Tuesday, October 08, 2013 - Low Probability High Consequence

10082013 Script

Low Probability High Consequence

by Sinclair Noe

DOW – 159 = 14,776
SPX – 20 = 1655
NAS – 75 = 3694
10 YR YLD un = 2.63%
OIL + .53 = 103.56
GOLD – 3.50 – 1319.90
SILV - .06 = 22.39

The Dow Industrials are down for 11 of the past 14 sessions, posting a loss of nearly 900 points. It's not exactly a crash; Wall Street is still expecting a resolution to the debt ceiling and the shutdown. The debt ceiling will likely be resolved with some short-term band-aid, but there is a chance that the idiots will mess it up and there will be a default. There is a low probability of default but a high consequence; that's a nasty mix and the reason I don't play Russian Roulette.

Most financial markets are only slowly getting worried about the possibility of a debt default, but in one tiny corner of the bond market things are starting to look a little panicky.

Today, investors dumped one-month Treasury bills due for payment after October 17, the date the Treasury Department has warned it will no longer have the cash to pay all of its obligations unless Congress raises its borrowing limit, known as the debt ceiling. Every day that passes after that date raises the risk the government will default on some of its debt. These short-term bills will probably be the first to go unpaid. Interest rates and bond prices move in opposite directions; so as prices dropped today, rates spiked, which means the government is paying more to borrow for one month than it does to pay for one year, a freak occurrence. Yep, everything is going exactly according to plan.

President Obama held a news conference today, calling on Republicans to both fund and reopen the government and to raise the nation’s borrowing limit as the federal shutdown entered a second week. President Obama phoned Speaker Boehner earlier this morning to urge him to allow a House vote on a budget bill without conditions, as Mr. Boehner called on the president to come to the negotiating table to resolve a spending standoff that has shuttered the government for eight days.

So far this whole shutdown hasn't been working out. What has been accomplished? Damage the livelihood of millions of Americans? Check. Government secretaries, food-truck operators, cleaners who work in motels near national parks: They’re all hurting. Waste billions of taxpayer dollars? Check. It costs a lot to shut agencies, Web sites and parks, and it will cost a lot to reopen them. Meanwhile, the House has voted to pay the salaries, eventually, of hundreds of thousands of employees whom it has ordered not to work.

And the lack of accomplishment just reinforces intransigence. In private, it appears Speaker Boehner has told his allies that he won’t bring up a clean CR, and he’s hopeful that as the deadline nears, President Obama will deal. It'd be nice to read that in private, there was some more conciliatory language, but at the moment, all of the private rhetoric is about hardening people's positions and convincing the team that the other side will cave.

In 1860, Abraham Lincoln had some choice words for Southerners who charged that he, not they, would be to blame for secession if Lincoln refused to compromise on the extension of slavery. Lincoln said: “A highwayman holds a pistol to my ear, and mutters through his teeth, ‘Stand and deliver, or I shall kill you, and then you will be a murderer!’ ”

So, while there may be a low probability of default, you still have to consider who's got a finger on the trigger. The debt ceiling is considered leverage, not a bullet to the skull.

And even if there is a stop-gap resolution to the debt ceiling and the shutdown, we still have other issues to deal with. The international Monetary Fund today issued a warning to central banks to move with extreme caution as they wind down emergency stimulus, warning that a botched exits risk setting off an asset crash in emerging markets and worldwide contagion.

The report said a witches’ brew of sliding currencies and excess credit could spin out of control. “Thin markets could amplify price movements and kick off sale spirals. Contagion effects could both amplify and broaden asset price movements and capital outflows as investors flock out of emerging market economies.”

Oh yeah, the taper!

The Supreme Court is in session again. I'm not sure how that works in a government shutdown. Maybe they pay the stenographer with an IOU, or a gift card to Wal-Mart. Today they heard arguments in a very important case,  McCutcheon v. Federal Election Commission, a case that maybe you could call Citizens United 2.0. 

 Here's the background. During the 2012 election season, Shaun McCutcheon, an electrical engineer who lives in Alabama, started making donations to all the candidates he supported. He made many donations, always staying under the donation limit of $2,500. Eventually, though, McCutcheon went over a different limit: the cap on the overall amount of money a single donor can dole out. Political donors can give no more than $123,200 during the two-year election cycle—$48,600 to federal candidates and $74,600 to political parties and related committees. McCutcheon believed the aggregate limit was unreasonable and unconstitutional, and so, with the backing of the Republican National Committee, a coplaintiff in his case, he sued his way to the Supreme Court.

At stake in McCutcheon is whether it's constitutional for the government to cap overall donations made by a single political donor. McCutcheon, his lawyers, and their conservative allies say the limit curbs First Amendment rights and does little to guard against corruption or the appearance of corruption, the court's justification for placing limits on political giving and spending. On the other side, campaign finance watchdogs and their lawyers say ending the aggregate limit would create a system in which wealthy donors could cut multimillion-dollar checks to candidates and parties, making Republicans and Democrats alike even more beholden to wealthy contributors.

The Supreme Court's landmark 1976 case Buckley v. Valeo upheld the overall contribution limit, at the time set at $25,000 for every two-year cycle. The court held that limiting the amount of contributions imposed only a marginal restriction on speech since the important thing was the act of contributing, not the amount). And the court said the government's interest in preventing corruption and the appearance of corruption justified that marginal restriction.

Fast forward to Citizens United, which overturned a couple of previous decisions that argued that some donation limits are constitutional. What happens if the overall cap is eliminated? A single donor could give nearly $3.7 million by maxing out his or her donations to every candidate of a preferred party, plus the state committee, the national party and its affiliated committees. With the overall limit scrapped party operatives could create mega-fundraising committees that can solicit seven-figure checks and then spread the money far and wide within their party at the federal and state level.

But wait, there's more! The Supreme Court has agreed to let a lawyer for the Kentucky Republican Seantor Mitch McConnell argue before the court. McConnell, the Senate minority leader is a vehement foe of campaign finance regulations; he led the fight to overturn the 2002 McCain-Feingold law with his suit, McConnell v. FEC, which he lost, and he has repeatedly filibustered Senate bills to beef up disclosure of dark money spending in our elections.

This time, McConnell wants to go even farther than McCutcheon;today the attorney for McConnell argued that the court should revisit the underlying legal principle that justifies whether there should be any limits on contributions to candidates. The aggregate contribution limits, he said, force candidates and political parties to compete for an "artificially limited pool of money." That seems a strange argument in light of Citizens United which allows an individual, like Mr. McCutcheon, to say whatever he wants and spend as much as he wants on independent, campaign related messages.

The FEC will have a tough row to hoe before the Roberts Court. The FEC seems to be arguing against an overall cap, but if an individual can give a few thousand to 23 different candidates, why not give the same amount to a 24^th candidate? Based upon today's arguments, that is probably what will decide the issue, but it misses the point. This is not a case about freedom of speech. One thing the Court has not truly explained is how spending a boatload of money is considered free speech. Of course, one should be free to speak about the government and politics, but I don't think that should include the ability to buy politicians and then bribe them to look after one's special interests.

James Madison wrote that government should be dependent on the great body of the people and not an inconsiderable proportion, or a favored class of it. There was a time, in the late 19th Century I believe, when business moguls actually put bags of cash on the desks of politicians to buy favors. Money has always been involved in this country's electoral politics, but many of the most blatently corrupt practices were reigned in during the 20th Century. Now, we seem to have returned to the age of the robber barons and to politicians who are for sale to the highest bidder. At every level, bottom to top, campaign contributions are a bribe. And what the Supreme Court is deciding is the difference between a democracy and an oligarchy; unfortunately that is not what they will consider, and that is part of the shame.

The justices will issue their opinion in McCutcheon before the end of June.

Friday, October 04, 2013 - This Is Not A Game

This Is Not A Game

by Sinclair Noe

DOW + 76 = 15,072
SPX +11 = 1690
NAS + 33 = 3807
10 YR YLD + .04 = 2.65%
OIL + .39 = 103.70
GOLD – 5.50 = 1312.20
SILV + .04 = 21.84

The government showdown continues. So, there isn't much actually happening. We don't have a jobs report to analyze. The next jobs report will be so screwed up by the shutdown that it won't be possible to make heads or tails of it, whenever it is reported. We don't need a functioning government to tell us that the job market is lousy. But we do need one to help make the job market better.

It's the first Friday of the month, usually the day we get a bunch of random numbers from the government telling us what we already knew: Good jobs are scarce. This month, the government is too busy being held hostage by House Republicans to give us those random numbers. But there's plenty of evidence already that September was grimly similar to many of the months that came before it in this grinding recovery. With sagging consumer confidence and hiring surveys, September may even have been worse than August.

Whenever Bureau of Labor Statistics workers stop being furloughed by a government shutdown, economists, on average, expect it to report 185,000 new jobs on nonfarm payrolls in September and an unemployment rate holding at 7.3 percent. And if we look at this week's ADP report and the ISM hiring survey, we see diminished expectations; maybe around 170,000 new jobs.

And then the longer this shutdown continues, the worse the labor market will manage. For example, today Lockheed Martin says it will furlough 3,000 employees on Monday due to the government shutdown, and they say the number of employees put on furlough will increase weekly if the shutdown continues.

Earlier this week, United Technologies Corp. announced that it will furlough 2,000 employees by Monday and more than 5,000 if the shutdown continues into next month.

The company said Wednesday that its Sikorsky division, which makes Black Hawk helicopters, would be hit first. It expects nearly 2,000 employees, including those employed at facilities in Connecticut, Florida and Alabama, will be furloughed on Monday.

There are numerous reports that House Speaker John Boehner has told Republican House members that he would cave on the debt ceiling fight. He'll agree to use a combination of Democratic and establishment GOP votes to hike the debt ceiling and avoid damaging America's credit and the economy, and perhaps creating a global financial meltdown.

We don't know it that is true, but if it is, that means the worst case scenario in the current self inflicted financial crisis won't come to pass and the US won't default on its debts in the midst of a government shutdown. Let's be clear about this; the shutdown is continuing. The debt limit problem is separate from the fiscal dispute that’s shut down the government.

The government is shut down because the appropriations that pay for its activities expired at the end of the fiscal year which was Sept. 30, and Congress hasn’t passed a funding bill to keep that money flowing. The debt limit arrives around Oct. 17, when the US hits a legal limit on the amount of money it can borrow, meaning the Treasury can’t pay many debts already incurred. Similar but different; a breach of the debt limit would likely result in a total freakout for financial markets and result in worldwide chaos. That's just a guess because it's never actually happened.

What exactly is the strategy heading into the debt ceiling? That's the funny thing. There is no strategy, other than the fear factor; you know, pass it or there will be a loud explosion. This whole debt ceiling thing is a sort of grand, metaphorical legislative ceremony. Congresses, past and present, have passed all sorts of bills that are now law, those laws dictate that a certain amount of money needs to get spent, and from time to time, in order to make good on what are already ironclad obligations, the "debt ceiling" has to be "raised," in order to maintain the full faith and credit of the United States, and the U.S. Treasury bonds, which the world has essentially agreed to observe as the magical linchpin of what is colloquially known as "the global economy."

This whole process of raising the debt ceiling is really nothing more than an incantation; a loud chant in which our lawmakers profess the desire to honor our sovereign credit. So, Boehner might cave on the debt ceiling. The stories appear to be based on the word of some Republican moderates reporting what Boehner has told them in private. That could be wishful thinking on their part. It could reflect Boehner just telling them what they want to hear. There could still be some partisan fights on the issue, and Boehner might not be able to control certain elements in the GOP. In other words, it's not a done deal.

But Boehner seemed anything but conciliatory when he and other senior Republican lawmakers appeared before reporters this morning denouncing comments from an anonymous White House official who was quoted as saying the Democrats were “winning” in the funding impasse. Boehner said, “This isn't some damn game.”

Meanwhile, not much going on, so President Obama gets together with Joe Biden and they head out for sandwiches with a side of damage control. Obama told reporters that “No one is winning.” and then he ordered a hoagie, and he went on to say the whole shutdown could be over today, if there was a clean CR presented to the House. Yeah, that's not going to happen.

Meanwhile, you heard about the story of the woman who drove her car into the blockades around the White House the other day; she was shot and killed by police. The Capitol Hill Police have been on the job since the government shut down on midnight on Tuesday without any idea of when their next paycheck will come. In the aftermath of Thursday's shooting though, the Democratic and Republican lawmakers they protect joined together to compensate with something even better than money: applause and a big thank you. The police force is largely excepted from the shutdown, meaning they still go to work, they just won't be paid until Congress passes a budget.

Now, if you really want to end this shutdown fast, I mean lightning fast, the Capitol Hill Police could just decide that they stand by their fellow federal employees, and they could refuse to go to work. No police protection for the politicians on Capitol Hill until they resolve the shutdown. The shutdown would be over in a New York minute.

Instead, House Democrats announced this afternoon that they will try to force the House to vote on a measure to fully fund the government -- and end the shutdown -- with a procedural motion known as a discharge petition. Their resolution would fund the government through Nov. 15 at the same levels as the Senate-passed continuing resolution. And, like the Senate bill, there would be no strings attached related to delaying or defunding Obamacare. Yeah, that's not gonna happen.

Anyway, banks  are totally not worried about the U.S. government defaulting, sparking a nightmarish financial panic. Yes, they're stocking extra cash in ATMs to satisfy cash-hungry zombie hordes. But they're sure they won't need it. Bank executives are adding 20 to 30 percent more cash to their ATMs just as a hedge against debt ceiling mayhem. This is all just in case House Republicans pull the trigger on the gun they're holding to the head of the U.S. economy by refusing to raise the federal government's borrowing limit, or debt ceiling. That could cause the government to default on its debts, triggering a crisis that would be make 2008 look like a blip.

At the same time, these banks are telling their clients they think there is a "zero percent" chance of such a crisis happening. Bank strategists and economists all remember the last time we came close to disaster, in August 2011, and politicians managed to pull out a deal at the last minute that time. So of course they expect the same thing to happen again. After all, past performance is a gold-plated guarantee of future results, right?

We've been keeping you up to date on the JPMorgan giant settlement with regulators which some report could top $11 billion, one of the biggest Wall Street deals in history; except of course that it would be $7 billion cash and $4 billion in accounting tomfoolery, and then JPMorgan could write off more than $3.8 billion in tax breaks.

Last week Dimon met with Attorney General Eric Holder to discuss the settlement after his bank’s offer to settle was reportedly rejected. If this sounds unusual, it is; and AG Holder is not instituting a new policy of personal consultations with everybody under investigation by the Department of Justice, but Dimon gets special treatment. And the latest twist in the story is that Dimon will step down as Chairman of the banking unit of JPMorgan Chase. This is a bit of a surprise because there was a recent push by shareholders to split the chairman and CEO roles. Shareholders voted against the measure however and Dimon was able to retain the dual roles.

What does it all mean? We don't know, but Jamie Dimon's halo is tarnished, and he might not carry as much clout as in the past. Most likely he will be spending a little less time in the spotlight, but he could just as easily be spending time in handcuffs for pretty blatant violations of Sarbanes Oxley.

Tuesday, October 01, 2013 - The Universe is Unfolding As It Should

The Universe is Unfolding As It Should

by Sinclair Noe

DOW + 62 = 15,191
SPX + 13 = 1695
NAS + 46 = 3817
10 YR YLD + .03 = 2.64%
OIL - .70 = 101.63
GOLD – 40.40 = 1288.50
SILV - .54 = 21.27

Thank you for joining us today. We will now arbitrarily shutdown for no apparent reason. We regret that this might cause inconvenience for listeners, advertisers, employees, or anyone else.

Can you imagine if you tried that with your business? But the business of politics is not like your business; politics has become more like theater of the absurd. Let's review how this is supposed to work. Voters elect representatives. The representatives write legislation, vote on it, the House of Representatives votes, the Senate votes, the bill goes to the President, the bill becomes a law. There are a series of checks and balances, including the possibility of a veto. The courts may weigh in to opine on whether the law is constitutional. And then every couple of years, the voters get a chance to weigh in and vote the bums out or not, which might open the door for a new crop of politicians to write new legislation.

Now, I've been wondering what I might say that's new and different about the shutdown; probably not much, except perhaps that it is more of a showdown that a shutdown, and there will be a political price to pay eventually. That thought is based upon the last shutdown in 1996; just ask Bob Dole.

The truth is that there were 17 government shutdowns from the initiation of the modern Congressional budget process in 1976 until 1996. Even after 1980, when it was mandated that government agencies receiving appropriations close down if funding ran out, government shutdowns occurred with disturbing regularity, with nine throughout the Reagan-Bush years, and two under Clinton. In fact, every time there has been divided government since the Ford Administration, the government has shut down at some point, with only one exception: the tenure of George W. Bush.

Shutdowns were, for quite a while, part of the normal business of government. When Congress and the White House are held by different parties, Congress has no bigger chip at their disposal than the power of the purse. So they use that, over and over again, to extract often unrelated policy concessions from the executive branch. It may have stopped for a while for various reasons, but it’s back because it’s a very inviting way for a Congressional majority to assert their will.

In a parliamentary democracy, the process is slightly different; a disagreement over budget priorities might lead to an election, not sending federal workers to furlough, and then one party wins the vote, and they do what they want for a while and then the public eventually gets to vote on things and they overturn one agenda or another. It's all part of the democratic process, or what some like to call mob rule.

Except it's not quite the mob that rules but rather the mob gets the short end of the stick, because it is the poor and the working poor who will get hit hardest from the shutdown, at least in the near term. Then it spreads out to the middle, and eventually it affects the entire society and the entire economy, but that takes time, and we're just at day one; so maybe it's not much more than political theater for the moment. Over time there is a political price to pay.

Here’s a look at some of the latest numbers on how a shutdown might affect our economy: A shutdown that lasted between three and four week could cost the economy about $55 billion (Moody’s Analytics). Washington, DC, would lose $200 million a day on lost wages and lost spending by those who get furloughed. That estimate doesn’t include tourism, and the huge losses DC will feel from the museums and national mall being closed. The shutdown would “reduce federal spending” by about $8 billion, which could reduce GDP growth by .8 percent annualized (Goldman Sachs). Estimated 1.4% lost economic growth in fourth quarter (Moody’s Analytics’ Mark Zandi). One billion per week from the pay of the roughly 800,000 federal employees will be lost.

These numbers, of course, don’t count a lot of things: The loans that the Small Business Administration will not make, the permits that the Environmental Protection Agency won't issue, the contracts that will be postponed, and the nutrition assistance for infants and mothers that won't buy food and milk. Or, of course, the stock market might eventually react adversely if consumer confidence tanks. And much, much more.

Of course the whole mess could be resolved in 20 minutes with a vote on a clean CR, a continuing resolution that funds the government without attacking the Affordable Care Act. It could happen immediately or in a week or two, whenever the political cost of the shutdown becomes high enough for Boehner to finally find the courage to say no to the Tea Partiers in his caucus. That CR will pass with mostly Democratic votes and about 20 moderate Republicans (and the latest count has about 40 or so moderate Republicans willing to come clean.) And maybe the result will be a revolt against Boehner that leads to him losing the speakership; or maybe not; Boehner's job could be safe simply because no one else could possibly want it.

And the CRs the House and Senate are passing back and forth now only fund the government for six weeks, meaning we could have a shutdown, followed by a debt ceiling crisis, followed by another shutdown. Whenever the next CR expires, we'll do it again, and we'll do it again the next time the debt ceiling has to be raised.

In addition to the shutdown, we are fast approaching the debt ceiling in about 2 weeks time, and that's when things will get real interesting because the repayment of the debt is mandated by the Constitution's Article XIV. And maybe the only answer is to mint a few trillion dollar coins, but don't get me started on that.

Meanwhile, the brouhaha supposedly has something to do with the Affordable Care Act, aka, ACA, or aka, Obamacare, which is one of the few parts of government not shut down today. Ironic, isn't it?

So, very early reports are that Obamacare exchanges are, as expected, having some technical glitches on the first day — maybe even a bit worse than expected, because it appears that volume has been much bigger than predicted.

The glitches will get fixed; remember the calamitous rollout of Medicare Part D? Remember the launch of the iPhones? Remember the launch of every Microsoft Operating System? What matters is whether enough people, especially, of course, young, healthy people,  actually do sign up for insurance. If they do, health reform will be a success, and will become irreversible.

The big fear has been that a combination of ignorance and misinformation would keep people away, that they wouldn’t sign up either because they didn’t know that insurance was now available, or because Republicans had convinced them that the program was the spawn of the devil, or part of a diabolic plot by Obama to force everybody to be healthy. Lots of people logging on and signing up on the very first day, a day when the Congress is dominating the headlines, is an early indication that it’s going to be fine, that plenty of people will sign up for the first year of health reform.

There will be some negative news stories about the glitches. Obamacare is not up for a vote. And today’s heavy volume is yet a sign that it is being accepted in large numbers. And whether or not it is clear to you, no doubt the universe is unfolding as it should.

Wednesday, September 18, 2013 - Surprise, Surprise, Surprise

Surprise, Surprise, Surprise

by Sinclair Noe

DOW + 147 = 15,676
SPX + 20 = 1725
NAS + 37 = 3783
10 YR YLD - .16 = 2.68%
OIL + .43 = 108.50
GOLD + 55.30 = 1366.30
SILV + 1.23 = 23.06

Record highs for the Dow Industrials and the S&P 500, topping the highs of August 2. Surprise, surprise, surprise.

It was not guaranteed the Fed would start to taper, but it was widely expected. We've talked about the reasons why the Fed might taper; the timing of the remaining FOMC meetings this year, some improvement in the economy, fear of frothy markets. Fouhgetaboutit. After two days of meetings, the FOMC decided to continue with the current quantitative easing policy of purchasing $85 billion a month in mortgage backed securities and treasuries.

The punchbowl is full and the party is still rocking. In addition to record highs for the Dow and S&P 500, we saw 5-year Treasury's biggest yield drop since March 2009, the US dollar's third worst day in a year, home-builders had their biggest rally since last summer, and gold had its best day since January 2009.

At least Wall Street institutions and traders love the accommodative policy and the morphine drip of free money from the Fed. So the patient is still on morphine and the reason is because of extreme weakness. The economy just isn't strong enough to survive on its own.

The stock market no longer rallies to the tune of increased retail sales, growing export markets or improved employment expectations, better durable goods orders and such. Good economic news is bad news for the markets because the Wall Street crowd and any investors still playing equities understand full well that any sign of fiscal improvement might mean the end of the private Federal Reserve’s morphine drip. And without the Fed’s artificial stimulus, the financial markets curls up and dies, but of course they'll wipe out your 401k when they go. Wall Street can rally on news the Fed is continuing QE, but the broader economy was never invited to the party.

For the third time this year the central bank cut its forecast for US economic growth in 2013. The Fed now sees the economy growing in a range of 2.0% to 2.3%. Earlier forecasts had predicted growth of 2.3% to 2.6% and 2.3% to 2.8%. Being wrong is nothing new for the Fed. The bank has repeatedly offered forecasts over the past few years that turned out to be way too rosy.

Some other observations noted in the FOMC statement today: the unemployment rate remains elevated, mortgage rates have risen, fiscal policy is restraining economic growth, inflation is less than expected, and the economy just hasn't picked up steam.

What they didn't specifically talk about was the frothy markets. The Fed plan has been to prop up the banks and the financial markets, creating a wealth effect on Wall Street, and then let the wealth trickle down to Main Street. They've done a nice job of creating a wealth effect on Wall Street, but there hasn't been any trickle down; there won't be any trickle down, and once again the Fed is looking like they've painted themselves into a corner with no exit.

By postponing the decision to October or even December or whenever, the FOMC may be setting the market up for an even larger correction when it finally bites the bullet. Every time the Fed has phased out one of its stimulus programs over the last few years, stocks have dropped; first in early 2010, with the winding down of QE1; then in spring 2011, when QE2 ended, and finally in 2012 with the end of Operation Twist. In fact, stocks rallied again only when the Fed announced or started a new round of stimulus.

And there are other considerations: The German election will come this weekend; the Syrian situation looks to be moving toward a solution that doesn't include military intervention although it is still full of obstacles.

Then we face those fiscal policy concerns; what could be some bruising budget battles as hard-line House Republicans vow to either shut down the government or not extend the debt ceiling unless Obamacare is defunded. It won't be defunded, and even the Wall Street Journal is calling the shutdown idea kamikaze missions.

Democrats and Republicans are far apart on spending issues. More important, perhaps, Republicans continue to insist they won’t continue funding government operations—or, when the time comes, increase the Treasury Department’s borrowing authority—until Democrats agree to defund or delay Obamacare. That’s simply not going to happen. No, this isn’t the first fiscal policy standoff of the Obama presidency. In the past, Democrats and Republicans always reached some last-minute agreement. This time each side has a lot less incentive to compromise. And there are apparently no backroom negotiations; there are no calls to dine with the opposition; there is no discussion going on at all at this point.  

What makes this time is different is that, in addition to having carved out hardline positions, neither side has an incentive to back down. In 2011, Obama was willing to give on his demand that revenue increases accompany spending cuts because he understood the apocalyptic consequences of failing to raise the debt ceiling. In late 2012, Republicans knew that the alternative to a small tax increase was for taxes to rise automatically by a much larger amount. The sequester, although unsatisfactory to both sides, was a built-in default position; and indeed that's what happened. This time, on the other hand, every party to the negotiation has reason to welcome the government shutdown that would result if they can’t reach a deal.

Start with the White House, which has been annoyingly open to concessions even when it has all the leverage. Now they are finding no constituency for caving. Add in that the elections have passed and lame ducks find it easier to grow a spine when they don't have to beg for campaign contributions. You can’t rule out the possibility that the White House will blink when the deadline gets close. At the very least, one can imagine Obama signing a short-term government funding measure (known as a continuing resolution) that leaves the automatic sequester cuts in place so long as it doesn’t touch Obamacare. Even if he were inclined to do this, Congressional Democrats seem less willing to support him than in the past. They believe they can demand much more in exchange for saving the GOP from a shutdown.

For the Tea Partiers, a shutdown would mean they forced their leadership to stand up to Obama, which plays well in their districts and the various organs of the conservative movement. And when the GOP inevitably bowed to public opinion and sued for peace, the Tea Partiers would be able to accuse their weak-kneed leadership of caving, thereby enhancing their status within the party, and greatly enhancing contributions.

Then you've got the old line GOP as represented by Speaker Boehner and McConnell from the Senate; they can't control the Tea Partiers, and it appears they will accept a government shutdown because they can't stop it. A shutdown would slow the economy and wreak havoc on people who rely on government services, and wreak havoc on companies that service the government and the people who receive government services, and there will be a massive fallout.

These consequences are nothing alongside the fallout from defaulting on our debt, which will happen if we don’t raise the debt ceiling by mid-October.So a government shutdown gives everyone a chance to sober up before we take on the substantially higher-stakes proposition of avoiding a debt default.

(Link to FOMC statement)

Tuesday, February 12, 2013 - The Battles to Come

The Battles to Come

by Sinclair Noe

DOW + 47 = 14,018
SPX + 2 = 1519
NAS- 5 = 3186
10 YR YLD + .01 = 1.97%
OIL + .48 = 97.51
GOLD + 3.00 = 1652.30
SILV + .17 = 31.22

The all-time high in the S&P 500 index is 1565. The all-time intraday high in the Dow Industrials is 14, 198.10, reached in October 2007. We are close.

After years of acting like deer in the headlights, investors are now throwing cash at the stock markets. Meanwhile, insiders are selling. Google's CEO is selling more than 40% of his stock. He didn't sell hardly anything from 2008 through now. There is a thought that insiders are selling now and mom and pop investors are buying, and once we work through this exchange, the markets will tank. This theory is being called the grand rotation.

Ahead of tonight’s State of the Union Address, the White House has followed custom by leaking tidbits from the speech. It is expected the president will talk about North Korea testing a nuclear bomb; this, for the third time, and bigger than ever. Apparently Mr. Obama will also announce that 34,000 out of 66,000 troops will come home from Afghanistan by this time next year, which sounds better than it is. That means the Pentagon is roughly on pace to hand over security to the Afghans by the end of 2014, as Mr. Obama has long promised. It also means there will still be more than 30,000 troops in Afghanistan, and I'm not sure what will be accomplished. 

The most recent Medal of Honor recipient, Clint Romesha was invited to attend the State of the Union speech as a guest of the first lady. Apparently he will spend the evening with his wife and buddies from his former unit, Black Knight Troop, 3-61 CAV. Romesha and his wife are celebrating their wedding anniversary. I don't know whether they will watch the address or not. Viewership is down to 38 million or so, less than back in the 70's. Romesha's story is inspiring. He was wounded on the battlefield during what has been described as one of the fiercest fights in the Afghan war, but he fought on, rescued his comrades and managed to hold onto an outpost that was technically indefensible. The young Sergeant is amazing; he can spend his evening however he wants.

President Obama will have a fight on his hands as he proposes a second-term agenda that includes new government investments, limits on guns, a revamped immigration system and new initiatives to kick-start the economy for middle-class Americans. The president will propose government action in education, manufacturing, infrastructure and clean energy. The president is also expected to announce his intention to begin negotiations on a free trade agreement with the 27-member European Union.

Mr. Obama already faces stiff opposition from Republicans who control the House and have repeatedly blocked some of his top priorities. On Tuesday, Republicans began using the Twitter hashtag #notserious to describe Mr. Obama’s expected speech; and that's the gentler of the hashtags; the not-so-gentle tag is #youlie.

House Speaker John Boehner this morning gave his own preview of the State of the Union as he  repeatedly challenged the president's willingness to go against his own party on issues that include reforms to social programs and spending.

Speaking with a small group of reporters this morning, Boehner said: "I think he'd like to deal with it [fiscal problems], but to do the kind of heavy lifting that needs to be done, I don't think he's got the guts to do it. He understands there is a spending problem. He understands that we need changes and reforms, and we need to solve these problems." When pressed about the severity of that statement, he modified, saying the president does not have the "courage."

Washington is in the midst of yet another self-inflicted, artificial fiscal crisis, facing a political showdown over "sequestration," the self-imposed round of across-the-board spending cuts to domestic programs and the Pentagon. The sequester was supported by both the White House and Congress as a way to encourage lawmakers to find common ground. Instead, they have been mired in a stalemate, unable to find an equitable solution for both sides. The deadline is March 1^st. It doesn't look good.

The State of the Union wasn't the only big speech of the week but it certainly has been overshadowing a speech by Janet Yellen, vice-chair of the San Francisco Federal Reserve; she talked about how slow this recovery has been and why. One of the culprits for the slower recovery? Fiscal policy. Specifically? We're not spending enough. Government spending, which usually provides a boost to the economy in the quarters following the recession, has been a net drag this time because the government is spending less than it normally does.

After passage of the 2009 economic stimulus package, which helped save or create millions of jobs, Congress all but gave up providing support to the labor market. Instead, in the last two years, the nation’s deficits have been reduced by $2.5 trillion, with the overwhelming majority coming from spending cuts. Yellen described fiscal policy as a headwind for the recovery: “Discretionary fiscal policy hasn’t been much of a tailwind during this recovery. In the year following the end of the recession, discretionary fiscal policy at the federal, state, and local levels boosted growth at roughly the same pace as in past recoveries. But instead of contributing to growth thereafter, discretionary fiscal policy this time has actually acted to restrain the recovery.”

Everybody that’s tried austerity in a time of no growth has wound up cutting revenues even more than they cut spending because it results in a downward spiral and it drags the country back into recession. The experience of Europe should be showing US policymakers that cutting spending in a weak economy backfires, squashing economic growth, which causes debt to expand. But it doesn’t seem like that lesson is taking hold.

Today, the Treasury Department reported the federal government had a rare surplus for January and is on track to run its smallest annual budget deficit since  2008. The government took in a surplus of $2.9 billion in January. That's the first monthly surplus since April, a month that benefited from income tax payments. January's budget benefited from an estimated $9 billion in extra revenue from higher Social Security taxes. That helped lowered the deficit through the first four months of the budget year to $290.4 billion — nearly $60 billion lower than the same period a year ago. The budget year began on Oct. 1.

For the entire year the Congressional Budget Office is forecasting the deficit will total $845 billion. If correct, that would be first time government hasn't run an annual deficit in excess of $1 trillion since 2008.

The deficit is the amount the government must borrow when its expenses exceed its revenue. Each month's deficit is volatile and can be affected by calendar quirks that shift government spending or revenue from one month to another. The annual deficit is projected to be smaller this year because the government is collecting more revenue this year, mainly because of faster job growth and higher taxes. At the same time, the government is spending less on some programs. That's in part because of spending cuts that were enacted under a 2011 agreement to raise the federal borrowing limit. Also, the improved economy has reduced demand for unemployment benefits and some other government programs, or some people have just used up their benefits and fallen from the rolls.

The Congressional Budget Office is projecting even smaller annual deficits of $616 billion in 2014 and $459 billion in 2015.

This weekend the G-20 will meet in Moscow. Today, the G-7 broke into the European trading morning with its first statement on exchange rates since September 2011, in which it pledged to keep economic policies directed at domestic needs and disavowed targeting currencies. The G-7 acknowledged Japan isn’t driving a devaluation and that its monetary policy is aimed at ending 15 years of deflation.

But after the G7 statement, an unnamed official of the G7 told reporters in the United States that markets had misinterpreted the statement and that it was in fact aimed at Japan, that it's okay for Tokyo if a weaker yen is the result of policies aimed at driving the economy, but it's not kosher if policies are aimed specifically at devaluing the currency.

What the G7 appeared to be saying - before the unnamed official signalled it was a warning to Tokyo - is that currency devaluation can be a byproduct, rather than a goal, on the long, hard road back to a sustained recovery. The Federal Reserve's quantitative easing, for example, an asset-buying program, is negative for the US dollar, but is aimed at juicing the economy, not driving down the greenback; theoretically anyway.

So, the G-7 issued another statement that said: "We, the G7 ministers and governors, reaffirm our longstanding commitment to market determined exchange rates and... that we will not target exchange rates."

And now the thinking is that this means Japan won't be buying US Treasury bonds as part of its stimulus plan because that would further weaken the yen. This also means there is a global race to devalue currencies.

China has become the world's biggest trading nation in goods. China's customs administration said the combined total for imports and exports in Chinese goods reached $3.87 trillion last year, edging past the $3.82 trillion trade in goods registered by the US commerce department. The US economy is still twice the size of the Chinese economy, but apparently we are more self contained.

A new report from the Project on Government Oversight says that regulators at the SEC derailed last year's efforts to reform the $2.6 trillion money market fund industry, and that many of those regulators are now working in the private sector, and the “revolving door” policy may have impacted policy and enforcement decisions. Yea, we're all shocked.

Friday, December 21, 2012 - If You Are Not a Member of an Organized Political Party, You Just Might Be a Republican

If You Are Not a Member of an Organized Political Party, You Just Might Be a Republican

by Sinclair Noe

DOW – 120 = 13,190
SPX – 13 = 1430

NAS – 29 = 3021
10 YR YLD - .05 = 1.75%
OIL – 1.24 = 88.89
GOLD + 9.80 = 1658.00
SILV + .04 = 30.06

The world as we know it did not end today. This means that I have a lot of Christmas shopping to complete in a very short period of time.

Last minute might working for shopping but it's no way to run a country.

Let's take a look at Plan B, excuse me, I think we've now moved on to Plan C. Will Rogers once said: “I'm not a member of any organized political party, I'm a Democrat.” Well, times change and now the unorganized party is the GOP. Consider: last week, Mitch McConnell tried to filibuster his own bill; this week John Boehner couldn't line up enough votes for a vote on Plan B, let alone Plan A.

Plan B was really a brilliant piece of legislation; it was sold as a tax cut for everybody with incomes under $1 million, except it actually raised taxes on everybody except the income earners between $200,000 and $1 million; everybody else would have been staring down a tax increase; low income earners and high income earners alike.

There were some other little dirty secrets in Plan B. House Republicans want to cut wasteful spending, so Plan B offered to eliminate the Office of Financial Research. Why that obscure little office? Because that’s where the Dodd-Frank Wall Street Reform & Consumer Protection Act provided for the breakup of too-big-to-fail banks that actually fail by means of an Orderly Liquidation Authority. Why would they want to axe that? Better question is how much did the big banks pay the politicians to try to kill that.

Maybe they think it would be impossible for the too big to fail banks to actually fail. No. The Office of the Comptroller of the Currency just had a closed-door “convention” to talk with bank directors about how safe the banks really are. Nineteen of the country’s biggest banks were looked at; they all failed.

Another big plan to cut spending contained in Plan B was to cut funding for the newly formed Consumer Financial Protection Bureau. The CFPB actually gets its funding from the Federal Reserve's Operating Expense Budget, not directly through Congress, so this was just a bald-faced attempt to kill the the CFPB because consumers don't need protection from the banksters, or because some politicians needed to boost their campaign coffers.

So, Speaker Boehner trotted out Plan B for a vote. Paul Ryan supported it; Eric Cantor supported it; Grover Norquist gave it his blessing, saying it wasn't really a tax increase. And even with the GOP stars of the House lining up in support, Boehner couldn't rally enough support to justify a vote.

Meanwhile, the guy sitting across from the negotiating table just won the Time Magazine Person of the Year Award. I'm guessing he'll put the award up on the shelf next to his Nobel Peace Prize. In case you have felt comfortable with reality, this is the new reality; and in this new reality, John Boehner now has lost his bargaining chips. He has shown he is unable to deliver votes in the House. Why would you even negotiate with someone who can’t deliver on a promise?

The two man game between Boehner and Obama is finished for now. Look for a shift to the Senate to make a deal with the White House. If that gets done, then the House will be left with nowhere to hide; meaning that if the House then fails, they will get the blame. Boehner had a horribly designed Plan and then he executed it in the worst possible manner, and after a quick Christmas recess he's going to come back and have a compromise plan that is likely to splinter the House Republicans even more.

And eventually a deal will get done, because taxpayers are getting fed up with this dysfunction, and because big business wants a deal. Which changes the old Will Rogers quote to a Jeff Foxworthy punchline; if you are not a member of an organized political party, you just might be a Republican.

NRA executive vice president Wayne LaPierre addressed the Sandy Hook shootings today for the first time since the massacre, and called for universal disarmament and a total ban on the sale of assault weapons. Just kidding.

LaPierre blamed video games and the media for the violence, because guns don't kill people, movies do. And the whole thing might have been avoided if we had armed police and armed teachers in every classroom.

In 1998, the SEC announced “Reg. ATS,” which authorized electronic communication networks to be used between traders to make deals outside exchanges. In 2001, the SEC made another big move, requiring stock prices to be quoted in decimals rather than fractions. This changed the minimum difference between stock prices from 1/16th of a dollar to 1/100th, preventing exchanges from making extra money on the spread between the price at which they sell a stock and the price at which they buy stocks. Then in 2005, the regulator implemented a set of rules collectively known as “Reg. NMS,” which, among other things, required brokers to route trades to the venue that offers the very best price; this regulation further squeezed the margins that the traditional exchanges and crated more competition among exchanges and upstart trading platforms.

Then, the rapid development of computer technology allowed upstart firms to set up their own trading platforms, and the new trading platforms attracted the high frequency traders using powerful computers located right next to the exchanges in order to cut down transmission times, allowing the high frequency traders to use algorithms to front-run consumer trades and scalp a fraction of a decimal from each trade.

So, the old, traditional stock exchanges don't make much money anymore, and that raises the question; why did a small Atlanta-based commodity and derivatives exchange called Intercontinental Exchange, or ICE, purchase the NYSE Euronext for $8.2 billion?

It's not for the stock exchange; it is for the derivatives exchange that the NYSE owned and operated out of London, called Liffe (pronounced LIFE), which stands for the London Interantional Futures and Options Exchange. There are relatively few derivatives exchanges, they tend not to compete directly with each other, they tend not to compete on price, and they’re extremely profitable. What do they do to make all this profit? They trade derivatives, which are not really equity positions or not really debt positions but more like a form of risk insurance, without claims paying reserves. This means the derivatives actually increase risk because of the false sense of security offered by having insurance, even if all the traders know the insurance is likely unable to pay off in the event of a problem, which just encourages far more risk than if someone actually had skin in the game.

But never-mind that that massive moral hazard. The derivatives can be traded, in a largely unregulated environment and that means big bucks for the traders. It also means systemic risk for the global economy, and that is why ICE bought the NYSE. How does this help the economy? How does this help finance companies to grow and employ people? Well, it doesn't. That's just old school thinking. As far as the iconic, historic trading floor of the New York Stock Exchange, well, it's nothing more than a tourist attraction.

Now, let's take a look at Banks Behaving Badly: The Year in Review. With thanks to : (Reuters)

Bank of America: the US Justice Department is seeking $1 billion in fines for troubled loans sold to Fannie and Freddie; MBIA’s lawsuit against Countrywide, which was disastrously acquired by BofA, rolls on; BofA is one of five banks participating in the $25 billion national mortgage settlement.

Bank of China: the families of Israeli students killed in a 2008 terrorist attack are suing the BOC for $1 billion “intentionally and recklessly” handling money for terrorist groups.

Bank of New York Mellon: a subsidiary paid $210 million to settle claims it advised clients to invest in Bernie Madoff’s ponzi scheme; the DOJ continues to investigate possible overcharges for currency trades that it says generated $1.5 billion in revenue.

Barclays: $450 million settlement in the Libor scandal; also fined by the FSA for mis-soldinterest rate hedges.

BBVA: settled overdraft suit for $11.5 million.

Citigroup: settled CDO lawsuit for $590 million; one of five banks participating in the $25 billionnational mortgage settlement; paid $158 million to settle charges it “defaulted the government into insuring” risky mortgages.

Credit Suisse: sued by NY state for allegedly deceiving investor in the sale of MBS.

Deutsche Bank: settled a DOJ mortgage suit for $202 million; FHFA fraud case is ongoing.

Goldman Sachs: FHFA fraud case is ongoing; after a ruling by federal appeals court, a class action lawsuit over MBS will go forward.

Crédit Agricole: sued by CDO investors two times.

HSBC: settled money laundering charges for $1.9 billion; set aside $1 billion for future settlements related to mis-selling loan insurance and interest rate hedges in the UK; Libor settlement still to be reached.

ING: settled charges that it violated sanctions against Iran, Cuba, etc. for $619 million.

JP Morgan Chase: being sued by NY state for MBS issued by Bear Stearns; class action lawsuit and criminal probe over failed derivatives trades in its Chief Investment Office; one of five banks participating in the $25 billion national mortgage settlement. And then there was this notice in the Murdoch Street Journal today: The Office of the Comptroller of the Currency, led by Comptroller Thomas Curry, is preparing to take a formal action demanding that J.P. Morgan remedy the lapses in risk controls that allowed a small group of London-based traders to rack up losses of more than $6 billion this year, according to people familiar with the company’s discussions with regulators. The OCC, the primary regulator for J.P. Morgan’s deposit-taking bank, isn’t expected to levy a fine, at least initially.

Mitsubishi UFJ: paid an $8.6 million fine for violating US sanctions on Iran, Sudan, Myanmar and Cuba.

Morgan Stanley: fined $5 million for improper investment banking influence over research during Facebook’s IPO.

Royal Bank of Scotland: $5.37 billion shareholder lawsuit related to 2008 rights issuance; set aside $650 million to cover claims it mis-sold payment protection products; also fined by the FSA for mis-sold interest rate hedges.

Santander: fined by the FSA for mis-sold interest rate hedges.

Société Générale: rogue trader Jerome Kerviel loses appeal his appeal 3-year sentence for trades that generated $6.5 billion in losses.

Standard Chartered: $340 million fine paid to NY state department of financial services for allegedly hiding the identity of customers in transactions with Iran and drug cartels; $327 millionpaid to the Federal Reserve and US Treasury’s anti-money laundering unit.

State Street: fined $5 million for lack of CDO disclosure.

UBS: $1.5 billion Libor fine and two traders criminally charged; rogue trader responsible for $2.3 billion loss found guilty of false accounting. The fine for Libor? Anything under $2 billion is considered a victory for UBS, or as they say at UBS, “half a Adoboli”.

Wells Fargo: Federal lawsuit over mortgage foreclosure practices ongoing; paid $175 millionover mortgage bias claims; one of five banks participating in the $25 billion national mortgage settlement.