Wednesday, June 25, 2014 - Use Your Library Card at a Copy Shop for a Horseback Ride to the Moon

Use Your Library Card at a Copy Shop for a Horseback Ride to the Moon
by Sinclair Noe

DOW + 49 = 16,867
SPX + 9 = 1959
NAS + 29 = 4379
10 YR YLD - .02 = 2.56%
OIL + .74 = 106.77
GOLD - .60 = 1319.40
SILV + .09 = 21.12

One of the jobs of the Commerce Department is to calculate the gross domestic product of the country; clearly it is a difficult task to figure out the value of all the goods and services produced, and so they tend to revise the numbers as they gather information. In April the Commerce Department figured the economy grew, just barely, 0.1% in the first quarter; last month they revised their GDP numbers to negative1.0%; today they revised GDP even lower. The economy shrank by 2.9%.

To understand the big move, you first have to realize that the GDP number is supposed to measure everything; construction and demolition, marriages and divorces, broccoli sales and cigarette sales, yoga classes and cancer treatments. One of the big reasons for the negative number is that the cost of healthcare dropped significantly.

The US spent $6.4 billion less on health care in the first quarter than in the last quarter of 2013. Government statisticians initially forecast a 9.9% increase in health-care spending, and what we got was a 1.4% decline. Considering all the millions of previously uninsured people who are gaining access to health insurance under the Affordable Care Act, how can they be shrinking so dramatically?

Health-care costs overall have been increasing more slowly in recent years compared with the pace before the 2007-09 recession. Slow growth in the price of health-care services combined with a decline in the amount of health care people consumed in the first quarter. Still, health-care spending is expected to accelerate again in coming quarters as the millions of people who gained health insurance coverage during the Affordable Care Act’s first open enrollment period begin to use their new coverage. Most people who got coverage at the start of the year, are just now figuring out how to use the coverage. So, the idea that people are spending less on health care may hurt the GDP number but that doesn’t mean it’s a bad thing. This also means that the economists don’t really understand how Obamacare is affecting the economic data; and that means they don’t really know how long it will distort data. This is new territory.  

A couple of other areas were also involved in shrinking the economy. Companies continue to hoard cash and shun investing in new equipment or new employees; and that will continue until demand picks up; we’ve been told demand will pick up, any day now…, it’ll pick up…., that’s what we’ve heard for a few years.

Another rough spot for GDP was in trade. The trade deficit widened in the first quarter, which would typically indicate growth, but in the first quarter both imports and exports dragged down growth. And then trade was disrupted by the weather, the excuse that keeps giving and giving.  And now that the winter has turned to spring and spring to summer, the economy will bounce back like a kangaroo on a trampoline. Maybe. Consider that when the economy shrank in the first quarter of 2009, the country lost 2.3 million jobs and the markets were in a free fall. Fast forward to first quarter 2014 and the markets are around record highs while the country added about 600,000 new jobs; hardly the stuff of gloom and doom.

Today’s GDP revision might give the Federal Reserve cause for pause, or more likely it will reinforce their dovish inclinations for monetary policy. On the fiscal side, if policymakers in Washington are concerned enough to give the economy a boost, they can consider straightforward measures that would promote growth and create jobs: invest in infrastructure, restore extended unemployment benefits, hire public-sector workers like teachers and first responders, and basically abandon austerity measures in general.

You may remember the gloom and doom days of 1973, when OPEC imposed an oil embargo; prices jumped, lines formed at gas stations to buy rationed gas. Lawmakers responded by limiting the export of oil from the US; we could still export gasoline and diesel but not oil. It didn’t make much common sense but that was the response to the embargo. Things have changed.

Now, oil drillers are tapping shale formations and so much oil is flooding out of the ground that prices for ultralight oil have dropped as much as $10 below the price of traditional crude oil. Which sounds good if you are a consumer, because you might think it would result in lower prices at the pump. But as you know, the price at the pump has been going up because of the crazies in Iraq, and Libya, and Ukraine. Rather than let the oil build up and let prices drop, the plan is to export that oil under a process known as a private ruling which would relax the export restrictions.

The private rulings by the Commerce Department define some ultralight oil as fuel after it has been minimally processed, making the oil eligible for sale outside the US. Export could start in August, and could increase to more than 700,000 barrels a day by next year. The Commerce Department has given permission to two companies to ship ultralight oil: Pioneer Natural Resources and Enterprise Products Partners.

So if you were hoping that all that domestic oil drilling would lead to lower prices for America, yea, that’s not going to happen.

Have you ever been on the floor of one of the commodity exchanges, or maybe seen pictures of the commodities traders? Thirty years ago, the scene was a violent confrontation of traders battling it out in the pits. Nowadays, the trading is much more subdued. Traders walk around with a portable computer that calculates the price in real time. That formula that is on every commodity trader’s computer is a continuous time option pricing model known as the Black-Scholes-Merton formula. Robert Merton and Myron Scholes won the 1997 Nobel Prize in Economics for their formula; Fisher Black passed away in 1995.

Robert Merton went on to create computerized arbitrage trading formulas and he advised hedge funds for a while, including the Arbitrage Management Company and Long Term Capital Management. He then settled down to work as a professor at MIT, where his current academic include financial innovation, controlling macro financial risk, and managing sovereign risk.

Bob Merton says your 401K is dangerous. In an article published in the Harvard Business Review, Merton writes: "The only way to avoid a catastrophe is for plan participants, professionals, and regulators to shift the mind-set and metrics from asset value to income."

Instead of telling you how much you’ve accumulated in your 401K, the plan administrators should be telling you the amount of sustainable income an employee can expect to receive in retirement. The “risk is retirement income uncertainty, not portfolio value.” That's not to say that 401k money shouldn't be invested in stocks. In fact, Merton says, 401k investment managers should invest participants' savings in a mixture of "risky assets," including equities, and "risk-free assets," such as long-term US Treasurys and deferred annuities. Merton says the solution  for employees who want to lock in retirement income, “the obvious decision is to buy the annuity.”

By disclosing annual income, Merton says, employers would help employees quickly and easily calculate how much of their annual salary they can expect to replace in retirement, together with Social Security. As a result, employees would be better able to take action to ensure they are on track to retire as planned.

The Supremes are in session and handing down decisions on a daily basis. Let’s start with American Broadcasting Company v Aereo; the Supremes delivered a major victory to the nation’s television networks, ruling that an upstart Internet company was violating copyright laws by transmitting their programs without paying for them. It was a 6-3 vote; in the majority, Justice Breyer said Aereo’s use of modern technology to stream broadcast television was not much different than cable systems that must pay the networks for its content. Meanwhile, in the minority, Justice Scalia said that Aereo is a copy shop that gives its customers a library card. I’m not sure how you might use a library card at a copy shop, but anyway, Kinko’s is out of business and so is Aero.

Today the Supremes also ruled on a couple of fourth amendment cases. The Fourth reads, in part: “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause…” and apparently your smartphone falls under the category of “papers and effects”.

 Riley v. California and United States v. Wurie featured similar facts. Defendants were detained validly, one for driving with expired tags and the other for a hand-to-hand drug sale. Police searched them, as they had every right to do, and seized their phones. Without getting a warrant, they looked at the contents of each phone and found evidence that led, eventually, to much more serious charges: gang-related attempted murder in the first case and drug distribution and weapons violations in the other.

California state courts refused to overturn Riley’s conviction when he appealed the attempted murder charge, but the 1st Circuit Court of Appeals reversed Wurie’s conviction and ordered a new trial on the grounds that the warrantless search violated the Fourth Amendment’s prohibition against “unreasonable searches and seizures.”

Police can search a suspect’s pockets, or briefcase, or car when making a valid arrest because there may be weapons nearby or evidence of crime that could be lost. In addition, officers can search when there are “exigent circumstances,” meaning when there is no time to lose, in order, say, to stop a crime in progress, prevent suspects from destroying evidence, or rescue a kidnap victim. Prosecutors in both cases argued that searching a cell phone is really just the same thing as the valid search of personal items. Chief Justice Roberts didn’t buy it, replying, “That is like saying a ride on horseback is materially indistinguishable from a flight to the moon.”

Roberts wrote the opinion for the unanimous decision and concluded: “We cannot deny that our decision today will have an impact on the ability of law enforcement to combat crime… Privacy comes at a cost.”

Thursday, April 03, 2014 - Tomorrow, Tomorrow, It’s Only a Day Away

Tomorrow, Tomorrow, It’s Only a Day Away

by Sinclair Noe

DOW – 0.45 = 16,572
SPX – 2 = 1888
NAS – 38 = 4237
10 YR YLD - .01 = 2.79%
OIL + .73 = 100.35
GOLD – 3.10 = 1287.80
SILV - .16 = 19.92

Forget about today; at least in terms of Wall Street trading. Tomorrow is more important. The first Friday of each month is always a big day because of the monthly jobs report; tomorrow, maybe more than most. The consensus estimates called for 200,000 net new jobs in March and the unemployment rate is expected to drop to 6.6% from 6.7%. Then there is the whisper number. Many people believe the harsh winter weather has held back hiring, like a balloon trapped under water by a thin sheet of ice, and when the ice melts, as it did in March, the balloon will jump out of the water like a salmon swimming upstream. Weather sensitive industries such as retail, construction and manufacturing might be especially strong performers.

A March jobs report that shows a broad increase in hiring across most or all industries would show the economy is recovering and everything, including the Fed, is on track. A disappointing number, though, would bolster the case of the increasingly famished Wall Street bears that bad weather alone is not the source of weak economic growth so far in 2014.

And if the number comes in right at expectations, we’ll have to go to the tiebreakers. We will look at the number of hours worked, In February, inclement weather kept people from getting to work, at least for a few days. The result: The average workweek slipped by 0.1 hour to 34.2 hours in February, the lowest level since January 2011. Fewer hours mean less take-home pay for many, translating into weaker consumer demand and slower economic growth. The wintry mix continued to hit parts of the country in March but the effect shouldn’t be as bad as earlier in the winter. Even a partial reversal of the weather distortion should generate a rebound in average weekly hours worked, which have slumped from 34.5 last November.

We’ll also look at the U-6 underutilization rate. Federal Reserve Chairwoman Janet Yellen this week highlighted the 7.2 million people who would like a full-time job but instead are working only part time. It’s a sign of slack in the labor market and one reason the Fed is likely to keep rates low for a long time. “This number is much larger than we would expect at 6.7% unemployment, based on past experience, and the existence of such a large pool of ‘partly unemployed’ workers is a sign that labor conditions are worse than indicated by the unemployment rate.”

And we’ll look at the participation rate, the share of working-age adults who have a job or are looking for work, held steady at 63% in February, near a 35-year low. That’s partly because baby boomers are retiring in greater numbers but may also indicate some people are frustrated with their job prospects and have dropped out of the labor force. Greater labor-force participation would be welcome, even if that keeps the unemployment rate from falling further.

Of course, that 200k jobs figure is just a guess, an arbitrary number pulled out of a hat. Total private employment reached 115,848,000 in February, close to the seasonally adjusted record of 115,977,000 from January 2008. If the private sector added more than 129,000 payroll jobs in March, the US will be back to its peak level of private-sector employment. Of course, a lot has changed since the prior peak. State local and federal governments have shed more than half a million jobs, leaving total employment still shy of its all-time high. The population is bigger: The civilian labor force has expanded by 1.6 million since then. And the mix of private-sector jobs has changed. For example, more people work in temp and health care jobs, while fewer are in construction and manufacturing.

With the Federal Reserve in the process of tapering down its bond purchases, big surprises on either side of the forecasts could upend expectations about the pace of the Fed’s stimulus withdrawal and the timing of eventual rate hikes. As important as the jobs figure is, it is also important to remember that, as Fed Chairwoman Janet Yellen has noted, unemployment isn’t the only number policy makers will consider.

It would take a really big number to move the bond market, but something north of 250,000 jobs could push the yield on the 10 year Treasury note above 2.8%. Market expectations appear to be biased toward higher yields.

A strong jobs report would also be bullish for the dollar. Today the dollar moved higher against the Euro as European Central Bank President Mario Draghi said policy makers were discussing the possibility of using quantitative easing and other unconventional stimulus measures to counteract extremely low inflation.

The ECB's governing council held its key interest rates unchanged for the fifth month in a row, despite an unexpected slowdown in area-wide inflation and worries about deflation.  Of course, Draghi has been trying to jawbone the Eurozone into economic growth for a couple of years, vowing to do whatever it takes but never actually doing whatever it takes, even as the destructive spiral of falling prices pushes consumers to put off purchases, thus destroying salaries, jobs and investment.

Meanwhile, International Monetary Fund Director Christine Lagarde was railing against the deflation ogre again, and warning the ECB about the dangers of “low-flation”, which is apparently a freshly minted economic term, and calling for more monetary easing by the ECB and the Bank of Japan. Draghi said the IMF has been “extremely generous” in suggesting what the ECB should or shouldn’t do. In fact, he urged the IMF to share the generosity “with other monetary policy jurisdictions, like for example issuing statements just the day before a (Fed) meeting.”

Which also means the ECB will not do whatever it takes to stoke the economic engine. And Lagarde was wrong; they don’t face “low-flation”; prices are falling.  The European Central Bank has let it happen. Deflation has been running at an annual rate of -1.5% in the Eurozone over the past five months, when adjusted for austerity taxes. Prices have dropped more than 6% in Greece, more than 5% in Italy, more than 4% in Spain and Portugal, 3% in Slovenia, and 2% in Holland. A little bit of stimulus would push the currency lower and goose exports and economic activity, but Draghi does nothing but jawbone; his constant promises to do whatever ring hollow.

Deflation can create some serious conundrums for debt. When a country’s debt burden rises faster than nominal GDP, it could engulf the private sector as well; tightening the vice on households and companies with fixed-rate debts; it would erode bank assets; risk fresh bank failures and hit life insurers through a mismatch in maturities.

An International Monetary Fund study detailed this week, that there's still a running assumption that governments would again rescue the biggest banks in the event of another panic. The IMF found that at least through 2012 the euro zone's biggest banks still benefited from an implicit taxpayer subsidy of $90 billion to $300 billion. Subsidies for UK and Japanese banks may have been as high as $110 billion and they ranged from $20 billion to $70 billion in the United States. So the risk, you might assume, is still loaded on the government's tab. Yet government borrowing costs across the western world and beyond have rarely, if ever, been lower.

Eurozone loans to businesses are contracting at a rate of 3%. The ECB is missing its 2% inflation target by 150 basis points, and will continue to miss it badly in 2015 and 2016 based on its own forecasts. Despite Draghi’s incessant and unbelievable jawboning, the ECB has consistently refused to offset the contractionary effects of austerity with enough monetary stimulus to keep GDP growing faster than the debt of the southern nations; and the more austerity the more the debt burden to GDP ratio has climbed. In Italy the debt climbed from 119% to 133% since 2010 despite harsh fiscal policy.

Say what you will about the Fed, and I have said plenty; their QE policy has been misdirected and has led to greater inequality, but at least the US maintains its global position as the cleanest shirt in the dirty clothes hamper because we weren’t hit with the double whammy of tight monetary policy and draconian fiscal austerity. (just the fiscal part)

The ECB insists that the latest dip in Euro inflation is due to falling energy costs, and therefore transient. That could all change if Russia decides to ramp up the use of natural gas as an economic weapon, and a precedent was set earlier this week. Rising energy prices in combination with falling prices for almost everything else would make for a really ugly mess in Euroland, and might force Draghi to stop sitting on his hands.

While offering her advice on “low-flation” to the ECB today, IMF chief Lagarde also spoke about other threats to global growth. Another threat is high corporate leverage in emerging economies, which if not adequately addressed will be worsened by the turmoil from eventual monetary tightening in advanced economies, especially the US. Yet another obstacle is the rise of geopolitical tensions, which could cloud the global economic outlook. "The situation in Ukraine is one which, if not well managed, could have broader spillover implications."

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.”

Thrusday, January 16, 2014 - The “It Could Be Worse” Victory Lap

The “It Could Be Worse” Victory Lap

by Sinclair Noe

DOW – 64 = 16,417
SPX – 2 = 1845
NAS + 3 = 4218
10 YR YLD - .04 = 2.84%
OIL - .07 = 94.10
GOLD + .70 = 1243.70
SILV - .11 = 20.20

The number of Americans filing new claims for unemployment benefits fell for the second consecutive week last week; down 2,000 to 326,000. This might suggest that the December jobs report, which was a weak 74,000 jobs added, maybe that report was just a temporary slowdown.

In a separate report, the Philadelphia Federal Reserve Bank said its business activity index rose to 9.4 points this month from 6.4 in December. Any reading above zero indicates manufacturing expansion in the region.

In another report, the Labor Department said its Consumer Price Index increased 0.3% after being flat in November. In the 12 months to December, consumer prices accelerated 1.5%. A 3.1% increase in gasoline prices was mostly behind the spike in inflation last month. The increase in gasoline was the largest since June and followed a 1.6% fall in November. Food prices rose 0.1% for a third month. There is no wage inflation. Average hourly earnings adjusted for inflation fell 0.3% in December; and with the weakness in the labor market, there is very little chance of wage growth for quite some time.

The Fed targets 2 percent inflation, although it tracks a gauge that tends to run a bit below CPI. And outgoing Fed Chairman Ben Bernanke says inflation is not a problem, and he cited this morning’s CPI report. As for overinflated assets, Bernanke said the Fed is "extraordinarily sensitive" to that risk after the financial crisis, which began with the bursting of a massive property price bubble, but rather than to try to pop bubbles with the blunt tool of higher interest rates, Bernanke said in the Fed is using supervision, regulation and other microeconomic-type tools to be sure the threat is minimal.

Bernanke claims there is no fear of hyperinflation, and he believes the Fed has the tools to manage inflation and avoid bubbles and keep everything under control. And to hear Bernanke talk, you might not think that the past 5 years have been a big monetary experiment. And maybe they have and will continue to avoid bubbles, but if you believe that, then you also believe the markets are fairly valued right now. So, what would happen if the Fed just stopped QE tomorrow? Imagine a market where the Fed just stopped buying Treasuries and mortgage backed securities. You are likely imagining a market dropping about 20%; maybe more.

Anyway, Bernanke is taking a victory lap as part of his farewell tour, and to some extent he’s probably entitled; the extent being that this whole grand experiment could still end quite badly. But for now things are improving, even if it has been painfully slow improvement; still it could be worse; it could be Europe.

If we compare the economic recovery of the United States since the Great Recession with that of the Eurozone, the differences are striking, and instructive. The US recession officially ran form December 2007 to June 2009, while the Eurozone recession ran from January 2008 to April 2009, and then they dipped back into recession in the third quarter of 2011 and lingered for another couple of years. Now you can argue that the US is still in some form of economic malaise, what with 20 million unemployed, but the technical definition of a recession doesn’t always count things like people out of work. In the Eurozone, unemployment is at near record levels of 12.1%, while in the U.S. it is currently 6.7%. In Greece and Spain, unemployment is over 25%, and youth unemployment is approaching 60%.

How are we to explain these differences? The Federal Reserve lowered short-term interest rates to about zero in 2008 and has kept them there since. The Fed also signaled its intention to keep these interest rates at these levels for a long time. And venturing into uncharted territory, the Fed engaged in three rounds of "quantitative easing," or more than $2 trillion of money creation. Just how much the Fed policy served to stimulate the economy is questionable, but there has been some impact. The stock market and the housing market saw an injection of liquidity, and some people got very, very wealthy, and maybe a little  of that spilled over into the broader economy; maybe. At the least, it helped to avoid the double dip that befell the Eurozone.

In the Eurozone, the response was tightening and austerity, and the IMF has now admitted that austerity has led to even higher levels of debt than before, and reduced GDP growth. Now the question is why the Europeans have been so unfortunate to be subjected to much more brutal economic policy than what we have experienced in the United States. While there are many nuances, there are also some simple but deadly important reasons. Most vital is the accountability, or lack thereof, of the institutions making the decisions. In Europe you have the so-called "troika" -- the European Central Bank (ECB), the European Commission, and (more recently recruited) the IMF. These are much less accountable to Eurozone residents -- especially but not limited to those of the most victimized countries (Spain, Greece, Portugal, Ireland, and Italy) -- than even the relatively unaccountable Federal Reserve and US Congress and executive branch are to Americans.

Some examples: In all 27 countries, the IMF recommended budget tightening, with spending cuts generally favored over tax increases. In 15 countries there were recommendations on health care: 14 were to cut spending. In 22 of the 27 countries there were recommendations to cut pensions. In half the countries, the Fund also gave advice on employment protection; in all of them, the recommendation was to reduce employment protections. Reducing eligibility for disability payments or cutting unemployment compensation, raising the retirement age, and decentralizing collective bargaining were also recommended.

But perhaps even more remarkably, this evidence tells us why the ECB allowed repeated and severe financial crises in the eurozone to take their toll on the eurozone and world economy for nearly three years. Not until July of 2012 did ECB President Mario Draghi utter those famous three words -- "whatever it takes" -- which, backed up a few weeks later by the new "Outright Monetary Transactions" program, put an end to the threat of financial meltdown.

After more than 20 European governments have fallen during the prolonged crisis, the pace of the destructive budget tightening there is finally winding down: from about 1.5 percent of GDP in 2012, to 1.1 percent in 2013, to 0.35 percent in 2014. But who knows how many more years it will take to reach normal levels of employment.

This is not to say that the US recovery has been a shining example, and Bernanke should not take too many bows, but it could have been worse.

It is earnings reporting season. Goldman Sachs’ profit fell 21 percent, as revenue from fixed income trading dropped 11% after adjusting for an accounting charge. Fixed income trading revenue accounted for 48% of Goldman's total revenue back in 2009. In the fourth quarter of 2013, it was 25%.

Profit at Citigroup rose 21%, after adjusting for items, as it cut costs and released dipped into funds set aside for bad loans. Now worries. What could go wrong?

Right before Christmas the Emergency Financial Manager for Detroit negotiated a settlement to end a costly interest rate swap with two investment banks. Ending the swaps with UBS and Bank of America Corp's Merrill Lynch Capital Services for $165 million was a key component of Detroit emergency manager Kevyn Orr's plan to adjust the cash-strapped city's finances through the municipal bankruptcy process.

Detroit currently pays about $50 million a year to the banks in exchange for the swaps, which provided a steady interest rate of about 6% on a $1.4-billion pension funding deal. That equals nearly 5% of the city’s sparse general fund budget.

The $165 million deal represented a 43% discount from a previously negotiated deal for a payment of $285 million to the banks, which the bankruptcy judge said was far too generous to the banks. Today, that same bankruptcy judge said the $165 million is still too high a price to pay.

Bankruptcy Judge Steven Rhodes said the city must stop making poor financial decisions, and it’s his judicial responsibility to ensure it emerges from Chapter 9 bankruptcy as a financially sustainable municipality. 

It represented a major win for Detroit retirees, city residents, the pension funds, several European banks and a bond insurer called Ambac Assurance, which aggressively fought the settlement. Because Rhodes denied the deal, they stand to get more money from the city’s eventual bankruptcy restructuring. It represents a major loss for the investment banks. Before you celebrate, this just sets the stage for a possible legal battle.

Tuesday, January 07, 2014 - No Place Else To Go

No Place Else To Go

by Sinclair Noe

DOW + 105 = 16,530
SPX + 11 = 1837
NAS + 39 = 4153
10 YR YLD - .02 = 2.93%
OIL + .46 = 93.89
GOLD – 6.00 = 1232.80
SILV - .32 = 19.95

Had to happen, eventually I suppose; an up day on Wall Street. Traders waded through the snow and decided to buy something. No place else to go. You can look for a better explanation, but I think that sums it up: no place else to go.

Maybe some folks think we're in bubble territory in stocks. I don't know. A couple of weeks ago, economist Robert Shiller wrote an article in the New York Times claiming we were near a bubble in housing. Being near a bubble and being in a bubble are very different. Shiller has a formula for stock valuations known as CAPE, which stands for cyclically adjusted price earnings ratio. For the past 60 years or so, the CAPE ratio has been around 18.3. If CAPE moves above this estimate of the mean, eventually it will "regress to the mean" and return to the long-term average. If CAPE rises excessively above the mean, then one can argue that a bubble exists in the stock market. Right now, CAPE is estimated to be 25.

Maybe there will be a reversion to the mean by way of prices dropping or maybe there will be a reversion to the mean by way of earnings rising. Either way, the prices of the underlying assets may be high relative to the cash flows that support them for an extended period of time. Which is another way of saying the markets can remain irrational longer than you can remain solvent. Maybe the markets will hit new highs and we'll have another record setting year on Wall Street. Who knows?

The Commerce Department reports the trade gap is getting smaller, a drop in oil imports pushed the trade deficit to the lowest level in 4 years, down 12.9% for November. Petroleum imports were the weakest in three years as advances in domestic extraction put the US on track to become the world’s largest oil producer by 2015. We're still buying stuff from overseas; things like cars, and parts, and other capital goods; the American consumer is still consuming. We're exporting more, especially airplanes. There has been a pickup in US manufacturing, and it's a little more than just a wave of exports; it appears more sustainable.

Energy independence, or at least developing a comprehensive plan to achieve US energy independence could be the single biggest way to boost the economy. Recently, FedEx CEO Fred Smith was quoted as saying “Oil is at the center of everything we do. If we produce more in the US and use less and develop alternatives … you allow the United States within our economy a half a trillion dollars more in GDP."

Six Republicans sided with Democrats on a 60-37 Senate vote to revive expired federal jobless benefits. The legislation would restore benefits averaging $256 weekly to an estimated 1.3 million long-term jobless Americans who were cut off when the program expired Dec. 28. Duration of federal coverage generally ranges from 14 to 47 weeks, depending on the level of unemployment within individual states. The three-month cost to the Treasury is estimated at $6.4 billion. Without action by Congress, hundreds of thousands more will feel the impact in the months ahead as their state-funded benefits expire, generally after 26 weeks.

At issue is a system that provides as much as 47 weeks of federally funded benefits, beginning after the exhaustion of state benefits, usually 26 weeks in duration. The first tier of additional benefits is 14 weeks and generally available to all who have used up their state benefits. An additional 14 weeks is available in states where unemployment is 6 percent or higher. Nine more weeks of benefits are available in states with joblessness of 7 percent or higher. In states where unemployment is 9 percent or higher, another 10 weeks of benefits are available.

Any legislation that clears the Senate would also have to make it through the House. Speaker John Boehner has insisted that any measure to renew unemployment benefits should be paid for, so today's vote was just a hurdle on the way to the battle. And any deals cut on unemployment benefits might spill over into other battles coming up in the next few weeks, including the omnibus spending bill and the farm bill. After that, Congress will face its toughest challenge of the year when Democrats and Republicans will have to find a way to prevent us from defaulting.

The deal to end the government shutdown in October raised the debt ceiling until February 7. The Treasury can employ extraordinary measures to extend the deadline even further. How long is still up in the air; it could come as soon as late February or as late as June depending on the amount Treasury collects in tax receipts.

Details about the JPMorgan-Madoff settlement are coming out today. JPMorgan Chase will pay $2.6 billion to resolve criminal and civil allegations it failed to stop or really even raise a warning flag about Bernie Madoff's Ponzi scheme. The bank will pay $1.7 billion to settle the government’s allegations, $350 million in a related case by the Office of the Comptroller of the Currency, plus $543 million to cover separate private claims. It's apparently the biggest ever bank forfeiture and also the largest ever Department of Justice penalty for violation of the Bank Secrecy Act. JPMorgan officials will not be penalized.

But wait, there's more. JPMorgan has come to the settlement because they turned a blind eye to what was, at a basic level, money laundering. Back in 2007 and 2008 it became increasingly clear that JPMorgan's top executives knew there were problems, and there are emails to support that.

The bank itself was invested with Madoff through a number of feeder funds. In the fall of 2008, a JP Morgan memo laid out what was wrong with Madoff. It questioned his "odd choice of a one man accounting firm, " and said that there were "various elements of this story that" made the bank "nervous." Two weeks later, the bank sent a memo to UK regulators saying that Madoff's returns were suspicious.

That was around October/November 2008, and as that was going on, JP Morgan also took $275 million of its money out of Madoff feeder funds. Madoff was arrested on December 11, 2008. JPMorgan connected the dots when it mattered to its own profit, but wasn’t so diligent when it came to its obligations to report illegal activity.

The financial services industry has grown like an cancer with the help of taxpayer bailouts and ongoing subsidies, all of which increase our debt.  In 2011, the Commerce Department reported the financial sector accounted for 8.4 percent of GDP, and represented 30 percent of corporate profits. If proceeds of US debt had been invested for roads, high speed railroads, new industries, cheap energy, airports, and to fund scientific research, the debt would self-liquidate. But the bailouts came with a huge component of dead-end financing designed to let bankers suck rents from the financial system. The Fed monetizes debt through asset purchases and has been filling gaping holes in bank balance sheets.

Meanwhile, median incomes have continued their seemingly relentless decline; for male workers, income has fallen to levels below those attained more than 40 years ago. In the US, where a growing economic divide – with more inequality than in any other advanced country – has been accompanied by severe political polarization. Maybe we can avoid another round of political bickering that resulted in last year's shutdown. But even if they do, the likely contraction from the next round of austerity – which already cost 1-2 percentage points of GDP growth in 2013 – means that growth will remain anemic, barely strong enough to generate jobs for new entrants into the labor force. A dynamic tax-avoiding Silicon Valley and a thriving hydrocarbon sector are not enough to offset austerity’s weight.

The fundamental problem of the global economy in 2013 remained a lack of global aggregate demand. This does not mean that there is an absence of real needs – for infrastructure, to take one example, or, more broadly, for retrofitting economies everywhere in response to the challenges of climate change. But the global private financial system seems incapable of recycling the world’s surpluses to meet these needs. And prevailing ideology prevents us from thinking about alternative arrangements.

Maybe the global economy will perform a little better in 2014 than it did in 2013, or maybe not. Maybe the stock market will perform better this year or maybe it will crash. I don't know. The problem seems to be that money pours into the market by default or maybe just because the salespeople on Wall Street are effective. There are other places for the money to go, it just isn't going there right now, and that seems to be a wasted opportunity. 

Thursday, November 07, 2013 - The Road Not Taken

The Road Not Taken

by Sinclair Noe

DOW – 152 = 15,593
SPX – 23 = 1747
NAS – 74 = 3857
10 YR YLD - .03 = 2.61%
OIL - .51 = 94.29
GOLD - 10.00 = 1308.60
SILV - .14 = 21.77

Big story on Wall Street today was the Twitter IPO. I will now tell you everything you need to know about it in 140 characters or less.

TWTR IPO 2day. Priced @ $26. Pop 2 $50. Close @ 44.90 up 72%. Market cap = $24 bil, earnings = < zero. Smooth not Facebook. #bubblicious

Economic growth accelerated in the third quarter. Gross domestic product grew at a 2.8 percent annual rate, the quickest pace in a year, after expanding at a 2.5 percent clip in the second quarter. Inventories, however, accounted for a 0.8 percentage point of the advance made in the third quarter, as businesses restocked shelves, but the slowest expansion in consumer spending in two years suggested an underlying loss of momentum. Consumer spending expanded at a 1.5 percent rate, the slowest pace since the second quarter of 2011. It grew at a 1.8 percent rate in the April-June period. So, unless there is a surge in 4^th quarter demand, we might see future production reduced to clear out inventories.

The economy grew at a 1.8 percent rate in the first half of 2013, expect growth of around 1.5% for the fourth quarter. The private sector decelerated over the summer, providing less of a cushion for the government shutdown in October. Steady growth in spending by state and local authorities pushed government spending up for the first time in a year, but federal spending continued to drop.

If we are to see a surge in demand, it would likely come from improvement in the labor markets. In a separate report today, initial claims for state unemployment benefits fell 9,000 to a seasonally adjusted 336,000 last week. Tomorrow we'll get the monthly jobs report for October, which will be more than a bit bizarre due to the government shutdown.

Although the unemployment rate has declined significantly from a peak of 10 percent in October 2009, it remains at an uncomfortably high 7.2 percent. About 21.5 million people are either unemployed, working only part-time despite wanting full-time work, or want a job but have given up the search.

Meanwhile, the Commerce Department reports home ownership is holding near 18 year lows. For the 3^rd quarter, the seasonally adjusted homeownership rate, the share of households owning a home, held at 65.1 percent, the lowest since the fourth quarter of 1995.

Separately, Fannie Mae and Freddie Mac, the government sponsored entities that provide financial backstops to the housing industry will send the Treasury $39 billion in December, meaning they have almost paid back the government bailout of 2008. The companies, which own or guarantee about two-thirds of all US home loans, were seized by the government at the height of the financial crisis as mortgage losses threatened their solvency. They are now seeing profits surge as housing rebounds.

Freddie Mac will pay about $30 billion and Fannie Mae will make an almost $9 billion payment. By early next year, taxpayers likely will have turned a profit. The two firms' bailout agreements, however, do not provide a way for them to buy back the $189 billion worth of senior preferred shares the government received in return for its aid. Under the bailout terms, they will continue to make dividend payments as long as they are profitable.

The European Central Bank cut interest rates today. The ECB cut its main refinancing rate by 25 basis points to 0.25 percent. It held the rate it pays on bank deposits at zero and cut its emergency borrowing rate to 0.75 percent from 1.00 percent. That is the lowest rates on record for the EU. ECB President Mario Draghi says they still have room to act if needed. The ECB said it would prime banks with as much liquidity as required until mid-2015, indicating a new round of cheap money stimulus within the next few months. Shares in major European markets, from the German DAX to France’s CAC40 all jumped on the news, gradually giving up their gains into the close. The euro took a tumble, falling as low as 1.33 against the dollar before recovering.

By contrast, many economists expect the Federal Reserve to begin withdrawing stimulus next year; and the stronger than expected GDP report today reinforced that expectation. Of course, right now it's just expectations and the last time the Fed floated the trial balloon on cutting back Quantitative Easing, the markets threw a taper tantrum. So, we'll wait and see. There is much buzz over the possibility the Federal Reserve will lower the unemployment rate threshold at an upcoming FOMC meeting. To a certain extent, the issue of thresholds has taken on a new urgency as a result of the tapering debate.  The Fed's excellent adventure with tapering this summer indicated that they do not fully understand the transmission mechanisms of large scale asset purchases. Despite some improvement in the economy, and in spite of fiscal headwinds, and forgetting about today's GDP report momentarily; the economy has been giving little room for the FOMC to maneuver. They do not want to withdraw accommodation at this point, only to limit additional accommodation. 

The Senate Banking Committee says it will hold a hearing on November 14 on the nomination of Federal Reserve Vice Chair Janet Yellen to take the helm of the central bank when Ben Bernanke steps down at the end of January.

Back to Europe for a moment. There has been talk of improvement in the Eurozone economies, but clearly the ECB action today indicates that there hasn't been enough growth; and gross domestic product growth alone is not enough to provide sustainable prosperity, especially if it doesn't result in significant job growth.

Technically the Spanish recession is over; third quarter GDP grew at a rate of 0.1%. But a glance at their job figures shows the country has a long way to go before it can genuinely say it has escaped the diminishing effects of austerity — in the form of tight fiscal policies, public spending cuts and labor and entitlement reforms — imposed indirectly by Germany through the European Union.

In Europe, only in Germany and Austria is youth unemployment under 10 percent. In Spain, where economic growth is occurring only in the export sector, there is little suggestion the economy has been genuinely fixed by this protracted austerity regime. Spain and Greece each have more than 25% unemployment, and 13 other Eurozone countries have unemployment higher than 10%. Spanish unemployment is at 26%, and half of those age 25 and under are unemployed. More than half those age 25 and under in Greece and Croatia are also unemployed. Those kind of numbers can lead to a lost generation, or worse.

In Britain, where the Conservative government imposed austerity measures ostensibly to ward off a sovereign debt crisis and a run on the pound, the quarterly growth rate is up to 0.8%. Britain may have averted a triple dip recession, but only because they loosened up the austerity policy and the Bank of England has kept rates artificially low while the government has subsidized the housing industry with mortgage subsidies. According to the International Monetary Fund, Britain’s economy will grow 1.4 percent this year and 1.9 the next; though it is still 2.5 percent smaller than it was in early 2008.

So, after five years of austerity, there are still 11 Eurozone countries with negative growth. Only four Eurozone countries have growth above 2%: Latvia, Lithuania, Malta, and Luxembourg. Apparently there is some advantage to being small. And the Euro powerhouse, Germany is only growing at 0.5%, which is hardly cause for celebration. The European Commission says the euro zone as a whole will decline by 0.4 percent this year, year on year, though they predict 1.1 percent next year. Output in the euro zone, however, is still about 3% lower than in 2008.

But even if the modest European recovery is sustained, it remains fickle, capable of being blown off course by temporary setbacks such as an American federal government shutdown. And the US Treasury points out that even the slender European recovery has taken place on the back of America’s by comparison expansive economic policies (so to speak).

Germany’s postwar economic model has always been export-led. In the last five years Berlin has defended the very existence of the euro because it allows German exports to be priced comparatively cheaply, far cheaper than if they had continued to use the deutsche mark — which reflected the true strength of the German economy.

Added to this, in the last five years Germany has browbeaten its European partners into adopting austerity rather than allowing them to borrow and grow their way out of the Great Recession. Only Britain, outside the euro, has largely evaded Germany’s beggar-thy-neighbor policies.

It is impossible to predict the outcome of a road not taken. So it is unknown whether, if the Europeans had not reneged on the deal struck after the 2008 crash at the Washington G20 summit to ensure “the action of one country does not come at the expense of others or the stability of the system as a whole,” we would now be in a more prosperous world with millions more in work.

It does, however, seem likely.

Thursday, September 26, 2013 - The Quotas Must Be Filled

The Quotas Must Be Filled

by Sinclair Noe

DOW + 55 = 15,328
SPX + 6 = 1698
NAS + 26 = 3787
10 YR YLD + .03 = 2.64%
OIL + .20 = 102.86
GOLD – 9.30 = 1324.80
SILV - .07 = 21.83

A couple of economic reports this morning with conflicting signals. The National Association of Realtors said its Pending Homes Sales Index, based on contracts signed last month, decreased 1.6 percent. At the same time, labor market data was more positive. Initial claims for state unemployment benefits dropped 5,000 last week to a seasonally adjusted 305,000.

And a little bit of research from the Atlanta Fed's macroblog that you probably didn't see; they report the pace of research and development (R&D) spending has slowed. The National Science Foundation defines R&D spending as “creative work undertaken on a systematic basis in order to increase the stock of knowledge” and application of this knowledge toward new applications.

R&D spending is often cited as an important source of productivity growth within a firm, especially in terms of product innovation. But R&D is also an inherently risky endeavor, since the outcome is quite uncertain. On top of that, the federal funding of R&D activity remains under significant budget pressure.

In the Countdown to the Shutdown, the Senate is expected to pass a government spending bill and send it back to the House of Representatives on Saturday, minus the defunding of Obamacare; the bill would be a so-called “clean” spending bill, dealing with spending and nothing else. House Speaker John Boehner says he doesn't like that and the House will try to tack on a measure to delay Obamacare for one year; they will also attach new spending cuts and other initiatives to a debt limit bill, something that Obama has said he would not tolerate.

If they can't figure this out, there could be a shutdown when we wake up on Tuesday morning. And despite near-universal acknowledgment that a shutdown is bad, it could happen. Investors have gone through such Washington brinkmanship before in 2011 and at the end of last year. There is a level of fatigue that has settled over the markets with regard to shutdowns and fiscal cliffs and political dysfunction. Last-minute deals emerged each time to kick the can down the road, and many investors believe this may play out again. Meanwhile, Treasuries have rallied from the expectation of taper to the fatigue of debt ceilings, and the only thing that seems to make sense is that the Fed wouldn't dare taper while Washington is in distress.

A new Bloomberg poll reveals most Americans say the country is on the wrong track: “Americans also are pessimistic about the course of the country, with 68 percent saying it’s headed in the wrong direction, the most in two years, according to the poll of 1,000 adults conducted Sept. 20-23.”

Note this is not a general malaise: “Americans’ negative feelings about Washington contrast with more optimistic views about their own prospects. Thirty-five percent of respondents expect their financial security to improve during the next year, up from 25 percent in December 2012.”

But for now, the circus is back in DC, and it's entertaining even if the act is stale. At least it would be fun if the whole thing didn't cost so much. So what has austerity cost us in the United States? The full price is hard to calculate, but the Congressional Budget Office figures that sequestration alone has cut GDP growth by about 0.8 percentage points. Since sequestration accounts for less than half of total belt-tightening over the past couple of years, a rough guess suggests that our austerity binge has cut economic growth by something like 2 percentage points—about half the total growth we might normally expect following a recession. Ironically, this means that we have indeed suffered the halving of economic growth that Reinhart and Rogoff estimated we’d get from running up the national debt above 90 percent. But we got it from not running up the debt. Go figure.

Jamie Dimon, the CEO of JPMorgan met with US Attorney General Eric Holder today, looking to cut a deal to end investigations into the bank's mortgage securities deals leading to the 2008 crisis. The talks might result in an $11 billion settlement; $7 billion cash and $4 billion in various forms of borrower relief; which is another way of saying it's really just a $7 billion dollar settlement, with some extra work for the accounting department on the side. Remember last year's multi-state, multi-bank $25 billion mortgage settlement? A new report shows the vast majority of the aid to borrowers came in the form of short sales and forgiveness of second mortgages. Just 20% of the aid doled out under the national settlement went to forgiveness of first-mortgage principal.

JPMorgan has been trying to negotiate a smaller settlement of perhaps $3 billion, but that lowball offer was rejected. A settlement of the government mortgage cases in the $11 billion range would likely include claims from the regulator of Fannie Mae and Freddie Mac, which has sought some $6 billion from the bank over risky mortgage securities sold to the government-sponsored entities. There are also talks about which liabilities would be covered in the announced amount of a deal. There are still state investigations and various other probes. The Justice Department has a minimum of seven different probes into JPM and they're reportedly trying to settle as many as possible in rapid fashion.

JPMorgan's litigation costs totaled $17.3 billion over the last three calendar years, according to the company's annual report. Add another $11 billion and soon you're talking real money; and yet for all that, remarkably, unbelievably, no senior executives have criminally charged. It's a whole lot of money, completely detached from personal responsibility. JPM has a ton of money. Earnings estimates are pegged around $22 billion for 2013 and the company has a market cap of about $200 billion. Is $11 billion enough of a payoff to get the regulators to leave Jamie Dimon alone?

This is just the cost of doing business for these mega banks. There's the rub. Paying off regulators and settling criminal charges is only supposed to be the "cost of doing business" for criminals. When the FBI goes after the Mafia the stated goal was putting them out of business. There is no specific goal when it comes to cracking down on Wall Street. Only a portion of the settlements collected go to the actual victims. For the most part the money is used to fund more investigations. As long as JPM's income exceeds its legal fees they have no economic incentive to stop pushing the law at every opportunity. 

Most of JPMorgan's penalties did not include an admission of wrongdoing, but last week's $920 million dollar settlement of the London Whale trades did include an admission of wrongdoing. JPMorgan had to confess to Sarbanes Oxley violations.

The reason that this is a big deal is Sarbanes Oxley was designed expressly to get past the “I’m the CEO and I have no idea what happened” defense. Sarbanes Oxley requires corporate executives, which generally is at least the CEO and the CFO, to certify the adequacy of internal controls. And for a big bank, that includes risk controls. You can’t pretend to have adequate controls when, as the SEC describes, management is shocked to learn that their trading desk in London is involved in wildly reckless trades. But it isn’t just banks that have to now take Sarbanes Oxley seriously, although they are the most obvious targets. Everyone who signs Sarbox certifications is now at risk, as they were supposed to be all along. Jamie Dimon has met all the conditions for a criminal prosecution under Sarbanes Oxley, and the only reason why he hasn't been indicted is he heads a Too Big To Fail bank.

And so there was a meeting today between AG Holder and Dimon, arguing about price.

Meanwhile, on an only slightly related note, a new report from In the Public interest reveals that private prison companies are striking deals with states that contain clauses guaranteeing high prison occupancy rates. The report, "Criminal: How Lockup Quotas and 'Low-Crime Taxes' Guarantee Profits for Private Prison Corporations," documents the contracts exchanged between private prison companies and state and local governments that either guarantee prison occupancy rates (essentially creating inmate lockup quotas) or force taxpayers to pay for empty beds if the prison population decreases due to lower crime rates or other factors (essentially creating low-crime taxes).

Some of these contracts require 90 to 100 percent prison occupancy. In a letter to 48 state governors in 2012, the largest for-profit private prison company in the US, Corrections Corporation of America (CCA), offered to buy up and operate public state prisons. In exchange, states would have to sign a 20-year contract guaranteeing a 90 percent occupancy rate throughout the term.

While no state accepted CCA’s offer, a number of private prison companies have been inserting similar occupancy guarantee provisions into prison privatization contracts and requiring states to maintain high occupancy rates within their privately owned prisons. Three privately run prisons in Arizona have contracts that require 100 percent inmate occupancy, so the state is obligated to keep its prisons filled to capacity. Otherwise it has to pay the private company for any unused beds. The report notes that contract clauses like this incentivize criminalization, and do nothing to promote rehabilitation, crime reduction or community building.