Thursday, March 13, 2014 - White Smoke

White Smoke
by Sinclair Noe

DOW – 231 = 16,108
SPX – 21 = 1846
NAS – 62 = 4260
10 YR YLD - .07 = 2.65%
OIL + .25 = 98.24
GOLD + 3.90 = 1372.10
SILV - .15 = 21.28

Let’s start with some economic news, and then we’ll get to today’s anniversary (yes, we have another one to talk about).

The federal budget deficit narrowed in February, shrinking 5% from a year earlier as receipts jumped and spending only modestly rose. The shortfall was $194 billion for February, versus the $204 billion recorded in the same month a year ago. The deficit has been steadily improving in the past several years, dropping to $680 billion in fiscal 2013.

Retail sales increased 0.3% from January to February; December to January sales were revised lower by 0.4%; sales were up 1.5% from February a year ago. Retail sales excluding gasoline increased by 2.2% on a year to year basis.

Initial claims for unemployment benefits for the week ending March 8, decreased by 9,000 to 315,000.

Since federal unemployment insurance expired on Dec. 28, an estimated two million Americans have missed out on the benefits. Today, a bipartisan group of Senators reached a deal to extend federal long-term unemployment insurance for 5 months. The deal would be distributed retroactively to when benefits ended in December. The cost of about $10 billion would be offset by some tricky accounting known as “pension smoothing”. The bill still needs to clear a Senate vote, probably in late March; then it would go to the House of Representatives, where it would likely face a quick demise.

Earlier today President Obama signed a memo directing the Labor Department to rework the rules regarding overtime. The reforms are expected to raise the salary threshold that currently allows employers to exclude workers from overtime pay under the Fair Labor Standards Act. It hasn't been raised in more than a decade. The threshold was last raised in 2004 to $455 per week under Bush, less than half of what it was almost 40 years ago on an inflation-adjusted basis. Obama said businesses are classifying all kinds of employees as professional or administrative, including some who make as little as $23,660 a year, thereby exempting them from overtime requirements under current law.

The situation in Ukraine is still a mess. Russia is conducting military exercises near its border with Ukraine. German Chancellor Angela Merkel warns of a “catastrophe” unless Russia changes course. US Secretary of State John Kerry said serious steps would be imposed Monday by the US and Europe if a referendum on Crimea joining Russia takes place on Sunday as planned. The referendum will probably happen. The serious steps refers to trade sanctions, bans on visas, a freeze on assets.

The EU has offered Ukraine 11 billion euros in aid, except it isn’t really aid, it is actually loans; it includes acceptance of an IMF austerity plan. Remember how the IMF helped Greece turn a recession into a full blown depression? One thing the past few years have done is provide a proving ground for austerity, and the results appear conclusive; budget tightening results in economic contraction or at a minimum, stagnant growth. So, it appears the only yields from Putin’s intervention in Crimea will be much pointless suffering among Ukrainians and life for years to come in the smothering embrace of a Russian bear or the smothering belt-tightening of the IMF.

The escalating situation would hurt an already stagnating Russia, where the Russian stock market hit a 4 year low, down about 20% year to date. The EuroZone can probably survive if Russia turns off supplies of natural gas, because we are now moving into spring. Within the EU, Germany tends to trade with Russia more than other countries. German exporters would take a hit; the German economy has been the strongest in the EU and if it catches cold, the rest of the EU catches pneumonia. And then the Euro banks get involved. Russia has more than $700 billion in foreign debt, and just a small bit of that is sovereign debt, most of it is private debt owed by banks and corporations, largely controlled or owned by the Kremlin. Euro banks have lined their vaults with potentially toxic Russian debt.

The thing about debt is that it comes due; when that happens, the options are to pay it off, roll it over or default. If sanctions are imposed and in place for any length of time, default will be the likely result. At this point it is becoming clear that the best possible scenario is one where bombs are not flying.

Don’t worry about the US banks, they only have about $24 billion in Russian debt; just a drop in the bucket. The New York State comptroller yesterday released estimates that Wall Street pulled in $26.7 billion in cash bonuses last year; up 15% for a year earlier; it works out to $164,530 per person when split up among the industry’s 165,200 employees in New York. Of course that’s not how it’s split up; some get more, some get less.

To put it in perspective, the Institute for Policy Studies figures that Wall Street’s bonus cash is nearly double what the country’s 1.085 million full-time minimum wage workers earned all of last year, which works out to $15.1 billion. Here’s the bad news; they also looked at the multiplier effect of that $26 billion pile of bonus money. The Wall Street crowd is more likely to hold onto their bonuses, and so bonuses impact the economy to the tune of $10.4 billion, whereas minimum wage workers spend almost all of their money, impacting the economy to the tune of $32.3 billion.

And that brings us to today’s anniversary. This week we’ve noted the 5 year anniversary of the current bull market, the bear market of 2000, the 25^th anniversary of the WorldWideWeb, and the 3 year anniversary of Fukushima. One year ago, Jorge Bergoglio of Argentia was elected as Pope. In recognition of St. Francis of Assisi he adopted the title of Pope Francis, and like his namesake he has focused his attention on caring for the poor and marginalized.

Pope Francis moved quickly to offset the influence of the Curia by appointing a standing advisory council made up of eight Cardinals from around the world, a move that also signaled his interest in a more decentralized governance within the church. Pope Francis created the position of the Secretariat of the Economy to oversee the finances and administrative functions of the Holy See and appointed Australian Cardinal George Pell to head the Secretariat. The move weakens the power of the Vatican Secretary of State. The change is one more step in Pope Francis' campaign to transform the Curia with a special focus on the scandal plagued Vatican Bank.

The new Pope elevated 19 Catholic leaders to the level of cardinals, including 5 from Latin America, and one from Haiti and one from Burkina Faso, a couple of the poorest countries in the world.

Two weeks after he was elected, Pope Francis left the walls of the Vatican to visit a juvenile detention center where he washed and kissed the feet of 12 prisoners incarcerated in Rome as part of the traditional Holy Thursday rite. Last summer, the Pope went to Brazil where he conducted a mass before about 3 million people on the beaches of Copacabana; he also visited hospitals, prisons, and a favela, earning the nickname the “Slum Pope”.

On the plane back from Brazil, the Pope told a group of reporters, "Who am I to judge a gay person of goodwill who seeks the Lord?" and opened up a new conversation about gay rights within the Catholic Church. Since that first quote, Francis has continued to make statements on gays that amount to a shift in tone for the Vatican if not a change in doctrine.

Recently the Pope has encountered criticism for defending the church on the issue of sexual abuse. Pope Francis appointed a commission on sex abuse led by Cardinal Sean O'Malley, the archbishop of Boston, but as of yet has not met with any abuse victims. This is an issue that remains a stain on the church and will need to be addressed, but it was not the only controversial issue.

In November, Pope Francis published an apostolic exhortation titled “Joy of the Gospel” offering a platform for a good and faithful life. The papal pronouncement also condemned the “new tyranny” of unrestrained capitalism, causing income inequality and poverty, and calling on leaders to curb “the absolute autonomy of the marketplace and financial speculation,” to reject the “new idolatry of money”, and act “for the common good.” 

He noted that “the earnings of a minority are growing exponentially, so too is the gap separating the majority from the prosperity enjoyed by those happy few.”  He called for “more politicians who are genuinely disturbed by the state of society, the people, the lives of the poor,” and for the commitment of political and financial leaders to “ensure that all citizens have dignified work, education and healthcare.”

Francis warned that our economic systems will “devour everything which stands in the way of increased profits, whatever is fragile, like the environment, is defenseless before the interests of a deified market.”

Francis broadened the definition of the commandment “thou shalt not kill,” by saying, “today we also have to say ‘thou shalt not’ to an economy of exclusion and inequality. Such an economy kills.” In striking terms he asked “How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses 2 points?”  He repeated his warning that “Money must serve, not rule.”