Friday, April 26, 2013 - The Fix is In

The Fix is In

by Sinclair Noe

DOW + 11= 14,712
SPX – 2 = 1582
NAS – 10 = 3279
10 YR YLD - .05 = 1.66%
OIL - .86 = 92.78
GOLD – 5.30 = 1463.90
SILV - .36 = 24.14

The initial guesstimate of first quarter gross domestic product shows the economy growing at a 2.5% pace. Consumer spending increased by 3.2%, the strongest increase in consumer spending in 2 years. Defense spending fell at an annual rate of 11.5 percent in the first quarter, on the heels of a 22.1 percent decline in the last three months of 2012.

This is the initial report on GDP and it is subject to revisions. The initial fourth quarter GDP number came in at a negative 0.1% and was revised up to 0.4%; the first quarter estimate of 2.5% is well below expectations, and it certainly isn't showing enough strength to indicate a solid recovery.

Personal disposable income, today’s report shows, actually fell by $140 billion in total from the fourth quarter. Reversion of the payroll tax to its normal rates at the beginning of 2013 will continue to drag on the disposable income of middle-class consumers throughout the year. Business investment in productive equipment and IT — a driver of productivity, innovation, and employment — slowed markedly to 3% growth in the first quarter, relative to nearly 12% in the prior quarter. Residential investment maintained strong growth, however, expanding 13% as housing markets in many areas of the country seem to be turning up. exports grew 2.9% in the first quarter. Imports grew even faster at 5.4%, much of that due to an increase in oil prices.

The quick and easy is that cuts in government spending is acting as a drag on economic growth. Government spending fell at an annual rate of 8.4 percent, after a decrease of 14.8 percent in the fourth quarter of 2012 — with both declines happening before the March start of the sequester. Fiscal policy is not enough to get the economy to cruising speed, and monetary policy has only been effective at delivering below-target inflation.

The sequester cuts haven't yet hit the economy, at least it wasn't reflected in the first quarter GDP numbers; the sequester has hit; maybe you haven't felt it yet, unless you were in an airport the past week. Washington politicians are frequent fliers; they are feeling the sequester.

The original theory was that the specter of sequestration would be so threatening that Republicans and Democrats would agree to a budget deal rather than permit it to happen. That theory was wrong. The follow-up theory was that the actual pain caused by sequestration would be so great that it would, in a matter of months, push the two sides to agree to a deal. That theory was wrong. The reality is that the pain of the sequester doesn't matter if it hits the general public, but if it inconveniences politicians; then they will change the parts they don't like.

Today, the Congress decided that the part of the sequester that resulted in furloughs for air traffic controllers, which resulted in delays at airports; they decided that was just too painful, so they are coming up with the money to prevent the air traffic controller furloughs.

Former Labor Secretary Robert Reich correctly observed that most of the pain of the sequester is invisible.

Brandeis University in Waltham, Massachusetts, for example, is bracing for a cut of about $51m in its $685m of annual federal research grants and contracts. The public schools of Syracuse, New York, will lose over $1m. The Housing Authority of Joliet, Illinois, will take a hit of nearly $900,000. Northrop Grumman Information Systems just issued layoff notices to 26 employees at its plant in Lawton, Oklahoma. Unemployment benefits are being cut in Pennsylvania and Utah.

Taken together, these cuts are significant. But they're so localized, they don't feel as if they're the result of a change in national policy.

A second reason the consequences of the sequester haven't been obvious to most Americans is that a large percentage of the cuts are in programs directed at the poor – and America's poor are often invisible.

The Salt Lake Community Action Program, for example, recently closed a food pantry in Murray, Utah, serving more than 1,000 needy people every month. The Southeast Alaska Regional Health Consortium is closing a center that gives alcohol and drug treatment to Native Alaskans. Some 1,700 poor families in and around Sacramento, California are likely to lose housing vouchers that pay part of their rents. More than 180 students are likely to be dropped from a Head Start program run by the Cincinnati-Hamilton County (Ohio) Community Action Agency.

All across America, food pantries and community centers catering to the poor are laying off staff, reducing services, or closing. But most Americans don't know anything about this because the poor live in different places than the middle class. Poverty has become ever more concentrated geographically in America.

A final reason much of the sequester is invisible is that many employees are being "furloughed" rather than fired. "Furlough" is a euphemism for working shorter workweeks and taking pay cuts.

Two thousand civilian employees at the Army Research Lab in Maryland, for example, are being subject to one-day-per-week furloughs starting this week, resulting in a 20% drop in pay. The Hancock Field Air National Guard Base is furloughing 280 workers. Many federal courts are now closed on Fridays.

Furloughs arguably spread the pain. Mass layoffs would be far harder to swallow.

For all these reasons, the sequester hasn't been particularly visible.

But the politicians couldn't deal with flight delays. Sequestration will continue because there is no more pain to push for overturning the whole policy. Well, there's no more pain for the politicians; there's going to be plenty of problems for people who don't have political clout. Air travelers get bailed out; cancer patients; food pantries, schools – all that other stuff is still grounded.

The jobless rate in Spain is now 27.2% for the first quarter; the highest since they have been recording unemployment there going back to the 1970's. In France, more than 3.2 million are unemployed, the highest jobless rate since 1997.

So, things are kind of lousy but there is a little bit of growth in the US economy, thank goodness we're not in Spain, or Greece, or Cyprus, or heaven forbid – Syria; it's okay, we'll just kind of slog along.

It would be great if we lived in a world where there were enough air traffic controllers for all the planes in the sky, and money for cancer research, and money for food pantries, and enough economic growth to create jobs for all the people who want to work. That would be great, but that's not the world we live in. The reason is not because we can't live in prosperity and abundance; the reason is because the banksters are skimming; they are siphoning off profits, at the expense of well, everybody else.

Now, let's move our attention to a story that has been building slowly and received almost no attention in the mainstream media. I'll provide a couple of links. (go to Eatthebankers.com) and click here (Matt Taibbi) and here (Bloomberg Businessweek)

First, let's get in the way back machine. Remember the Libor rate rigging scandal? Libor is the London Interbank Offered Rate, it's where 18 of the big banks get together each day and submit interest rates that the banks would be charged if borrowing from other banks. They take the numbers and average them together, and Libor is then used as the benchmark interest rate for almost everything that uses an interest rate. The Libor is used to calculate how much interest you pay on a credit card, a mortgage, a car loan, financial products, bonds, and derivatives; all together, about $500 trillion dollars worth of financial instruments. And the whole thing was rigged.

The banksters were submitting false numbers to try to look better during the financial crisis and they were also front-running trades based upon the rates, and sometimes they were getting the people who submitted the numbers to submit fake numbers to manipulate trades based on the Libor interest rate.

Taibbi:

Yet despite so many instances of at least attempted manipulation, the banks mostly skated. Barclays got off with a relatively minor fine in the $450 million range, UBS was stuck with $1.5 billion in penalties, and RBS was forced to give up $615 million. Apart from a few low-level flunkies overseas, no individual involved in this scam that impacted nearly everyone in the industrialized world was even threatened with criminal prosecution.

Two of America's top law-enforcement officials, Attorney General Eric Holder and former Justice Department Criminal Division chief Lanny Breuer, confessed that it's dangerous to prosecute offending banks because they are simply too big. Making arrests, they say, might lead to "collateral consequences" in the economy.

The relatively small sums of money extracted in these settlements did not go toward reparations for the cities, towns and other victims who lost money due to Libor manipulation. Instead, it flowed mindlessly into government coffers.

So, the government won't prosecute, but some private investors did, and in March a case went before federal judge Naomi Buchwald in the Southern District of New York and the judge basically said there was no collusion by the banks because the banks weren't competing against one another. So the judge dismissed most of the claim against the banks.

But the case did open up another investigation because if the banks were rigging $500 trillion in interest rates, maybe they were rigging other markets as well.  So, regulators have subpoenaed as many as 15 banks and about a dozen current and former brokers at ICAP, a London based brokerage, with trading desks in New Jersey. ICAP is short for Intercapital. ICAP's website says they are the world’s leading voice and electronic interdealer broker and provider of post trade risk and information services. Among other things, the company collects the data submitted by 13 banks to set ISDAfix prices. ISDA is the International Swaps and Derivatives Association; and the ISDAfix is the benchmark for interest rate swaps, which is about a $379 trillion dollar market.

In their simplest form, swaps are used by investors to exchange a fixed interest rate for a floating one, or vice versa. They affect everything from pension annuities to commercial real estate investments, to more complex derivatives.

And now regulators, including the Commodity Futures Trading Commission, are trying to determine if they’re colluding to manipulate quotes.

The ISDAfix works the same way as the Libor did. Banks submit rates and an average is compiled every day. About 15 banks and about a dozen brokers set the rates on a $379 trillion dollar market. An April16 report by the International Organization of Securities Commissions found that benchmark setting is a process with “opportunities for abusive conduct,” through submission of “false and misleading data” or attempts to buy off the people who physically enter submissions.

In other words, the ICAP brokers may have been gathering the information and then holding on, delaying publication of the rates to allow the banksters to slip in a trade ahead of the public.

It's not like these guys would have to cheat in really big and obvious ways; just a tiny fraction of a percent of a $379 trillion dollar market is enough to pay, one-one hundredth of one percent would be enough to pay for air-traffic controllers, cancer centers, Head Start, food pantries – you know – everything in the sequester.

But wait, there's more.

Given what we have seen in Libor, we’d be foolish to assume that other benchmarks aren’t venues that deserve review, and that means more than just Libor and ISDAfix. So, what other markets carry the same potential for manipulation?

In all the over-the-counter markets, you don't really have pricing except by a bunch of guys getting together and setting prices.

That includes the markets for gold, where prices are set by five banks in London every morning and afternoon (it's called the AM and PM fix); and silver, whose price is set by just three banks; as well as benchmark rates in numerous other commodities – jet fuel, diesel, electric power, coal, you name it.

The problem in each of these markets is the same: We all have to rely upon the honesty of companies like Barclays (already caught and fined $453 million for rigging Libor) or JPMorgan Chase (paid a $228 million settlement for rigging municipal-bond auctions) or UBS (fined a collective $1.66 billion for both muni-bond rigging and Libor manipulation) to faithfully report the real prices of things like interest rates, swaps, currencies and commodities.

All of these benchmarks based on voluntary reporting are now being looked at by regulators around the world. And after they're done investigating, they will be too afraid to do anything because the banks are to big to jail. And so the banksters will continue to skim off the top of everything, and that means that the rest of us will just kind of slog along.

Wednesday, May 9, 2012 - Greek Government, Spanish Banks, Gold Prices - It's All Messy

DOW – 97 = 12,835
SPX – 9 = 1354
NAS – 11 = 2934
10 YR YLD unch = 1.84%

OIL - .56 = 96.45
GOLD – 15.40 = 1590.40
SILV - .20 = 29.37
PLAT – 12.00 = 1505.00

The Greek tragedy continues; no success so far in negotiations to form a coalition government after weekend elections resulted in a deadlock. It looks like there might be another election in June. The Greeks accepted another $5 billion dollar bailout payment today, so they keep the government afloat for a few more weeks. Now, the chatter is shifting to the very real idea that Greece will exit the Euro, and trying to figure out the implications. The concern is that exiting the Eurozone is going to be impossible and possibly will trigger a cascade of bad economic consequences. Absolutely right, but only because it might be done in an uncontrolled manner.

The Federal Reserve and the ECB and the IMF and all the others have been saying that the Euro-crisis is under control. If, or when Greece exits the Euro, nobody should be surprised; this train has been rolling down the track for a couple of years, and the Germans and ECB and IMF and Fed all had plenty of time to come up with solutions. And they didn't. So, now the Greek voters have come up with a solution. They didn't come up with a unanimous decision, not even a plurality. The whole thing was a crazy mish-mash of votes, ranging from communists to neo-nazis. Sometimes democracy is messy, but it looks like it has produced a solution in Greece.

Spain took over Bankia, the country's fourth biggest lender. In a deal that will give the state a 45 percent indirect stake in Bankia, the government will take control of its parent company BFA by converting into equity a 4.5 billion euro loan it had given the financial group previously. The economy ministry pledged to do all it takes to clean up Bankia, which has more than 30 billion euros of exposure to troubled loans to property developers and repossessed land and buildings. The government is expected to lend or give Bankia up to 10 billion euros in additional aid and it is widely expected that the bank will need more.

Since the banking crisis began, Spain has bailed out seven smaller savings banks, but the Bankia rescue is by far the biggest and it comes after a string of other banking reform plans revealed over the past week. These include moving toxic assets out of some banks and demanding that banks set aside 35 billion euros against loans to the building sector, on top of 54 billion euros the banks are already provisioning.

Prime Minister Mariano Rajoy had promised not to use state funds to rescue the banks, but mounting doubts over Bankia had shaken the euro zone and he did a U-turn. And if you're wondering why voters in France voted the way they voted, or why the voters in Greece went to such extremes. Here is the answer. Spain demands austerity from its citizens and then bails out the banks. The politicians promise they won't bail out the banks and it's just a lie. Where does all the money go? To the banks.

As concerns about Spanish banks grow, there are warning that Europe's banking system urgently needs to be overhauled, otherwise the entire monetary union could be in jeopardy. The continent's leaders missed their chance to reform the system in the wake of the 2008 financial crisis, and are now paying the price. At a press conference last week, ECB President Mario Draghi admitted the temporary European Financial Stability Facility (EFSF, also known as the Euro Fubar Slush Fund), the rescue fund for cash-strapped euro-zone countries, has not been very successful Draghi said: "Its functioning fell short of both expectations and needs.” He did not say exactly what is wrong with the fund and what needs to be changed. He failed to mention that the ECB has long been exploring ways of expanding the scope of the EFSF, or its permanent successor, the European Stability Mechanism (ESM, also known as the Euro Slush Mechanism), to give the bailout mechanism more firepower.

Spanish banks are particularly unsteady. They are sitting on roughly 1 trillion-euro ($1.3 trillion) in shaky loans related to the ailing real estate sector. The estimates for the cash shortfall range from 50 billion-euro to 200 billion-euro. The German government wants to prevent the bailing out of Spanish banks from setting a precedent. Bailing out German banks at the taxpayers' expense has already not been particularly popular. What's more, it would hardly end with bailouts for Spanish banks. Ireland, which only had to be bailed out by the rescue fund because of its banks, and thus has a much higher level of government debt than Spain, could insist on equal treatment.

So, after all this time, nobody wants to bailout the banks, and yet, nobody has a better idea. Well, nobody but the Greeks.

Moody’s Investors Service will this month start cutting the credit ratings of more than 100 banks, a move that risks pushing up their funding costs and probably curbing lending. BNP Paribas, France’s biggest lender, Deutsche Bank, Germany’s largest, and New York-based Morgan Stanley are among firms that face having their short- and long-term debt downgraded to their lowest-ever levels by Moody’s.

The cuts follow downgrades by Standard & Poor’s and Fitch Ratings last year; and the fear is the cuts could erode profits, trigger margin calls and leave some firms unable to borrow from money market funds that have strict rules on who they can lend to. Without access to funding from private sources, banks have had to sell assets and reduce lending. I’d like to say the views of the rating agencies don’t matter anymore but, unfortunately, they do.

The Federal Reserve has for the first time given approval for a large Chinese bank to purchase a US bank. It also gave approval to two other large Chinese banks to expand their operations in the United States.

The Fed approved the application of the Industrial and Commerce Bank of China Limited, China’s largest bank, and two other Chinese firms to purchase The Bank of East Asia U.S.A., located in New York City. The Fed also approved an application by the Bank of China to set up a branch in Chicago and an application by the Agricultural Bank of China Limited to establish a branch in New York City.

It's tough to beat the kind of year Exxon Mobil had in 2011. Shares rose by 20% and profits surged by 35% to $41.1 billion. Revenues jumped 28% to $452.9 billion, helping Exxon reclaim the top spot in the Fortune 500. Wal-Mart slipped to No. 2 in the Fortune 500 in 2011 after holding onto the top spot for two years in a row. The retailer was forced to aggressively cut prices to reverse its declining same store sales in the U.S. That helped push revenues up by 6% during 2011, to $447 billion, but it hurt Wal-Mart's bottom line -- profits declined by 4.6% during the year, to $15.7 billion.

Gold prices have been trading lower this week and futures prices hit a 17 week low this morning before recovering through the trading session. It is becoming apparent that Greece will have a difficult time remaining in the Euro-Union. And many people are more worried about Spain than Greece. The US dollar index has benefited recently on safe-haven demand due to the EU situation. The dollar may have problems but it is the cleanest shirt in a hamper full of dirty laundry. The lower prices have spread through the commodities markets, not just precious metals; it appears to be part of a risk-off response to the European Union debt and financial crisis. Crude oil hit a four and a half month low on Monday, and traded lower today; over the past five sessions, oil is down about 10%. As recently as last month, ever higher crude oil prices and $5 a gallon gas were still regarded as possible. Since then gas prices have dropped to levels much lower than they were a year ago.

Back to the metals; why isn't gold performing as a safe-haven investment? Consider that the metals are a measure of how well the currency is being managed. Right now the US dollar is being reasonably well managed compared to other currencies; the cleanest shirt theory. With all the problems in Europe, it is fairly obvious that central banks are printing a whole bunch of currency in order to bail out banks and countries. The ECB and the IMF have already dished out about $2 trillion dollars in bailouts over the past six months, and there is almost certainly going to be more. And so, you're probably wondering why gold isn't selling for about $10,000 an ounce. And the answer is that gold and silver prices are manipulated. I'm not big into conspiracies, but seriously, if you were printing a currency would you want to see gold prices jump up to $5,000? And if gold hit $10,000 we would all be talking about the collapse of the dollar; we would all be talking about how Federal Reserve notes are nothing but counterfeit paper. We would all be crying about the failure of the Fed. And considering the relatively small market for gold and silver, it shouldn't surprise anybody that the markets are manipulated. You should remember that the investment market for gold is quite small. Wal-Mart has a bigger market valuation than the entire market for gold.

Seriously, I'm not a conspiracy theorist. This is what the Fed does. They manipulate the amount of money in circulation. The M1 through whatever M amount; they have a printing press. They manipulate interest rates; every few weeks they have a meeting and then they announce how they decided to manipulate rates. In turn, they manipulate bonds and mortgages and all manner of debts. They manipulate stocks. We used to call it the Plunge Protection Team until we learned the real name, “The President's Working Group on Financial Markets”. The price of oil is manipulated by use of the strategic reserves and cafe requirements on one side to out and out war on the other end of the scale. The government pays farmers to grow or not grow certain crops – which sounds like they manipulate the price of food. From time to time, the CME will change margins on the precious metal futures – that manipulates the price.

If you were going to have a major monetary easing in the near future, (like maybe if Greece exits the EU, or maybe at the June 19 FOMC meeting) if you were planning something that would devalue the dollar and run the risk of inflation – you would come out and say inflation is under control and you remain vigilant – you would suppress gold prices – and you wouldn’t tell people your real plans.

Why would you want to buy gold and silver if you know the prices are artificially low? Back to basic supply and demand. Think of it like a balloon being held under water. The price is being pushed down. And think of demand as the air that fills that balloon. Demand is currently expanding. Admittedly, the technical levels for gold are making holders nervous, but long term holders are probably looking at these prices as a chance to buy the dip.