Monday, July 22, 2013 - One Can At a Time

One Can At a Time

by Sinclair Noe

DOW + 1 = 15,545
SPX + 3 = 1695
NAS + 12 = 3600
10 YR YLD un = 2.48%
OIL – 1.05 = 107.00
GOLD + 38.50 = 1336.20
SILV + 1.01 = 20.64

Sometimes great wealth is built slowly, just a little at a time. If you can make a small, consistent, repeatable profit – it adds up over time. For example, Americans consume 90 billion aluminum cans each year. If you could get a small profit from each can sold, say one-tenth of one cent on each can, why you could rack up about $5 billion in profits per year. What would you have to do? Well, some companies mine the aluminum, some companies fabricate the actual cans, some companies transport the cans; and then there's Goldman Sachs, which hoards the aluminum, keeping it off the market to influence the available supply.

You didn't know that Goldman Sachs was in the aluminum can business? Well, they aren't. They are in the aluminum warehousing business. Three years ago, Goldman bought Metro International, a warehousing firm in Detroit. Before Goldman bought Metro, aluminum customers would order aluminum and it would be retrieved and shipped to its destination within about six weeks. Now, Goldman makes that same delivery in about 16 months. The delays push up the price.

Longer waits might be written off as an aggravation, but they also make aluminum more expensive nearly everywhere in the country because of the arcane formula used to determine the cost of the metal on the spot market. The delays are so acute that Coca-Cola and many other manufacturers avoid buying aluminum stored here. Nonetheless, they still pay the higher price.

Metro International holds nearly 1.5 million tons of aluminum in its Detroit facilities, but industry rules require that all that metal cannot simply sit in a warehouse forever. At least 3,000 tons of that metal must be moved out each day. But nearly all of the metal that Metro moves is not delivered to customers, it is shuttled from one warehouse to another. Goldman doesn't actually do anything with the aluminum, they just hoard it until the price goes up. And in the 3 years since they purchased Metro, the price has almost doubled. (An article in the NYTimes over the weekend explained the scam in great detail.)

For much of the last century, Congress tried to keep a wall between banking and commerce. Banks were forbidden from owning nonfinancial businesses (and vice versa) to minimize the risks they take and, ultimately, to protect depositors. Congress strengthened those regulations in the 1950s, but by the 1980s, a wave of deregulation began to build and banks have in some cases been transformed into merchants, or warehousers. Over the past decade, a handful of bank holding companies have sought and received approval from the Federal Reserve to buy physical commodity trading assets.

Of course, controlling the physical flow of a commodity into and out of a warehouse, provides a tremendous information advantage when it comes to trading that commodity. And it's not just aluminum; the banks are also involved in storing other commodities such as copper, and oil, and almost anything.

In 2010, JPMorgan quietly embarked on a huge buying spree in the copper market. Within weeks — by the time it had been identified as the mystery buyer — the bank had amassed $1.5 billion in copper, more than half of the available amount held in all of the warehouses on the exchange. Copper prices spiked in response.

In 2011, an internal Goldman memo suggested that speculation by investors accounted for about a third of the price of a barrel of oil. A commissioner at the Commodity Futures Trading Commission, the federal regulator, subsequently used that estimate to calculate that speculation added about $10 per fill-up for the average American driver. Other experts have put the total, combined cost at $200 billion a year. What does the average American receive for the additional prices we pay? What do we get for that nearly $700 a year we all pay on average? Not a damn thing.

Every time Goldman CEO Lloyd Blankfein and JP Morgan CEO Jamie Dimon testify before Congress they offer up boilerplate about how their companies' "market making" helps to "allocate capital," spark "innovation," and "hedge against risk." But it's all a pack of lies. They increase risk by putting traffic jams in the supply chain; they stifle innovation by artificially inflating prices; and the only allocation of capital is the money they skim going right into their own wallets.

The Commodities Futures Trading Commission has put Wall Street banks and other big traders on notice for a possible investigation of their metals warehousing businesses following years of complaints about inflated prices. I'm not holding my breath that anything will actually get done, still..., gold prices rose by more than 3 percent today, their biggest gain of the year.

The U.S. Commodity Futures Trading Commission (CFTC) last week sent a letter to firms ordering them to preserve emails, documents and instant messages from the past three years

When it comes to aluminum, cotton, coffee, oil, wheat, and copper the big banksters have been charging all manner of rents and premiums for doing nothing other than controlling supply through creating artificial delays to drive up prices then reap the windfall of their own manipulation. Goldman Sachs is doing to aluminum exactly what Enron did to energy in the late 1990s and early 2000s. The price of everything is now rigged; from your morning cup of coffee to the gas in your car's tank to interest rates based on Libor, to everything. The question is: How long are the American people going to allow themselves to be fleeced by these fat cats?

Detroit may be alone among the nation’s biggest cities in terms of filing for bankruptcy, but it is far from the only city being crushed by a roiling mountain of long-term debt. From Baltimore to Los Angeles, and many points in between, municipalities are increasingly confronted with how to pay for these massive promises. The Pew Center for the States, in Washington, estimated states’ public pension plans across the U.S. were underfunded by a whopping $1.4 trillion in 2010.

Chicago recently saw its credit rating downgraded because of a $19-billion unfunded pension liability that the ratings service Moody’s puts closer to $36 billion. And Los Angeles could be facing a liability of more than $30 billion, by some estimates.

Early this year, the Pew Center released a survey showing that 61 of the nation’s largest cities — limiting the survey to the largest city in each state and all other cities with more than 500,000 people — had a gap of more than $217 billion in unfunded pension and health care liabilities. While cities had long promised health care, life insurance and other benefits to retirees, “few ... started saving to cover the long-term costs.”

No one really expects a rush on the bankruptcy courts nationwide, however — the unfunded pensions and health care liabilities notwithstanding. In a sense, that’s why the Detroit bankruptcy filing, at $18 billion or more the largest municipal bankruptcy ever, is so unique. Are Detroit’s woes the leading edge of a national public pensions crisis? No. State and local pensions are indeed underfunded, but the funding is becoming a bit more realistic.

So was Detroit just uniquely irresponsible? Again, no. Detroit does seem to have had especially bad governance, but for the most part the city was just an innocent victim of market forces.

What? Market forces have victims? Of course they do. After all, free-market enthusiasts love to quote Joseph Schumpeter about the inevitability of “creative destruction” — but they and their audiences invariably picture themselves as being the creative destroyers, not the creatively destroyed.

Sometimes the losers from economic change are individuals whose skills have become redundant; sometimes they’re companies, serving a market niche that no longer exists; and sometimes they’re whole cities that lose their place in the economic ecosystem. Decline happens.

One reason municipal bankruptcies are rare is because they don't really solve the underlying problems. And the Emergency financial manager of Detroit is now going to face this problem. One of the first acts of the Emergency financial manager is to order the destruction of abandoned buildings. Some 78,000 buildings stand abandoned, including fire stations and hospitals and many private houses. Once grand apartment blocks, complete with decorative Art Deco cornices,lie empty, just the occasional ricochet of kids through them, then left to the wind. One of these has the word "Zombieland" emblazoned above its glassless windows, an apt description of a bleak cityscape.

The pictures are like stills from one of those end-of-the-world disaster epics – you half expect to see a zombie emerging from the dust. The cost to demolish what's left of Detroit is pegged at about $100 million. They don't have enough money to do the job.

And even if they could, they would still have to build something. Or maybe they could just turn the whole city, and all those empty buildings into warehouses for Goldman Sachs.

New research from economists at Harvard and Berkeley finds big differences in income mobility in different parts of the US, with most of the Southeast offering fewer opportunities to climb the income ladder, and places like New York, Los Angeles and San Francisco offering more.

So what accounts for these geographic differences? A mix of different incomes in the neighborhood works to provide greater opportunity for advancement; also,  tax expenditures aimed at low-income taxpayers can have significant impacts on economic opportunity.

Of course, the easiest way to strike it rich in America is still to win the genetic lottery and be born into a rich family: Children of the 1 percent are at least eight times more likely to make $100,000 or more by the time they're 30 years old than children with parents in the lower 50 percent of incomes.

We've talked on several occasions about the high costs of income inequality. If you hear that it plays an important role in health, your first thought might be that there is a strong relationship between income and health within any country. In any nation you will find that people on high incomes tend to live longer and have fewer chronic illnesses than people on low incomes. For instance, rich Americans are healthier on average than poor Americans.

Yet if you look for differences between countries, the relationship between income and health fades away. For instance, the US is much richer than Greece, for example, yet Americans on average have a lower life expectancy than Greeks. More income gives you a health advantage with respect to your fellow citizens in your own country, but not with respect to people living in other countries.

Once a floor standard of living is attained, people tend to be healthier when three conditions hold: they are valued and respected by others; they feel ‘in control’ in their work and home lives; and they enjoy a dense network of social contacts. Economically unequal societies tend to do poorly in all three respects: they tend to be characterized by big status differences, by big differences in people’s sense of control and by low levels of civic participation. Unequal societies, in other words, will remain unhealthy societies – and also unhappy societies – no matter how wealthy they become.

Back in 1990, the Journal of the American Medical Association reported the United States ranked 20^th on life expectancy among the world's 34 industrialized nations. The US now ranks 27^th, despite spending more on health care than any other nation. It seems Americans are losing ground globally by every health measure. According to a report on The State of US Health, in the US, males and females are living longer than in the past, but their progress lagged behind that of their peers in other wealthy countries. 

To really understand America’s poor health standing globally we need to look at “the social determinants of health,” those social and economic realities that define our daily lives.

None of these determinants matter more, these researchers contend, than the level of a society’s economic inequality, the divide between the affluent and everyone else. Over 170 studies worldwide, as reviewed by the Journal Social Science and Medicine, have so far linked income inequality to health outcomes. The more unequal a society, the studies show, the more unhealthy most everyone in it — and not the poor alone.

Researchers sometimes disagree about the pathways leading from inequality to worse population health. The most consistent interpretation of all the evidence is that the main route hinges on the way inequality makes life more stressful. Chronic stress is known to affect the cardiovascular and immune systems and to lead to more rapid aging; it wears down our immune system and leads to more disease. This same stress drives people to seek relief in unhealthy habits. They may do drugs or smoke — or eat more “comfort foods” packed with sugar and fat. Inequality makes social relations more stressful, by increasing status differences and status competition. These effects are important: Americans living in more equal states live around 4 years longer than those living in more unequal states.

Inequality has an equally potent impact on policy decisions around health. And as the US has now become the world's most unequal major nation, our health outcomes have deteriorated. There is no question that the US is the largest economy but these new findings raise some questions about how advanced we are.

Thursday, June 27, 2013 - To Not Trade in Principles

To Not Trade in Principles

by Sinclair Noe

DOW + 114 = 15,024
SPX + 9 = 1613
NAS + 25 = 3401
10 YR YLD - .05 = 2.48%
OIL + 1.35 = 96.85
GOLD – 24.40 = 1201.80
SILV - .01 = 18.61

First some economic news, then we'll head to Ecuador.

Consumer spending rose a seasonally adjusted 0.3% in May, reversing a 0.3% decline in April. So, for the past 2 months, it's a wash. Adjusted for inflation, the numbers are slightly lower. Consumers bought more cars and trucks in May and spent a bit more on gasoline, reflecting higher prices at the pump. They also ate outside the home more often and shelled out extra cash for housing, financial advice, insurance and recreational activities. Since incomes rose faster than spending in May, the savings rate of Americans climbed to 3.2% from 3%. That’s the highest level since December and well above the 2013 low of 2.2%.

In a separate report, the Labor Department reported a 9,000 drop in first-time jobless claims for the last week.

The National Association of Realtors reports pending home sales jumped in May to reach a six-year high, The NAR's pending home sales index climbed 6.7% to 112.3 in May, from a downwardly revised 105.2 in April. The index was up 12.1% from May 2012 levels. 

Freddy Mac reports the average rate for the 30-year fixed-rate mortgage rose to 4.46% in the week ending June 27, the highest rate in a couple of years, and up from 3.93% in the prior week. That gain of 53 basis points is the largest weekly change since 1987. A year ago, the 30-year rate averaged 3.66%.

Earlier this week, Dallas Fed President Richard Fisher likened market participants to “feral hogs” for pushing bond yields higher. Today, three more top Federal Reserve officials took issue with the increase in interest rates. William Dudley, the president of the New York Fed, Fed Gov. Jerome Powell and Atlanta Fed President Dennis Lockhart were less colorful but more pointed.

Dudley said expectations of an earlier rate hike were “quite out of sync” with both FOMC statements and the expectations of most FOMC participants,” and he said any rise in short-term rates “is very likely to be a long way off.”

Powell, in a separate appearance, said the spike in bond yields over the past month is “larger” than would be justified by any “reasonable reassessment” of the path of Fed policy. Powell said that if the market is now pricing in an increase in rates in 2014, “that implies a stronger economic performance than forecast either by most FOMC participants or by private forecasters.”

And Lockhart said that some in the markets appeared to mishear what Bernanke said. The three Fed officials were generally upbeat about the economic outlook despite what Lockhart admitted were “weak inflation readings, mixed vital signs, and choppy quarter-to-quarter growth statistics.”

As expected, the Commodity Futures Trading Commission said it is suing Jon Corzine, who was MF Global’s chief executive, and the firm’s former assistant treasurer Edith O’Brien for the unlawful use of about $1 billion in customer funds that “harmed thousands of customers and violated fundamental customer protection laws on an unprecedented scale.”

The CFTC, cites internal MF Global phone recordings as evidence in alleging that Corzine knew the company was running out of cash and directed it to keep paying out obligations without asking where the money came from. The CFTC cites one MF Global official’s comment that “we have to tell Jon that enough is enough. We need to take the keys away from him.”

CFTC said Corzine is charged with being more than a passive actor in the downfall of MF Global. The CFTC is seeking financial penalties against Corzine and O’Brien and also to ban them from trading and registering to work in the derivatives markets overseen by the agency. MF Global has agreed to settle with regulators and payback any customers who are still owed money as well as pay a $100 million fine. I still have a hard time understanding how this is not a criminal matter.

The SEC is now investigating the relationship between Thomson Reuters and the Institute for Supply Management. ISM manufacturing data was sent out early on June 3^rd to Thomson Reuters high-speed clients, or high frequency traders, and there were trades based on the early release of data; by some estimates more than $28 million in trades in a matter of 15 milliseconds prior to the official release.

Earlier this week President Obama announced his plans to fight global warming. The GOP response was that it would kill jobs. Today, Christine Lagarde, the managing director of the International Monetary Fund, said that climate change will drive job creation. “Climate change will create jobs. It will create disasters before it creates jobs, but it will create jobs.” Clean up on Aisle 3.

Where in the world is Edward Snowden? Right now, it looks like Snowden is doing his best imitation of Tom Hanks in the movie “The Terminal”; remember that Hanks played a guy who's country was lost while he was on an airplane, and when he landed, his passport was no longer valid; he ended up stuck in a no-man's land in the terminal of an airport. The best guess is that Snowden is in the terminal of the airport in Moscow, not quite admitted into Russia. At some point he will leave the terminal. Where will he go?

Well, he's already been in Hong Kong and Moscow; and in each location the governments of China and Russia have refused extradition; certainly a bit of a slap on the diplomatic wrist, but that's China and Russia. And if Snowden were to stay in China or Russia, at some point the State Department would step up pressure, and he might be extradited. So, where will he go?

The possible candidates for an ultimate landing spot include Iceland and Ecuador. Why would either country accept Snowden? Well, for Iceland the thinking is that they've already kicked out the bankers; they have no real reliance on the US or for that matter, on our European allies. Iceland is reverting back to fishing, and they really just don't care. For Ecuador, it's a little bit different.

The US is Ecuador's largest trade partner. Ecuador now sends about 40 percent of its exports to the United States, including crude oil, seafood, fruit and nuts, cocoa and flowers. The nation’s total exports to the United States tallied up to $9.6 billion in 2011. Right now, Ecuador has two major trade deals with the US; the Andean Trade Practices and Drug Eradication Act, which is scheduled to expire this summer; and the General System of Preferences, which gives Ecuador and about 100 other countries duty free entry for certain products.

Today, Ecuador's Communications Minister announced that Ecuador was renouncing trade benefits with the US because of American pressure not to offer asylum to Snowden. He claims the trade pact has become a “new instrument of blackmail” and says Ecuador “does not accept threats from anybody, and does not trade in principles, or submit to mercantile interests, as important as they may be.”

Meanwhile, the Washington Post has jumped into the fray with an editorial accusing Ecuadorian President Correa of suppressing media while aiding the self-proclaimed whistleblower of another country.

President Correa responded with a tweet saying “The nerve! Do you realize the power of the international press? They have managed to focus on Snowden and the 'evil' in countries that 'support' him, making us forget the terrible things done against the American people and the entire world.”

You may recall that Julian Assange, the founder of Wikileaks has spent the past year in an Ecuadorian embassy in London to avoid extradition. What's the deal with Ecuador?

One thing you probably won't hear in the Washington Post is the back story, which involves a 20-year battle against Chevron, the oil company. Texaco, now owned by Chevron, dumped 16 billion gallons of toxic water into streams from the early 1970s until 1992, harming the environment and the people who used them for drinking water, cooking and cleaning. Texaco never tried to prevent this from happening, never cleaned up the contamination or compensated victims. That is a fact even Chevron does not deny.

An Ecuadorian court has held Chevron liable, to the tune of $19 billion. Chevron refuses to pay because it says the Ecuadorian judiciary and American plaintiffs’ lawyers conspired in a vast racketeering plot to extort from the multinational. And rather than pay the Ecuadorian judgment, Chevron sued the Ecuadorian plaintiffs (the indigenous indians) and the lawyers. Chevron itself stripped almost all of its assets from Ecuador in recent years in anticipation of losing the case. And since Chevron has removed all assets from Ecuador, the Ecuadorians are now forced to seek judgment through third countries. That's not so easy.

Chevron has roughly $15 billion in assets in Canada. In Toronto, in an unusual decision without any precedent in Canadian law, a court found that because Chevron operates only through subsidiaries, the case must be stayed. The vast majority of Chevron's assets lie with its subsidiaries, not in its corporate shell. Chevron also operates via its subsidiaries in dozens of countries around the world that could be targeted. The company does not even own its own building housing its headquarters near San Francisco.

Knowing it cannot win the Ecuador battle on the merits, Chevron also exercised improper political influence over governments and courts. In Argentina, after an order to freeze Chevron's assets in that country, Chevron suddenly decided to "invest" $1.5 billion in a large gas field with the local state-owned oil company, YPF; followed by an advertising and a lobbying campaign – freeze lifted.

The battle between Chevron and Ecuador has more twists and turns than a bag full of pretzels; the same could be said of the strange story of Edward Snowden, Booz Allen Hamilton, and the Carlyle Group. What is becoming more apparent is the growing corporate influence on issues which were once considered the purview of governments. 

January, Wednesday 11, 2012

DOW –13 = 12449
SPX +0.4 = 1292
NAS + 8 = 2710
10 YR YLD -.07 = 1.90
OIL -.51 = 101.73
GOLD +10.80 = 1644.00
SILV + .03 = 30.07
PLAT + 30.00 = 1500.00

Fitch Ratings Agency reminds us all that Europe isn’t in good shape. Fitch says the ECB should take a more active role in buying Eurozone debt to avert a cataclysmic collapse. Fitch said they’re not really predicting a collapse of the Euro; just that it is a concern. Meanwhile, Fitch downgraded Hungary to junk status. The euro hit a 16 month low of $1.27. Germany reported its economy shrank in the fourth quarter. European regulators will recommend blocking the deal that would have seen Germany’s largest stock exchange buy the New York Stock Exchange. France says they have not been informed of an imminent decision to cut the country’s credit rating.  In Italy, the banks stopped lending and organized crime has stepped in to fill the void for short-term lending, meaning the Mafia has become the number one bank in Italy.  And the rest of the Eurozone seems determined to grind Greece into the ground. Grecian formula austerity has seen unemployment jump from 13% to 19%. Rates of homelessness, suicide, crime, and HIV have skyrocketed; and public hospitals are facing severe shortages – they’ve run out of bandages and similar necessities. And Germany’s Angela Merkel and the IMF’s Christine LaGrande warn that Greece won’t get any more bailout money if they don’t pull themselves up by the bootstraps. So, it’s not like Europe had a cataclysmic collapse – not today, anyway.

Back in the USSA, life is good. We have seen “ongoing improvements in economic conditions in recent months”, so says the Federal Reserve in the most recent Beige Book. Economic activity increased “at a modest to moderate pace.” Holiday sales were better this year. Price pressures are limited. Tourism is down because of a lack of snow in some areas. The Sierra Nevada region is experiencing the driest winter in more than 100 years. This results in winners and losers. Losers include tourism; in a few months the farmers will feel the effects; natural gas prices have dropped, in part due to the mild winter weather. One bright spot is construction, which is unhampered by the weather. A lack of snow and cold has allowed road building to go uninterrupted over at least 80% of the country.

But I digress: the White House is touting the economic growth trend and unveiling tax proposals aimed at encouraging US firms to keep jobs at home; they’ve come up with a catchy description – insourcing jobs. The new proposals include making research and development tax credits permanent, write-offs for new equipment, and hiring credits for adding new workers.

The Dodd-Frank financial oversight law included provisions to boost protection and segregation of customer collateral. Of course, not much of Dodd-Frank has actually been enacted because the bankers objected to the excessive regulation. Today, the Commodities Futures Trading Commission adopted a measure to protect swap traders’ collateral used in trades to reduce risk. The move prevents commingling customers funds with a firm’s own money, at least on swaps trades – no protection for the futures traders. Typically, large corporations and banks dominate OTC swaps; typically farmers and smaller traders are involved in the futures markets. What motivated the move to increase regulation? MF Global. The regulators still haven’t been able to find the money lost by MF Global; there’s $600 million to $1.2 billion floating around; they don’t know how much; they don’t know where it is; they don’t know how it disappeared; they don’t know blank from Shinola, but have no fear – the regulators are investigating; that’s unofficial but sources close to the situation say they are investigating.

At some point you have to think the regulators are being told to wear blinders, they must be forced to look the other way, they must have received direct orders to do anything other than their jobs.

Meanwhile, if you’re wondering whatever happened to the Dodd-Frank Act – well, it is still being debated. The banks are saying there will be dire consequences if they are forced to follow the rules, especially onerous is the Volker Rule, designed to prohibit banks from making risky trades for their own accounts with money they don’t have. The Volker Rule wouldn’t prohibit banks from making risky trades for their own accounts – just that if the risky trades go bad, they can’t come beggaring for bailouts from taxpayers; you know – like they did 3 years ago.

The Volker Rule, named after former Federal Reserve Chairman Paul Volker, who helped write the rule, would basically restore a little of the protections old Glass–Steagall Act. Here’s how Volker described the rule to keep the banks from gambling with taxpayer backed money: "If you are going to be a commercial bank, with all the protections that implies, you shouldn't be doing this stuff. If you are doing this stuff, you shouldn't be a commercial bank."

The financial industry has been fighting the Dodd-Frank Act and very specifically they have been fighting the Volker Rule – they say it would crash the economy. The former customers of MF Global know what a bummer a crash can be; they’re just thankful it’s not a cataclysmic collapse.

The journal “Nature” released results of a new report that shows the Milky Way has 100 billion stars and they updated earlier estimates that there are 50 billion planets circling those stars – Now they say a recount shows there are 160 billion planets. There might be more but the chief planet counter was tired and needed a vacation. Our galaxy is much bigger than you knew, which means the universe is infinitely bigger than we imagined; and you and I are just specks in the great beyond, and our own individual problems are nearly non-existent in the grand scheme of things.  So, prioritize and have a great day.