Tuesday, August 05, 2014 - Go Firgure

Go Figure

by Sinclair Noe

DOW – 139 = 16,429
SPX – 18 = 1920
NAS – 31 = 4352
10 YR YLD - .01 = 2.48%
OIL - .86 = 97.43
GOLD + .40 = 1289.60
SILV - .39 = 19.84

We start with a couple of economic reports: The Institute for Supply Management’s services index rose to 58.7 last month, the highest level since December 2005, from 56.0 in June. A reading above 50 indicates expansion. Orders jumped to a 9 year high. A sub-index gauging services industry employment also rose as did order backlogs, but export order growth moderated.

In a separate report, the Commerce Department said orders for manufactured goods increased 1.1% in June, more than reversing May's 0.6% decline. Orders for non-defense capital goods excluding aircraft hit a record high; this might indicate a renewal in business confidence and equipment spending plans. Factory orders rose across all categories, with bookings for electrical equipment, appliances and components recording their largest gain since November 2010. In another sign of strength, unfilled orders saw their largest rise in seven months.

So, a couple of good reports on the economy, and the stock market tumbles. Go figure.

The situation in Ukraine appears headed to a tipping point. Ukrainian forces have been pushing back against Russian backed separatists in eastern Ukraine. Meanwhile, Russia is massing troops on the border. Some 20,000 troops are now stationed about 50 kilometers from the border, closer than they had been stationed previously. In April, Russian President Vladimir Putin had briefly deployed about 40,000 troops at the border. The latest troops include Russian Elite forces, armored brigades, artillery and anti-aircraft units. Poland’s foreign minister thinks Russia is preparing to invade Ukraine; he didn’t flat out say an invasion was imminent, just that the Russians are getting ready.

Putin has ordered his government to prepare retaliatory measures against US and European economic sanctions imposed on Russia. We don’t know what Putin means by retaliatory measures. Russia may limit or ban flights over Siberia by European carriers bound for Asia as a response to sanctions levied against the country. Russia has also called for the UN Security Council to hold an emergency meeting on the humanitarian situation in Ukraine. It isn’t a humanitarian situation when the pro-Russian rebels shoot a plane full of civilians out of the sky, but it is a humanitarian situation when the rebels start getting their butts kicked.

One thing that hasn’t happened yet is a disruption in oil and gas supplies from Russia to Europe. Russia derives half its tax revenue from the oil sector; Europe relies on Russian supplies. As the weather changes and winter sets in, Europe’s resolve, which has already been soft, will weaken further. For now, energy prices are moving lower, despite violence in Eastern Europe, Libya, and Iraq. Global oil demand has been running below supply over the last few months, building up a glut of high quality crude oil in the West African, European and Asian markets. The US Energy Information Administration reported last week that gasoline supplies rose by 400,000 barrels at a time when market bulls hoped to see a reduction. Oil prices are at their lowest levels since February.

Yesterday we told you about the collapse of Portugal’s Banco Espirito Santo; today we report on the fallout. The French bank Credit Agricole held a 14% stake in Banco Espirito Santo and two seats on its board. Crédit Agricole's ties to the Portuguese group go back to 1986 when it helped the Espírito Santo Group set up Banco Internacional de Crédito. Over the years, the French bank raised its stake in the Portuguese group, as part of a larger international expansion plan in southern Europe.The French bankers say they never detected any “slip or difficulties” at Banco Espirito Santo. The collapse of the Portuguese bank nearly wiped out all the second quarter profits at the French bank.

Standard & Poors today announced that it was dropping its 10-year estimate of annual GDP growth in the US from 2.8% to 2.5%, which over a decade amounts to a pretty significant reduction. Why are they cutting the growth forecast? Here’s what S&P says: "Our review of the data, as well as a wealth of research on this matter, leads us to conclude that the current level of income inequality in the U.S. is dampening GDP growth, at a time when the world's biggest economy is struggling to recover from the Great Recession and the government is in need of funds to support an aging population... At extreme levels, income inequality can harm sustained economic growth over long periods. The U.S. is approaching that threshold...."

S&P analysts say it basically boils down to the idea that high levels of income inequality cause more affluent households to save more of their increasing income rather than spend it, and as that cash is withdrawn the economy slows. At the other end of the economic scale, as income declines, households go into debt to try to maintain their standard of living, a strategy that is simply unsustainable over time. And when the unsustainable ceases to be sustained, you get a breakdown, much like that of 2008. In fact, S&P notes, as income inequality increases, an economic system becomes more and more vulnerable to a boom-and-bust cycle. It cites research demonstrating that income distribution plays a much more important role in sustaining long-term economic growth than any other factor.

Although the issue of income inequality is often addressed in moral terms, S&P concludes, at its foundation it is really an economic issue, saying: "A rising tide lifts all boats … but a lifeboat carrying a few, surrounded by many treading water, risks capsizing."

Earnings reporting season:

Retailer Target cut its second quarter earnings estimates due to higher promotions and more discounting; they also lost about $148 million related to that data breach, where hackers gained access to customer credit card info; that’s a small number compared to total sales at Target, but it apparently proved a costly distraction. Morgan Stanley reduced its second quarter earnings by 2 cents per share due to increased legal settlements. Disney posted better than expected earnings; shares moved just a smidge higher in after-hours trading. Cablevision cut back on its promotions and subscriber losses doubled in the second quarter. First Solar posted profits that missed estimates by a wide margin; they blamed project delays. Groupon fell in after-hours trading after posting a second quarter loss nearly triple the loss from a year ago. Zillow announced a second quarter loss, even as revenue increased; and they raised their full year revenue outlook. This was Zillow’s first quarterly report since they announced a $3.5 billion deal to acquire rival Trulia.

Time Warner and Fox both report earnings tomorrow, but the big news came today. Fox withdrew its offer for Time Warner. Game over. When Fox made the hostile bid, its stock dropped and Time’s stock soared; meanwhile Time’s board and management opposed the takeover and refused to discuss the offer. Now that Murdoch has dangled a huge windfall in front of Time Warner shareholders, only to take it away, one imagines that some of those shareholders may soon be venting their frustration to Time Warner's board and management.

Several America corporations have found a loophole in the tax code, which allows for a company to acquire a partial interest in a foreign company, and then change the address of its headquarters in order to evade US taxes; it’s called an inversion. There have been 22 such deals since 2011, most have been in the pharmaceutical industry, where overseas sales generate significant income that cannot be brought back to the US without suffering a major tax hit; but there have also been inversion deals in the media, consumer and manufacturing sectors. Some of those deals have collapsed, amid disputes over price and political scrutiny.

Walgreens was next on the list; closing in on a deal to buy the 55% of British pharmacy retailer, Alliance Boots; Walgreens already owns 45% of Alliance Boots. Walgreens will buy out Alliance Boots, but it won’t move its corporate headquarters abroad and it will not change its corporate citizenship to a lower tax country. They say they won’t do the inversion move because they would have had to renegotiate an existing agreement, and Alliance Boots wasn’t willing. There may also have been some political pressure.  President Obama has denounced tax inversions as unpatriotic and has urged Congress to stop them; which is like asking a Kleenex to stop a freight train. So, now the Treasury Department says there may be an executive order to provide a partial administrative fix, you know, until Congress gets back from its 5 week vacation.

As Ebola spreads, pharmaceutical giants are sitting this one out. That's mainly because treating a disease that affects a relatively small number of people who typically don’t have a lot of money doesn’t offer a great return on investment. It's unclear how much profit it would take to get Big Pharma interested in finding an Ebola cure, but right now such a project could well be a money-loser. Instead, small biotech firms, academics and government agencies are leading the search for an Ebola cure. And in a twist of fate, they may have found a way to treat the virus: tobacco.

A tiny San Diego-based company provided an experimental Ebola treatment for two Americans infected with the deadly virus in Liberia. The biotechnology drug, produced with tobacco plants, appears to be working. Mapp Biopharmaceutical produced an experimental drug called ZMapp, an antibody that had been tested only on infected animals; now it’s been given to human patients, and it seems to make a big difference. The antibody work came out of research projects funded more than a decade ago by the U.S. Army to develop treatments and vaccines against potential bio-warfare agents, such as the Ebola virus.

The tobacco plant production system was developed because it was a method that could produce antibodies rapidly in the event of an emergency. To produce therapeutic proteins inside a tobacco plant, genes for the desired antibodies are fused to genes for a natural tobacco virus. The tobacco plants are then infected with this new artificial virus. The infection results in the production of antibodies inside the plant. The plant is eventually ground up and the antibody is extracted. The whole process takes a matter of weeks.

Thursday, June 12, 2014 - The Beautiful Game

The Beautiful Game 

by Sinclair Noe

DOW – 109 = 16,734
SPX – 13 = 1930
NAS – 34 = 4297
10 YR YLD - .05 = 2.59%
OIL + 2.51 = 106.91
GOLD + 12.70 = 1274.30
SILV + .34 = 19.63

This is a big day for sports fans. In the US, many fans are thinking about the NBA playoffs or the start of the US Open golf championship, but those games are small potatoes compared to the World Cup. Over the next month, the World Cup will attract about 4 billion television viewers, maybe more when we consider all the digital devices that can replay the games; that’s more than the 3.6 billion viewers who watched the Beijing Olympic games; more than the 3.2 billion that watched the 2010 World Cup. By comparison, the Seahawks-Broncos Super Bowl managed a record 111 million viewers. The cumulative viewership for all the matches over the next month might top 35 billion. It’s a corporate marketing bonanza.

Over the next month, there will be countries across the globe that will quite literally shut down for 90 minutes intervals. Courts will delay hearing cases, hospitals will not schedule surgeries, offices and retail outlets and factories will shut down, the crime rate will drop, the streets will empty with almost zero traffic, planes stop flying, and trains stop running. I’ve seen it happen; and because I am blessed to be married to a lovely Brazilian woman, I have been caught up in the madness.

If you are still unclear, and most Americans are unclear on this subject, I’m talking about the beautiful game, futebol, or what we call soccer and the rest of the world calls futebol. The World Cup is the global championship in soccer and this year it is being played in Brazil, which is the greatest soccer team in the history of the World Cup. The first game was just a little earlier today, Brazil beat Croatia 3-1.

The whole thing was once strange to me as well, but I have a friend, Charles Oelfke, the Honorary Brazilian Consulate in Arizona; he is also an American married to a Brazilian, and when I talked with him about this World Cup thing, he pulled out an article he wrote back in 1994; that was the year the US hosted the World Cup; that was also the year Brazil won its fourth championship.

Here’s what I learned from Charles’ Gringo’s-eye view of the World Cup Extravaganza. Because of my marital affiliation, I will be required to watch all games involving my adopted country every four years. It’s a cultural thing. I will be required to record every game. I will be required to call Brazil immediately after each game to discuss why, for example, a 0-0 tie was such an exciting, logical, tactical display, clearly proving Brazil’s world dominance in the sport. I will be required to replay each game at least 3 times that same night, then twice weekly for the next four years. And apparently it also involves turning the TV room into a green and yellow shrine to Brazilian futebol.

I still don’t really understand the game and the rules, but Charlie explained that there is a certain methodology of the 22 men in plastic shorts and long hair who run around like decapitated chickens for 90 minutes making life miserable for the goleiros (the goalkeepers) who wear oversized sticky gloves while flying horizontally through the air. The goleiros can’t win games, but they’re so often blamed for losing them that volunteers for this position on the team are scarce and they are often hired from other countries.

Next question: just how large is a soccer field? I’ve learned from experts (of which Brazil now has more than 200 million) that it’s… oh…maybe… uh 70 or 80 meters wide by about maybe…, 100 meters… uh.. maybe 110 meters long; something like that. The regulation probably reads “the dimensions of which depend upon space available.” You have to respect the degree of precision in the world’s most popular sport.

My own travels in Brazil reveal that futebol, at least on the amateur level, can be played on almost any stretch of open field, or a street without too much traffic, or the beach, or even on a volleyball court. The only requirement is a ball, or something that looks like a ball.

I asked about the 1994 World Cup, which was in the US but for some reason I have almost no personal recollection of it. It was supposed to be the games that introduced soccer to the US, and the US to World soccer; but mainly it proved that we weren’t quite ready, with the possible exception of our ability to grow and mow grass.

And then I asked about the actual final, the championship game from ’94. Charlie explained that back then he and his wife Josefa had been inviting friends to watch the TV broadcasts at their home, and this usually involved a lot of yelling and screaming and copious overeating (and I’m guessing quite a few cervezas and caipairinhas), but the numbers grew too fast, and they ran out of chairs for everybody, and they had to set up in a restaurant (a steak house, of course) for the final game. About 300 Brazilians showed up, and about 3 very foolhardy Italians; and there was a lot of cheering and dancing and singing. It’s a cultural thing, he explained.

And about that final game in 1994, he said: “It was Brazil’s destiny. Everyone agrees, Brazil was the best team and I believe that, but…” the final of 52 games, of an every four year event, the showcase, the championship of the world’s most popular sport, between two tri-champion teams, the most important athletic competition in the universe with billions of spectators around the world ended in a 0-0 tie. And after 30 minutes of overtime, still a 0-0 tie.

So then it was decided by penalties, a shoot-out, a lottery. Why not just give the goleiros a last cigarette, put a blindfold on them? And … 4 years of preparation and 52 games and it all came down to individual luck. The experts called it a great game, a real cliff hanger, and justified the Brazil win because Brazil had 22 shots on goal compared to Italy’s 8.  That’s like saying Michael Jordan had a great game because he shot 22 air balls. Still, it will go down in history as Brazil Campeao 3-2 over Italy. It was also the first championship to be decided by penalty kicks. Something that still upsets Charlie 20 years later.

Brazil is the undisputed greatest national team in the history of futebol. They have 5 championships; their closest rivals have 3. And this year, Brazil, the most futebol crazy country in the world, is the host country for the World Cup; and most of the experts are picking Brazil as the favorite to win a sixth championship. This would seem to be a perfect, futebol dream come true. Not so fast.

Many Brazilians are angry about how much was spent preparing for the Cup and how the country still struggled to be ready. Anger about broken promises and the ballooning cost of soccer venues contributed to widespread protests that drew over a million Brazilians into the streets last year. Detractors say the World Cup has done more harm than good by taking funds away from social programs and investment projects. The Brazilian government has spent an estimated $11 billion on the World Cup, while protesters say the money should have gone to low income housing, hospitals, better roads, and better schools.

And as the games start today, Brazil is ill-prepared, with many projects over budget and behind schedule. The government spent nearly $300 million for a stadium in Manaus, a city that doesn’t have a major league soccer team, and is deep in the jungle along the Amazon River. It’s expected that after the World Cup, the stadium will sit empty for the most part. Building materials were shipped in by boat because you can’t drive to Manaus.

And to add insult to injury, the ticket prices for most games will price average Brazilians out of the stadiums, and the profits from the games don’t go to Brazil, they go to FIFA. And part of FIFA’s deal is complete tax exemption on all profits. Toss in some charges of bribery and FIFA is being compared to the mafia.

Part of the preparations for the World Cup involved what is known as pacification plans for the favelas, the massive shantytowns that are home to tens of millions of the urban poor. The police move in and after they enforce order, they are supposed to upgrade hospitals and schools. So far, it has been a police invasion without the benefits.

Last year, Brazil hosted the Confederation Cup, a trial run for the World Cup; that led to riots, and protests that drew hundreds of thousands to the streets. The protests continued today, with subway workers on strike in Sao Paolo, and protest camps set up just out of sight from the stadiums.  Two days ago, Joseph Blatter, the President of FIFA, the international football association that arranges the World Cup, kicked things off in Sao Paulo. Brazilian celebrities including President Dilma Rousseff as well as the governor of the state of Sao Paulo and the mayor of the megacity stayed away from the event. They didn’t want a repeat of last year, when Blatter and Rousseff were booed off the stage. Blatter’s solo performance in Sao Paulo speaks volumes about the mood in the country. The World Cup may be a fiasco, but if Brazil loses the World Cup Championship it could be a disaster for the government.

Brazil is the 5^th largest country in the world; it has the 6^th largest economy; Sao Paulo and Rio de Janeiro are major cosmopolitan cities with massive favelas; it is the 17^th worst country when it comes to inequality. When millions live in poverty, and corruption is rampant, and basic public services are denied, a sports extravaganza seems inappropriate, even if it is futebol on Brazilian soil. And so they play. Maybe this is Brazil’s destiny. 

Wednesday, June 04, 2014 - An Airtight Defense

An Airtight Defense
by Sinclair Noe

DOW + 15 = 16,737
SPX + 3 = 1927 (record close)
NAS + 17 = 4251
10 YR YLD + .01 = 2.60%
OIL - .27 = 102.39
GOLD – 1.30 = 1244.60
SILV - .01 = 18.90

Eight times a year the Federal Reserve gathers economic updates from the 12 districts and publishes the information about two weeks before its FOMC meetings. The data is published in a beige folder, and that is why it is called the Beige Book, although it might actually refer to the writing style. Anyway, economic activity expanded all across the country, with most districts reporting moderate or modest growth. Consumer spending expanded across almost all districts. Tourism was another bright spot and manufacturing activity expanded across the country. Home sales were described as “mixed across the country” even as home prices continue to rise. Labor markets were described as steady. Inflation was tame, with a slight exception for higher food prices in some areas.

In other words, when the Fed meets in a couple of weeks, there won’t be any big changes in monetary policy.

The Institute for Supply Management said its services index rose to 56.3%, its highest level since August, from 55.2% in April. That’s the number and they’re sticking with it.

The US trade deficit grew to $47 billion in April, up from $44 billion in March. Exports slowed in April, down slightly to $193 billion. Imports, meanwhile, surged by nearly $3 billion to $237 billion, mainly driven by increased spending in consumer goods and cars.

A new survey from the MacArthur Foundation finds 70% of Americans still feel a housing crisis remains today and the worst is yet to come; that’s down from 77% a year ago, but still it doesn’t look like there’s much confidence in a housing recovery. Half the respondents think housing represents a good long term investment, while 43% says that’s not the case; two-thirds say it’s harder to build wealth through home ownership than 20 or 30 years ago. Over half of Americans, 52%, have had to make at least one major sacrifice in order to cover their rent or mortgage over the last three years.

In line with the survey on housing, a new poll from CNN and ORC International finds 59% of adults think the American Dream has become impossible for most to achieve, up from 54% in a poll conducted in 2006. What’s more, 63% of those surveyed believe most children in the US will grow up to be worse off than their parents. While most Americans say they’re better off than the prior generation, they also feel gains in living standards are grinding to a halt. One problem is that the survey didn’t define exactly what the American Dream is supposed to be.

ADP, the payroll processing firm, issues a monthly payroll report ahead of the Labor Department each month. The ADP report is not always an accurate predictor of the government report but it is still closely watched for any hints. ADP says the economy added 179,000 private sector jobs in May; that’s significantly below the consensus estimate of 200,000 to 215,000 jobs for the Friday jobs report.

According to the latest revisions from the Labor Department, productivity in the first quarter declined at a 3.2% annual rate, the worst in six years, as workers spent more time on the job producing fewer goods during an unusually stormy weather.

A new research study published today from the Economic Policy Institute shows a sharp disconnect in the late 1970s between the overall productivity of the US economy and wage gains for the average worker. Normally, when workers make more things during a work day, they get paid more for that day’s work. From 1948 to 1979, both hourly wages and productivity roughly doubled. But from 1979 to 2013, productivity rose 65% while average hourly compensation rose just 8%; those at the bottom and middle of the income ladder saw little of those gains.

Wages for everyone at or below the 30th percentile of the income distribution have essentially been flat, while wages for the poorest 10% of workers have fallen during that time period. At all income levels, women earn less on average than men do.  Most wage growth has flowed to the top 1% of earners, posting a 153% increase in wages. Since wages for the lowest income group have fallen while wages at the highest income group have grown, income inequality has also increased.  Piketty was right.

The S&P 500 index hit another record high close today, and even at that it’s just up about 5% year to date. The best performing market year to date is in Dubai; posting a 56% return since the start of the year and posting a 117% return for the past 12 months. The strongest S&P 500 subsectors this year include oil & gas equipment and services, which is up 17%; oil & gas exploration and production, up 15%; real estate investment trusts, up 15%; natural gas utilities, up 21%; and electric utilities, which have risen 14%, largely on the back of some big mergers.

The top performing stocks in the S&P year to date include: Forest Labs, up 60%, a takeover target; Nabors Industries, a contract oil driller based in Bermuda is up 54% year to date; Electronic Arts, the video game developer is up 51%; Keurig Green Mountain has returned 50% this year, this is the coffee company that makes those little single serve containers of coffee; Newfield Exploration, an oil and gas exploration and development company out of Texas is up 49% since the start of the year; Delta Airlines is up 47% after rejoining the S&P 500 index; and Pepco, the Washington DC based utility is up 47% YTD, after agreeing to be acquired by Exelon. Probably nobody picked those stocks as the top performers at the start of the year.

After the close of trade today, comes word that Sprint is nearing an agreement price to acquire T-Mobile for about $40 a share, or around $32 billion, a 17% premium to the closing price today. There will be regulators to deal with. An announcement and an actual deal are still down the road. If you are unhappy with the service and price you pay for your mobile phone, this won’t help.

A federal appeals court has overturned a decision by Judge Jed Rakoff to reject a federal settlement deal with Citigroup. Judge Rakoff had considered the Citigroup-SEC settlement to be little more than a slap on the wrist. The original case accused Citigroup of duping investors into buying tainted CDO’s, Collateralized Debt Obligations. The bank agreed to pay $285 million to settle the civil fraud case, without admitting wrongdoing.

Judge Rakoff called the fine “pocket change” for the bank and said the settlement deprived the public “of ever knowing the truth in a matter of obvious public importance.” And now the court of appeals decision is going to rein in judicial discretion even more. The ruling essentially says that a judges job is not to search for the truth.  One small victory for Judge Rakoff: the SEC last year reversed its longstanding yet unofficial policy of allowing companies to neither “admit nor deny wrongdoing,” signaling that it would force admissions in particularly egregious cases.

If only the SEC had the backbone to pursue a particularly egregious case.

The G-7 or Group of 7 is meeting today and tomorrow; it used to be the G8 until Putin invaded Crimea, and so Russia was kicked out of the clubhouse. A draft of the G7 communique calls on Russia to "accelerate withdrawal of military forces from the eastern border with Ukraine" and "exercise its influence among armed separatists to lay down their weapons".

More important is how Europe will deal with energy security as the continent relies on Russia for about a third of its oil and gas, a fact that gives Putin considerable leverage over the EU. The G7 draft communique says: "The use of energy supplies as a means of political coercion or as a threat to security is unacceptable." Euro leaders say they are committed to diversifying energy sources away from Russia, but it won’t happen overnight. Complacency on the energy front seems like a really big mistake.

As the G7 meeting wraps up, the various leaders will head to France on Friday to mark the 70^th anniversary of the D-Day invasion at Normandy. Putin will be there. No negotiations or diplomatic level talks are planned but it should make for some interesting photo ops.

And before the D-Day anniversary there will be an uncomfortable dinner between President Obama and French President Hollande, who will make the case that the French bank, BNP Paribas should not be fined $10 billion for money laundering. Naturally, this has BNP clients nervous about what all this means for business, and the upper echelons of BNP management nervous about how their employees might respond to questions about money laundering.

Once upon a time BNP thought they could beat the rap. BNP showed prosecutors a memo that the bank thought would explain and possibly mitigate the conduct. The memo, drafted around 2004 by an outside law firm, essentially authorized the bank to process certain transactions for Sudan, as long as BNP’s employees in New York were not involved in the arrangement. BNP argued that it lacked the intent to commit a crime, saying that it followed the law firm’s directive. That legal argument, known as the “advice of counsel” defense, prompted prosecutors to pore over the single-page memo and weigh the bank’s argument. Ultimately the prosecutors concluded that the memo alleviated only a small fraction of the wrongdoing. Apparently hiring lawyers to tell you that you can do whatever you want turns out to be a little bit less than an airtight legal strategy.

Wednesday, April 09, 2014 - Feeding Time at the ZIRP Trough

Feeding Time at the ZIRP Trough
by Sinclair Noe

DOW + 181 = 16,437
SPX + 20 = 1872
NAS + 70 = 4183
10 YR YLD un = 2.68%
OIL + 1.04 = 103.60
GOLD + 4.30 = 1313.30
SILV  - .22 = 19.95

In an otherwise light week for economic news, the big report is today’s release of the FOMC minutes from last month’s meeting. No surprises. You may recall that after the last meeting, Chairwoman Janet Yellen talked about the possibility of raising the fed funds target rate after a “considerable time”; when pressed she indicated a “considerable time” was about six months after the Fed ends it asset purchases under Quantitative Easing. That would mean late spring or summer of 2015.

Fed policymakers were unanimous in wanting to ditch the thresholds they had been using to telegraph a policy tightening; no hard and fast target of 6.5% unemployment or 2% inflation. The minutes indicate the Fed would like to see more improvement in the economy; the emphasis on quality rather than quantity. In other words, the Fed remains dovish, and they will taper but they will also keep rates low for a long time. And also, those “dots” are over-rated.

The dots are actually charts suggesting the fed funds rate would top 2% by the end of 2016. In the minutes published today, several policy-makers claim the charts overstated the shift in projections, which would suggest the Fed is not ready to tighten policy. A couple of the voting members wanted to commit to keeping rates low if inflation remains persistently below the Fed's 2-percent goal.

Wall Street loves feeding at the Zero Interest Rate Policy trough. Stocks were up. Despite the three-day selloff, the S&P 500 index managed to hold above its 50-day moving average around 1,840, a key support level. The Nasdaq Composite is in positive territory year to date.

In other economic news, Commerce Department data showed that wholesale inventories rose at a slower pace of 0.5% in February, in line with expectations, after a revised gain of 0.8% in January, which could support views that restocking did not help the economy in the first quarter. You recall that companies were overstocked on inventory in the fourth quarter; we haven’t worked our way through those full shelves, and that likely means that the economy is slogging along in the first quarter.

The IMF, the International Monetary Fund says the global economy is strengthening but emerging markets still face challenges from outflows of capital and the big threat for the global economy is super-low inflation, or low-flation.

The IMF expects the global economy to grow 3.6% this year and 3.9% in 2015, up from 3% last year. Those figures are just one-tenth of a percentage point below the IMF's previous forecasts in January. And the forecasts will likely be revised lower as more months pass; that seems to be the tendency. The IMF made no changes to its forecasts for US growth, which it estimates at 2.8% this year and 3% in 2015. Overall, the recovery seems to be broad, fairly strong and more stable.

The IMF and the World Bank will hold their spring meetings in Washington this weekend. Finance ministers and central bankers from the Group of 20 leading economies will meet Thursday. The IMF is expected to reiterate the message that central banks should be more aggressive.

Inflation in the 18 countries that use the euro currency fell to an annual rate of 0.5% last month. Though consumers can enjoy flat prices, ultra-low inflation can stifle growth. People and companies postpone purchases knowing that prices will be little changed months later. Debts become harder to pay off. That's a particularly severe problem in Europe, where many governments remain squeezed by debts. Super-low inflation also raises the risk of deflation; a decline in wages and prices that slams the brakes on economic growth.

Another topic at the meetings is expected to be inequality. The IMF’s new interest in income distribution coincides with other, seemingly unorthodox positions coming from the fund and some of its experts since the financial crisis of 2008. It has come to support some controls on cross-border capital flows. Its research has argued in favor of fiscal stimulus, pointing out its positive impacts on economic growth.

In the latest edition of the World Economic Outlook, the fund makes the case that inflation in the United States and other developed nations should be higher to help pull the world economy out of its morass. IMF Director Christine Lagarde now argues economic policy cannot be only about promoting low inflation and robust growth. Healthy, stable economies also depend on a reasonably equitable distribution of the rewards. The study concludes a flatter distribution of income contributes more to sustainable economic growth than the quality of a country’s political institutions, its foreign debt and openness to trade, its foreign investment and whether its exchange rate is competitive.

Deep inequality breeds resentment and political instability, discouraging investment. It can lead to political polarization and gridlock, as it cleaves the political system between the interests of the haves and the have-nots. And it can make it more difficult for governments to deal with brewing crises and economic imbalances. An analysis published last year by economists in the IMF’s fiscal affairs department concluded that efforts to curb budget deficits increase inequality, especially if they take the form of spending cuts. It suggested that targeted government spending and progressive taxes could offset some of these effects.

Fears that High Frequency Traders have been rigging the stock market went mainstream last week when 60 minutes ran a story on Michael Lewis’s new book “Flash Boys”. Then the FBI announced it would investigate; my guess is that this will slowly fade away in the light of the Holder Doctrine, which basically says that the Department of Justice and other supposed law enforcement types only arrest petty criminals, and if you have enough money and provide jobs, you are entitled to a “get out of jail” card.

Anyway, the High Frequency Traders are nothing new, they've been around for a long time. The major exchanges lease high speed access. Perhaps less well known are the dark pools. So much trading is now happening away from exchanges that publicly quoted prices for stocks on exchanges may no longer properly reflect where the market is. And this problem could cost investors far more money than any shenanigans related to high frequency trading.

When the average investor, or even a big portfolio manager, tries to buy or sell shares now, the trade is often matched up with another order by a dealer in a so-called "dark pool," or another alternative to exchanges. Those whose trade never makes it to an exchange can benefit as the broker avoids paying an exchange trading fee, taking cost out of the process. Investors with large orders can also more easily disguise what they are doing, reducing the danger that others will hear what they are doing and take advantage of them. 

The rise of "off-exchange trading" is terrible for the broader market because it reduces price transparency. The problem is these venues price their transactions off of the published prices on the exchanges; and if those prices lack integrity then "dark pool" pricing will itself be skewed. Around 40% of all US stock trades, including almost all orders from "mom and pop" investors, now happen "off exchange," up from around 16% six years ago.

A brokerage has several ways to fill customers' orders. It can match buy and sell orders from its own customers, known as "internalizing," or sell its orders to another broker that can do the same. Brokers also send trades to "dark pools," which are similar to exchanges, except the fees are lower and they are anonymous, with orders going unreported until after they have been executed. And finally, they can send trades to exchanges, where they will have to pay higher fees. A major concern with off-exchange trading is that brokers who internalize trades and offer dark pools do not provide any data to the market before the trade is executed.

On a stock exchange, when an order is sent in, the price of the stock is adjusted and everyone with a data feed sees it. Dark pools only report data after a trade has occurred. At that stage, information about the trade has little influence on the price. In other words, dark pool trading is priceless, and you actually need prices to have a marketplace; price discovery is an essential element; cut that out of the equation, and you can see some serious manipulation and distortion.

And finally, in today’s edition of “Banks Behaving Badly”, Bank of America has agreed to pay nearly $800 million in fines and restitution to settle allegations of deceptive marketing and unfair billing involving credit card products. The Consumer Financial Protection Bureau and Office of the Comptroller of the Currency said the bank had misled roughly 1.4 million people about the cost of two credit card payment protection products, which allow consumers to suspend minimum card payments if they lose their job or suffer a severe illness, and the amount of time they would receive benefits from them.

The bank also billed customers for identity protection products before they received them and did not provide some fraud-monitoring services consumers thought they were buying. About 1.9 million people were unfairly billed. The fines work out to about $5 million the rest in restitution. The bank says it has already issued refund payments to most customers who were affected. Bank of America neither admitted nor denied wrongdoing.

Monday, March 10, 2014 - Disconnected

Disconnected
by Sinclair Noe

DOW – 34 = 16,418
SPX – 0.87 = 1877
NAS – 1 = 4334
10 YR YLD - .01 = 2.78%
OIL – 1.64 = 100.94
GOLD + .30 = 1340.80
SILV - .05 = 20.94

This is a pretty quiet week for economic data; Thursday brings a report on February retail sales; we’ll also see reports Friday on inflation at the wholesale level and on consumer sentiment. That’s about it.

Today, we ran across the Economic Report of the President, compiled by the White House Council of Economic Advisors, which discusses the progress of the recovery. The economic report serves as the administration’s analysis of the president’s $3.9 trillion budget, which he unveiled last week. The president’s top economic advisors say the nation is on track to make economic progress over the next two years, but say it would do even better if Congress would enact the additional spending he proposed in his most recent budget. Yea, that’s not going to happen.

Even without new government spending, the economy should pick up a little, in part because the budget cuts moving forward won’t be as bad as what we’ve already seen. The economists think consumer spending has adjusted since the payroll tax cut expired more than a year ago. Increases in housing construction and greater business investments should give the economy a boost as well.

The report says gross domestic product should expand by 3.1% this year and 3.4% next year, which would be the best performance since 2005. The economy grew at a 1.9% pace last year. The jobless rate will average 6.9% this year, which may not be good news considering the rate is currently at 6.7%; but they think unemployment will decline to an average of 6.4% in 2015.

The report also says the two-year budget agreement in Congress through 2015 that ends “budget brinksmanship” and means “some stability during the coming year” will aid the economy. Also, households are building wealth, housing demand is gathering momentum, inflation remains subdued and global markets “are stable or improving.”

The report says the unemployment rate remains elevated and wages have been slow to rise for many Americans. Long-term unemployment presents a major challenge because these individuals may face stigmatization from employers or experience skill deterioration.

The report also looks at income inequality, stating: “Economic growth is an important determinant of poverty … as long as the gains are shared with those in the bottom of the income distribution. When growth fails to benefit the bottom, it cannot play a role in eradicating poverty. As such, the distribution of income can have a profound impact on the level of poverty. While the real economy grew at an annual rate of about 2.1 percent during the 1970s and 1980s, since 1980 economic growth has not produced the “rising tide” heralded by President Kennedy, as rising inequality left incomes at the bottom relatively unchanged.”

“Incomes in the top 20 percent of the income distribution rose dramatically until the 2000s and are about 50 percent higher today than in 1973. By contrast, real household incomes in the bottom 60 percent of the income distribution stagnated until the mid-1990s expansion, and today are little changed from the business cycle peak in 1973. A large group of poverty scholars have pointed to this rise in inequality as a leading explanation for the lack of progress in reducing poverty since 1980.”

The report also says “starting in the 1970s, inequality began its relentless rise and productivity growth became increasingly disconnected from compensation growth for typical families.” In other words, the American worker is very productive, we just aren’t getting paid for that productivity.

Of course much of the money made in the past 5 years has come in the form of stock markets returns compared to housing market recovery. When the economy slows down and there is a sharp decline in house prices, it is debtors’ net worth that is most heavily impacted, and from a recovery standpoint it is the debtors’ net worth that is in most need of repair.

The Fed’s bailout for the big banks further fueled the casino mentality of the big banks, which really further propelled the Wall Street rally. The Fed directly controls short term interest rates, and the area where the Fed had the strongest and quickest influence was on bond prices. Bond prices are inversely related to interest rates, so those holding long term bonds profited handsomely from the decline in interest rates. And it could well be argued that the housing market rebound was driven primarily by investors buying up foreclosed properties. As a result, we should not expect it to fuel household spending as we saw before.

We’re marking a 5 year anniversary of the bull market, back to March 09, 2009, with about 200% total return on the S&P 500. We should also mark the 14 year anniversary of the bear market of 2000. Back on March 10, 2000 the Nasdaq closed at 5,048; that followed an 86% gain in 1999. What followed? March 10, 2000 was the absolute peak of the market bubble: In one of the worst crashes in history, NASDAQ plunged 34% to the close on April 14th at 3,321; and the carnage continued with a 60% drop over the next 12 months.

And so, with the disconnection between the markets and the economy, you might wonder where we are headed. Nobody knows, but we have seen market inefficiency in the past and it usually gets ugly.

We’ve seen a lot of attention on the situation in Ukraine, but there has been some economic data out of China that bears a look. The first batch of Chinese February data was out over the weekend and showed some staggering shifts. Exports collapsed 18.1% year on year. There appears to be a sizable hit from the US winter as well with the trade surplus down two thirds month on month. And some contagion in emerging markets, which were down 20%. Imports were up more than forecast by 10.1% year on year but down 0.4% month on month. All of that added up to a crazy swing in China’s trade balance from a $32 billion surplus in January to a $23 billion deficit in February, a $55 billion dump in one month, and a big question mark about Chinese growth prospects.

Also, on Friday there was a default of a Chinese Solar company; not a big issue, in and of itself, but it points to further possible defaults. Today, the Shanghai Composite dropped almost 3%. Copper slipped 1.5%.  Copper tends to be sensitive to Chinese industrial demand and is having a horrible year.  The Chinese Yuan continues to slide, and is now at its lowest level since late last year.  Meanwhile, the ripples were felt across Asia, with Hong Kong losing 1.7%, Korea down 1%, Japan off 1%, and Australia off 0.9%. That little default in China may have set off some big ripples.

In today’s edition of banks behaving badly, the New York Times reports “Credit Suisse Documents Point to Mortgage Lapses”. Which is a big understatement of the problem. Anyway, Credit Suisse is being sued in Massachusetts, and a big batch of emails have turned up, and they paint a bad picture of how Credit Suisse, a major player in the American mortgage market, operated as the housing bubble inflated. The documents suggest that top officials at the bank routinely pressed subordinates to override due diligence standards and accept questionable loans that were subsequently bundled into mortgage investments.

The documents are noteworthy because Credit Suisse, unlike many other major banks, has refused to settle large lawsuits stemming from the mortgage crisis. The bank has long maintained that its operations were held to a high standard and that the mortgage investments it sold lost value largely because of the broad housing collapse, rather than its practices.

The documents, which were made public on Friday, include internal audits indicating that the mortgage unit’s activities worsened over time in 2004, and concluding that the unit could expose the company “to a significant and unacceptable level of operational, financial or reputational risks.”

The previously confidential documents raise questions about the bank’s decision to fight, rather than settle, cases filed by plaintiffs including the Federal Housing Finance Agency and the New York attorney general. In its lawsuit against Credit Suisse, the F.H.F.A. is asking for damages relating to $14 billion in mortgage securities purchased from the bank by Fannie Mae and Freddie Mac, the government-sponsored mortgage giants.  The New York attorney general’s case is seeking $11.2 billion to cover losses incurred by investors in the state who bought mortgage securities from Credit Suisse.

Many of the emails show the struggle between executives interested in keeping loan volumes high and those worried about the perils posed to the bank by its acceptance of risky mortgages.  In June 2006, for example, one Credit Suisse executive wrote an email about a fellow executive that said, “I spend my time playing defense from a guy supposedly on my team who won’t stop waiving credit guidelines until we’ve taken on so much water the firm will pull the plug. Trust me, when this Titanic goes down,” the executive concluded, that colleague “will be the guy on the bow proclaiming ‘I’m the king of the world!!!!!’ ”

Thursday, February 27, 2014 - As She Was Saying…

As She Was Saying…

by Sinclair Noe

DOW + 74 = 16,272
SPX + 9 = 1854
NAS + 26 = 4318
10 YR YLD - .03 = 2.64%
OIL - .35 = 102.24
GOLD + 2.00 = 1332.80
SILV + .05 = 21.36

Two weeks ago, the freshly minted Fed Chair Janet Yellen appeared before the House Financial Services Committee to deliver her first bi-annual Humphrey Hawkins testimony on the state of the economy and monetary policy. She read a prepared statement and then answered questions from the Congressional representatives. The next day she was scheduled to repeat the process with senators; that didn’t happen because of a big winter storm that essentially resulted in a Snow Day for Washington DC. Today, Yellen returned to Capitol Hill to continue her testimony before the Senate Banking Committee.

Yellen began today’s hearing with the same prepared remarks from two weeks ago, but then she got to the part about the Fed’s outlook for the economy and this time she said something a little different: “Mr. Chairman, let me add as an aside that since my appearance before the House committee, a number of data releases have pointed to softer spending than many analysts had expected. Part of that softness may reflect adverse weather conditions, but at this point, it's difficult to discern exactly how much. In the weeks and months ahead, my colleagues and I will be attentive to signals that indicate whether the recovery is progressing in line with our earlier expectations.”

Now for the past few months, the Fed policymakers have been reading and repeating the same script from the playbook, that the recovery will pick up later this year and the Fed’s QE stimulus had helped make things better and jobs were coming back, and just be patient and you’ll see that everything is coming up roses and daffodils.

The rosier outlook was behind the Fed decision to cut back, or taper, its bond buying program. The Fed had been buying $85 billion per month in Treasuries and mortgage backed securities; they have since tapered back to just $65 billion a month; and they’re expected to get out of the bond buying stimulus program altogether by the end of the year, based on the idea that the economy will be able to grow without the stimulus. The clear picture of the road to recovery is not so clear anymore.

When will we get a clearer picture of the recovery? The answer is unlikely to emerge before the Fed’s policy-setting committee meets again in March. Yellen reiterated that the winding down of the Fed’s stimulus program is “not on a preset course” and “if there's a significant change in the outlook, certainly we would be open to reconsidering. But I wouldn't want to jump to conclusions here.”

Wall Street just loves to feed at the Fed’s easy money trough. The S&P 500 index has been pushing for new highs, three times in recent days it has inched to intraday highs, and today it found the force to close at a new record high.

There might have been something in Yellen’s testimony that Wall Street won’t like. Pressed by Senator Elizabeth Warren for more transparency on the regulatory from Yellen said the Fed was moving in that direction. Warren noted that the Fed rarely holds public votes on issues such as its enforcement actions taken against banks. Yellen replied: “You have raised a very important question. I do think it is appropriate for us to make changes and I fully expect that we will.”

That may not sound like much, but compared to her predecessors, it is a seismic change. Greenspan was a deregulating regulator, and Bernanke was a reluctant regulator from the Holder school of fear over collateral damage. Yellen isn’t backing down, although she hasn’t yet stepped up.

Meanwhile, Yellen pointed to what she thinks  might be the biggest problem with the economy, saying, “I think the issues of income inequality, of rising income inequality, in this country really date back many decades -- probably to the mid-eighties, when we began to see a very substantial widening of wage gaps between more-skilled and less-skilled workers, and this is a trend that unfortunately has continued almost unabated for the last 30 years."

Like her predecessor Ben Bernanke, Yellen offered a couple of the usual stock explanations for widening inequality: technological change and globalization. But those two trends didn't just abruptly get much worse in 1987, leading to the sudden spike in inequality. A Cleveland Fed study points to cuts in income-tax rates on the wealthy in 1986, directly contributing to the mid-80s spike in inequality. Further tax cuts in 1997 led to another spike in inequality and then the Great Recession came along and hammered low-income  Americans much harder than high-income Americans, driving an even bigger wedge between the haves and the have-nots. Yellen said today: "Households and segments of our population that had already been suffering stagnant or declining incomes for many years have seen the recession take a large toll."

Helping the economy grow is one of Yellen's responsibilities as Fed chair, so it behooves her to understand how to address this problem. So far, aside from identifying the start date, Yellen's thoughts on the issue aren't very encouraging. Asked what Congress could do to help, Yellen offered more stock solutions: More education and training for workers and kids. Those could help with the issues of technological change and globalization, maybe; although more education sure hasn't helped raise the incomes of low-wage workers. And that was as far as Yellen was willing to go today.

In economic news, the number of people applying for unemployment benefits rose last week to the highest level of 2014. This is not a sure sign that the employment picture is getting worse but it doesn’t show anything getting better.

Orders for durable goods fell 1.0% in January as demand tapered off for most big-ticket items except military hardware. Orders for long-lasting goods have fallen in three of the past four months, but up-and-down airline bookings are largely responsible. Aircraft orders sank 20.2% in January. Boeing received just 38 orders for new planes in January, down from a record 319 in December. Stripping out transportation orders, orders were up 1.1% and have been up in 4 of the last 5 months.

Even then, it doesn’t mean we have strong durable goods orders. Orders fell 6.7% for computers, 2.1% for electrical equipment and appliances, 1.8% for primary metals and 0.4% for machinery. That adds to mounting evidence that first-quarter gross domestic product is likely to be weak.

RealtyTrac data reports that institutional investors, defined as entities purchasing at least 10 properties in a calendar year, accounted for 5.2% of all US residential property sales in January, down from 7.9% in December and down from 8.2% in January 2013. This was the biggest one month plunge in history. It gets worse: the January share of institutional investor purchases represented the lowest monthly level since March 2012. This does not appear to be a weather related event, as some colder weather cities posted gains in investor purchases, while warm weather cities saw declines. Perhaps this will be another bit of data the Fed will consider before continuing to further taper MBS purchases.

The institutional or private equity investors have a fairly short-term view toward single family residential. In the past, many smaller investors have jumped into single family homes and added sweat equity with a long-term view towards slow and steady returns. The private equity money jumped in and jacked rent rates above market combined with unrealistically low levels of reinvestment into their projects. 

The idea was to create a liquidity event by taking the operating company public in an IPO and thus sloughing off the risk on the retail investor. That isn’t flying very high. A few deals were done; then one was pulled. The other short-term liquidity event was planned to come from securitizing rent streams. Blackstone tried that and their efforts dropped as rental income came up short just after it was launched. The market for this synthetically structured mess could be as big as $1.5 trillion, if it ever gets off the ground.

Many have anticipated that the large institutional investors backed by private equity would start winding down their purchases of homes to rent, and the January sales numbers provide early evidence this is happening. And if the institutional investors aren’t buying, then who is? Existing homeowners just swap one home for another. Normally, first time buyers would jump in and pick  up slack, but with higher prices, and higher mortgage rates, and ubiquitous student loan debt, potential young buyers aren’t.

The Treasury Department reported today that the deficit has dropped, quite a bit, from about $1.1 trillion in fiscal year 2012 to $680 billion in fiscal year 2013. That is the smallest deficit since 2008, and marks the end of a five-year stretch when the country’s fiscal gap came in at more than a trillion dollars a year.

Growth in tax revenue accounts for much of the decline in the deficit. Increases in taxes and cuts in federal spending figure strongly too, as does a surprising long slowdown in the pace of health-spending growth.

The Treasury said that revenue climbed $324 billion to $2.8 trillion between 2012 and 2013. That is growth of around 12.9 percent, reflecting both higher income rates, including higher top marginal rates and the expiration of the payroll tax holiday, and a strengthening economy. At the same time, government spending grew relatively slowly, to $3.9 trillion from $3.8 trillion a year earlier.

Wednesday, February 26, 2014 - Inequality With a Dash of Salt

Inequality With a Dash of Salt

by Sinclair Noe

DOW + 18 = 16,198
SPX + .04 = 1845
NAS + 4 = 4292
10 YR YLD - .03 = 2.67%
OIL +72 = 102.55
GOLD – 11.80 = 1330.80
SILV - .68 = 21.32

Sales of new single-family homes started 2014 with surprising strength, with January posting the fastest pace in more than five years. Home sales jumped 9.6% in January to a seasonally adjusted annual rate of 468,000, hitting the highest level since July 2008. Today’s sales news follows a string of recent reports signaling recent sputtering in the housing market. The data, to be fair, have a huge confidence interval—plus or minus 17.9% in January. That means we can’t know for certain whether sales rose or fell during the month. On a three-month average, sales rose 1.2% in January. Sometimes you have to take a look at economic data with a dash of salt.

Bank earnings jumped in the fourth quarter, but not solely because of increased net income. According to the Federal Deposit Insurance Corporation, financial institutions in the US earned a whopping $40.3 billion in net income in the fourth quarter of 2013, up 16.9% from a year earlier. More than half of the 6,812 FDIC insured institutions reported a year-over-year growth in quarterly earnings. And the portion of unprofitable banks dropped to 12.2% from 15% in the fourth quarter of 2012.

But it’s not all good news. The improvement in earnings was largely attributable to an $8 billion decline in loan-loss provisions, which is a way banks can boost the bottom line by fudging the numbers. Revenue was lower year-over-year due to slowing mortgage activity and a drop in trading throughout the industry. Mortgage activity fell 62% in the fourth quarter compared to the same period the year before for one- to four-family homes, as rising interest rates in the first half of 2013 reduced the demand for mortgage refinancings. Net Income for the full year in 2013 was up 9.6% to $154.7 billion, compared to 2012.

The Senate Permanent Subcommittee on Investigation, or PSI, has issued its report on offshore tax avoidance; the report would make Robert Ludlum flinch; it’s full of implausible cloak and dagger schemes that could never pass muster in a quality spy novel. Truth is stranger than fiction, but it is because fiction is obliged to stick to possibilities; so said Mark Twain.

The co-authors of the tax avoidance story were Senators Carl Levin and John McCain. For more than 6 years, US officials have been investigating how Americans dodged taxes by hiding assets in secret Swiss bank accounts. At a press briefing, McCain said offshore tax practices operated by Credit Suisse and other institutions had cost US taxpayers $337 billion in potential revenue, which he called “the largest amount of tax revenue lost due to evasion in the world.” He said Credit Suisse, Switzerland’s second largest bank, had “greatly profited from this infamous business model”.

According to Senator Levin, Credit Suisse’s US office used a series of intermediaries to set up a series of offshore shell companies for US clients “in order to hide their assets”. Large sums were divided into smaller ones before they were sent to the US so as not to trigger investigations by US tax authorities. The Credit Suisse crowd also set up phony visa applications to disguise their travels to meet clients. And when they did meet clients, they played the spy game, complete with clandestine exchanges of bank statements, and smuggling cash. In other words, all the actors knew they were doing something that should not be exposed to the light of day.

An investigation into similar practices at UBS, Switzerland’s biggest bank, ultimately led to the recovery of $6 billion in undeclared taxes from US customers, but investigations into the tax schemes had been hampered by the Swiss government. Instead of turning over the names of US taxpayers who have Swiss accounts like UBS did, the Swiss government has delayed requests for assistance and prevented banks from turning over information in an effort to close the door on past conduct.

According to the PSI report the tax avoidance schemes went on from at least 2001 to 2008. Over the past five years the Justice Department has obtained information, including US client names, for only 238 undeclared Swiss accounts out of the tens of thousands opened offshore. Two top Justice Officials told the subcommittee "the department is committed to global enforcement against financial institutions that engage in or facilitate cross-border tax evasion." So far that commitment has seen the Justice Department file tax-evasion related charges against 73 account holders and 35 bankers and advisors since 2009.

An investigation into Credit Suisse resulted in a deal last week between the Swiss bank and the Securities and Exchange Commission. Credit Suisse agreed to pay $197 million for servicing US clients without approval; that means the bankers traveled to the US and met with US clients - maybe 8,500 clients - and advised those clients on how to evade taxes, but they didn’t register as financial advisors. The agreement left unsettled a criminal probe into Credit Suisse and others over whether they helped Americans evade taxes. About 1,800 Credit Suisse staff worked on the accounts, but only 10 people have been disciplined and none had been fired.

McCain said: “This fine pales in comparison to the full range of wrongdoing perpetrated by the bank and its unwillingness to take responsibility for its actions immediately.”

The Credit Suisse chief executive, Brady Dougan, told the senators that he was blocked by Swiss law from disclosing the names to the US authorities. The bank's general counsel, said: "We would all face criminal indictments and possibly prison terms if we were to hand over these client names."

Dougan testified before the senators: "To our deep regret, it is also clear that some Swiss-based bankers at Credit Suisse appear to have helped their US clients hide income and assets in the past… Although it was not and is not illegal for Swiss banks to accept deposits from Americans, it is absolutely unacceptable for Swiss-based bankers to help US taxpayers evade taxes or to provide them with securities advice in the US without being properly licensed."

That doesn’t exactly sound like remorse for tax evasion, as much as annoyance for not having the licenses in order.

So, now the question is what will be done. The senators said the Justice Department had decided to tackle the issue by filing treaty requests, with little success. McCain said he would be quizzing Justice Department officials about why they had not made more progress. Years and years of illegal activity; a 178 page report detailing the wrongdoing; and this on top of repeated offenses from banks that have resulted in slap-on-the-wrist fines and DPA’s, deferred prosecution agreements – which is basically an agreement that says if you break the law again you actually get punished. And the result is the banks never get punished. They break the law with impunity. This tax evasion is stealing, plain and simple.

Meanwhile the International Monetary Fund has released a new study on income inequality, and the takeaway is that income inequality can lead to slower or less sustainable economic growth, while redistribution of income, when measured, does not hurt and can even help an economy.

The IMF has traditionally advised countries to promote growth and reduce debt, but has not explicitly focused on income inequalities. In the past year, IMF Managing Director Christine Lagarde has said that creating economic stability is impossible without also addressing inequality.

According to the study: "It would still be a mistake to focus on growth and let inequality take care of itself, not only because inequality may be ethically undesirable but also because the resulting growth may be low and unsustainable."

The IMF report said countries with high levels of inequality suffered lower growth than nations that distributed incomes more evenly. It warned that inequality can also make growth more volatile and create the unstable conditions for a sudden slowdown in GDP growth.

The new study comes after several years of heated debate over the path that developed and developing countries' economies have taken since the financial crash and whether their recoveries are sustainable. Anti-poverty charity Oxfam welcomed the report, saying it shows "extreme inequality is damaging not only because it is morally unacceptable, but it's bad economics".

It added: "The IMF has debunked the old myth that redistribution is bad for growth and demolished the case for austerity. That redistribution efforts -essential to fight inequality- are good for growth is a welcome finding. Low tax and low public spending are clearly not the route to prosperity."

"We find that inequality is bad for growth ... in and of itself, and we can say that redistribution by itself doesn't seem to be bad for growth, unless it's very large."

They said the traditional view that efforts to redistribute incomes would have a corresponding and most likely detrimental effect on growth was unfounded.

"Rather than a trade-off, the average result across the sample is a win-win situation, in which redistribution has an overall pro-growth effect, counting both potential negative direct effects and positive effects of the resulting lower inequality."