Wednesday, February 13, 2013 - Everything You Need to Know - Fast and Furious Edition

Everything You Need to Know - Fast and Furious Edition

by Sinclair Noe

DOW – 35 = 13,982
SPX + 0.90 = 1520
NAS + 10 = 3196
10 YR YLD +.04 = 2.02%
OIL - .37 = 97.14
GOLD – 8.70 = 1643.60
SILV - .34 = 30.88

I realize that you are a very important person; your time is valuable; time is money. I could spend hours bloviating on the minutiae of the State of the Union Address. Instead, I respect your busy schedule by condensing the one hour Address down to less than 3 minutes. Seriously, you take out the applause and the pomp and circumstance and a few adjectives, and the hour long speech fits neatly in just under 3 minutes. Here you go:

I know you also like lists, so here's the top ten policy area's covered in the speech:

#10 – an emotional appeal to vote on gun control,

#9 – raise the minimum wage to $9 an hour,

#8 – on the energy front, tap the oil and gas royalties for revenue to find alternatives to oil,

#7 – the president pledged action on climate change and if Congress won't do it he would use executive authority,

#6 – Education starting with universal pre-school for 4-year olds,

#5 – let people vote, (turns out this is controversial. Who knew?)

#4 – immigration reform,

#3 – on foreign policy, cut the forces in Afghanistan by half,

#2 – beef up American manufacturing (starting with a visit today to a Canadian auto parts plant in North Carolina, and

#1 – try to get Congress to avoid imploding on national debt. (yea, that's not gonna happen)

So, there is fast and furious version of the State of the Union.

There were a few little things that didn't make the condensed version. For example: the T-TIP, the Transatlantic Trade and Investment Partnership with the European Union, which was worth one single sentence saying we will launch talks; which wasn't accurate; talks have already been going on behind the scenes. Between them, the United States and Europe account for about half of global economic output and one-third of world trade. Trade in goods between the Union and America totaled $646 billion last year.

The Union is the best customer for U.S. exports, buying $459 billion in goods and services and supporting 2.4 million American jobs. So, it might be the biggest trade agreement in the history of the planet. Tariffs on goods traveling between the US and the Eurozone are only about 3% but the volume is enormous. One big sticking point would be agricultural products. We send them genetically modified corn; they send us horsemeat lasagna and pony burgers.

There was also something about fighting back against cyberattacks. I made a note last night but I can't seem to find it on my computer today.

One issue that did not make the State of the Union Address was financial reform. During Tuesday’s speech, the president made one direct reference to the financial crisis, saying during the first few minutes of his address, “Together, we have cleared away the rubble of crisis, and can say with renewed confidence that the state of our union is stronger.” No mention of regulatory reform. No mention of the very significant work that still needs to be done under Dodd-Frank. No reference to the necessary things we need to do beyond Dodd-Frank to really fix the financial system. You may remember last year's State of the Union included an  initiative within the Department of Justice -- a special investigative unit that Obama said would "hold accountable those who broke the law" in the lead up to the financial crisis.

A new report says the top 1% has captured all of the income gains since 2009, and then they took some more; wracking up 129% of the income gains. How did that happen? Incomes to the bottom 99% fell by 0.4%.And the new Emmanuel Saez paper also describes how it came about. In short form, income to the top 1% is significantly influenced by capital gains. Remember, the tax reporting is not clean here: rising equity and bond markets help all those private equity and hedge fund professionals, who are able to get capital gains treatment for what ought to be labor income. But the paper also stresses that the lower orders were hit hard in the aftermath of the global financial crisis than in the dot-bomb era, which also saw a big drop in capital gains. That isn’t as hard to understand. The collapse of the dot-com mania didn’t impair the real economy overmuch because it was not fueled in a meaningful way by borrowings. 

It’s important to recall that at least in America, the relentless pursuit of wealth for its own sake dates from the Gilded Era, or at least so argues Richard White in the Boston Review:

After his death, Lincoln’s personal trajectory from log cabin to White House emerged as the ideal American symbol. Anything was possible for those who strived. But the goal of this striving was not great wealth. Perhaps the most revealing memorial to Lincoln and his world is found in one of the most mundane of American documents: the census. There he is in the Springfield, Illinois, listing of 1860: Abraham Lincoln, 51 years old, lawyer, owner of a home worth $5,000, with $12,000 in personal property. His neighbor Lotus Niles, a 40-year-old secretary—equivalent to a manager today—had accumulated $7,000 in real estate and $2,500 in personal property. Nearby was Edward Brigg, a 48-year-old teamster from England, with $4,000 in real estate and $300 in personal property. Down the block lived Richard Ives, a bricklayer with $4,000 in real estate and $4,500 in personal property. The highest net worth in the neighborhood belonged to a 50-year-old livery stable owner, Henry Corrigan, with $30,000 in real estate but only $300 in personal property. This was a town and a country where bricklayers, lawyers, stable owners, and managers lived in the same areas and were not much separated by wealth. Lincoln was one of the richer men in Springfield, but he was not very rich.

Not only was great wealth an aberration in Lincoln’s time, but even the idea that the accumulation of great riches was the point of a working life seemed foreign. Whereas today the most well-off frequently argue that riches are the reward of hard work, in the Civil War era, the reward was a “competency,” what the late historian Alan Dawley described as the ability to support a family and have enough in reserve to sustain it through hard times at an accustomed level of prosperity. When, through effort or luck, a person amassed not only a competency but enough to support himself and his family for his lifetime, he very often retired. Philip Scranton, an industrial historian, writes of one representative case: Charles Schofield, a successful textile manufacturer in Philadelphia who, in 1863, sold his interest in his firm for $40,000 and “retired with a competency.” Schofield, who was all of 29 years old, considered himself “opulent enough.” The idea of having enough frequently trumped the ambition for endless accumulation.

Now there were robber barons who dated before that era, such as John Jacob Astor. And the railroad boom (and related stock market speculation) may have been a catalyst for the shift in American values. But if you buy this thesis, then there’s a reason for the expression “conspicuous consumption”. It really was describing a novel phenomenon.

We now know the problem that sank the London Whale, courtesy of Baselinescenario.com, referring of course to the London based trading unit of JPMorgan Chase which lost $6 billion. Turns out a quantitative analyst for the trading unit had figured out the value at risk model for the derivatives trades by using a series of Excel spreadsheets. The numbers were entered on the spreadsheets manually by a process of copy and paste from one spreadsheet to the other. Here's what went wrong: “After subtracting the old rate from the new rate, the spreadsheet divided by their sum instead of their average, as the modeler had intended. This error likely had the effect of muting volatility by a factor of two and of lowering the VaR . . .” Essentially, it was a $6 billion typo.