Monday, January 28, 2013 - What's Going On

What's Going On

by Sinclair Noe

DOW – 14 = 13,881
SPX – 2 = 1500
NAS + 4 = 3154
10 YR YLD + .03 = 1.97%
OIL + .69 = 96.57
GOLD – 4.80 = 1655.50
SILV - .34 = 30.94

This will be a big week of economic reports, including: the Federal Reserve concludes its first policy meeting of 2013 on Wednesday; the monthly jobs report on Friday (look for a gain of 165,000 jobs and the unemployment rate to hold steady at 7.8%); earnings reporting season continues according to expectations; tomorrow brings an update on fourth quarter GDP; later in the week we'll see reports on incomes, spending, and sentiment.

Today we learned orders for durable goods, the big-ticket items made in the US, increased 4.6% in December, fanned by a big batch of bookings for military and commercial aircraft. Demand also improved for most other makers of long-lasting goods, suggesting that US manufacturers could be poised for a modest rebound in 2013. Then Caterpillar issued a less than bright outlook for 2013, which put a damper on the sector.

Toyota Motors retook the title of world's largest auto maker, posting a 23% gain in global sales to a record 9.75 million vehicles in 2012. General Motors moved to second place in global sales at 9.29 million; Volkswagen was in third place with 9.07 million sales.

The National Association of Realtors reports pending home sales fell 4.3% in December, with low inventory cutting results. The trade group's pending-home-sales index declined to 101.7 in December from 106.3 in November.

No policy changes are expected from the Fed this week, but investors will be on the lookout for further clues to policy makers’ assessment of the economic recovery. Last year, the Fed said it was committed to holding interest rates near zero as long as unemployment remained above 6.5% and inflation remained below 2.5%.

It‘s less clear, however, what it would take to get the Fed to end its open-ended third round of quantitative easing, because the analysts still don't quite believe the Fed targets for inflation and employment. Minutes of previous Fed meetings have highlighted a wide divergence of opinion over the potential time frame for the program. Beyond the targets and the time frame, nobody is quite sure how the Fed can possibly back away from juicing the economy. And an equally intriguing thought is what the Fed might do if all their stimulus continues to disappoint. Don't expect big surprises from this week's Fed meeting. The Fed will continue to pass out money for their buds on Wall Street; they will continue their $85 billion per month bond-buying program and keep short-term interest rates near historic lows. Esther George, president of the Kansas City Federal Reserve, has said that the Fed’s willingness to give away easy money could undermine the stability of the financial system in the future.

Not surprising then to hear a new elite consensus on the US budget deficit. One of the functions of the World Economic Forum in Davos – decide for yourself whether this is a virtue or a vice – is to give the plutocrats a venue for figuring out their party line. For a long time, the conventional wisdom among this crew has been that the deficit and the debt were the United States’ chief economic problems. Not only was the deficit the United States’ most important economic woe, it was the most important economic issue in the entire world. But, then the rich guys figured out that if austerity is actually imposed, it might deter the Fed from loading bags of money into their helicopters and dumping it on their buds on Wall Street. So the new idea out of Davos is that deficits don't really matter.

The fact that deficit cutting was the right prescription in the 1990s doesn’t necessarily make it the priority today. So, the rich guys in Davos are abandoning the deficit fighting dogma in favor of economic policy that is more like medical treatment than religion. It isn’t a dogma that should be cleaved to under every circumstance. Instead, it is a doctor’s black bag, whose particular instrument depends on the specific patient.

Viewed in that way, there is no contradiction between supporting a hawkish approach to U.S. government spending in the 1990s and a more expansionary bias today. The world has changed, so the right policy needs to be different, too .Today, the long-term interest rate is negligible, the constraint on investment is lack of demand, productivity has vastly outstripped wage growth, and the oft-repeated mantra that reduced deficits spur investments and you’ll get more middle-class wages doesn’t work in the same way,

In other words, deficit reduction does not constitute the basis for satisfactory growth strategy. Instead, to get growth, particularly for the beleaguered middle class, you need “investment,” a category a budget hawk might simply term “spending.” Let's all remain flexible.

Of course, there is still the Machiavellian intrigue of DC politics, but today, a surprise as a bipartisan group of senators. Four Republicans and Four Democratic senators agreed on an immigration reform plan they hope to move quickly with legislation giving 11 million illegal immigrants a chance to eventually become American citizens. The senators released the outline of a comprehensive immigration reform effort - one with plenty of details missing - that still must be turned into legislation.

A funny thing happened on the way to the bank. Bloomberg reports: More than $114 billion exited the biggest U.S. banks this month, and nobody’s quite sure why.

The Federal Reserve releases data on the assets and liabilities of commercial banks every Friday. The most current figures, covering the first full week of 2013, show the largest one-week withdrawals since the Sept. 11, 2001, attacks. Even when seasonally adjusted, the level drops to $52.8 billion—still the third-highest amount on record, and one for which bank experts and analysts were reluctant to give a definitive explanation.

The most obvious culprit is the expiration of the Transaction Account Guarantee program, the extraordinary federal effort to shore up the country’s non-gigantic banks during the 2008 financial crisis. Big banks were considered “too big to fail,” while smaller ones were vulnerable to runs. The TAG program backstopped their deposit bases by temporarily offering unlimited insurance on money kept in non-interest-bearing accounts. That guarantee ended on Dec. 31, so a decrease in deposits would be expected first thing in January.

But hold on: The Fed data show $114 billion leaving the 25 biggest banks—about 2 percent of their deposit base. Only $26.9 billion left all the others, equivalent to 0.9 percent of their deposit base. Experts had predicted that the end of TAG would hurt the nation’s small banks because the big ones are still considered too big to fail.

So if the missing $114 billion is not the result of the TAG program expiration—or at least not all related to TAG—what’s going on? The first quarter is always a wacky quarter. And January 2013 has seen an incredible amount of change. First, the fiscal cliff drama had companies shifting dividends and had bank clients guessing what their tax liabilities would be, which might explain the $60.4 billion pumped into the largest banks during the week ending Dec. 26. (Seasonally adjusted, it was the sixth-highest level on record.) Second, the payroll tax just went up, sticking most wage earners with paychecks that are 2 percent smaller.

Third, ordinary investors may be ready to move out of federally guaranteed accounts and into investments. Stocks did very well in 2012. Equity mutual funds saw their second-highest inflows on recordin the first week of the year. Market exuberance is high, with one measure of risk aversion at a three-decade low.

If deposits are really trending down—and at the end of the month, we’ll be smarter than we are now—if that’s the case, it can tell us a few things. It could tell us is that the law of elasticity is finally catching up with deposits. In other words, contrary to what economic theory predicts, deposits have been piling up at banks ever since the crisis, even though they offer pitiful yields. That may finally be ending, but it is a little too early to tell. One week does not make a trend. Still, $114 billion is a big figure, and it’s one to keep an eye on.

ABC News reported:

Activists from the hacker collective known as Anonymous assumed control over the homepage of a federal judicial agency Sunday morning. In a manifesto left on the defaced page, the group demanded reform to the American justice system and what the activists said are threats to the free flow of information.

The lengthy essay largely mirrors previous demands from Anonymous, but this time the group also cited the recent suicide of Reddit co-founder and activist Aaron Swartz as has having "crossed a line" for their organization. Swartz was facing up to 35 years in prison on computer fraud charges. Prosecutors said he had stolen thousands of digital scientific and academic journal articles from the Massachusetts Institute of Technology with the goal of disseminating them for free.

Anonymous says Swartz was "killed because he was forced into playing a game he could not win - a twisted and distorted perversion of justice - a game where the only winning move was not to play."

"There must be a return to proportionality of punishment with respect to actual harm caused," it reads, also mentioning recent arrests of Anonymous associates by the FBI. In their statement, the hackers say they targeted the homepage of the Federal Sentencing Commission for "symbolic" reasons.

The group claimed that if their demands were not met they would release a trove of embarrassing internal Justice Department documents to media outlets. Anonymous named the files after Supreme Court justices and provided hyperlinks to them from the defaced page. I've heard about efforts to follow the links, which don't seem to link to anything, but this could get interesting.