Thursday, January 10, 2013 - California As A Role Model

California As A Role Model

by Sinclair Noe

DOW + 80 = 13,471
SPX + 11 = 1472
NAS + 15 = 3121
10 YR YLD + .04 = 1.89%
OIL + .77 = 93.87
GOLD + 16.80 = 1675.80
SILV + .50 = 30.96

So, those are the closing numbers. At least, we think those are the closing numbers; give or take; kinda, sorta. It could be off a bit. The stock exchanges have a bit of a problem with something called the consolidated tape, which provides trade data. Seems it went out for about an hour at the New York Stock Exchange Tuesday, making it tough to see in anyone had traded in 165 securities. And the NYSE's screw up follows a similar snafu last week at the Nasdaq. The consolidated tape at Nasdaq went totally blank last week. The consolidated tape is the record of securities transactions across all US exchanges. If you're keeping track, the exchanges have recently had to admit they can't always run IPO's competently, there are some problems with faulty data and trade data. So, that's the closing numbers, more or less.

The World Economic Forum is underway in Davos, Switzerland. The annual gathering of the wealthy and influential includes the publication of a survey which outlines the concerns of about 1,000 experts. This year's report seemed to focus on the interplay between the environment and the economy, saying: “A sudden and massive collapse on one front is certain to doom the other’s chance of developing an effective, long-term solution.

That diagnosis underscores several points of contention in the United States, where there is a push for increased domestic energy production despite concerns from green groups about environmental impacts.The report said governments should invest in infrastructure upgrades to bolster resiliency to climate change and associated natural disasters.

Even if policymakers can recover to handle climate change, the report said experts wondered if we have "already passed a point of no return and that Earth’s atmosphere is tipping rapidly into an inhospitable state.”

While recognizing climate change is happening, the report said policymakers will need to become more comfortable making decisions without a conclusive set of data. At the same time, governments must boost research funding to gather more complete information.

The report also highlighted the income divide between rich and poor, ballooning government deficits, water shortages and aging populations as causes for concern.

For the past three years, the focus of Davos was the Euro-zone debt crisis. There seems to have been a shift away from worries about Euro-land and back to the political and budgetary process in the US, and whether the dysfunction will devolve into a political fistfight. Of course, it doesn't really matter what the rich folks think in Davos; the Forum isn't an official anything, just a lot of talk.

When it comes to most of the major political disputes in Washington, congressional Republicans insist Democrats focus on reducing the debt Republicans built up during the Bush/Cheney era. It underpins everything from the budget fight to the debt ceiling to efforts to expand public investments. What the debate tends to ignore is the debt reduction that's already happened; nearly $2.4 trillion in deficit reduction scheduled for the next ten years has already been signed into law. Roughly three-quarters of the deficit reduction has come is in the form of spending cuts.

As we enter the new year, the nation's most pressing economic problem remains the slow recovery, particularly the job market. Unemployment is still far too high and the rate at which we are creating new jobs is far too low. At the present rate of job growth, we are still several years away from full employment. The ability of monetary and fiscal policymakers to combat the slow recovery is constrained by three things: fear that aggressive monetary policy will drive up inflation to an unacceptable level; fear that tax cuts or increases in spending will worsen our long-run debt problem; and political disputes over taxes and the size and role of government.

There is debate that fiscal and monetary policymakers should do more to push an economic recovery, but the recent minutes from the last FOMC meeting indicate some reticence on the part of the Fed, and the question then becomes whether the Fed will try to increase rates and exit quantitative easing before the economy can enter a virtuous circle of growth. From the fiscal side, the best we can hope for is that the political standoffs over the deficit don't become disruptive.

Exactly how to avoid a political brawl remains to be seen. The debt ceiling will be breached some time in February. If nothing is done, the government will soon be unable to pay all of its bills in a timely manner. This unprecedented event would profoundly damage the government’s credit rating and send the financial system into a tailspin. So far, President Obama isn't giving in. Last week, he said he: “will not have another debate with this Congress over whether or not they should pay the bills that they've already racked up through the laws that they passed.”

So, what are the options? Well, one idea floated is the $1 trillion dollar platinum coin. And I'm sure we'll talk more about this plan in coming days and weeks; it's really a pretty good idea in some ways, and far too fantastic in others. The President could ignore the debt ceiling and direct the Treasury to issue more bonds to cover its obligations; a move that would likely result in even more political acrimony. And another plan has been used on multiple occasions in the nation's history, and as recently as 2009 – print IOU's.

The President could threaten to issue scrip — “registered warrants” — to existing claims holders (other than those who own actual government debt) in lieu of money. Recipients of these I.O.U.’s could include federal employees, defense contractors, Medicare service providers, Social Security recipients and others.

The scrip would not violate the debt ceiling because it wouldn't constitute a new borrowing of money backed by the credit of the United States. It would merely be a formal acknowledgment of a pre-existing monetary claim against the United States that the Treasury was not currently able to pay. The president could therefore establish a scrip program by executive order without piling a constitutional crisis on top of a fiscal one.

To avoid any confusion with actual Treasury debt, and to be consistent with the law governing claims against the United States more generally, the scrip would not pay interest in most cases. And unlike debt, it would have no fixed maturity date but rather would become redeemable in cash only when the secretary of the Treasury was able to certify that there’s enough money available in the Treasury’s general fund to cover it.

The idea may sound crazy, but remember that California did it in 2009; the state issued registered warrants, totaling $2.6 billion to individual and business claimants, including recipients of aid programs, recipients of tax refunds and government contractors. Those holders who needed immediate cash were usually able to sell their registered warrants to banks at face value, though some institutions limited such purchases. Eventually a budget was worked out and the scrip was redeemed for cash. California continued to pay its public debt service in cash and on schedule and never lost an investment-grade credit rating.

California is expected to post a budget surplus of $851 million for the fiscal year that begins July 1. The solution was a combination of deep budget cuts and billions in new taxes approved by voters last year. Schools will be the big winner in the governor's new spending plan, receiving $56.2 billion in state funds, an increase by $2.7 billion over the last year. That funding is set to jump to more than $66 billion by 2016. The budget also dedicated an additional $350 million to the state’s public insurance program, Medi-Cal, to help implement President Obama’s healthcare law. This is a tentative surplus, and there is plenty of debt, but this is another small positive step. The plan in California is to increase spending slightly, about 5%, in the upcoming year after several years of budget cuts. California as a role model; go figure. 

Nearly a third of the nation's homeowners have no mortgage at all, according to an estimate released by real estate website Zillow. The free-and-clear class includes, predictably, retirees who have chipped away at their debts for decades, but also a surprisingly high percentage of young people and those who live in relatively affordable regions. Zillow found that the nation's most elderly were the most likely to own their homes, with 77% of those older than 85 owning their homes outright, followed by those ages 74 to 84, at about 62%. One outlier was those homeowners ages 20 to 24. Out of that relatively young demographic, about 34% owned their homes outright.

As the economy picks up, regions with high percentages of free-and-clear owners probably will get a boost. That means there is a lot more disposable income, and that is positive for the local economies. Out of the nation's largest metro areas, Pittsburgh, Tampa, New York, Cleveland and Miami had the highest percentages of mortgage-free homeowners. Washington, Atlanta, Las Vegas, Denver and Charlotte, N.C., had the lowest.

Tuesday, June 19, 2012 - There is No Escape for the Fed - by Sinclair Noe

06192012 Script


DOW + 95 = 12,837
SPX + 13 = 1357
NAS + 34 = 2929
10 YR YLD +.04 = 1.62%
OIL - .12 = 84.23
GOLD – 10.80 = 1618.90
SILV - .32 = 28.52
PLAT – 2.00 = 1487.00


The Federal Reserve FOMC is meeting today and tomorrow to determine monetary policy for the next few weeks. Here is what they will probably say tomorrow. They won't lower interest rates; interest rates are at zero; interest rates are actually already negative when you consider the effects of inflation. Operation Twist is scheduled to expire in about two weeks. The idea behind Operation Twist is that the Fed sells shorter-term securities and buys longer-term securities with the goal of reducing long-term interest rates to encourage borrowing and spending. The yield on the 10-year note is 1.62%, so rates are pretty low even though the Twist hasn't been able to encourage a big round of borrowing and spending. Low interest rates alone have not been enough to create demand. Operation Twist is the Fed pushing on a string – which is to say, supply side economics is a crock.


Here's the conundrum for the Fed – how do they exit Operation Twist without creating a problem, possibly unwinding those nice, ultra-low interest rates? The Fed might announce a limited extension of the Twist, maybe to September or they might just offer a soft extension – saying something like: “we will monitor long-term rates and stand ready to maintain stability”. 


As far as QE3 – not likely. Europe hasn't collapsed, not today; but due to the possibility the Euro economy might implode in the not too distant future, the Fed will keep its powder dry. That's not totally accurate. Just like Operation Twist, QE 1&2 never really included an exit plan. The truth is that the Fed has continued to be the biggest buyer of Treasuries, they are propping up the market, they are pushing on a string and again confirming the fallacy of supply side economics. QE never went away, it just hasn't been effective and the Fed let it expire (in name only) while continuing to maintain an accommodative policy and this way they didn't have to answer questions about why QE was so ineffective. 


Another option for the Fed tomorrow is to announce they will maintain the ZIRP even longer than previously announced. It is already scheduled to last until 2014, they might say it should remain in place until 2015 or until such time as an asteroid destroys life on earth as we know it. Here is the bottom line – the Fed can't exit their easy money policy; if they try to exit, it would get ugly; so, tomorrow they will say something which will indicate they are not trying to exit, and the markets will be somewhere between mild disappointment and moderate pleasure. 


The payrolls report shows job growth has averaged 96,000 in the past three months, well below the 252,000 rate in the three months before that.


The payrolls number is the net change between job additions and separations; the difference between hirings and firings. The Job Openings and Labor Turnover Survey (Jolts) provides some details on the labor markets. The April report  shows the spring payroll weakness reflects a very steep drop in hiring, not a rise in job losses.  According to the Jolts report, new hires fell to 4.18 million in April, down from 4.34 million in March and from 4.44 million in February which had been the highest hire number since October 2008.


Companies also cut back on looking for workers. April job openings fell to 3.42 million, the lowest number in five months.  Job separations actually fell in April, to 4.09 million from 4.17 million in March. Separations including layoffs, firings, quits and retirements have stabilized around 4.1 million over the past year.


Any way you look at it, the Federal Reserve has failed miserably in its mandate to achieve maximum employment.


Meanwhile, Greece is trying to form a coalition government and it looks like the 3 major parties are getting closer. The conservative New Democracy party won the election, narrowly, but the reality is that all the political parties want to renegotiate the bailout because a monkey with a calculator could figure out that the Greeks are getting screwed on the deal. And there seems to be some wiggle room. An IMF spokesperson said: “These economic programs are not static. They do get adjusted.” Germany has been inflexible on allowing any compromise. Then, late this afternoon we heard reports from the G-20 meeting in Mexico that Germany was going to end its opposition to the euro zone’s bailout funds buying the sovereign debt of troubled European nations. The stories have not been confirmed, but who knows? Maybe Merkel discovered the great Mexican invention, the margarita, and maybe she's getting a little loose in Los Cabos.


While this was going on, British Prime Minister David Cameron sparked a war of words with French officials by saying he would roll out the red carpet for French firms if new French President Francois Hollande raised taxes as planned on the wealthy. So it isn't total unanimity.


The G-20 is expected to issue a communique stating that the euro-zone will issue a jobs and growth plan and they will take concrete steps toward a more integrated approach to bank supervision, resolution, recapitalization and deposit insurance. The communique appears aimed, in part, at easing market worries about Spain.


If yesterday was all about Greece, today belongs to Spain. The euro strengthened 0.6 percent to $1.2647 while the yield on Spain's ten-year note dropped 11 basis points to 7.05 percent, after topping 7 percent yesterday for the first time in the history of the euro. The 7% threshold is the level that knocked other smaller countries like Greece and Ireland over the edge. Spain will need a lot more than 100 billion-euro to recapitalize its banks. And even though the bailout is too small to be effective it is still a big number, big enough to add to Spain's sovereign debt, pushing real debt to GDP to more than 146%. This means Spain now has a banking problem and a sovereign debt problem. They are not going to grow their way out of this problem. There doesn't appear to be a bailout plan that could pull Spain out of its downward spiral. It is probably just a matter of time. Of course we could be looking at another year of Spanish misery, and a lot can happen in 12 months, if they can last that long, but the situation doesn't look good. Spain is big enough to wipe out the EU.


There is a great photo of the doors of the Bank of Spain; someone has put up multiple stickers and post-it notes that read: “this is not a crisis, it is a scam.”


Let's look at some quotes that tell the Euro story:
"Spain is not Greece." Elena Salgado, Spanish Finance minister, February, 2010.


"Portugal is not Greece." The Economist, April 2010.


"Greece is not Ireland." George Papaconstantinou, Greek Finance minister, November, 2010.


"Spain is neither Ireland nor Portugal." Elena Salgado, Spanish Finance minister, November 2010.


"Ireland is not in ‘Greek Territory.’" Irish Finance Minister Brian Lenihan. November 2010.


"Neither Spain nor Portugal is Ireland." Angel Gurria, Secretary-general OECD, November, 2010.


"Italy is not Spain” – Ed Parker, Fitch MD, 12 June 2012


"Spain is not Uganda" Spanish PM Rajoy. June, 2012


"Uganda does not want to be Spain" (Ugandan foreign minister) June 13th 2012






Google has put out its latest "transparency report." It includes details of all the "takedown requests" the company received from governments around the world; these are basically government requests to pull something off the internet.  Leading the pack: The government of India, but that's a little misleading because China simply blocked Google. Sometimes Google complies with the takedown request, sometimes they don't.


Wikileaks founder Julian Assange is seeking political asylum at Ecuador's London embassy. Last week the UK's Supreme Court dismissed Mr Assange's bid to reopen an appeal against extradition to Sweden over alleged sex crimes he denies. The Supreme Court gave him until 28 June before extradition proceedings can start.


He says the allegations are politically-motivated. Swedish prosecutors want to question him over allegations of rape and sexual assault made by two female former Wikileaks volunteers in mid-2010 but have not filed any charges. Mr Assange, whose Wikileaks website has published a mass of leaked diplomatic cables that embarrassed several governments and international businesses, claims the sex was consensual.


According to a State Department report, more than 42,000 adults and children were found in forced prostitution, labor, slavery or armed conflict in 2011, a US government report has found. Some 9,000 more victims were identified around the world than in 2010.  But the number is just a fraction of the estimated 800,000 people trafficked across borders every year.


Describing the report as a "clear and honest assessment", US Secretary of State Hillary Clinton said: "The end of legal slavery in the United States and around the world has not meant the end of slavery."


Where the trade in persons was once labelled as human trafficking, Mrs Clinton said: "I think labelling this for what it is - slavery - has brought it to another dimension."


The stories of those enslaved "remind us of what kind of inhumane treatment we are still capable of as human beings. They are living, breathing reminders that the war against slavery remains unfinished."


Now, let's put that in perspective; JC Penney shares fell 8.5% to close at $22.25 one day after Michael Francis, the company's CEO announced a very abrupt resignation. The stock is down nearly 37% year to date. Store traffic fell as Penney shifted toward everyday low pricing and away from marked sales days. Francis walks with about $10 million for nine months work. 

Tuesday, May 15, 2012 - JPMorgan is Scary, the California Budget is Easy - by Sinclair Noe

05152012 Script

DOW – 63 = 12,632
SPX – 7 = 1330
NAS – 8 = 2893
10 YR YLD =.01 = 1.78%

OIL - .57 = 93.41
GOLD – 12.20 = 1545.30
SILV -.46 = 27.82
PLAT – 5.00 = 1437.00

So, JPMorgan shareholders held their annual meeting. They decided to pay Jamie Dimon $23 million. They can still afford it; despite a $2 billion dollar loss, JPMorgan is still the largest publicly traded company, the largest bank in the US, and the largest derivatives dealer in the world. JPMorgan invented credit default swaps, they wrote the legislation to reform the derivatives markets, and when JPMorgan went insolvent in the 1980s and in 2007, they were bailed out by taxpayers.A $2 billion dollar loss is not the end of the world, JPMorgan is not in imminent danger, but I don't think this will end well. The really scary part isn't the loss, but that it only represents one-tenth of the annualized profit. What are they doing to make that kind of money? And if these are supposed to be the best and brightest bankers, what does it say about the others?

The FBI has opened an investigation into the trading losses. We don't know what the FBI is looking at and I won't hold my breath waiting. The SEC has opened an inquiry into JPMorgan's disclosures and accounting practices. JP Morgan maintains that the purpose of the trades that resulted in the $2 billion loss was to hedge exposure elsewhere, as opposed to being proprietary trading intended to generate profits. That’s contradicted by a report citing current and former employees of the chief executive office, including its former head of credit trading. Dimon is claiming even now that this qualifies as a hedge under the current version of the Volcker rule. And the Volcker rule was put in as part of Dodd–Frank at the suggestion of Paul Volcker for the explicit purpose of preventing exactly this kind of transaction. The banks and the leader in the banks' campaign against the Volcker rule has been JPMorgan and Jamie Dimon in particular, who has been brutally rude to Paul Volcker and incredibly arrogant, saying Volcker doesn't understand anything about what he's talking about.

"You can't legislate away stupidity and risk-taking and greed and recklessness. What you can do is make sure when it happens it does not cause too much damage and to do that you have to make sure you have good rules against fraud and abuse, better protections and you force banks to hold more capital against their risk," so says Treasury Secretary Timothy Geithner. He is wrong. You can legislate away quite a bit of stupidity and risk-taking and greed and recklessness. If you can have government creating a fractional reserve system which allows banks to create money out of thin air, then you can legislate how they gamble with that money. The solution is incredibly simple – reinstate Glass-Steagall. Let commercial banks be commercial lenders and the investment bankers can still gamble with their own money. Of course, any meaningful reform is nearly impossible considering the banks have purchased the politicians.

Francoise Hollande has been sworn in as the new president of France. In his inauguration speech he promised a “new path” for France, and then, in his first act as president, he followed the well worn path to Berlin to meet with German Chancellor Merkel. It wasn't easy; his plane had to turn around after being struck by lightning. Seriously. He's never heard of an omen?

Greece can't form a government, and so they will vote again in about one month. Meanwhile, stocks, precious metals, oil, gasoline, and the kitchen sink have all been slipping in price and the reason, from everything I read - is because of Greece. You probably never realized the amazing economic control Greece is able to exercise on world markets. It's reported that Greeks withdrew nearly $900 million dollars from Greek banks yesterday; kind of a run on the banks.

I keep getting the feeling that what we've been watching play out in Greece will eventually play out in the US, an if so, it might start in California. Governor Brown announced an ugly budget, featuring cuts in Medi-Cal payments to hospitals and nursing homes, (remember the talk about health care “death panels”? Eliminate Medi-Cal and see what happens) cuts to those who care for the disabled, cuts to state courts and cuts in hours and pay for state employees. Construction on courthouses, will be stalled and the court system will be even more underfunded. And although few Californians have much sympathy for state workers, they are struggling to fill the gaps in agencies that are experiencing layoffs and, if Brown gets his way, will be rewarded for their extra work with a 5% pay cut. So far schools have been largely spared from this grisly exercise, but that will probably change in November if voters fail to approve a tax-hike initiative.

Brown's proposed budget presumes that voters will approve the tax-hike initiative in November, which would increase the state sales tax by a quarter of a percent and raise income taxes on the wealthy. These taxes would generate an estimated $8.5 billion through the end of the budget year, and voters would blow another gaping hole in the budget if they reject them. Brown addresses this possibility by including "trigger" cuts in his budget proposal that would reduce funding for schools and community colleges by a whopping $5.5 billion and higher education by $500 million, while cutting game wardens, park rangers, lifeguards and other popular positions and services. There is a word for these kinds of cuts, it's a Greek word – austerity.

Facebook is expected to increase its offering price from its initial range, giving the company a valuation possibly as high as $104 billion. Governor Brown is expected to announce a 15% tax on IPO valuations on Saturday. Problem solved. This budget stuff is easy.

So, do you think the economy has slowed enough to warrant the Fed stepping in with another round of stimulus?

Home builder sentiment improved in May to the highest reading since the depression. The National Association of Home Builders/Wells Fargo housing market index rose to 29 from 24 in April. The April index was initially reported to be 25. The reading, though the best since May 2007, is still well short of the 50 level that indicates that more builders view conditions as good than poor. Builders in many markets are reporting that buyer traffic and sales have picked back up after a pause this April.

The Commerce Department said April retail sales growth slowed to 0.1% Taking the first four months of 2012 together, the U.S. economy appears to be growing at a modest 2% to 2.5% clip. In April, online retailers, furniture outlets, auto dealers, pharmacies, and sports and leisure stores all posted solid sales increases. Internet and catalog retailers got a 1.1% boost while spending on autos climbed 0.5%.

Consumer prices were unchanged in April as lower gasoline prices offset rising food, apparel and car prices, The Labor Department said prices didn’t change on a seasonally adjusted basis and that so-called core prices, which exclude food and energy, rose 0.2%. Gasoline prices dropped 2.6% on the month, while food prices dropped were up 0.2%. For the past 12 months, consumer prices are up 2.3%.

So, do you think the economy has slowed enough to warrant the Fed stepping in with another round of stimulus? The economy is actually in much better shape than the past couple of weeks in the financial markets, nothing exciting but shuffling along while the markets stumble. The broader economy can crash and burn and the Fed would be frozen but when the markets whine, it usually gets the Fed to take action. Not this week, but it is a setup for next month's FOMC meeting. 

Monday, May 14, 2012 - Problems in Greece, Euro, California, and JPMorgan - No Surprise

DOW – 125 = 12,695
SPX – 15 = 1338
NAS – 31 = 2902
10 YR YLD -.05 = 1.79%
OIL - .70 = 94.08
GOLD – 23.80 = 1557.50
SILV - .71 = 28.28
PLAT – 29.00 = 1442.00

Back in early April I started telling you to heed the old market maxim: “Sell in May and Stay Away”. You are welcome. The Dow Industrial Average has now dropped 8 out of the last 9 sessions; no surprise.

Of course, we had the weekend to think about the shenanigans of JPMorgan Chase; a too big to fail bank acting irresponsibly while simultaneously demanding less regulation; no surprise.

Today's declines started in Europe; no surprise. In Germany, Angela Merkel's Christian Democratic Union Party suffered more losses in a local election for the second straight week. Merkel's CDU party received just 26% of the vote while a coalition of left-leaning Social Democrats and Green party candidates received over 50%. In light of the recent French elections, we are starting to see a trend.

In Greece, the various leaders of the various political parties failed to form a coalition government over the weekend; no surprise. The Greeks will likely need to call another election. And the fate of Greece hangs over the markets just as the possibility of exiting the Euro-Union hangs over the heads of the Greeks. And I think that is the correct application of the metaphor, with Angela Merkel in the role of Dionysius and the Greeks in the role of Damocles. I don't know whether the next Act in the tragedy comes from “The Merchant of Venice”: The quality of mercy is not strained, or “Brer Rabbit”: Brer Fox I don’t mind if you eat me. But, oh, whatever you do don’t throw me in that briar patch; or maybe “Hamlet”: To be or not to be, that is the question. Whether 'tis nobler to suffer the slings and arrows of outrageous austerity, Or to take arms against a sea of troubles, And by opposing them end them?

Which is the long way of getting round to the point that the final chapter has not been writ and so there are infinite options in Euro-land. The Greeks are coming to the realization that the plan of essentially indentured servitude to their northern masters might have shortcomings and they reject this as a false choice, although the alternatives are still a bit vague. The Greeks might like to stay in the Euro-zone and reject the harsh budget-balancing measures Europe has demanded in return for the money Greece needs to remain solvent. That, at least, was the message of the recent election in which the two dominant parties that had signed off on the terms of Greece’s 130 billion euro bailout deal took a drubbing. So, why can't the Greeks increase wages, halt public sector layoffs and repudiate Greece’s debt, and stay in the Euro-Union?

Of course, that is dangerous thinking for the powers that be. If Greece does not buckle under the crack of the bankers' whips, there is little chance the Portuguese and Spanish and Italians and Irish, and then the Union will dissolve and Greece will be shown the exit. This is the claim. The Greeks say it is a bluff. The ECB and the IMF must surely be flustered. They can't even have a good standoff until the Greeks can cobble together a government and the next election won't happen until mid-June.

It appears to be the European hard-liners that have been pushing austerity that has destroyed the political center and radicalized the extreme right and left. What's the worst that could happen? Greece gets tossed back into the briar patch once known as the drachma. They won't be buying new cars or computers or importing much of anything but they'll export like crazy; tourism will flourish; before you know it they'll be standing on the Acropolis, combing the tar out of their fur and laughing at the IMF.

With a month to go until the next election, is it possible the hard-liners will soften their demands? After all, how can you get money out of a bankrupt country? And don't forget who gets the bailout money; it's not the Greeks, it's the Euro-banks. All these billions of dollars of funds aren't going into the pockets of people in Athens, the money goes to the banksters. And the Greeks have come up with the radical idea that they don't care if the banksters get paid.

The threat to kick Greece out of the Euro-Union is very real but it would require the votes of 16 countries to do it. What happens if Portugal or Spain sides with Greece? How long would it take for that vote? Germany may talk tough but they don't have much firepower behind their rhetoric, and the German voters don't seem to have the stomach for discipline.

Though this be madness, yet there is method in't.

There is a chance that Greece might find some coalition of pro-austerity parties and remain in a debt purgatory while applying Teutonic discipline, or there is a possibility the Greeks will lead a Euro-revolt against austerity and various elections will serve as happy rapprochment between the debt slaves and the cracking whip. Of course, there is still a huge downside to all of this; global credit markets could freeze, global equity markets could tumble, global capital markets could be trashed, and governments could nationalize, and the banksters could be bailed out again, or not, and we could have a global financial meltdown – you know, almost like the one we had in 2008, and then did nothing to correct.

And make no mistake, we are not immune; it is just a matter of time before the basic problems of Europe come to the United States; it could hit us any day; maybe today.

And that brings us to California, which still has a budget problem; no surprise. Governor Jerry Brown is proposing more than $8 billion in cuts to close the state budget deficit and he is touting a tax hike initiative for the November ballot. And the combo might fill the revised $15.7 billion budget shortfall for the fiscal year that starts July 1. That is up from an earlier estimate of a $9.2 billion gap projected in January.

The Legislature had cut tens of billions of dollars from schools, social services, universities, courts, and health care programs for the poor. The cuts in higher education have sparked demonstrations at regents' meetings and on college campuses.

Brown said the size of the deficit makes it virtually impossible to balance the budget with spending cuts alone, so his budget balances the cuts with the revenue he anticipates if voters approve his proposal to increase the statewide sales tax by a quarter cent and boost income taxes on those who make more than $250,000 a year. Both tax increases would be temporary. Brown's budget proposes $8.3 billion in cuts, $5.9 billion from the tax increases and $2.5 billion in a variety of other solutions.

Jamie Dimon has been trying to gut the Dodd-Frank reforms, specifically the Volcker rule. Apparently JPM was so confident that their interpretation of the hedging exemption would prevail, that they got ahead of themselves and operated as if this loophople were in effect. That is part of what the Too Big To Fail Banks have been doing. Paying the lobbyists and the legislators to eviscerate the reforms, while continuing to act like the rule of law doesn't apply to them. Maybe it doesn't. A new article from Matt Taibbi, How Wall Street Killed Financial Reform. This is a good article, and it really points out just how broken Congress and the electoral system are.

Let me share with you part of what Taibbi wrote:

The giant reform bill turned out to be like the fish reeled in by Hemingway's Old Man -- no sooner caught than set upon by sharks that strip it to nothing long before it ever reaches the shore. In a furious below-the-radar effort at gutting the law -- roundly despised by Washington's Wall Street paymasters -- a troop of water-carrying Eric Cantor Republicans are speeding nine separate bills through the House, all designed to roll back the few genuinely toothy portions left in Dodd-Frank. With the Quislingian covert assistance of Democrats, both in Congress and in the White House, those bills could pass through the House and the Senate with little or no debate, with simple floor votes -- by a process usually reserved for things like the renaming of post offices or a nonbinding resolution celebrating Amelia Earhart's birthday.

The fate of Dodd-Frank over the past two years is an object lesson in the government's inability to institute even the simplest and most obvious reforms, especially if those reforms happen to clash with powerful financial interests. From the moment it was signed into law, lobbyists and lawyers have fought regulators over every line in the rulemaking process. Congressmen and presidents may be able to get a law passed once in a while -- but they can no longer make sure it stays passed. You win the modern financial-regulation game by filing the most motions, attending the most hearings, giving the most money to the most politicians and, above all, by keeping at it, day after day, year after fiscal year, until stealing is legal again. "It's like a scorched-earth policy," says Michael Greenberger, a former regulator who was heavily involved with the drafting of Dodd-Frank. "It requires constant combat. And it never, ever ends."

That the banks have just about succeeded in strangling Dodd-Frank is probably not news to most Americans -- it's how they succeeded that's the scary part. The banks followed a five-point strategy that offers a dependable blueprint for defeating any regulation -- and for guaranteeing that when it comes to the economy, might will always equal right.

Here's a list of the five ways,. The article gives great detail on how each of these work and were accomplished for the Dodd-Frank legislation. 

STEP 1: STRANGLE IT IN THE WOMB

STEP 2: SUE, SUE, SUE

STEP 3: IF YOU CAN'T WIN, STALL

STEP 4: BULLY THE REGULATORS

STEP 5: PASS A GAZILLION LOOPHOLES

Taibbi concludes this lengthy article, saying, "But money never gets tired. It never gets frustrated. And it thinks that drilling holes in Dodd-Frank is every bit as interesting asThe Book of Mormon or Kate Upton naked. The system has become too complex for flesh-and-blood people, who make the mistake of thinking that passing a new law means the end of the discussion, when it's really just the beginning of a war."

Wednesday, May 02, 2012 - Jobs Report, Euro Elections, California Budget, and Watching Paint Dry

DOW – 10 = 13,268
SPX – 3 = 1402
NAS + 9 = 3059
10 YR YLD -.03 = 1.92
OIL +.14 = 105.36
GOLD – 8.50 = 1654.70
SILV - .32 = 30.75
PLAT – 9.00 = 1569.00

This is shaping up to be a wild weekend. Friday we get the jobs report. Then, in Europe there will be elections in France and Greece. On a personal note, I'm going to paint the patio on my house, so I'll be watching paint dry, just to counterbalance the rest of the world.

The monthly jobs report, already the most highly anticipated data of the month, will be getting a little extra attention this Friday after a disappointing report on GDP late last week. A bad jobs report and a weak GDP report might be enough to trigger another round of Quantitative Easing from the Federal Reserve. The economy is adding and will continue to add jobs; that is not in question. It is the rate of job growth.

Expectations are that there were about 160k to 175k new jobs created in April, up from 120,000 in March, and an unemployment rate that remains steady at 8.2%. The lowball guesses are for only about 125k jobs. With the addition of 120,000 jobs, March marked the 15th straight month of jobs growth, but it broke a three-month streak in which the economy had added more than 200,000 jobs.

Now we are only a couple days away from finding out whether March's report was a fluke or the beginning of a new, disappointing trend of declining growth in the labor market. A not-so-promising sign: The private sector added only 119,000 jobs in April, down from a downwardly revised 201,000 in March and well short of expectations. The ADP report is not always a good indicator for the monthly report.

Manufacturing grew in April at the fastest pace in almost a year, propelled by a pickup in orders that signaled factories will remain a source of strength for the US Expansion; that according to a report yesterday from the ISM. Still the numbers seem disappointing and the outlook less than bright. Overseas demand for US made-goods risks fading as global growth slows.

Spain's economy contracted in the first quarter, putting the euro region's fourth-largest economy into its second recession since 2009, and at some point, you have to consider multiple, rolling recessions are in truth, a depression. S&P downgraded Spain last week,and today the Spanish IBEX traded below the March 2009 closing lows and near the lows of 2003. The US markets didn't seem to be bothered by the problems in Europe. You love to see a market move higher on bad news, but sometimes that is just a chance for the smart money to time an exit.

The U.K. economy shrank 0.2 percent in the first quarter after contracting 0.3 percent in the prior three months as Britain slid into its first double dip recession since the 1970s. Defenders of British policies dismiss any call for a rethinking of these policies, despite their evident failure to deliver, on the grounds that any relaxation of austerity would cause borrowing costs to soar.

In France, the Socialist candidate Mr. Hollande beat out Sarkozy in a runoff a couple of weeks ago and is favored to win this week. Mr. Hollande opposes austerity and will cause more thana few headaches for German chief Angela Merkel. This could be a problem for Merkel or for Mr. Hollande; we'll see.. The bottom line is the market has realized Mr. Sarkozy probably isn't going to win.

The global economy is uneven. The growth has slowed in China and India. And North Americas is a recovering but far from fully recovered economic environment.

There is no recovery. There is a slow grinding improvement, not enough to lift us to that righteous circle of sustainability, but enough to keep us afloat on vast mountains of stimulus, mainly from the Fed. And so we'll watch the results of the jobs report, and we'll see if there is any indication the Fed will move again. Meanwhile, we'll be reminded that the Fed has been acting and not acting on the monetary policy and over on the fiscal policy side, we've seen deadlock for quite some time. Our response has been wrong for quite some time. It isn't just a recession, or the possibility of a double dip. We entered a depression, a small “d” depression, and we failed to recognize it and we failed to respond appropriately; quite a mistake for great student of the Great Depression, Bernanke. We are living in a world of zombie economics, just shuffling along, and very little sign of higher level intellect guiding our path.

Real wages for real workers are not growing and America’s crushing debt is strangling growth, and maybe that means we would be lucky to see 2% GDP growth, maybe we're lucky to see any growth at all. Both political parties can share blame for the trouble; the Republicans want to limit spending and Democrats don’t want to cut programs, and so they are at an impasse. Little is likely to change regardless of this year’s presidential election.

And what we are likely to see in the markets is a slow grinding decline into the summer. Not because the economy is so terrible but because it isn't so great. The Fed has been propping up the markets with monetary policy but that hasn't helped Main Street and it hasn't done much – or rather it hasn't done enough to improve the jobs report. We have the most stimulative fiscal and monetary policy in the history of this country and here we are three years into the recession and it's not ended. Does that mean the policy is a failure or does it mean that we weren't really in a recession but rather in a small “d” depression?

Even in an election year we have to deal with the seasonal nature of the markets. Sell in May and go away. And by the time we come back, we should have a good idea about how this whole austerity issue is working out, and how the 99 percent are fairing against the 1 percent, and how the red and blue are fairing against each other, and how monetary policy is fairing against fiscal policy.

Sometimes, the best choice is to just step aside. Take the summer off. That's about the best investment advice there is, unless your just a high frequency trader with a USB port on the back of your neck. Take some time off, visit the family and friends. Some of you have already started doing this. You've turned off CNBC. Maybe we are finally spitting out the lure.

I heard a great investment analogy this weekend. The idea was that as investors we should act like a trout. The trout tends to take a position in the stream and just hang out waiting for the passing current to deliver a tasty morsel. It's a low energy solution, effective even if it is a little boring - kind of like watching paint dry.

The legislative analyst’s office has a new number for California: $3 billion. That’s the total amount that tax revenue has lagged behind goals set by Gov. Jerry Brown’s administration in the current fiscal year. Much of that gap comes from a disappointing April, the most important month for income taxes. Income taxes were $2 billion short of the $9.4-billion goal, and corporate taxes fell $143 million short of an expected $1.53 billion.

When April's poor results are tacked on to earlier shortfalls, the state has fallen about $3 billion behind tax goals. Yesterday, the ratings agency Standard & Poor's already warned that poor tax revenue was imperiling California's financial recovery. It's unclear exactly how much this year's budget deficit will grow because of the tax shortfall. Brown's administration estimated the gap at $9.2 billion in January, but has since said it will grow. The updated budget proposal that is expected by May 14.

Fitch Ratings, in conjunction with Oxford Economics, issued a new report today and it claims that without the unprecedented stimulus actions by the federal government triggered by the 2008 financial crisis, the Great Recession might still be going on. But those actions came with a price -- soaring budget deficits and rock-bottom interest rates that hurt savers.

The actions by policymakers in Washington -- including the $700-billion bailout fund, the $831-billion stimulus package and the Fed's ZIRP, zero interest rate policy -- continued to boost the nation's total economic output by more than 4% annually two and three years after the end of the Great Recession in mid-2009.

The boost from those policies helped the U.S. gross domestic product increase 3% in 2010 and 1.7% last year, "implying that the U.S. might still be mired in a recession absent this stimulus."

The U.S. economy would have seen little or no growth in the two years after the recession technically ended in June 2009 without the policies. And the stimulus actions appear "to have significantly softened the severity of the decline" in GDP in the year immediately after the recession.

Though the Fed's monetary policy actions were helpful, fiscal stimulus by Congress and the White House "had the strongest positive impact on consumption during the recent recovery.”

The conclusions mirror findings in February by the Congressional Budget Office and a 2010 study on the economic effect of the $831-billion stimulus package known as the American Recovery and Reinvestment Act.

The Fitch analysis looked more broadly at all federal stimulus policies, such as the large-scale asset purchases by the Fed. And although the study said the stimulus policies "appeared to have achieve their intended effect," it warned that the actions have come with negative consequences.

"The very high deficits of the last few years have led to unprecedented levels of government indebtedness, which will weigh on the federal government for years and require contraction in spending. Furthermore, while low rates clearly benefit borrowers, at the same time, they hurt savers."

The deficits, and the inability of the Obama administration and lawmakers to make deep enough cuts in a deal last summer to raise the debt ceiling, led Standard & Poor's to downgrade the U.S. credit rating.

For the past couple of years we've been hearing that the response to a depressed economy is to cut spending and balance budgets. While there is no question that cleaning up indebtedness will take time and effort, the calls for austerity are creating a bigger mess. All around Europe’s periphery, from Spain to Latvia, austerity policies have produced Depression-level slumps and Depression-level unemployment. European leaders spent years in denial, insisting that their policies would start working any day now; three years into its austerity program, Ireland has yet to show any sign of real recovery from a slump that has driven the unemployment rate to almost 15 percent.

There seems to be a shift in sentiment. Several events — the collapse of the Dutch government over proposed austerity measures, the strong showing of the vaguely anti-austerity François Hollande in the first round of France’s presidential election, and an economic report showing that Britain is doing worse in the current slump than it did in the 1930s — seem to have finally broken through the wall of denial. Suddenly, everyone is admitting that austerity isn’t working.

What happens next? The push for national-level austerity across the euro zone is undermining integration and thereby exacerbating the crisis. And the only ones that seem to benefit are the speculators and the bond vigilantes. Ultimately, Spain, Greece, Italy, the Netherlands, and others do have an alternative to endless austerity, one that may be forced on them by events: exit the euro, with all the financial and political fallout that follows. And on the current course, that’s what’s coming. For California, the choice is not a possibility.