider all available instruments” to address either further weakness in consumer prices or increases in short-term money market rates that could put stress on banks. He did not, though, specify what tools he would use. The fear in Europe is that a nascent recovery could sputter and that low inflation (0.8% in December) could turn into deflation.

When asked if the euro crisis was over, Draghi said, “The recovery is there, but it’s fragile,” and it was too soon to declare victory. Even that might be a stretch. The unemployment problem for much of the euro-zone remains lousy; stuck at 12.1% for the past 9 months, and in some areas, youth unemployment is still around 50%, very dangerous levels. The problem for the ECB is essentially the same problem the Fed faces – how to improve aggregate demand. The ECB has been offering cheap money to the euro banks but the credit isn't getting through to companies and households. Lending to small businesses in the euro zone shrank 3.9% in November from a year ago, the biggest decline recorded by the ECB.

And with the Fed taper ready to kick in, the hope is that other countries and other central banks will pick up some slack in the world economy. Draghi has promised to do whatever it takes, and today he reiterated that promise, but that has been the promise for the past couple of years, and a couple of years can easily turn into a lost decade.

Here in the US, Ben Bernanke's farewell tour included a luncheon on Capitol Hill with Congress-folk, where he received a standing ovation and some of his past critics seemed to go soft. Bernanke offered an optimistic view of the economy, listing the country’s booming energy sector, stronger financial institutions and modest federal budget deficit reductions as positive signs.  Bernanke indicated he is more worried about the economic fate of middle-class families than the federal budget deficit going forward.

Meanwhile, the newly confirmed Federal Reserve Chairwoman, Janet Yellen has granted an interview to Time magazine and here's what she says about the economy: "I think we'll see stronger growth this year. Most of my colleagues on the Fed's policymaking committee and I are hopeful that the first digit [of GDP growth] could be 3 rather than 2... The recovery has been frustratingly slow, but were making progress in getting people back to work, and I anticipate that inflation will move back toward our longer-run goal of 2 percent." On the housing market, which had a brief lull this fall: "I expect it to pick back up and I do expect a further recovery."

Talking about the Fed's QE program, Yellen seems to believe that higher home prices and stock market stimulation is helping the average family. She is clearly a believer in the wealth effect, even though I have to question what data she might be looking at. RealtyTrac just released its Home Equity and Underwater Report for December 2013, which shows that 9.3 million US residential properties were deeply underwater, or about 1 in 5 of every property with a mortgage. "Deeply underwater" is defined as worth at least 25% less than the combined loans secured by the property. There are fewer homeowners who are deeply underwater, but there are still millions who are in serious trouble, and the longer these homeowners remain in a negative equity position without relief in the form of a principal loan balance reduction, the more likely that foreclosure will become the path of least resistance for them.

And on the jobs front, recent data from the Economic Policy Institute shows we're still about 1.3 million jobs below the pre-crisis peak – that's just to get back to break even, and then we would need about 6.6 million more jobs to get to where we need to be, in other words, how many jobs would be needed to employ all the people who would be actively looking for work if the economy were running at full steam.

The 7% unemployment rate is misleading because it is based partly on people dropping out of the work force and no longer being counted as unemployed. The economy is not strong enough to create jobs, so labor-force growth is not living up to its potential. If people who have dropped temporarily out of the labor force were still looking for jobs, the real unemployment rate would be 10.3%, not 7%. In other words, Dr. Yellen's confidence in the wealth effect never filtered down to the actual labor force.

If labor force participation drops, if for whatever reason, millions of people are no longer counted as part of the labor force, as is the case in the US, it’s a troublesome indicator for the economy and the real employment picture. It also makes the unemployment rate, now 7%, look a lot less awful: if you’re not counted in the labor force, and you don’t have a job, you’re not counted as unemployed. There are millions of people in that category. And their numbers are growing, not diminishing. The irony of the U-3 unemployment statistic is the fact that while unemployment has gone down 30% since its 2009 peak, we have the lowest labor force participation rate in over 3 decades.

People 55 to 64 years old, the first forget-about-retirement generation, are staying in the labor force to an ever greater degree. In 1992, only 56.2% were still in the labor force, in 2012, 64.5% were. Similar for older folks. The participation rate for people 65 to 74 years old jumped from 16.3% to 26.8%. Reality is this: fewer people can afford to retire. And the further reality is that the older workers are getting paid less.

The pattern among employers in a downturn in managing the non-executive/senior managerial workforce was to push out higher-cost older workers in favor of cheap, high energy, less set-in-their-ways new hires. Lots of people over 40 were given the heave-ho. Some eventually found work at much lower pay, some became self-employed (it’s a lot harder than the business press lets on; 9 out of every 10 new businesses fail in the first three years), and some retired, living more modestly than they had wanted to.

But who is not making it into the labor force? Young folks. The participation rate for those 16 to 19 has plunged from 51.3% in 1992 to 34.3% in 2012. OK, the BLS explains that by an increase in school attendance, and that would be a good thing. But the 25 to 54 year olds? Even among them, participation rates dropped from 83.3% in 2002 to 81.4% a decade later.

Among the 18 to 34 year old “Millennials,” those lucky ones who’re official counted in the labor force, unemployment has been a nightmare, with double digit unemployment rates, still, nearly 6 years after the financial crisis. It’s even worse for the 16 to 24 year olds, whose official unemployment rate is still 15%. In prior downturns, the employment rate for young adults nearly reached pre-recession levels within 5 years.

In the Great Recession, young adult employment had not even recovered halfway by the same point. A quarter of all job losses for young adults came after the Great Recession was officially over. The lack of jobs had driven many discouraged young people from the labor force altogether. A recent report by Opportunity Nation estimates that 5.8 million young adults are neither working nor in school.

And on the issue of banking reform Yellen says Dodd-Frank is a good road map but there may be a need for further steps. Which may be the biggest understatement of the new year. The Dodd-Frank reform legislation has been moving forward at a snail's pace, and the bank lobbyists are still in the process of re-writing bits and pieces and generally eviscerating key components. And even complete fulfillment of Dodd-Frank along current lines will not end the problem of “too big to fail.” 

Still, it's nice to see an incoming Fed head act like she'll pay attention to the Fed's role as a regulator. Under Alan Greenspan, the Fed was more of a deregulator than a regulator. Under Ben Bernanke, the Fed seemed to be more concerned with crisis control, and any thoughts of regulation were subservient to not letting the banking system implode, even if the bankers had lit the fuse. Now that there is some level of equilibrium, Yellen may actually feel emboldened to … ah hell, let's not get carried away; nothing will change.

Tuesday, July 09, 2013 - What's It All About?

What's It All About?

by Sinclair Noe

DOW + 75 = 15,300
SPX + 11 = 1652
NAS + 19 = 3504

10 YR YLD -.01 = 2.63%
OIL + 1.38 = 104.52
GOLD + 13.40 = 1251.70
SILV + .18 = 19.36

It's earnings reporting season. The stock market is feeling happy for the moment. Second quarter earnings are expected to be soft, but expectations have been ratcheted down, so there is potential for upside surprises. That's the game that's played on Wall Street to siphon a little bit of trading profit. Anywhere else, they'd call it price fixing.

But this game of diminished expectations may have some basis in reality. The top line numbers more than likely suck. Analysts expect the 30 companies in the Dow Industrial Average to see revenue growth of just 0.7%; that number could be ratcheted down into negative territory; that follows a 0.6% drop in revenue in the first quarter.

What do you call it when there are two consecutive quarters of economic contraction? Recession. That's a bit of a non sequitur, but the logical conclusion is not too far removed from the premise. After all, we're talking about 30 of the biggest, most powerful companies in the world and they are struggling to grow sales. They're still reporting profits, but that comes from cost cutting, which tends to fall on the labor force. There are limits to cost cutting as a business strategy for growing profits.

No worries. The S&P 500 closed above 1650 and looks poised to make a run at those record highs of May; remember the days of milk and cookies, before Bernanke started talking about taper. Well tomorrow the minutes of last month's FOMC meeting will be released, and we'll see if they're still talking taper, and we'll see if the markets can remain exuberant if the Fed is still talking taper.

Of course the Fed looks at more than just the headline unemployment rate, even if they have set a target of 6.5% based upon that rate. They also look at broader views of the labor markets. After all, the Fed will make its decision based on the outlook for labor markets, not what happened a month ago. One such report, know as “Jolts” looks at job openings and labor turnover. In May, businesses posted more job openings and gross hiring also picked up. But the rates remain well below those seen before the most recent recession.

May also saw a small increase in job separations. A sizeable part of the gain in separations came from people quitting their jobs. That’s a positive for the labor market outlook since workers tend to give notice only when they are confident they will quickly land another job.

Before you think that is overly optimistic, the Conference Board employment trend index, a compilation of job indicators designed to foreshadow changes in nonfarm payrolls, edged up a mere 0.05% in June. Its growth rate for the second quarter moderated. The report said that suggests “acceleration in the employment growth is unlikely in the near future.”

Part of the problem is that for every job opening, there are 3 people looking for a job, and since people aren't really leaving their current jobs, because of the tight labor market, that means people aren't moving up; they aren't leaving a job for a better job. The ratio of unemployed workers to job openings is the highest in the 13 years the BLS has been collecting the data. Not coincidentally, most of the industries with the highest numbers of job openings in May, according to the JOLTS data, were lower-paying sectors, including health-care services, retail sales and restaurants.

Another consideration in the jobs market is that one of the most consequential effects of the sequester began just this week: weekly unpaid furlough days for more than 650,000 civilian workers at the Defense Department, who will effectively see their pay cut by 20 percent for the  final 11 weeks of this budget year. A little back-of-napkin math shows 20% of 650,000 jobs is kind of like losing 130,000 jobs.

All the commissaries at domestic military installations will be closed every Monday through the end of September. (Most agencies within the department have decided to salve the economic sting a tiny bit by setting the furloughs on Mondays and Fridays, so that workers might at least enjoy a series of long weekends.)

But the visuals of closed cafeterias, equipment maintenance sheds, supply warehouses, payroll offices and the like will have absolutely no effect on the pace of congressional effort toward untangling the budget morass. Whatever work is taking place on that score is totally out of view. And none of the congressional leadership is suggesting this will change before Congress returns from its August recess a full week after Labor Day, when there will be 23 days left before this fiscal year gives way to the next.

Some agreement on spending will need to get done by then to forestall a partial government shutdown, which is in neither party’s political interest to permit. Odds are that the first month or so, at a minimum, will be covered by a temporary patch in the form of a continuing resolution that keeps agencies spending at their across-the-board budget cut levels.

But any longer-term agreement already seems destined to be delayed until the end of the year, by which time the debt ceiling will also be nearing. And if they can't find agreement, then the budget would require layoffs – probably a mix of civilian, active-duty military, National Guard and Reserves.

As expected, the IMF cut its forecast for world economic growth for the third time this year. The IMF now expects global output to expand by 3.1%, down from 3.3% forecast in April, and down from 3.5% forecast growth back in January. The revision means the global economy will have failed to pick up pace over the past two years, although the IMF expects a slight acceleration in growth in 2014 to 3.8%, subject to revisions, of course.

The IMF said: "While old risks remain, new risks have emerged, including the possibility of a longer growth slowdown in emerging market economies." They pointed to the slowdown in China which is also affecting emerging markets such as Brazil and South Africa; also, the ongoing slowdown in the Euro-zone. One country that is expected to show growth – Japan, which should see growth of 2%, up from earlier forecasts of 1.6%, due to the success of Abenomics.

The FDIC, the Federal Reserve and the Office of the Comptroller of the Currency are proposing raising the leverage ratios on the largest US banks to 5% from the 3% agreed upon by international regulators as part of Basel III. The insured bank subsidiaries of those firms would be subject to a 6% leverage ratio to be considered well-capitalized. That basically means the banks would have to hold a little more in the way of reserves.

While the proposed changes would not take effect until 2018 if finalized, the rules as proposed represent the latest attempt by regulators to address lingering concerns that certain large, complex banks remain too big to fail. Of course, that still leaves a 5 year window, and considering the extreme leverage, it is doubtful that a 5% cushion could save us from a bank crash, but it's a start I suppose.

FDIC staff said market perceptions that certain banks would be protected by the government poses a threat to the financial system, allowing these firms to obtain cheaper funding and eliminating checks on excessive risk taking by the banks. The banks don't want to be forced to hold more reserves, even if it would mean they are a bit safer. And the reality is that it would not make them much safer. If we really have concerns about too big to fail, we could start by regulating derivatives trading and reinstating Glass-Steagall.

Yesterday, Fortune released its list of the world's 500 largest corporations, ranking them by revenue for the fiscal year ended on or before March 31. In total, the 500 largest global corporations reported $30.3 trillion in 2012 revenue, nearly a 3 percent increase from the year before, with profits of $1.5 trillion. There are 132 US companies on the Global 500 list; China had the second most with 89 companies. Seven of the top ten companies by revenue were in the energy business. Royal Dutch Shell topped the revenue list with $481 billion, followed by Walmart with $469 billion and Exxon Mobil with revenue of $449 billion. Exxon Mobil was the most profitable at $44.9 billion, followed by Apple at $41.7 billion.

Oil closed at $104.52. Fill up the gas tank now.

Thousands of people gathered in Prescott Arizona today to honor the 19 members of the Granite Mountain Hotshot squad who died fighting the Yarnell fire. Vice president Biden lead a list of dignitaries on hand. Biden referred to an old saying: “All men are created equal - then a few became firefighters.”

Over the years I've raised a question from time to time on this program: “What's the economy for?” Why do we get up each day and do the work we do? What is the purpose of our labors? Well, for the Yarnell 19 their mission was to save lives and protect property, and their jobs weren't jobs, but a duty to their fellow citizens. Sometimes I wonder about the purpose of our labors, but I'm quite certain the Yarnell 19 had figured out the right answer. 

Wednesday, May 15, 2013 - Have Another Cookie

Have Another Cookie

by Sinclair Noe

DOW + 60 = 15275
SPX + 8 = 1658
NAS + 9 = 3471
10 YR YLD - .01 = 1.94%
OIL + .18 = 94.39
GOLD – 33.30 = 1393.50
SILV - .82 = 22.69

More record highs on Wall Street. We celebrate with milk and cookies, and remembrances of the days of rice and beans and tins of tuna. Record highs are fleeting, almost ephemeral. I know the trend is your friend; don't fight the Fed; a rising tide lifts all boats; yada, yada. Why is this starting to feel like an asset bubble?

Stock Traders Daily did a comparison of quarter to quarter earnings and revenue growth rates for the S&P 500 and the Dow Industrials: “For the past two consecutive quarters, the Dow Jones Industrial Average has had zero growth. In fact, this quarter revenue growth declined by 2.65% (25 companies reporting thus far) and earnings have barely budged. Last quarter, there was negative earnings growth with revenue growth less than 1%, and since the third quarter of 2010, the EPS growth rate for the Dow has been declining steadily.”

So, the growth rate is at zero and the prices keep going higher. Don't worry, have another cookie; after 13 years in the market, you should be back to break even.

Meanwhile, the National Association of Home Builders/Wells Fargo housing-market index rose to 44 in May from 41 in April. The NAHB says builders are noting an increased sense of urgency among potential buyers as a result of thinning inventories of homes for sale, continuing affordable mortgage rates and strengthening local economies. Have another cookie.

Wholesale prices dropped in April. The producer-price index declined by a seasonally adjusted 0.7% to mark the biggest drop in more than three years. Wholesale prices over the past 12 months are up just 0.6%. In April, the cost of fuel fell 2.5%, led by a 6.0% drop in gasoline prices. Electricity and home-heating-fuel costs also eased, though natural-gas prices posted the biggest increase since mid-2008.

The price of food, meanwhile, fell 0.8% in April after jumping by the same amount in March. Vegetable prices plunged 10.6%, with the cost of squash, lettuce, celery and cucumbers all taking a dive. Meat prices also fell. Cookie prices were not included in the report.

The muted rate of inflation at both the producer and consumer levels gives the Federal Reserve more leeway to keep interest rates low and continue with QE. So, the talk about tapering off of QE might make more sense if the Fed was actually getting closer to its targets of 6.5% unemployment or 2.5% inflation. They aren't close.

The Federal Reserve Bank of New York reports households reduced debt during the first quarter by 1 percent to the lowest level since 2006. Household debt fell to $11.2 trillion in the first quarter compared with a peak burden of $12.7 trillion in the third quarter of 2008. Consumers reduced debt by $110 billion after increasing their borrowing by $31 billion in the fourth quarter of 2012, while delinquency rates fell across the board. Student debt bucked the trend, rising to a record $986 billion.

Households in the first quarter improved their debt payment patterns as delinquency rates on mortgages fell to 5.4 percent from 5.6 percent, on home equity loans to 3.2 percent from 3.5 percent, on credit cards to 10.2 percent from 10.6 percent and on student loans to 11.2 percent from 11.7 percent. One way to look at this is that reducing debt results in a better vintage of debt. Student lending has surpassed credit cards, auto loans, and home equity loans, and is now the largest form of consumer debt after mortgages.

Last week, Fed Chairman Ben Bernanke said “the Fed could push banks to maintain a higher leverage ratio, hold certain types of debt favored by regulators, or other steps to give the largest firms a ‘strong incentive to reduce their size, complexity, interconnectedness.’

“The Fed chairman acknowledged growing concerns that some financial companies remain so big and complex the government would have to step in to prevent their collapse and said more needs to be done to eliminate that risk.”

And Fed Governor Jeremy Stein said pretty much the same thing; and Fed Governor Daniel Tarullo also picked up on the talking point.

James Kwak raised a vital question about these talking points: Too-big-to-fail banks enjoy implicit subsidies and impose externalities on the rest of us; therefore those subsidies and externalities should be priced; and then those banks can decide whether they want to absorb those costs or make themselves smaller. 

Here’s what they are saying: Too-big-to-fail banks are too big and complex and pose a systemic risk to all of us; therefore they need to become smaller and less complex; and the Fed will tweak the regulations until they become smaller and less complex.

What’s remarkable about this? These three men—probably the three most important on the Board of Governors when it comes to systemic risk regulation (as opposed to monetary policy, for example)—all say that they know that the megabanks are too big and complex. They all say that accurate pricing of subsidies and externalities is not an end in itself.* They all say that the goal is smaller, less complex banks.

If the goal is smaller, less complex banks, why not just mandate smaller, less complex banks? Why beat around the bush with capital requirements and minimum long-term debt levels? Those tools might be appropriate if you think huge, complex banks should exist but you want to make them safer. But if you’ve already concluded that banks need to be smaller and less complex, then they’re just a waste of time.

They also betray a frightening naivete regarding corporate governance. The theory is that higher capital requirements, for example, will lower banks’ profits, which will upset shareholders, who will eventually force the board of directors to eventually convince the CEO to break up his empire. This scenario, unfortunately, depends on the premise that American corporations are run for the benefit of their shareholders, which is only roughly true, and even that often requires long, expensive, and messy shareholder activist campaigns.

Instead, there’s an obvious solution: rules that limit the size and scope of financial institutions. But Bernanke has ruled out “arbitrary” size caps in favor of his cute regulatory dial-tweaking.

Again, Bernanke’s position might be defensible if he wasn’t already sure that today’s banks are too big and complex. Then it might make sense to tweak the incentives and see how the market reacts. But if he knows they are too big and complex, he should eliminate that risk in the simplest, most direct way possible. If he’s not sure how much smaller and simpler banks need to be, he can do it in steps: set one set of size and scope limits, see what he thinks about the outcome, and then set another set of limits if he’s still unhappy.

To use a crude analogy, let’s say we’re concerned about guns on airplanes. Ben Bernanke thinks, like I do, that guns on planes present an unacceptable risk to the safety of air travel. But his approach is to charge a $100 fee for anyone who wants to bring a gun onto a plane. If people keep bringing guns on board, he’ll raise the fee to $200, then $300, and so on until people stop. The sensible, obvious solution is to just ban guns on planes. But that would be “arbitrary.”

It is theoretically plausible that one should simply price the subsidies and externalities and then let the market determine whether big banks provide enough societal benefit to offset the costs they impose on the rest of us. But that is not what Stein, Tarullo, and Bernanke are saying.

Meanwhile, Attorney General Eric Holder was speaking before the House Judiciary Committee hearing today on another subject, but he was asked about comments he made back in March about the idea that the big banks are too big to jail. He said his comments were misconstrued and he added that there is “no bank, there’s no institution, there’s no individual who cannot be investigated and prosecuted by the United States Department of Justice.”

And that was the straightest answer he gave in testimony today. Have another cookie.

Meanwhile, a few years ago, I wrote a book about breaking up the too big to fail banks; Eat The Bankers: The Case Against Usury: The Root Cause of the Economic Crisis and the Fix

Thursday, March 07, 2013 - Banks Rule the Law

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Banks Rule the Law

by Sinclair Noe

DOW + 33 = 14,329
SPX + 2 = 1544

NAS + 9 = 3232
10 YR YLD + .05 = 1.99%
OIL + 1.09 = 91.52
GOLD – 5.90 = 1579.60
SILV - .16 = 28.98

Another day, another record high close. It seems blasé, these little record high celebrations; and the more we see it the more mundane, but you'll miss it when it's gone. When will it be gone?

I'll let the market tell us. Right now the market is telling us that it is hitting record highs. Is there a disconnect between the market and the economy? Yes, there is. We have seen improvements in the economy, and we have some economic reports to cover in just a moment, but this is not a great, robust economy. So, can we expect a bubble in the market? Not necessarily. It's certainly possible, but as of today, there is not a bubble. Check tomorrow.

It is possible to have a less than perfect economy and to have record highs in the stock market; in fact, it's not uncommon: 1929, 1937, 1946, 1966, 1982; market highs, rough economic times. At some point you might expect the markets to reflect the economy, meaning you might expect a bubble; maybe tomorrow, maybe three years, or maybe longer. The markets can remain irrational, exuberantly so, for much longer than you can remain solvent.

Are there reasons to be sour on the economy? Sure. Are there reasons to be sour on the markets? Sure, but just be aware that the market has hit a high. Should you jump in? You'll remember that I told you, for less-active investors, that the easiest way to play the market was to follow the Best Six Month, Worst Six Month Strategy. In which case, you are in. You're welcome.

And if you feel battle scarred from Wall Street chopping your financial legs out from under you, and if you have vowed to not let it happen again, then don't. There is no rule that says you have to invest in stocks or bonds. I'm not saying you should bury your cash in a coffee can in the back yard. I am saying that it's O.K. To think outside the box.

Now, over to economic news.

The number of Americans who applied last week for new unemployment benefits fell 7,000 to a seasonally-adjusted 340,000 in the latest week. It's the lowest level in a month and a half and hovered just above a five-year low, offering another sign that the outlook for hiring is on the upswing, or more precisely it was on an upswing. The sequester will start to effect the labor market soon, but not yet. Tomorrow we'll dig into the monthly jobs report for February.

The numbers for fourth quarter productivity were revised slightly lower, to a 1.9% annual rate from 2.0% in its preliminary tally. The output of goods and services and the amount of time workers put in on the job were both somewhat higher compared to the earlier estimate. In the short term, declining productivity can be a signal that companies need to hire more workers to keep up with rising demand while maintaining strong profit margins. Hourly pay for American workers rose 2.6% in the fourth quarter, but adjusted for inflation, earnings only increased 0.4%. What’s worse, inflation-adjusted hourly wages fell 0.6% for the full year, following a revised 0.6% decline in 2011.

You may recall the trade gap narrowed in December as oil prices dropped. You may also remember that all through January and February, you were getting a case of sticker shock whenever you went to the gas station. Today, the Commerce Department reports the trade deficit widened by $6.3 billion in January to $44.4 billion. Excluding petroleum, the trade deficit was unchanged.

So, with all the talk about the sequester and the continuing resolution, which was continued and will not result in a government shutdown, and record highs and Italian elections, yada, yada, yada. You may have forgotten that banksters behave badly. That's where I come in, to tell you more banking news that should twist your intestines.

Attorney General Eric Holder, the top law enforcement official, the nation's top cop appeared before the Senate Judiciary Committee and admitted the most self-evident truth: the big banks are too big to jail.

Holder was responding to questions from Republican Senator Chuck Grassley about why the Justice Department brought no criminal charges against the large British bank HSBC after it admitted laundering money for parties in Iran, Libya and Mexican drug lords. Holder said:

"I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy," he said. "And I think that is a function of the fact that some of these institutions have become too large."

Holder acknowledged that the sheer size of the big banks "has an inhibiting impact on our ability to bring resolutions that I think would be more appropriate.  That is something you (members of Congress) all need to consider."

Grassley and Sen. Sherrod Brown, an Ohio Democrat, have been pushing the Justice Department on the issue and have asked for the names of the outside “experts” officials say advised them that it would threaten financial stability to prosecute big banks. It's no secret.

Allowing the big banks to operate above the law is at one with the philosophy that guided both the Bush and the Obama administrations during the financial collapse. Tim Geithner, former head of the New York Federal Reserve bank under Bush and Treasury Secretary under Obama, gave the advise to protect the banks. In what has become known as the “Geithner doctrine,” documented by numerous eyewitnesses to the administration’s deliberations on the financial crisis, the former Treasury chief consistently advocated preservation of the banks as the paramount objective in any measure. Geithner said that it was necessary to "foam the runway" to protect the banks from total crackup.  That "foam" included literally trillions in the backdoor bailout of banks organized by the Federal Reserve, abandoning the underwater homeowners who were victimized by Wall Street's predatory practices and reckless gambling.

Foaming the runway essentially neutered regulators who weren't already bought and paid for. Holder claimed that the Justice Department has been “appropriately aggressive” in pursuing fraud at the banks, which is an absolute joke. And then contradicted himself when he conceded that levying a fine that is a small percentage of profit is far less effective in scaring bank executives into obeying the law than putting some individuals in jail. Holder said:  “The greatest deterrent effect is to prosecute the individuals in the corporations that are responsible for those decisions.”

At a hearing last week, Warren took Federal Reserve Chairman Ben Bernanke to task for the “subsidy” reaped by the big banks from the perception that they are too big to fail, which a study by Bloomberg evaluated at $83 billion.

Bernanke countered that any benefit was a result of market perceptions, but he became less convincing as he argued that the perception was inaccurate because the Fed would not bail out the banks again.

Holder tried to place the blame at the feet of Congress, and Congress needs to stop stuffing their pockets for a few moments to take action. Bankers spend tens of millions lobbying to weaken regulations and starve regulators of authority and resources.  But when the action gets hot, the bubble starts to build, the music keeps playing, they can trample the laws, mislead the regulators and defraud their customers, bolstered by the confidence that the laws will not apply to them. 

The banksters know their losses are covered, while they pocket their winnings.  They have multi-million dollar personal incentives to leverage up, use other people's money to make big bets on high risk operations that offer big rewards.  Their excesses blew up the economy, but they got bailed out and emerged bigger and more concentrated than ever. And, of course, since investors know the big banks can't fail, the big banks can attract money at much lower rates than smaller banks, a subsidy worth about $83 billion a year according to recent calculations by Bloomberg News.

So, banks operate above the law. Holder's argument is indefensible. There is no reason a bank can't survive the indictment of a CEO or CFO. And if the bank did fall, so be it. It's not the end of the world. The far greater fear than a bank failure is a country that abandons the rule of law.

Wednesday, April 11, 2012

DOW + 89 = 12,805
SPX + 10 = 1368
NAS + 25 = 3016
10 YR YLD +.04 = 2.03%
OIL - .13 = 102.57
GOLD - .90 = 1660.70
SILV -.23 = 31.71
PLAT – 14.00 = 1591.00

What changed between yesterday and today? What pushed the markets higher today? What pushed the markets lower yesterday? I hope I'm smart enough to not fall into that trap. The markets fluctuate. They don't go straight down and they don't go straight up. At the start of the month, I said you might want to think about taking profits off the table; I still think that's wise, but I'm not saying the market will crash; I don't think the sky is falling, at least not today.

There are twelve different regional banks in the Federal Reserve; each month the task of writing about the economy falls to a different bank; the results are published in a book format with a beige cover, hence the name “Beige Book”. It's a misnomer. Some months the book should be called “the lime green electrifying economic report” and other months it might be called the “Kind'a Blue Forecast”. This month, the report was prepared by the Cleveland Fed and the “Beige Book” title fits.

The Federal Reserve says the economy continued to grow at a "modest to moderate pace” over the last month. Manufacturers and retailers expressed some concern about rising oil prices, but the unusually warm weather helped retail sales. The report showed an economy chugging if not roaring along: manufacturing expanding, professional business services growing, freight volume increasing, strong new-car sales, growing tourism, favorable agricultural conditions, more mining and oil extraction, some improving loan demand, real estate activity was at low or lackluster levels but improving, hiring was steady, wage growth was constrained, and overall price inflation was modest. In a word – Beige.

About two weeks ago, the Dallas Fed issued a paper explaining how Too-Big-To-Fail must be allowed to fail. Today, Kansas City Fed President Esther George said the most important step in restoring market discipline to the financial system would be to eliminate too-big-to-fail policies, including taking advantage of a provision in the Gramm-Leach-Bliley Act that would force divestitures or termination of new activities within 180 days if a financial holding company isn't well managed or capitalized. Speaking at the 21st annual Hyman P. Minsky Conference in New York, she also said bank capital standards, in particular leverage requirements tied to equity capital, need to be strengthened She said she supported the implementation of the Volcker Rule and added there may be more financial activities that are incompatible with public safety nets.

By the way, do you know who Hyman Minsky was? He was an economist and part of what he did was to explain the characteristics of financial crises; he opposed deregulation in the 80's and he argued against the accumulation of debt. The debt argument came up in the subprime crisis. Minsky said there were three types of debtors, a hedge borrower, a speculative borrower, and a Ponzi borrower: a hedge borrower would have a traditional mortgage loan and would pay back both the principal and interest; the speculative borrower would have an interest only loan and would have to try to refinance later; and the Ponzi borrower would have a negative amortization loan that wouldn't cover the interest payments and the principal would actually increase.

I digress. Eric Rosengren, the President of the Federal Reserve Bank of Boston was also out on the Propaganda Tour. Rosengren said the money-market fund industry remains a significant source of risk for the U.S. economy, and is in need of major reform; a warning we also heard from Fed head Bernanke a few days back. And let us be aware that there is risk in money markets despite the perception they are safe places to park cash – remember they do not enjoy FDIC protection.

We have now seen two Fed presidents come out against too big to fail. A couple of months ago, President Obama said “no more bailouts”. I get the feeling that they're preparing us and maybe preparing the banks to take a hit. I suspect there's a bank, at least one major bank, major as in the top 19, that is “on the roof” and when it fails, the government will let it fail, and if it starts a cascade of failures, the government will allow some failure. Which would probably be a very good thing.

There is, I think a good argument to be made that the growth of the financial sector, and the increase in credit and debt is a form or wealth redistribution, and relative gains in the financial sector result in inequality. This is not a new concept; in the 13th Century, Thomas Aquinas said that “usury leads to inequality which is unjust in itself.”

It's not quite a zero sum game because the gains in the financial sector are not the result of productive output. It is worse than a simple shift of money from one pocket to another, it is malinvestment and the potential for improvement is lost. Still, if the share of income passing through the financial sector were to be reduced it might make room for expanded public services, improved social conditions, more productive private purpose, and reduced inequality. I'm not exactly sure how to accomplish this; there is no foolproof blueprint, but you could start by enforcing financial fraud laws – wouldn't that be a welcome change? And you could downsize the financial sector, or just allow it to fail on its own. Yesterday, the President gave a speech in which he demanded Congress raise taxes on millionaires as a way to recalibrate the nation's wealth distribution, but there might be a real need.

Income concentrations are relatively rare, and the conditions need to be just right; a perfect storm such as what we saw three years ago, followed by TARP, TALF, and massive bailouts that amounted to looting the Treasury. Helicopter Ben was blowing asset bubbles and enriching the bankers and related industries, because this is what the Fed does best - while the median household is living paycheck to paycheck and struggling with the price of gas and food. Monetary policy has been very influential on the income gap.

It should come as no surprise that a disproportionate share of income is going to the top 1%. For example, from 2002 to 2007, average real family incomes grew by 16.1% but 65% of that growth accrued to the top 1% while only 35% of that growth accrued to the bottom 99% of US families. From 2009 to 2010, average real family incomes increased by 2.3% and the top 1% captured 93% of those gains. The inequality has been growing at an unsustainable rate.

I'm not trying to say that the policy framework was better or worse in 2007 or 2010, only that it was cumulative. Moving forward, there are many policy battles to fight and it is an election year, which means nothing will get done. And that might be the best thing that could happen to a financial sector that is rife with toxicity. When it fails – do nothing. The financial sector has too much political clout to be regulated into downsizing but they are certainly capable of failing on their own; and we are being prepared for that probability.

Sinclair Noe