Tuesday, April 22, 2014 - Helicopter Drops Were Successful, and Other Revisions

Helicopter Drops Were Successful, and Other Revisions

by Sinclair Noe

DOW + 65 = 16,514
SPX + 7 = 1879
NAS + 39 = 4161
10 YR YLD + .01 = 2.73%
OIL – 1.77 = 101.88
GOLD – 6.60 = 1284.70
SILV - .05 = 19.49

Sales of previously owned homes fell in March for a third consecutive month as rising prices and a lack of inventory discouraged would-be buyers. The National Association of Realtors reports closings, which usually take place a month or two after a contract is signed, fell 0.2% to a 4.59 million annual rate, the lowest level since July 2012. It was the seventh drop in the last 8 months pushing sales down 8.5% compared with the same month last year before adjusting for seasonal patterns.

The drop in demand might not lead to a flat-line in home prices. That’s because one obstacle to lower sales is the low number of homes on the market. The number of houses for sale at the end of last month rose to 1.99 million compared with 1.93 million a year earlier. At the current pace, it would take 5.2 months to sell houses compared with 5 months at the end of February.

There are some positives in the housing market: distressed sales are down; delinquencies are down; negative equity has declined; and even though inventory is up slightly, that is a positive because inventory had been too tight.

The median price of an existing home climbed 7.9% from March 2013 to $198,500. The appreciation was led by a 12.6% year-to-year advance in the West, while the Northeast posted a more moderate 3.2% increase. As prices increased, sales dropped, with the biggest 12-month drop coming in the West at 13.5%, and the smallest in the Northeast, with a 4.4% decrease.

Million-dollar home sales are on the rise, while deals for cheaper homes are dropping. In March, sales of single-family existing homes priced at $1 million and above were up 7.8% from the year-earlier period. Meanwhile, sales of homes that cost between $100,000 and $250,000 fell 9.9% over the past year. This might say something about the weak labor market and eroding income levels; it also speaks to mortgage lending practices, which remain strict for all but the jumbo market, where standards have eased; and it screams about the growing divide in America.  

Meanwhile, each month Bloomberg conducts a survey of 67 economists and one of the questions is where yields on the 10-year Treasury note are headed for the next six months; and the answers have overwhelmingly been that yields are headed higher. This month’s survey was more than overwhelming, it was unanimous; 100% say yields will be up by the end of the year. The last time the survey had that result was in May 2012, when benchmark yields were well below 2%.

Of course the Federal Reserve has said they intend to keep their target for Fed Funds rate right at zero; that has been the policy since the aftermath of the 2008 meltdown and Janet Yellen has let the markets know that there is no reason to expect a change in the policy “for a considerable time” after it ends its QE bond buying program, which means no change until around the Spring of 2015; and even then, it will be dependent on data showing the economy has improved. So, what has unanimously convinced economists that yields are going higher, faster than the Fed has plotted? What is wrong with the current, low interest rate environment?

Fed Governor Jeremy Stein delivered a speech last month arguing that the Fed should withdraw stimulus or raise interest rates, even if that means allowing a higher-than-normal unemployment rate, all to prevent the growth of a bubble in the bond market. Stein points to three things: first, the rising level of private-sector debt as a percentage of the US economy; second, narrowing spreads between risk-free Treasuries and corporate bonds; and third, the growing proportion of corporate debt going to riskier companies, or junk bonds going to companies that have a greater likelihood of defaulting on their loans.

Private sector, non-financial debt has now grown to 55% of gross domestic product. Meanwhile, low rates may have distorted the proper evaluation of risk; the spread between Baa rated corporate debt and risk-free Treasuries has dropped. Those spreads were high during the financial crisis but have since dropped down below pre-crisis levels. Total corporate bond issuance hit $1.3 trillion last year, not just recovering but surpassing pre-crisis levels and a big chunk of that issuance, $336 billion, is going to junk bonds.

The housing market has seen some recovery, depending on location, but the latest data on new and existing sales shows a market that is slowing for now. The market for debt has been expanding much faster than seems reasonable, and might indicate an area of concern for the Fed. Or maybe the Fed is realizing that their policy just hasn’t worked and they are now sitting on a huge balance sheet that can’t be artificially propped up indefinitely.

Meanwhile, the former Fed Chairman Ben Bernanke was speaking today at the Economic Club of Toronto and he said the Fed could have done a better job communicating during the financial crisis. He said the public incorrectly believed the Fed’s emergency-lending programs benefited Wall Street over Main Street. Bernanke also said, “There will be a time coming soon when inflation will improve and when central banks will move to a more normal monetary-policy road.”

Of course, that might be part of the problem; the markets always expected the Fed to have their helicopter drops directly over Wall Street and then get back to more normal monetary policy. In other words, the Fed never truly committed to all out monetary stimulus, and the result was a prolonged economic slump as the velocity of money slowed to a crawl. Bernanke would like to say everything worked out for the better, but that wasn’t really the case.

Bernanke likes to think Fed policies helped Main Street as much as Wall Street, but we all know better and now we have facts to refute Bernanke. The New York Times reports the American middle class is no longer the most affluent in the world; we have lost that distinction even as the wealthiest Americans outpace their global peers and most American families are paying a steep price for high and rising income inequality.

After-tax middle-class incomes in Canada are now higher than in the United States. The poor in much of Europe earn more than poor Americans. The data on Europe is a bit tricky as some countries such as Portugal and Greece have seen income fall sharply in recent years, while other countries, such as Sweden and the Netherlands have narrowed the gap. One large European country where income has stagnated over the past 15 years is Germany, but even poor Germans have fared better than poor Americans.

The struggles of the poor in the United States are even starker than those of the middle class. A family at the 20th percentile of the income distribution in this country makes significantly less money than a similar family in Canada, Sweden, Norway, Finland or the Netherlands. Thirty-five years ago, the reverse was true. The top 5% of American income earners still top their global counterparts, and for those well-off families, the US still represents the world’s most prosperous economy. The US still holds the title of the world’s richest large country based upon per capita gross domestic income, but those numbers are averages which don’t capture the distribution of income.

The results of the 35 year study compiled by LIS recognize 3 major factors behind the weak income performance in the US. First, educational attainment in the US has risen far more slowly than in much of the industrialized world, and especially among younger workers. Literacy, numeracy, and technology skills of younger Americans have fallen well behind counterparts in Canada, Australia, Japan, and Scandinavia, and close to those in Italy and Spain.

Another factor is the distribution of income in the US; it has been growing faster for the top earners, but shrinking for the middle class and poor. Yet the American rich pay lower taxes than the rich in many other places, and the United States does not redistribute as much income to the poor as other countries do. As a result, inequality in disposable income is sharply higher in the United States than elsewhere.

So despite Bernanke’s assertions that the Fed helicopter drops benefitted all American, we know better. And we also know that there are some policy tools that haven’t been used that could change the situation. The best place to start would seem to be the financial industry, since this is the sector that benefitted most from Fed policy and has continued to act as a drain on the productive economy.

A new IMF analysis found the value of the implicit government insurance to backstop too big to fail banks, just the idea that the government would not allow the mega-banks that have been labeled systemically important would not be allowed to fail, that subsidy is pegged at $50 billion a year in the US, and about $300 billion a year in the Eurozone.

Maybe the Fed could even act like a regulator and break up the biggest banks, cut them into small pieces; and in that way, if there was a failure, it wouldn’t represent a threat to the broader economy; as long as that threat hangs over our heads, it is hard to accept Bernanke’s assurances that Fed policy benefits all equally.

Wednesday, January 29, 2014 - Benny Jets

Benny Jets

by Sinclair Noe

DOW – 189 = 15,738
SPX – 18 = 1774
NAS – 46 = 4051
10 YR YLD - .07 = 2.67%
OIL – 01 = 97.40
GOLD + 12.00 = 1268.70
SILV + .15 = 19.81

You’ve heard the old post office creed; “neither snow nor rain nor heat nor gloom of night stays these couriers from the swift completion of their appointed rounds.”

Generally true, however I bet some letter carriers are having a tough time delivering mail in Atlanta today. The Federal Reserve apparently has a creed. Who knew? Neither a disappointing December jobs report nor turmoil in emerging markets nor gloom of the US economy shall stay these central bankers from the incremental completion of their taper.

Don’t worry; nothing to look at here; keep moving, keep moving. No sonny, that’s not a train wreck on Wall Street, that’s just the debris and detritus stirred up by the whirlybird which will now carry Helicopter Ben into the sunset, or more accurately to the boardroom of some investment bank. Yes, this is the last FOMC meeting for Ben Bernanke. He promised he would set a course for exiting QE, and he has; the problem is that the set course is fraught with perils.

The Federal Reserve’s policy making Federal Open Market Committee wrapped up a two day meeting today by announcing they would cut back their bond buying program by $10 billion, to a mere $65 billion per month.  The FOMC added that it was “likely” to continue the pullback, suggesting a similar cut is probable at its next meeting, in March. The stock market fell for the fifth session out of the past six, wiping out yesterday’s gains, but stocks were already moving lower before the Fed announcement.

While noting recent weakness in the housing sector recovery the FOMC statement says the overall economic picture continues to improve. And then the statement included a little slap on the wrist for Congress: “Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee continues to see the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy.

The Fed reiterated their view that "risks to the outlook for the economy and the labor market as having become more balanced," language they added to the statement for the first time in December. They reconfirmed that they will likely keep interest rates in the near zero range even if the unemployment rate drops below the target of 6.5%. And just remember your mantra: tapering is not tightening, tapering is not tightening.

And if taper leads to a little turmoil in emerging markets, well what’s it to you? The Fed pullback is contributing to a global shift in investments. That is causing problems for countries like Turkey, which would the example du jour.  The central bank in Turkey tried to bolster that nation’s currency yesterday by sharply raising its benchmark interest rate. The Turkish central bank increased the rate for one-week loans to banks to 10% from the previous level of 4.5%. The idea was to lure investors with a better yield, instead it may be causing collateral damage to the rest of its economy.

And today, the Turks learned the meaning of the old axiom, “don’t fight the Fed”, as the Turkish lira slumped, along with other emerging market currencies. The Russian ruble took another hit, the Argentine peso continued to plunge, and the South African rand could not be shored up. The South Africans raised rates a more subtle half-percent from 5% to 5.5%.

We used to identify the fast growing emerging markets as BRICS – Brazil, Russia, India, China, and South Africa. Now the new catch phrase is the “fragile five” and it refers to the emerging economies of Turkey, Brazil, India, South Africa and Indonesia as economies that have become too dependent on skittish foreign investment to finance their growth ambitions. The term has caught on in large degree because it highlights the strains that occur when countries place too much emphasis on stoking fast rates of economic growth.

Actually, the emerging market turmoil may be working in the Fed’s favor. Investors concerned about emerging market risk are seeking out the safe haven of Treasury bonds, bidding up prices and pushing down yields even as the Fed pulls back from bond purchases. But there are limits to how low the Fed can push emerging market currencies. The declines could come back to bite the developed economies of the US, Europe and Japan. Developing countries have served as engines of global growth, but now they find their purchasing power diminished and that equates to buying fewer exports. The direct effects of the recent emerging market foreign exchange turbulence, if contained, are not likely to prove substantial, but that’s based on the idea that things don’t deteriorate from here.

It makes for challenging times for the central bankers of emerging economies. The flight of foreign capital, which is a primary reason for the currency declines, is a result of investors’ putting money back into developed countries as their economies improve. To counteract the outflow of capital, the policymakers lure investors with higher interest rates but higher rates put the brakes on economic growth. And currency investors know this and bet that the central banks won’t be able to keep rates high for long. Sure enough, in today’s case of the Turkish central bank, the currency sharks smelled blood and they killed off the policymakers last vestiges off credibility.

All the blame for the problems in Turkey can’t be laid at the feet of the Fed; the Turks had a big mess before the taper. There has been an extensive corruption probe against the government and Prime Minister Erdogan responded by purging the judiciary and the police force.

The world can be chaotic at times, but we usually muddle through, except when it gets too crazy. Whenever we talk about emerging market turmoil, we’re reminded of 1997, when the Fed raised rates just a little and a few months later, the hot money went flying out of the developing Asian markets, then Russia defaulted, Long Term Capital Management missed that bet, and wham, bam, it was a meltdown man.

Of course, back then we didn't have hundreds of trillions of dollars in derivatives to contain the risk. Nowadays we have more than a quadrillion in derivatives to protect us. What could go wrong?

And that brings us to our next question of the day: what the heck is a MyRA?

Did you catch that last night during the State of the Union speech? A quick and stumbling reference to My-aye-aye-aye-RA. Obama promised to use executive action to create a new middle class savings vehicle, although he didn’t explain what it was. So, the White House issued a briefing sheet to explain that the MyRA, or My Retirement Account, is a new simple, safe and affordable “starter” retirement savings account that will be available through employers and help millions of Americans save for retirement. This savings account would be offered through a familiar Roth IRA Account and, like savings bonds, would be backed by the US government.

The administration noted that many private-sector providers don’t allow “smaller balance savers” to open accounts; providers who do allow such accounts often charge fees that can eat up a proportionately high percentage of their balances. In his address, Obama described the myRA as “a new savings bond” that “guarantees a decent return with no risk of losing what you put in.”

Today, Mr. Obama signed a presidential memorandum to create the "myRA" program, which he told employees would go toward "making sure that after a lifetime of hard work you can retire with some dignity." The retirement accounts can be opened with as little as $25, and monthly contributions can be as little as $5, automatically deducted from paychecks. The program will operate like a Roth IRA, so contributions would be made with after-tax dollars. That means account-holders could withdraw the funds at any time without paying additional taxes.

The funds would be backed by US government debt, similar to a savings option available to federal employees, and earn the same variable interest rate return as the Thrift Savings Plan Government Securities Investment Fund accounts that federal employees enroll in. Investors could keep the accounts if they switch jobs or convert them into private accounts, and once the account reaches $15,000 funds must be withdrawn or it can be rolled over into a private sector Roth IRA. Treasury Secretary Jack Lew will be in charge of setting up the program and it should be available through some employers by the end of the year. Workers can invest if they make less than $191,000 a year. Businesses will not administer or run the accounts. They will simply offer them to their employees if they decide to participate.

There are still some details of the plan that are not quite clear. The Federal Thrift Savings Plan caps contributions to 10%, and there are rules on what investments are made. Already we are hearing the loons come out with conspiracy theories. This is not – repeat NOT – an effort to confiscate existing IRAs. It is a little like the old Savings bonds that you used to buy, which were actually a decent deal; not a big wealth builder but a decent savings vehicle.

There was plenty more to the State of the Union speech, but you probably slept through that part, so I’ll give you a quick recap: The state of the union is absolutely fantastic for the top 1%, and for about 25% it’s decent, and for the rest of the country things are pretty lousy. Fifty years after the declaration we can now announce that the War on Poverty has been won. The poor and the middle class have been defeated. 

Thursday, January 09, 2014 - A World Of Central Bankers

A World Of Central Bankers

by Sinclair Noe

DOW – 17 = 16,444
SPX + 0.64 = 1838
NAS – 9 = 4156
10 YR YLD - .03 = 2.96%
OIL - .67 = 91.66
GOLD + 1.80 = 1228.70
SILV + .02 = 19.65

If it's not one central bank, it's another. Today the European Central Bank and the Bank of England met to determine monetary policy. Back in November, the ECB cut interest rates to 0.25%, so there were no expectations of further rate cuts in today's meeting. In Britain, which is outside the euro zone, the Bank of England left its benchmark interest rate unchanged at a record low of 0.5 percent.

As the US Federal Reserve has been creating new dollars at the rate of $85 billion a month under Quantitative Easing, the Fed's balance sheet has been growing, even as the ECB's balance sheet has been shrinking. And even though the Fed announced it would scale back those purchases by $10 billion a month, that just means the Fed balance sheet will continue growing, just not as fast. Or the bottom line; the Fed is creating money and the ECB is not.

Today, Mario Draghi, the president of the ECB said he wanted to “strongly emphasize” his earlier promise to keep monetary policy easy for as long as necessary. And Draghi said the ECB was “ready to consider all available instruments” to address either further weakness in consumer prices or increases in short-term money market rates that could put stress on banks. He did not, though, specify what tools he would use. The fear in Europe is that a nascent recovery could sputter and that low inflation (0.8% in December) could turn into deflation.

When asked if the euro crisis was over, Draghi said, “The recovery is there, but it’s fragile,” and it was too soon to declare victory. Even that might be a stretch. The unemployment problem for much of the euro-zone remains lousy; stuck at 12.1% for the past 9 months, and in some areas, youth unemployment is still around 50%, very dangerous levels. The problem for the ECB is essentially the same problem the Fed faces – how to improve aggregate demand. The ECB has been offering cheap money to the euro banks but the credit isn't getting through to companies and households. Lending to small businesses in the euro zone shrank 3.9% in November from a year ago, the biggest decline recorded by the ECB.

And with the Fed taper ready to kick in, the hope is that other countries and other central banks will pick up some slack in the world economy. Draghi has promised to do whatever it takes, and today he reiterated that promise, but that has been the promise for the past couple of years, and a couple of years can easily turn into a lost decade.

Here in the US, Ben Bernanke's farewell tour included a luncheon on Capitol Hill with Congress-folk, where he received a standing ovation and some of his past critics seemed to go soft. Bernanke offered an optimistic view of the economy, listing the country’s booming energy sector, stronger financial institutions and modest federal budget deficit reductions as positive signs.  Bernanke indicated he is more worried about the economic fate of middle-class families than the federal budget deficit going forward.

Meanwhile, the newly confirmed Federal Reserve Chairwoman, Janet Yellen has granted an interview to Time magazine and here's what she says about the economy: "I think we'll see stronger growth this year. Most of my colleagues on the Fed's policymaking committee and I are hopeful that the first digit [of GDP growth] could be 3 rather than 2... The recovery has been frustratingly slow, but were making progress in getting people back to work, and I anticipate that inflation will move back toward our longer-run goal of 2 percent." On the housing market, which had a brief lull this fall: "I expect it to pick back up and I do expect a further recovery."

Talking about the Fed's QE program, Yellen seems to believe that higher home prices and stock market stimulation is helping the average family. She is clearly a believer in the wealth effect, even though I have to question what data she might be looking at. RealtyTrac just released its Home Equity and Underwater Report for December 2013, which shows that 9.3 million US residential properties were deeply underwater, or about 1 in 5 of every property with a mortgage. "Deeply underwater" is defined as worth at least 25% less than the combined loans secured by the property. There are fewer homeowners who are deeply underwater, but there are still millions who are in serious trouble, and the longer these homeowners remain in a negative equity position without relief in the form of a principal loan balance reduction, the more likely that foreclosure will become the path of least resistance for them.

And on the jobs front, recent data from the Economic Policy Institute shows we're still about 1.3 million jobs below the pre-crisis peak – that's just to get back to break even, and then we would need about 6.6 million more jobs to get to where we need to be, in other words, how many jobs would be needed to employ all the people who would be actively looking for work if the economy were running at full steam.

The 7% unemployment rate is misleading because it is based partly on people dropping out of the work force and no longer being counted as unemployed. The economy is not strong enough to create jobs, so labor-force growth is not living up to its potential. If people who have dropped temporarily out of the labor force were still looking for jobs, the real unemployment rate would be 10.3%, not 7%. In other words, Dr. Yellen's confidence in the wealth effect never filtered down to the actual labor force.

If labor force participation drops, if for whatever reason, millions of people are no longer counted as part of the labor force, as is the case in the US, it’s a troublesome indicator for the economy and the real employment picture. It also makes the unemployment rate, now 7%, look a lot less awful: if you’re not counted in the labor force, and you don’t have a job, you’re not counted as unemployed. There are millions of people in that category. And their numbers are growing, not diminishing. The irony of the U-3 unemployment statistic is the fact that while unemployment has gone down 30% since its 2009 peak, we have the lowest labor force participation rate in over 3 decades.

People 55 to 64 years old, the first forget-about-retirement generation, are staying in the labor force to an ever greater degree. In 1992, only 56.2% were still in the labor force, in 2012, 64.5% were. Similar for older folks. The participation rate for people 65 to 74 years old jumped from 16.3% to 26.8%. Reality is this: fewer people can afford to retire. And the further reality is that the older workers are getting paid less.

The pattern among employers in a downturn in managing the non-executive/senior managerial workforce was to push out higher-cost older workers in favor of cheap, high energy, less set-in-their-ways new hires. Lots of people over 40 were given the heave-ho. Some eventually found work at much lower pay, some became self-employed (it’s a lot harder than the business press lets on; 9 out of every 10 new businesses fail in the first three years), and some retired, living more modestly than they had wanted to.

But who is not making it into the labor force? Young folks. The participation rate for those 16 to 19 has plunged from 51.3% in 1992 to 34.3% in 2012. OK, the BLS explains that by an increase in school attendance, and that would be a good thing. But the 25 to 54 year olds? Even among them, participation rates dropped from 83.3% in 2002 to 81.4% a decade later.

Among the 18 to 34 year old “Millennials,” those lucky ones who’re official counted in the labor force, unemployment has been a nightmare, with double digit unemployment rates, still, nearly 6 years after the financial crisis. It’s even worse for the 16 to 24 year olds, whose official unemployment rate is still 15%. In prior downturns, the employment rate for young adults nearly reached pre-recession levels within 5 years.

In the Great Recession, young adult employment had not even recovered halfway by the same point. A quarter of all job losses for young adults came after the Great Recession was officially over. The lack of jobs had driven many discouraged young people from the labor force altogether. A recent report by Opportunity Nation estimates that 5.8 million young adults are neither working nor in school.

And on the issue of banking reform Yellen says Dodd-Frank is a good road map but there may be a need for further steps. Which may be the biggest understatement of the new year. The Dodd-Frank reform legislation has been moving forward at a snail's pace, and the bank lobbyists are still in the process of re-writing bits and pieces and generally eviscerating key components. And even complete fulfillment of Dodd-Frank along current lines will not end the problem of “too big to fail.” 

Still, it's nice to see an incoming Fed head act like she'll pay attention to the Fed's role as a regulator. Under Alan Greenspan, the Fed was more of a deregulator than a regulator. Under Ben Bernanke, the Fed seemed to be more concerned with crisis control, and any thoughts of regulation were subservient to not letting the banking system implode, even if the bankers had lit the fuse. Now that there is some level of equilibrium, Yellen may actually feel emboldened to … ah hell, let's not get carried away; nothing will change.

Friday, January 03, 2014 - Trust Me

Trust Me

by Sinclair Noe

DOW + 28 = 16,469
SPX – 0.61 = 1831
NAS – 11 = 4131
10 YR YLD + .01 = 2.99%
OIL – 1.30 = 94.14
GOLD + 15.00 = 1239.00
SILV + .14 = 20.25

Fed Chairman Ben Bernanke will retire from public service at the end of the month, and likely wander off to be a well paid consultant or director at one or more banks or private equity firms. Today he gave what might be his final speech as the Fed head. Speaking at the American Economic Association forum in Philadelphia, Bernanke said that even though the FOMC announced taper in December, they were still committed to highly accommodative monetary policy for as long as needed; "Rather, it reflected the progress we have made toward our goal of substantial improvement in the labor market outlook that we set out when we began the current purchase program in September 2012.”

He tempered the good news in housing, finance and fiscal policies by repeating that the overall recovery "clearly remains incomplete", adding that the number of long-term unemployed Americans "remains unusually high." This is something like the doctor telling you the cancer has been cured but there is still a massive tumor. As of the November jobs report, the labor market has 1.3 million fewer jobs than December of 2007. In a healthy environment, we would have seen jobs added as the population grew; the economy would have needed to add 6.6 million jobs just to maintain the level of December 2007. Counting jobs lost plus jobs that should have been gained to absorb all those people coming into the labor market, the economy had a shortfall of 7.9 million jobs as of November 2013.

So, as QE tapers into the sunset, what tools does the Fed have to juice the economy? Bernanke said the central bank has the tools - including adjusting the rate on excess bank reserves and so-called reverse repurchase agreements, or repos - to return to a normal policy stance without resorting to asset sales. And then he added: "It is possible, however, that some specific aspects of the Federal Reserve's operating framework will change." That sounds a bit cryptic, but remember there is a thing called Permanent Open Market Operations, which is when the Fed buys or sells securities outright in order to add or drain reserves available in the banking system. There is plenty the Fed could do, and most of it will likely not filter down to Main Street.

Americans have a very pessimistic view of our government, and we don't trust elected officials to solve the nation's biggest problem. A new poll by the AP-NORC Center for Public Affairs finds half believe the American system of democracy needs either "a lot of changes" or a complete overhaul. Just 1 in 20 says it works well and needs no changes. The percentage of Americans saying the nation is heading in the right direction hasn't topped 50 in about a decade. In the new poll, 70% lack confidence in the government's ability "to make progress on the important problems and issues facing the country in 2014."

Local and state governments inspire more faith than the federal government, with 45% at least moderately confident in their state government and 54% expressing that much confidence in their local government. Other results of the poll show 86% of those who called health care reform a top priority said they want the government to put "a lot" or "a great deal" of effort into it, but about half of them are "not at all confident" there will be real progress; 65% who consider the budget and national debt to be a priority don't believe the government can fix the problem; 57% say "we need a strong government to handle today's complex economic problems." Even among those who say "the less government the better," 31 percent feel the nation needs a strong government to handle those complex problems.

Simon Johnson is the former chief economist for the IMF; he has written books and some great articles about how the banksters have effectively taken over the government. He provided an update in the New York Times, saying:

When middle-income “emerging markets” encounter a financial crisis because of dysfunctional incentives in the banking system, the obvious reaction is to adopt reforms that make banks safer…Prominent people in other sectors are deeply annoyed at the collateral damage caused by excessive risk-taking by bankers.

And in most middle-income countries, the financial sector comprises at most a few percentage points of gross domestic product…

In contrast, in a country like the United States or Britain, the financial sector is much larger as a percent of G.D.P. – from 7 to 9 percent, depending on how exactly you measure it. This is a direct result of having accumulated more financial assets – a direct result of prosperity and the reasonable desire to save for retirement.

In addition, because rich countries are able to issue a great deal of government debt in the short-term and have central banks with credibility in limiting inflation, they are able to provide very large amounts of support, direct and indirect, that prevent prominent financial companies from collapsing.

There is no sector in the modern United States or Britain that is willing to stand up to big banks in the political arena. And top financial-sector executives continue to enjoy such high prestige that they are still called upon to run public finances.

Five years after the worst crisis since the 1930s, the conventional wisdom in Washington is once again that United States is a bastion of global stability and that it is important for the national interest that the financial sector should remain basically as is.

There is no desire to discuss how financial crises affect fiscal deficits and push up government debt. There is no inclination to recognize that providing support to parts of the financial sector undermines the legitimacy of the central bank.

The rise of finance is a mark of success – and it can also be most helpful to sustaining economic growth. But the political power of big financial institutions means trouble, because it provides cover for a high degree of private leverage that is prone to collapse.

Of course, hardly anyone is calling for a collapse in 2014; maybe a few perma-bears, but it's a tough case to sell. Most forecasters are warning stock investors not to expect another year of 30 percent gains, as there was in the S&P 500 in 2013. When the Federal Reserve said in September that the economy was too weak for the central bank to taper its purchase of securities, stocks went up. When the Fed said in December that it would begin to taper, stocks still went up. When the government shut down, stocks went down for a bit, then stocks went up. There seems to be a trend here, and trends continue until they end. The unanimity of forecasts may be cause for concern.

Each year about this time, people who talk about the markets and the economy are prone to make predictions, and most of them are wrong; some are right or nearly right but that isn't because the person has a crystal ball. Still, many people believe in the crystal ball and believe that some people actually know what stock prices will do and they go on CNBC or Fox and they talk to reporters and they give their money making knowledge away, but you know they don't give away this great knowledge out of pure charitable aspirations to aid humanity. Odds are that their words are designed to make people buy the very stocks in which they already have an investment, or otherwise churn positions for a commission. So, the market analysis is frequently nothing more than a slick sales pitch, and the wildly optimistic or pessimistic forecasts are little more than a way to separate from being lost in the herd.

We have similar problems with economists. If you head a big pharmaceutical company and you want to strengthen your patent monopolies to allow you to charge more money for your drugs for a longer time, there is no shortage of economists who will argue your case, for a nice fee, mind you. If you run an investment bank and you want to avoid regulations and oversight, there are plenty of economists who can be purchased to draw impressive charts and claim that government interference will slow growth and cost jobs. The rules for responsible household budgeting are not the same as the rules for responsible federal-government budgeting. We get economics dumbed down for the masses, or distorted because there is money at stake. There are plenty of economists who, under the influence of moneyed interests, are willing to put forward arguments that don’t fit the data. For this reason, the public has rightly grown skeptical of economists.

And then there are the government officials who are willing to take impassioned stands on behalf of campaign donors, which is just bribery. And so we we don't trust elected officials to solve the nation's biggest problem. We have a pessimistic view of our ability to ever solve our problems. And that's unfortunate because our problems are solvable. 

Wednesday, December 18, 2013 - According to Plan

According to Plan

by Sinclair Noe

Don't worry. Everything is going exactly according to plan. The Fed will taper just a little; cutting back to $75 billion a month in Treasury bond and mortgage backed securities; the cuts will trim back equally from both categories. You'll hardly notice.

The Fed said: "In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the committee decided to modestly reduce the pace of its asset purchases.” Great news for people in the hunt for a job; everything is good. And for those of you with two jobs, well your doubled efforts have not gone unnoticed. The Fed expects unemployment to dip to 6.3% to 6.6% by the end of the year, what with more people dropping out of the workforce and the participation rate shrinking. Besides, the current 7% unemployment is apparently just good enough to avoid civil unrest, or as the Fed calls it “progress toward maximum employment.”

The central bank also said it "likely will be appropriate" to keep rates near zero "well past the time" that the jobless rate falls below 6.5 percent. Again, this confirms that everything is going exactly according to plan..., for the bankers; for the rest of us – not so much. But if you are a banker, you have to love free money from the Fed.

It's not like they could continue QE forever; they were running out of stuff to buy. The federal deficit has been shrinking and that means fewer Treasuries. Mortgage rates have increased and that means fewer MBS. And as the Fed dried up supply, that would potentially lead to increased costs in executing QE. The Fed has already dumped $4 trillion on their balance sheet, and even with taper they'll purchase up to $900 billion over the next 12 months.

Inflation has not been a problem; disinflation has. QE couldn't get the prices up on just about anything but stocks and other financial assets. In the press conference, Bernanke said: “If inflation does not show signs of returning to target, we will take appropriate action.” Not sure what that is, but clearly $85 billion a month in QE wasn't the answer. Toss in the idea that our emerging market friends were getting miffed; the Brazilian finance minister sent a letter to the Fed before the FOMC meeting asking them to taper; something to the effect of just do it already!

And so the Fed just ripped the band-aid off the cut. I was a little surprised; it seems Grinch-like heading into the holidays and the Fed's big birthday bash. Goldman Sachs described it as “slightly more hawkish than expectations.” I thought they would wait until January or March, but in the long run it really won't matter. QE has not done the job intended because the money never went where it was most needed. Bernanke's helicopter hovered over Wall Street, the bags of money were tossed out, and sucked into a black hole, also known as the banks. The money never moved. 

The Fed created debt-free money and bought government debt with it, returning the interest to the Treasury. The result was interest free credit for the government; which was great for reducing the debt load, but the government never took the extra step of deploying super cheap money into the economy. And then the fatal flaw was that QE delivered money to the accounts of the creditors while doing nothing for the accounts of the debtors. There is still plenty of bad debt floating around, and there is still a debt problem. The Fed never extended its largesse to Main Street, and Congress is just contrary to economic growth.

In his final press conference after the FOMC meeting, Bernanke said “the recovery remains incomplete,” and he repeated the idea that tapering is data dependent, suggesting the Fed could always come back in and increase securities purchases on an as needed basis.

So Bernanke will leave the Fed in January and this wraps up, sort of, lingering loose ends; he'll hand over control to Janet Yellen and not leave her with the task of explaining taper. He leaves with one final short squeeze for the market bears. I'm not sure why the markets soared to new highs on this news, since it would seem to portend higher interest rates and higher interest rates tend to portend lower corporate profits and lower stock prices. But then rates have been going up anyway. Ah well, you know the old saying: don't fight the Fed, at least not today.

The Fed will taper; you'll hardly notice, because it was never meant for you and me, just whatever scraps might fall our way; what they call the “wealth effect”. Ben is leaving and maybe his legacy will be that everything went according to plan, it's just that the plan was all about Wall Street and not about Main Street. 

Wednesday, November 20, 2013 - Fed Minutes, Fed Conundrum

Fed Minutes, Fed Conundrum

by Sinclair Noe

DOW – 66 = 15,900
SPX – 6 = 1781
NAS – 10 = 3921
10 YR YLD + .09 = 2.79%
OIL - .01 = 93.33
GOLD – 32.40 = 1243.80
SILV - .49 = 19.95

The Federal Open Market Committee, Federal Reserve policy makers, met October 29-30, and to no one's surprise they did not change monetary policy. Today, minutes of that meeting were released. The policy makers “generally expected that the data would prove consistent with the Committee’s outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months.”

They think the economy is improving, despite the government shutdown and ongoing political dysfunction, the economy is getting better and the FOMC is considering how and when they can exit Quantitative Easing; they would like to scale back $85 billion per month in purchases of Treasuries and mortgage backed securities without triggering a rise in interest rates that could slow economic growth and wipe out gains in the labor market. That is not to say they are ready to raise their Fed Funds target for interest rates. That target has been right at zero and will likely remain at zero for at least a year or more.

They want to get out of the bond buying business without the market noticing, and independently pushing interest rates higher. It'll be a fine trick if they can pull it off.

In a speech to the National Economists Club, Ben Bernanke said: "I agree with the sentiment, expressed by my colleague Janet Yellen at her testimony last week, that the surest path to a more normal approach to monetary policy is to do all we can today to promote a more robust recovery," and he says, "The FOMC remains committed to maintaining highly accommodative policies for as long as they are needed."

Exactly how long the accommodative policies will remain in place is the $85 billion dollar question; the market is now guesstimating the Fed won't taper till March or maybe January. The idea is that they will wait for signs that the economy is strong enough to finally reach escape velocity. We're not there yet.

The National Association of Realtors reported that home re-sales fell 3.2 percent last month from September to a seasonally adjusted annual pace of 5.12 million. That's down from a 5.29 million pace in September and the slowest since June. A healthy pace is around 5.5 million. Sales of single family homes declined 4.1 percent, while condominium sales rose 3.3 percent. The median sales price of an existing home was $199,500 in October, up 12.8 percent from a year earlier and the 11th straight month of double-digit annual increases.

The 16-day partial government shutdown pinched home sales last month by creating uncertainty about the economy and slowing loan approvals: 13 percent of real-estate agents reported that transactions had been delayed. Now, that might just mean that sales were postponed, and they'll pick up in the next report, or it might signal a plain old slowdown.

The Fed's bond purchases have kept long-term interest rates low. Mortgage rates are still low by historical standards, but interest rates began to rise in late May on speculation the Fed would slow its bond purchase program. Add to that the idea that many younger potential home buyers, or first time buyers saw the carnage of 2006 and 2007 and they just aren't interested. In this past month's report, first time buyers accounted for 28% of sales, down from around 40% in healthier housing markets.

Cash purchases made up 31 percent of October's sales. This might indicate that the Fed's easy monetary policy has only been easy between the Fed and the banks. So, this gets right to the Fed policy makers' conundrum; how can they withdraw easy money from the markets without creating a slowdown; if the Fed stops buying mortgage backed securities, that would almost certainly make it even tougher to get a mortgage and the housing market would surely suffer.

One idea is to counter any taper of asset purchases by reducing the interest rate on funds that banks keep on deposit with the Fed. That's right, the Fed not only buys mortgage backed securities from the banks, but then they pay the banks to keep funds on deposit with the Fed, essentially discouraging the banks from taking the money and lending it out in the community and into the economy. This is something that might be a small step, worth considering, but the reality is that any Fed taper from QE will be met with a taper tantrum, and for now the Fed doesn't want to rile the markets.

This is not to suggest the economy is horrible; the Fed's assessment of a growing economy was reinforced with a report this morning that consumer spending rose in October, despite the shutdown, and suggesting upside momentum heading into the fourth quarter. Retail sales excluding automobiles, gasoline and building materials increased 0.5 % last month after advancing 0.3% in September. Overall retail sales rose 0.4% after being flat in September. Core retail sales last month were bolstered by gains in receipts at clothing, furniture, electronics and sporting goods shops, among others. Sales at electronics and appliance stores rose by the most since April.

Meanwhile, the Labor Department reported that inflation is a bit less than optimal; the Consumer Price index dipped 0.1% last month as gas prices dropped, after rising 0.2% in September; this was the first decline in 6 months. In the 12 months through October, the CPI increased 1.0%, the smallest gain since October 2009.

Stripping out the volatile energy and food components, the core CPI edged up 0.1%, rising by the same margin for a third consecutive month. Over the past 12 months, the core CPI increased 1.7%, matching the previous month's rise. A reminder that the Fed targets inflation at 2%; that's the level they want; less than 2% indicates a greater concern that disinflation could lead to deflationary pressures. All the more reason for the Fed to continue with its easy money policies.

The other target, or guidance, offered by the Fed is that they will stick with easy money until the unemployment rate hits a target of 6.5%; in last night's speech, Fed Chair Ben Bernanke, indicated that it is still a target but it doesn't mean that if the target is hit, it will automatically change anything. Bernake said:

“In the judgment of the Committee, the unemployment rate--which, despite some drawbacks in this regard, is probably the best single summary indicator of the state of the labor market--is sufficient for defining the threshold given by the guidance. However, after the unemployment threshold is crossed, many other indicators become relevant to a comprehensive judgment of the health of the labor market, including such measures as payroll employment, labor force participation, and the rates of hiring and separation. In particular, even after unemployment drops below 6-1/2 percent, and so long as inflation remains well behaved, the Committee can be patient in seeking assurance that the labor market is sufficiently strong before considering any increase in its target for the federal funds rate.”

Bernanke went on to say:

“When, ultimately, asset purchases do slow, it will likely be because the economy has progressed sufficiently for the Committee to rely more heavily on its rate policies, the associated forward guidance, and its substantial continued holdings of securities to maintain progress toward maximum employment and to achieve price stability. In particular, the target for the federal funds rate is likely to remain near zero for a considerable time after the asset purchases end, perhaps well after the unemployment threshold is crossed and at least until the preponderance of the data supports the beginning of the removal of policy accommodation.”

The Dow just skirted 16K and virtually the entire run-up of the stock market is based on one thing, and one thing only, the Fed pumping money into the markets.  That is it, that is all.  Since the market bottom the market has more than doubled, but jobs aren’t even close to recovering as a percentage of the population, Europe is still in crisis, and oil prices are still ludicrously high. You cannot have profits higher than actual productivity increases plus inflation plus population increase.  Anything more than that is not profit, it is fraud, underinvestment in real capital or it is diverting future profits to the present.

 The problems the economy has cannot be fixed by giving more money to banks and rich people and attempting to turn the housing market into a cash cow again. The economy requires targeted spending, to get off oil, to break up the big banks and other oligopolies, to open up the economy to actual competition, and to increase the pricing power of labor and reduce the pricing power of employers while making sure they don't run up against supply bottlenecks.  It does not require giving money to people who will simply use that money for more leveraged financial plays or to bury bad assets on balance sheets at mark to make believe.

To the extent a market works it must be regulated to be competitive, and assets must not be allowed to pile up in a few hands.  Financial profits cannot be allowed to be higher than non-financial profits, and the labor market must be tight, so that people are free to move away from jobs they hate (if your employees hate their jobs they should either be very well paid because the job is absolutely necessary, or it shouldn’t exist at all.) And the employees who are actually working need enough to actually live on. Did you hear about the Wal-Mart in Ohio that held a Thanksgiving food drive – for their own employees?

Whatever the Fed is doing or thinking about doing, the first step should be acknowledgment that the trickle down wealth effect from the housing market and the stock market is limited, very limited. As for the stock market, it is in fantasy land, entirely a creature of the Federal Reserve, almost completely divorced from the actual economy. Of course, the stock market can remain irrational longer than you can remain solvent. 

Tuesday, August 20, 2013 - 10 Year and Jackson Hole

10 Year and Jackson Hole

by Sinclair Noe

DOW – 7 = 15,002
SPX + 6 = 1652
NAS + 24 = 3613
10 YR YLD - .07 = 2.81%
OIL - .77 = 106.33
GOLD + 5.30 = 1371.90
SILV - .16 = 23.13

One number keeps standing out from the daily scorecard. The yield on the 10 year note. That is the benchmark for interest rates. As a standalone figure, of course, the yield on 10-year Treasuries is small. But the amount of money it impacts worldwide is flat-out staggering. Out of the estimated $1.5 quadrillion dollars' worth of derivatives on the planet right now, roughly $500 trillion is specifically related to interest rates. So you can see why the 10-year gets so much attention.

Many investors believe the Fed controls interest rates. That's not true; they merely influence them. Rates are set by trades in the market. And if interest rates rise much further, the support the Fed is counting on in the bond markets may not be there. In fact, it may be running the opposite direction. Foreign custody holdings of US Treasuries continue to decline, which implies that our trading partners are not comfortable with treasuries, so they're moving to other assets.

Meanwhile, emerging markets from Brazil to Indonesia have raised borrowing costs in 2013 to try to aid their currencies as the prospect of reduced US monetary stimulus curbs demand for assets in developing nations. The $3.9 trillion of cash that flowed into emerging markets over the past four years has started to reverse since taper talk started back in May. Asia still has potential in the next three years or more, but in the shorter term, momentum has turned a bit.

Institutional managers - read pension fund administrators, foreign banks, and ETFs - who would have normally been big buyers, are paring back because they don't want the exposure that comes with 10-year paper or longer-term assets in a rising rate environment.

Money managers are seeing extremely high levels of redemption requests and withdrawals from bonds. PIMCO, for example, experienced a $7.5 billion hit last month as money headed for the exits. The presumption is that the money is rotating into stocks, but the data suggests a solid portion is simply going back under the mattress. Somebody has to make up the gap; the only one big enough is the Fed. But if $85 billion a month isn't good enough, you've got to wonder how much is.

So, this week the Fed policymakers are headed to Jackson Hole Wyoming for an annual retreat. The Fed heads will talk about their role; the Fed followers will cogitate; the economic thinkers will theorize about the critical information regarding potential shifts in macroeconomic policy. Investors look to the meeting to bring a healthy, if fleeting, shot in the arm to the markets and share prices. Nearly any unexpected remark or errant word coming from the proceedings has the ability to rock the markets.

The markets have come increasingly unglued from economic reality, and are really just responding to Bernanke's speeches. Typically we see a bump folllowing the Jackson Hole get together. In each year, with each speech given in the Grand Tetons, the Dow has experienced triple-digit jumps: 119 points in 2007, 197 points in 2008, 155 points in 2009, last year it was a 151 point gain.

Perhaps unsurprisingly, in each instance but one (in 2009, when he announced the worst of the Great Recession was over), Bernanke spoke about or reiterated the Fed's willingness to intervene in difficult economic circumstances. These words were promptly followed up with a demonstration, most recently with the never-ending rounds of quantitative easing. Clearly, the markets love this talk, the markets have become addicted to the Fed juicing the markets, even if the juice hasn't spilled over to Main Street.

Bernanke has spoken at every Jackson Hole meeting since he took over the chairmanship. Chairmen Ben won't be in Jackson Hole this week. Bank of England Governor Mark Carney won't be there. The ECB Pres, Mario Draghi won't be there. Larry Summers won't be there. Janet Yellen will be there but she isn't scheduled to give a keynote speech. The conference still might move the markets, or it might prove a bit of a snoozer. As exciting as Jackson Hole has been for investors over the past three decades, it wouldn't be wise to plan for any triple-digit jumps this year. Anyone looking for a quick bump out of Jackson Hole should look elsewhere. Specifically, look to the next Fed meeting Sept. 18-19, when Bernanke has another press conference.

That's the sanguine outlook. Not much happens in Jackson Hole. But the Fed and talk of taper has been the prime mover in the market for the best part of the year (you could easily argue that it's been longer),

Thin summer volumes, bull trap head-fake and slightly better data exposed treasury market weakness; it’s no longer just fear of tapering but also uncertainty regarding the next Fed Chair. This past week the US rates market displayed unusual behavior as it didn’t require much in order for bonds to get crushed. We wait for the FOMC minutes and other key Fed events ahead to gauge what lies ahead for treasuries. The biggest risk to the bond market and tactical bullish trades is the combination of tapering fears and the election of a more hawkish Chairperson. In such a scenario it wouldn’t be surprising that investors just sit on the sidelines and see how high rates can go if a hawkish Fed nominee is announced, with an overshoot meaningfully above 3% possible. Stocks then would be under pressure as bonds become enticing again and asset allocation adjustments eventually reverse the flows back into bonds, at least on a short-term trade.

Intermediate, as in to the year end, there is a widespread expectation for us to pop out of the summer doldrums and enjoy a year end rally. When everyone expects something, anything can happen, and it's not always what everyone expects. In other words, we're starting to hear rumblings that the Fed is losing control of the bond markets, and as 10-year yields tap dance toward 3%, there is speculation and rumor, and some of the arguments are compelling, but only to a point.

Bottom line? The Fed is ultimately in control, contrary to what some are claiming. Might just be a little lag time in tamping down rates, that’s all. The lessons from the BOJ should be enough to quell those who doubt this. And the BOJ can do nothing that our Fed can’t do on this side of the pond. If the Fed wants a 2, 3 or 4% 10 yr treasury note then they’re damn well going to get just that. Maybe the FOMC likes rates at 2.8%. Maybe they like them at 3.5%. I just don’t think they like the parabolic rise. That can be fixed in due course if they so desire.

What else is going on in business? Well Barnes & Noble just reported stunning losses for the last quarter. At a conference call following the release of results, analysts called the company's leaders slow and ineffective. They zeroed in on the company's Nook e-reader as a sign of failure, demanding payout for "long-suffering" shareholders. Barnes & Noble reported a loss of $87 million in the last quarter, and it attributed about $54.6 million of that to its Nook unit. The struggle over the Nook comes at a time when e-books have decimated the traditional publishing business. The Nook has also struggled to compete with other tablets and e-readers, most notably the iPad and Kindle.

Retailers had a hard day today. JC Penney same store sales down 11% from a year ago in the quarter to August 3 as the department store posted a $586m net loss. But its shares, which closed 6 per cent higher, were bolstered by assurances from management that business was not as bad as it once was.

Best Buy, the electronics retailer, met a better reception from investors as cost cutting helped it to report its first net profit in a year, even though like-for-like sales – at stores open at least a year – fell 0.6 per cent. Its shares closed 13.2 per cent higher.

Meanwhile a bankruptcy judge has approved Kodak's plan to emerge from court oversight, paving the way for it to recreate itself as a new, much smaller company focused on commercial and packaging printing. Kodak said it hopes to emerge from bankruptcy protection as early as Sept. 3. Founded by George Eastman in 1880, Eastman Kodak Co. is credited with popularizing photography at the start of the 20th century and was known all over the world for its Brownie and Instamatic cameras and its yellow-and-red film boxes. The new company won't make cameras anymore.

The long, painful process for Detroit’s bankruptcy is under way.  Unlike corporations that file for Chapter 11 bankruptcy protection, municipalities and other governments seeking to file for Chapter 9 are required to prove that they are eligible. A trial to consider Detroit’s eligibility for bankruptcy is scheduled for Oct. 23. I think everyone conceded that Detroit was a municipality as required by the statute. But the public employees union did argue that Chapter 9 itself is unconstitutional

First is the argument that Michigan’s Constitution prohibits modification of the pensions, and thus prohibits a Chapter 9 filing, where they might be modified. What Michigan’s Constitution actually provides is that pension benefits “shall be a contractual obligation thereof which shall not be diminished or impaired thereby.” By calling the benefits a contract, the state’s Constitution invokes the federal Constitution, which has a Contracts Clause that prohibits the states from passing any law impairing contracts. The same kind of provision also appears in Article I, Section 10 of the Michigan Constitution. Then there is debate about whether pensioners or bondholders should be paid. There will be a lot of talk about morality as well as contractual obligations. I'd like to say this will be interesting, but the truth is it will just be sad.