Thursday, October 4, 2012 - If I Didn't Hear It, Did It Happen?

If I Didn't Hear It, Did It Happen?

By Sinclair Noe

DOW + 80 = 13,573
SPX + 10 = 1461
NAS + 14 = 3149
10 YR YLD +.04 = 1.66%
OIL + 3.47 = 91.61
GOLD + 11.30 = 1791.30
SILV + .33 = 35.07
PLAT + 31.00 = 1725.00

Initial claims for state unemployment benefits climbed 4,000 last week to a seasonally adjusted 367,000, the Labor Department. But that followed a drop of 22,000 and a four-week average, which offers a view of trends, held steady at 375,000. The monthly jobs report is tomorrow morning.

Today, the Federal Reserve released the minutes of the FOMC's September 13meeting. Of course, we know the Fed launched QE to Infinity and Beyond, or at least $40 billion dollars a month in mortgage-backed securities, until such time as we see maximum employment or until inflation becomes a problem. From the meeting minutes we learn that there might be limits on QE. The report says: "Most participants agreed that the use of numerical thresholds could be useful in providing more clarity about the conditionality of the forward guidance but thought that further work would be needed to address the related communications challenges."

In other words, there might be limits to acceptable unemployment. Maybe 7%, maybe 5%? We don't know. And there might be limits to acceptable inflation. Maybe 2%, maybe 3%? We don't know. We would like to know. If we knew, we could bet on the numbers. Unemployment at 8.2% and inflation at 1.5% equals risk on. Unemployment at 4.9% and inflation at 3.1% equals risk off.

A number of FOMC participants expressed uncertainty about the effect the new Fed program might have and how it might complicate monetary policy going forward. So they adopted a "flexible approach" that would allow the Fed "to tailor its policy response over time." And instead of numerical thresholds, the Fed will buy large quantities of mortgage bonds until it is satisfied that the jobs market has "substantially" improved.

I didn't hear a lot of things in the presidential debate last night. For example, it seems the housing crisis is officially over; didn't hear anything. I didn't hear anything about the problems in Europe. I heard more about big bird than malfeasance by banksters. Facts; that was another thing missing in action. If I didn't hear it, did it happen? One of the big things I didn't hear was a mention of the Federal Reserve or the fate of the dollar. QE to infinity and beyond will substantially chip away at the value of the dollar. Sometimes currencies don't slowly erode, sometimes they crumble quick. The Iranian rial is collapsing. The rial has dropped 60% in the past 8 days. The sanctions against Iran are having an effect. There have been increasing labor strikes for months around Iran. There are three likely outcomes: first, the government of Iran might collapse, or they might try to provoke an attack by Israel or the US and rally the people behind an increasingly unpopular government, or the economy might collapse without the government collapsing – this would probably involved throwing Ahmadinejad under the bus.

Of course, there is one more possibility. The sanctions might not work as expected. China’s buying of Iranian oil hasn’t slowed in recent months despite the sanctions. In July they bought 20 million barrels. If China and others are buying Iranian crude on the sly and paying with gold, they are providing lifelines to Tehran’s economy and the regime. Because of this, Europe is considering a fresh wave of sanctions at their next ministerial meeting on October 15th targeting loopholes where crude is leaking out of Iran. And the US is also set to implement a new round off sanctions this fall. Time will tell if this is a deathblow to the Iranian economy; if it is and there is regime change, the sanctions get lifted and oil flows back into the broader market and prices could drop fast. Or it could go nuclear and prices light up like a bottle rocket. Expect volatility.

Meanwhile, the European Central Bank held another policy meeting today. They decided to hold interest rates at 0.75% because there isn't really any advantage to lower rates right now. ECB President Mario Draghi said the program of outright monetary transactions, or OMTs, outlined last month has “helped to alleviate such tensions (in financial markets) over the past few weeks, thereby reducing concerns about the materialization of destructive scenarios.”

Draghi said the OMT program is ready to launch and serves as an effective “backstop” against turmoil in the region, while reiterating that the ECB sees the euro currency as “irreversible.” It is widely expected Spain’s 2013 budget will get a thumbs-up from European authorities in coming days, clearing the way for a formal aid application and the subsequent activation of the OMT program. The bailout could be a boost for the euro and possibly for stocks. Meanwhile, Spain, which is seen as all but certain to need a full sovereign bailout as it wrestles with the aftermath of a collapsed property bubble, has remained reluctant to seek aid, and has continued to drag its feet. That’s attributed largely to concerns abut the potential for demands for added austerity and the loss of Madrid’s control over its own budget. The Spaniards really don't want to have the ECB jackboots on their economic throat.

Nobel prize winning economist Joseph Stiglitz writes: Central banks on both sides of the Atlantic took extraordinary monetary-policy measures in September: the long awaited “QE3”..., and the European Central Bank’s announcement that it will purchase unlimited volumes of troubled eurozone members’ government bonds. Markets responded euphorically... Others, especially on the political right, worried that the latest monetary measures would fuel future inflation...

In fact, both the critics’ fears and the optimists’ euphoria are unwarranted..., the stimulus that is needed – on both sides of the Atlantic – is a fiscal stimulus. Monetary policy has proven ineffective, and more of it is unlikely to return the economy to sustainable growth.

And here in the US the Murdoch Street Journal had this headline:

Imminent Recession?

So says David Malpass in the WSJ:

Data released this week by the Commerce Department waved bright red recession flags—orders for durable goods fell 13.2% in August and inflation-adjusted personal income fell 0.3%. ... the new Commerce Department numbers, combined with his stay-the-course approach, point to recession in 2013.

Back in June 2008, David Malpass stated:

While many problems remain from the 2007-2008 financial crisis, the rebound from the two-quarter slowdown looks to have taken root. I expect 1-2% growth in the second quarter and 3% in the second half. Rising inflation and Fed rate hikes later in 2008 will bring periodic worries about the pace of rate hikes, causing occasional market jitters like the current one. But the low level of interest rates should win out for both the economic and equity market uptrends (as it did during the rate-hiking cycle in 2004-2006).

 When someone with a bad track record tries to scare people you have to take it with a grain of salt, however we do have general nervousness about economic conditions in the US, combined with QE to infinity and the ECB's OMT. Monetary-policy easing over the past few months has acted as a support for gold as investors view it as the ultimate store of value. Mix in some tensions in the Middle East, and watch gold jump to an intraday high of 1796.

Yesterday I told you about the New York Attorney General's civil fraud case against JPMorgan Chase over mortgages originated and sold by Bear Stearns. The lawsuit accuses Bear Stearns of a "systematic abandonment of underwriting guidelines" and says that defects among loans sold to investors were largely ignored. Creating and packaging defective loans for sale to investors helped cause the housing bubble and subsequent collapse. The JPMorgan complaint was the first action to come out of a working group created by President Barack Obama earlier this year to go after wrongdoing that led to the 2008 financial crisis. JPMorgan, which bought Bear Stearns for $10 a share in March 2008, said in a statement it would contest the allegations.

Today, Reuters reports the New York AG and the Justice Department are investigating Credit Suisse over mortgage backed securities packaged and sold by the bank. Credit Suisse was a "huge player" in residential mortgage-backed securities until the market collapsed in 2007. The bank securitized some $128 billion in residential mortgage loans starting in 2004.

The head of the Office of the Comptroller of the Currency, a new guy appointed in March, is trying to shake things up, you know, actually get the regulators to show more signs of life than Jim Lehrer. So, Thomas Curry has apologized to senators and bankers. He says his agency should have stopped a major bank from helping drug cartels launder cash. The violations went on for years while his agency was overly passive. “I deeply regret we did not act sooner,” he said.

Curry had been on the job for just over three months on that day in July, so the mistakes hadn’t been made on his watch. His apologies were less a confession than a signal the Office of the Comptroller of the Currency -- long seen as the most bank- friendly of US regulators -- was changing course. Curry has also raised the profile of consumer protection and shifted focus toward “operational risk” -- the idea that bank practices and management can pose as much of a threat to safety and soundness as external forces.

Curry’s four predecessors all became advisers to the banking industry after they left the job -- three as lawyers in financial-services practices and Eugene Ludwig as founder and chief executive officer of Promontory Financial Group LLC, a Washington-based consulting firm.