Friday, June 28, 2013 - Halftime

Halftime

by Sinclair Noe

DOW – 114 = 14,909
SPX – 6 = 1606
NAS + 1 = 3403
10 YR YLD - .05 = 2.48%
OIL - .49 = 96.49
GOLD + 34.50 = 1236.30
SILV + 1.15 = 19.76

What a long strange trip it's been, and we've only just reached the halfway mark of 2013.

It started with the fiscal cliff, and after the lemmings jumped, we still had payroll tax hikes, debt ceiling battles, sequestration, mixed with assorted dysfunction; and through it all the stock market climbed. The S&P 500 hit a record high of 1687 in May; the Dow hit a high of 15,542. Those were the days of milk and cookies.

And then Bernanke did a little tap dance around the punchbowl, sparking the animal spirits of the marketplace, and transforming bond market vigilantes into feral hogs, raising their snouts in the air and sniffing a whiff of blood. Volatility spiked, with more than 15 consecutive days of 100-point swings for the Dow. The bond market swooned, and June turned gloomy.

Still, the first half was generally positive. The best first half for stocks since 1998. The S&P 500 closed the first half of 2013 up 12.6 percent. For the second quarter, the Dow rose 2.3%, the S&P 500 gained 2.4% and the Nasdaq Composite climbed 4.2%

We are at a policy inflection point, or at least we are at a point where we can think about an inflection point, which may or may not be a bad thing if it is accompanied by good economic news. So, let's see where the markets stand in relation to the beginning of QE2 back in the autumn of 2010. Not much change really. Bond yields are just a little lower than in November of 2010. The dollar has been on a roller coaster ride, but it recovered all the lost ground. Gold, which was beaten bloody in the last quarter, was just a smidge higher in late 2010. Three rounds of QE failed to produce hyper inflation, or even any kind of inflation; the price of milk and bread is the same as it was five years ago; maybe all that QE avoided deflation. Even though the Fed expanded its balance sheet, the money never made it into the broader economy, with the possible exception of stocks. Stocks looked bubbly, at least until a month ago. The jobs picture has improved, but not enough.

Gold plunged to a 34-month low, set for a record quarterly drop. Gold has dropped 23 percent this quarter, heading for its biggest loss since at least 1920 in London.  Silver futures fell to the lowest since August 2010. About $60 billion was wiped from the value of precious metals exchange-traded product holdings this year.  Silver futures are down 34 percent this quarter, set for the biggest drop since the start of 1980. It’s the worst performer this year on the Standard & Poor GSCI Spot Index of 24 commodities. The index is down 5.5 percent this year. The current gold to silver ratio is about 64 to 1; which might indicate that silver is over-sold, or might indicate that gold still has more to drop. China announced today that they would buy gold to support their currency. Even as the paper metals have dropped, the premium for physical metal has been growing. So, it should go up, but remember that market can remain irrational long than you can remain solvent.

The dollar index has been on a bit of a rally the past couple of weeks, and for the year the dollar has climbed from around 80 to 83; cementing it's status as the prettiest horse in the glue factory. By the way, a New Mexico company has received permits from the USDA to open a horse meat plant. It would be the only one in the country, at least for now, to slaughter horses for human consumption. Just a side note there.

Bonds have been hammered as of late. The benchmark 10 year note rose 64 basis points over the last three months in the largest quarterly yield rise since the fourth quarter of 2010. The 10-year yield is up 33 basis points on the month.  Bond mutual funds and bond ETFs saw $62 billion in outflows through the first 3 weeks of June. The withdrawals wiped out over half of the $115 billion deposited into bond funds through the first five months of the year. Emerging market debt and high yield were among the casualties, with losses of 8.8% and 4.2% respectively. NYSE margin debt declined to $377 million in May from April’s record reading of $384 million. This was the first decline on a monthly basis since last June. Historically, margin debt has a strong correlation with the S&P 500 as investors tend to lever up as the market advances and the mood shifts from risk off to risk on. Mortgage rates jumped to the highest level in 2 years. The average rate on the 30-year fixed is 4.46%.

It seems like we've been on a wild ride this week. There were Supreme Court rulings: voting rights, affirmative action, Doma, Prop 8. You heard all about those. You probably didn't hear about a few others. Vance v. ball State and University of Texas v. Nassar involved employment discrimination and both make it significantly more difficult for employees to sue employers for workplace discrimination. In Koontz v. St. Johns River Water Management, the Court ruled that a man trying to develop property in a wetlands region did not have to pay money to improve wetlands in other areas to counteract the effects of his development. This decision makes it more difficult for localities to demand financial compensation to enforce environmental regulations. And in Mutual Pharmaceutical v. Bartlett, the Court ruled a woman could not sue a pharmaceutical company for the side effects of a generic drug she took which caused her to go blind, put her in a coma, and made most of her skin fall off. By the way, the drug is called Clinoril, a generic form of sulindac, and it's still on the market.

Jon Corzine has finally been charged, in a civil suit, for losing $1 billion dollars of MF Global's clients' money. A civil suit. And before you say there is no justice in this country. I present the case of Robert Bracone and Rene Torres. This is a New York City story of corruption; filthy, dirty corruption. The two men are accused and pleaded guilty to accepting cash payments to remove the filth from New York. Specifically, they each accepted a $5 dollar tip for cleaning up trash in an alley. The guys were sanitation workers, trash men; more than 25 years on the job. They have lost their jobs, and they have each paid a $2,000 fine. Finally, there is justice in New York City.

And then there was a little bit of data that slipped by almost un-noticed. It comes from the Wealth Data Book. It confirms some of what we know. America has more millionaires than any other country; more billionaires, too. We have tall buildings and fast cars and shiny airplanes, and that must mean we are the richest country in the world, why, we must be the richest country in the history of the world. Not exactly.

Kind of depends on how you measure things. The most telling comparative measurement is median wealth (per adult). It describes the amount of wealth accumulated by the person precisely in the middle of the wealth distribution -- fifty percent of the adult population has more wealth, while fifty percent has less. You can't get more middle than that. And when it comes to median wealth, we're not Number One. We're not even in the Top Ten. We're Number 27!

And according to the Global Wage Report, the number one reason why we're number 27 isn't globalization, or new technologies, or poor social safety nets; the reason is fiancialization.

"Financialization means the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies."

This includes such trends as:

• The corporate change during the 1980s to make shareholder value the ultimate goal.

• The deregulation of Wall Street that allowed for the creation of a vast array of new financial instruments for gambling.

• Allowing private equity firm to buy companies, load them up with debt, extract enormous returns, and then kiss them good-by.

• The growth of hedge funds that suck productive wealth out of the economy.

• The myriad of barely regulated world financial markets that finance the globalization of production, combined with so-call "free trade" agreements.

• The increased share of all corporate profits that go to the financial sector.

• The ever-increasing size of too-big-to-fail banks.

• The fact that many of our best students rush to Wall Street instead of careers in science, medicine or education.

In short, financialization is when making money from money becomes more important that providing real goods and services.

With all that going on, you may have missed the speech by President Obama on Tuesday. It was the first time a President has acknowledged global warming and set out to change policy to address the problem. The main thing I got from it was bad for coal, good for fracking.

A few weeks back, someone called in and asked about problems with the Vatican Bank. I hadn't been following it but I did a little research and yes, there was an investigation into money laundering. When Pope Francis took office, he pledged to clean up the Holy See's scandal plagued government. For the past two years, Italian prosecutors have been investigating money laundering at the Vatican Bank, formally known as the institute of Religious Works. That investigation revealed an alleged plot to smuggle $26 million from secret Swiss bank accounts into Italy. Today, Italian financial police detained a Vatican accountant, a financial broker, and a former member of the country's secret services. 

There seems to be something about banking that is repellant to the notion of good deeds; perhaps it is the idea that usury is considered a sin; perhaps it goes back to the idea of casting out the money changers from the Temple. Whatever the root, the problems with the Vatican Bank underscores the challenges the Pope faces in trying to recast the Catholic Church as more humble and serving the poor. 

So, where are we going in the second half? What do you think about the Supremes? Now that we have a policy dealing with global climate change, do you believe in climate change? Have you been outside today?

Tuesday, May 28, 2013 - The Central Banks Grand Experiment, Continued

The Central Banks Grand Experiment, Continued

by Sinclair Noe

DOW + 106 = 15,409
SPX + 10 = 1660
NAS + 29 = 3488
10 YR YLD + .12 = 2.13%
OIL + .88 = 95.03
GOLD – 4.90 = 1382.40
SILV - .12 = 22.37

New record highs for the Dow, not for the S&P 500.

Last week there was considerable hand wringing and flop sweat about the idea that the Federal Reserve might pull back from QE. And you may recall that I told you that I didn't think so; we might see the Fed change the composition of the accommodative monetary policy in order to avoid particular asset bubbles, but they would not abandon a loose money policy; they might even try out some new tools.

The economic stagnation of the major developed nations has driven central banks in the United States, Japan, Britain and the European Union to take increasingly aggressive action. Because governments are not taking steps to revive economies, like increasing spending or cutting taxes, the traditional concern of central bankers that economic growth will cause too much inflation has been supplanted by the fear that growth is not fast enough to prevent deflation, or falling prices. The European Central Bank faces legal and political restraints that make it harder for the bank to imitate the other major central banks. It cannot finance governments, which limits its ability to buy any country’s bonds. Still, there has been a shift in sentiment from the ECB, including lower rates and a change in attitude away from austerity.

Both the Bank of Japan and the European Central Bank reaffirmed that their policies would remain in place. Yesterday, an executive board member of the European Central Bank said the policy would stay as long as necessary. Today, a Bank of Japan board member said it was vital to keep long- and short-term interest rates stable.

What are we learning from this global shift towards super-easy money? After years of sluggish or no growth, Japan is serving as the laboratory for this grand experiment in easy money economics. Last month, Haruhiko Kuroda, the new chairman of the Bank of Japan, steered the central bank toward a bold new policy of reinflating the Japanese economy by doubling the money supply. It is considered the boldest step so far by a central bank.

The good news is that the Japanese economy is recovering. The Japanese stock market is red hot. The bad news is that the austerity hawks and conservative pundits still want to see Abenomics — the economic policies put forward by Prime Minister Shinzo Abe on taking office last year — as a mere flash in the pan. More sizzle than steak. Yet despite some hiccups that sizzle now looks like turning into a full-fledged conflagration. Abenomics seems to be winning out against bad economics.

Perhaps the biggest mistake of the bad economists was failure to realize how much the yen depreciation triggered by Abenomics can benefit an economy. They like to point out how any boost to exporters is canceled out by losses to import-dependent industries. But even in Economics 101 we learn that currency depreciation benefits not just exporters. A large swath of domestic industries also benefit — everything from pig farmers and parts makers competing with imports to universities and tourist hotels seeking foreign customers.

It's still too early to declare a victory for Japanese easy money. Bank of Japan monetary easing urgently needs to be reinforced by  fiscal measures and new growth policies. To date, neither has offered much promise. The growth policies are not yet fleshed out and the austerity hawks are still able to kill any talk of serious fiscal stimulus.

The austerity people seem to see increased fiscal spending purely in terms of adding to national debt. But that really is bad economics. Well-chosen government spending can have multiplier effects that increase tax revenues as much as the spending increases. By the same logic, spending cuts can very easily end up cutting tax revenues to the point where the national debt increases rather than falls. This is especially true for Japan where rises and falls in asset prices strongly influence tax revenue.

In Japan, they've been dealing with a weak economy for so long, they've learned some of the moves that don't work. The spending cuts only pushed the economy into recessions. Tax revenues fall and stay depressed despite the later spending increases to counter those recessions. Increases in national debt are spectacular. During the Koizumi years when “structural reform” was supposed to save the economy, the national debt increased by a massive 200 trillion yen, an inconvenient truth ignored by the austerity hawks.

Some austerity pundits compare Japan’s economy to a broken engine that the Keynesian planners try vainly to spark into action with the “gasoline” of fiscal stimulus. The real problem is the exact reverse. Japan already has a fine well-oiled economic machine. What it lacks is the gasoline of demand. It has been running on empty, for years, one reason being the demand-killing repairs those pundits have tried to make to that allegedly broken engine.

The austerians do have one valid point. If, thanks to Abenomics, the economy does begin to grow, then eventually interest rates are bound to rise. This rise will force a large increase in the government spending needed to service national debt. Unless that spending increase is matched by rapidly rising tax revenues, debt levels will rise even more, forcing even more debt service spending, ad infinitum.

There is an answer to this, and it may be a part of the Japanese monetary experiment. It says that provided inflation is under control governments can ignore their central banks and simply print the money they need to expand demand and service debt.

How about here in the good old USA? Well, it's a mixed bag, but the latest survey of consumer-confidence climbed to a five-year high of 76.2 in May from a slightly revised 69.0 in April. Consumers are considerably more upbeat about future economic and job prospects. Higher stock prices, rising home values and falling gasoline costs have made Americans more upbeat. A lack of drama in Washington has also allowed consumers to regain confidence after several political disputes had threatened to harm the economy. The bad news is the politicians aren't helping. The good news is they aren't screwing things up, at least not this month.

And I have a follow-up to a listener who called in last Friday, asking about money laundering at the Vatican Bank. The Vatican Bank, officially called the Institute for Religious Works (IOR), manages an estimated $5 billion in assets for religious orders and Catholic charities. A private entity, its inner workings have long been shrouded in secrecy. Now, there are efforts to bring a new era of transparency to the bank. The head of the Vatican's new Financial Intelligence Authority, disclosed Wednesday that he had found six incidents of possible money laundering in the Vatican Bank from last year. Two of the incidents were considered to be serious enough to pass to the Vatican's prosecutor.

The Vatican Bank has a history of murky transactions, but in 2010 Italian authorities place the bank's CEO and president under investigation for money-laundering. After that, Pope Benedict initiated the Financial Intelligence Authority to clean things up. Maybe last week's announcement is a step in the right direction.