Wednesday, May 15, 2013 - Have Another Cookie

Have Another Cookie

by Sinclair Noe

DOW + 60 = 15275
SPX + 8 = 1658
NAS + 9 = 3471
10 YR YLD - .01 = 1.94%
OIL + .18 = 94.39
GOLD – 33.30 = 1393.50
SILV - .82 = 22.69

More record highs on Wall Street. We celebrate with milk and cookies, and remembrances of the days of rice and beans and tins of tuna. Record highs are fleeting, almost ephemeral. I know the trend is your friend; don't fight the Fed; a rising tide lifts all boats; yada, yada. Why is this starting to feel like an asset bubble?

Stock Traders Daily did a comparison of quarter to quarter earnings and revenue growth rates for the S&P 500 and the Dow Industrials: “For the past two consecutive quarters, the Dow Jones Industrial Average has had zero growth. In fact, this quarter revenue growth declined by 2.65% (25 companies reporting thus far) and earnings have barely budged. Last quarter, there was negative earnings growth with revenue growth less than 1%, and since the third quarter of 2010, the EPS growth rate for the Dow has been declining steadily.”

So, the growth rate is at zero and the prices keep going higher. Don't worry, have another cookie; after 13 years in the market, you should be back to break even.

Meanwhile, the National Association of Home Builders/Wells Fargo housing-market index rose to 44 in May from 41 in April. The NAHB says builders are noting an increased sense of urgency among potential buyers as a result of thinning inventories of homes for sale, continuing affordable mortgage rates and strengthening local economies. Have another cookie.

Wholesale prices dropped in April. The producer-price index declined by a seasonally adjusted 0.7% to mark the biggest drop in more than three years. Wholesale prices over the past 12 months are up just 0.6%. In April, the cost of fuel fell 2.5%, led by a 6.0% drop in gasoline prices. Electricity and home-heating-fuel costs also eased, though natural-gas prices posted the biggest increase since mid-2008.

The price of food, meanwhile, fell 0.8% in April after jumping by the same amount in March. Vegetable prices plunged 10.6%, with the cost of squash, lettuce, celery and cucumbers all taking a dive. Meat prices also fell. Cookie prices were not included in the report.

The muted rate of inflation at both the producer and consumer levels gives the Federal Reserve more leeway to keep interest rates low and continue with QE. So, the talk about tapering off of QE might make more sense if the Fed was actually getting closer to its targets of 6.5% unemployment or 2.5% inflation. They aren't close.

The Federal Reserve Bank of New York reports households reduced debt during the first quarter by 1 percent to the lowest level since 2006. Household debt fell to $11.2 trillion in the first quarter compared with a peak burden of $12.7 trillion in the third quarter of 2008. Consumers reduced debt by $110 billion after increasing their borrowing by $31 billion in the fourth quarter of 2012, while delinquency rates fell across the board. Student debt bucked the trend, rising to a record $986 billion.

Households in the first quarter improved their debt payment patterns as delinquency rates on mortgages fell to 5.4 percent from 5.6 percent, on home equity loans to 3.2 percent from 3.5 percent, on credit cards to 10.2 percent from 10.6 percent and on student loans to 11.2 percent from 11.7 percent. One way to look at this is that reducing debt results in a better vintage of debt. Student lending has surpassed credit cards, auto loans, and home equity loans, and is now the largest form of consumer debt after mortgages.

Last week, Fed Chairman Ben Bernanke said “the Fed could push banks to maintain a higher leverage ratio, hold certain types of debt favored by regulators, or other steps to give the largest firms a ‘strong incentive to reduce their size, complexity, interconnectedness.’

“The Fed chairman acknowledged growing concerns that some financial companies remain so big and complex the government would have to step in to prevent their collapse and said more needs to be done to eliminate that risk.”

And Fed Governor Jeremy Stein said pretty much the same thing; and Fed Governor Daniel Tarullo also picked up on the talking point.

James Kwak raised a vital question about these talking points: Too-big-to-fail banks enjoy implicit subsidies and impose externalities on the rest of us; therefore those subsidies and externalities should be priced; and then those banks can decide whether they want to absorb those costs or make themselves smaller. 

Here’s what they are saying: Too-big-to-fail banks are too big and complex and pose a systemic risk to all of us; therefore they need to become smaller and less complex; and the Fed will tweak the regulations until they become smaller and less complex.

What’s remarkable about this? These three men—probably the three most important on the Board of Governors when it comes to systemic risk regulation (as opposed to monetary policy, for example)—all say that they know that the megabanks are too big and complex. They all say that accurate pricing of subsidies and externalities is not an end in itself.* They all say that the goal is smaller, less complex banks.

If the goal is smaller, less complex banks, why not just mandate smaller, less complex banks? Why beat around the bush with capital requirements and minimum long-term debt levels? Those tools might be appropriate if you think huge, complex banks should exist but you want to make them safer. But if you’ve already concluded that banks need to be smaller and less complex, then they’re just a waste of time.

They also betray a frightening naivete regarding corporate governance. The theory is that higher capital requirements, for example, will lower banks’ profits, which will upset shareholders, who will eventually force the board of directors to eventually convince the CEO to break up his empire. This scenario, unfortunately, depends on the premise that American corporations are run for the benefit of their shareholders, which is only roughly true, and even that often requires long, expensive, and messy shareholder activist campaigns.

Instead, there’s an obvious solution: rules that limit the size and scope of financial institutions. But Bernanke has ruled out “arbitrary” size caps in favor of his cute regulatory dial-tweaking.

Again, Bernanke’s position might be defensible if he wasn’t already sure that today’s banks are too big and complex. Then it might make sense to tweak the incentives and see how the market reacts. But if he knows they are too big and complex, he should eliminate that risk in the simplest, most direct way possible. If he’s not sure how much smaller and simpler banks need to be, he can do it in steps: set one set of size and scope limits, see what he thinks about the outcome, and then set another set of limits if he’s still unhappy.

To use a crude analogy, let’s say we’re concerned about guns on airplanes. Ben Bernanke thinks, like I do, that guns on planes present an unacceptable risk to the safety of air travel. But his approach is to charge a $100 fee for anyone who wants to bring a gun onto a plane. If people keep bringing guns on board, he’ll raise the fee to $200, then $300, and so on until people stop. The sensible, obvious solution is to just ban guns on planes. But that would be “arbitrary.”

It is theoretically plausible that one should simply price the subsidies and externalities and then let the market determine whether big banks provide enough societal benefit to offset the costs they impose on the rest of us. But that is not what Stein, Tarullo, and Bernanke are saying.

Meanwhile, Attorney General Eric Holder was speaking before the House Judiciary Committee hearing today on another subject, but he was asked about comments he made back in March about the idea that the big banks are too big to jail. He said his comments were misconstrued and he added that there is “no bank, there’s no institution, there’s no individual who cannot be investigated and prosecuted by the United States Department of Justice.”

And that was the straightest answer he gave in testimony today. Have another cookie.

Meanwhile, a few years ago, I wrote a book about breaking up the too big to fail banks; Eat The Bankers: The Case Against Usury: The Root Cause of the Economic Crisis and the Fix

Friday, July 13, 2012 - Jamie Dimon is to Jerry Sandusky as Tim Geithner is to Joe Paterno

Jamie Dimon is to Jerry Sandusky as Tim Geithner is to Joe Paterno
-by Sinclair Noe


DOW + 203 = 12,777
SPX + 22 = 1356
NAS + 42 = 2908
10 YR YLD +.02 = 1.50%
OIL +.99 = 87.07
GOLD + 17.20 = 1590.40
SILV + .13 = 27.44
PLAT + 15.00 = 1438.00


JPMorgan Chase reported second quarter earnings of $5 billion; part of that is from accounting gimmickery – turning loss reserves into profits and such; and that's after losses from the trading unit in London. The Chief Investment Office, or CIO, also know as the London proprietary trading unit, aka., the London Whale, sometimes known as Voldermort, occasionally referenced as he whose name can not be spoken – they lost $5.8 billion. Jamie Dimon, the CEO said back in May that the losses were $2 billion; now Dimon says that in a worst case scenario the London Whale losses will grow to $7.5 billion; the slow motion train wreck is still happening and Dimon can't stop it. 


Dimon claimed traders may have deliberately hidden losses and the bank will restate first quarter earnings within the next week or so. So, there was this small trading unit in London and they accounted for about one-quarter of the bank's net income, several billions of dollars in profits, and wants you to believe that he didn't know what they were doing. His best story is that he is remarkably incompetent yet pleasantly surprised when billions of dollars of profits just magically materialized out of thin air. All right, MF Global and PFGBest client funds deposited at JPMorgan can vaporize -whooosh – into thin air, so maybe the London Whale could make profits materialize out of thin air. 


And although Jamie Dimon seemed to be saying “it's not my fault” the SEC and the FBI will continue to look at what exactly did Jamie Dimon knew and when he knew it; further, there will be questions about why he didn't know more and why JPMorgan withheld vital information from regulators. Did Dimon mislead investors when he originally called the trade a 'tempest in a teapot' during the firm's first-quarter earnings conference call in April?


In addition to the FBI and SEC, the bank is being investigated by the UK's Financial Services Authority, the U.S. Federal Deposit Insurance Corp, the U.S. Commodity Futures Trading Commission, the U.S. Treasury's Office for the Comptroller of the Currency, and the Federal Reserve Bank of New York.


Today, Dimon said:  "We're not making light of this error, but we do think it's an isolated event."


JPMorgan shares traded up 2.03 at $36.07, nearly a 6% gain. 


Go figure. 


The train wreck at JPMorgan is still happening but apparently the morons on Wall Street think the train wreck will stop soon and everything will be hunky dory. What they failed to realize is that the CIO, the London Whale was responsible for  a big chunk of net income at JPMorgan, over the past few years, between 31% and 10%. The Whale was JPMorgan's private hedge fund, using excess customer deposits to account for a very big chunk of earnings. In other words, JPMorgan's business model was to use depositors' deposits to gamble. Today, JPMorgan lost about 30% of their net earnings moving forward; the casino is now closed; the profit center has now dried up. And the stock gained 6%. Go figure. 


There was actually a video piece on Marketwatch today where the guy poses the question, since JPMorgan posted $5 billion in earnings, despite the London Whale, should we consider Jamie Dimon a hero? And should he be given a raise? Seriously.


I suppose it is nothing more than coincidence that the London Whale was making his biggest profits in 2008, making massive trades on interest rate derivatives and JPMorgan was one of the banks that reported to the British Banking Association to set Libor. So, the banks were lying about the interest rates and then betting on the interest rates that were set based upon their lies. 


 An unidentified employee of  Barclays bank  told the New York Federal Reserve Bank more than four years ago that Barclays was filing false reports on a key interest rate. The New York Fed released a bunch of documents, and it looks like the admission was distributed through the Federal Reserve and the US Treasury. The New York Fed released the documents in response to inquiries from members of Congress about the role of Treasury Secretary Timothy Geithner, then the head of the New York Fed, and its questions about Libor. Barclays continued reporting false Libor submissions until 2009, according to the Commodity Futures Trading Commission. Geithner and Fed Chairman Ben Bernanke are expected to be asked about the Libor scandal in upcoming Senate testimony.


In December 2007, Barclays told the New York Fed in a phone call that, in general, Libor submissions appeared unrealistically low.


On April 11, 2008, a New York Fed analyst asked a Barclays employee in detail about the extent of problems with Libor. “We [Barclays] just fit in with the rest of the crowd if you like,” the bank’s staffer said in a phone call. “We know that we’re not posting um, an honest Libor.” 


The New York Fed statement says: “The Barclays employee explained that Barclays was underreporting its rate to avoid the stigma associated with being an outlier with respect to its Libor submissions, relative to other participating banks.”


The Fed analyst, her name is Fabiola Ravazzolo, reported the comment to senior New York Fed management and the comment was mentioned in a weekly briefing prepared by the New York Fed staff for the Fed Board of Governors in Washington and the Treasury Department.


On May 1, Geithner raised the subject of Libor with the President’s Working Group on Financial Markets, consisting of the heads of U.S. regulatory agencies, also known as the Plunge Protection Team. The New York Fed gave a detailed briefing to Treasury officials on May 6. Geithner then approached British regulators. In a June 1, 2008 memo to Bank of England Governor Mervyn King, released by the BOE, Geithner proposed six reforms of Libor, including steps to establish a “credible” reporting procedure and eliminating incentives to misreport.


And nothing was done.


Sound familiar?


Where else have we heard about wrongdoing, that was reported to people in position of authority, and those people in power did nothing? Just substitute the names of  Tim Geithner, Ben Bernanke, Mervyn King, Bob Diamond, and Jamie Dimon with the names Jerry Sandusky, Joe Paterno, Mike McQueary, and Tim Curley. 


What we have is institutional failure on a massive scale. And when the news first came out that Joe Paterno was involved with protecting a pedophile, Penn State fans rushed out into the streets to support their coach. And when Wall Street learned that JPMorgan managed to post a second quarter profit despite gambling losses and when Wall Street learned that the Fed and the Bank of England and the entire Libor scandal had been covered up – they pushed the Dow Industrials up 203 points and they bought up shares of JPMorgan.


George Osborne, Britain’s Chancellor of the Exchequer (the equivalent position to the Secretary of the Treasury) said recently, “Fraud is a crime in ordinary business; why shouldn’t it be so in banking?” The answer, of course, is that fraud is not allowed in any well-run country.


Anyone who takes personal responsibility seriously should want all those involved to be held accountable – to the full extent of the law in all jurisdictions. Anything that lets individuals escape consequences will further undermine the legitimacy that underpins all markets. Bankers should be leading the charge to clean up their industry. We know the difference between right and wrong, and if we are unwilling to stand up to what is wrong, then we are in the wrong.


We haven't talked about the Euro-crisis for a while. The latest fix in Europe is already coming un-fixed. The immediate problem was Spanish banks. They are insolvent and failing. The Euro-leders held a summit and developed a plan to bail out the banks directly, rather than funnel the money through the Spanish government, which is also insolvent.


German Chancellor Merkel couldn’t just hand out money without pushing the boot down on the necks of the Spaniards; it wouldn't sell in Berlin. She needed to go back and tell the German voters that she had fought the hard fight.The Spaniards were forced to make more cuts, 65 billion euro in cuts:


Spanish workers blocked streets and railways in Madrid today in protests against new austerity measures they said hurt ordinary people more than the bankers and politicians they blame for the economic crisis. The Spanish government approved the deepest cuts in 30 years, including a second round of wage cuts and reduced benefits for civil servants, and Spain's main unions called on public workers to strike in September.


The date of the strike will be announced at a later stage, the unions said in a statement. Traffic was blocked in central Madrid for hours as hundreds of public workers - many wearing black t-shirts in support of striking miners or green ones for public school teachers - shouted: "Cuts for bankers, not workers" outside ministries and public offices.


Railway workers blocked train tracks; other public workers blocked highways. 
Several policemen took the unusual step of joining the protests. As one protester explained: "Civil servants tolerated the first round of cuts because we wanted to show solidarity, but this has reached a limit. It can't always be the same people paying the price."


It was the third consecutive day of protests since Spanish Prime Minister Mariano Rajoy unveiled fresh austerity measures designed to slash 65 billion euros from the public deficit by 2014 as he tries to dodge a full state bailout after requesting a European rescue for the country's ailing banks in June.

Thursday, July 12, 2012 - Banks Taking Risks, Evading Taxes, Discriminating, Foreclosing, And Yes It Is A depression

Banks Taking Risks, Evading Taxes, Discriminating, Foreclosing, And Yes It Is A depression
-by Sinclair Noe


DOW – 31 = 12,573
SPX – 6 = 1334
NAS – 21 = 2866
10 YR YLD -.02 = 1.48%
OIL - .23 = 85.85
GOLD – 4.40 = 1573.20
SILV +.07 = 27.31
PLAT – 12.00 = 1423.00


After the financial meltdown of 2008, regulators vowed to overhaul supervision of the nation’s largest banks. Last year, the Federal Reserve Bank of New York replaced almost all of its roughly 40 examiners at JPMorgan Chase. The thinking was that the regulators shouldn’t get too cozy with the regulated. They brought in some new regulators. By the time they got up to speed, it was too late.


The New York Fed’s shake-up only aggravated a continuing struggle between JPMorgan executives and regulators from the Office of the Comptroller of the Currency, which supervises banks. For years, the agency, with dozens of its own examiners at JPMorgan, worried that the bank had been miscalculating how much money it could lose in extreme situations.


Examiners challenged the executives; the executives stonewalled. At one point in early 2012, JPMorgan briefly stopped providing examiners with an important risk estimate for the chief investment office, the group at the center of the recent trading losses. Executives told examiners not to worry. For their part, regulators say it is not their job to micromanage or remove risk altogether. Their goal is to protect the financial system broadly.


Around that time, the bank changed the value-at-risk measure for the chief investment office, which they did not disclose publicly for months. The switch would prove important. By changing the metric, the bank could seemingly take on more risk. It all came to a head in May when the bank announced a $2 billion trading loss on a soured credit bet. These are excess customer deposits. Tomorrow, JPMorgan will report second quarter earnings; the loss likely grew from $2 billion to $5 billion, and it might still get worse. 


German tax inspectors are raiding the homes of people suspected of using Credit Suisse accounts as illegal tax shelters. The dispute is the latest in widening effort by foreign governments to crack down on tax evasion engineered by Swiss banks. 


Wells Fargo says it will pay a total of $175 million to settle Justice Department charges that the company violated fair-lending laws for its role in allegedly steering black and Hispanic borrowers into subprime mortgages. According to the Justice Department, the settlement provides $125 million in compensation for borrowers who the agency alleges were steered into subprime mortgages or who paid higher fees and rates than white borrowers because of their race or national origin, not because of their creditworthiness or other financial risk. 


Wells Fargo denied the claims, the company said it would compensate those the government believes were adversely impacted by mortgages priced and sold by independent mortgage brokers through its wholesale channel. The Justice Department also said Wells Fargo will also provide $50 million in direct down payment assistance to borrowers in communities the agency identified as having large numbers of discrimination victims. And this is the part of this that I am truly sick and tired of hearing; the big bad banksters are not required to admit their guilt. Wells Fargo and the CEO and the executives and even the biggest investors like Warren Buffet should be required to go to areas where they discriminated against people, (I've seen judges that forced shoplifters to wear a sign outside the Walmart that says “I'm a shoplifter”) and the banksters should wear a sandwich board sign that says “I am a bigot. I steal from people because of their skin color.”  And maybe they should be put on probation and if they violate probation, they should go to jail. (Don't hold your breath.)


I know, you're wondering why I'm going off on Wells Fargo.  The Justice Department reached a similar pact with Bank of America in December. In that case, the agency struck a $335 million settlement with BofA over alleged discriminatory lending practices by its Countrywide unit during the build up to the financial crisis of 2008. 


Wells Fargo issued a statement saying they're committed to fair and responsible lending for all their customers and they blamed it on independent mortgage brokers and they claim they've stopped funneling loans through the independents. Yea, that's it; it was those guys over there. 


Actually, there is nothing to indicate Wells Fargo is full of racists and bigots. They'll steal from anybody; they just got caught stealing from people of color. 


California foreclosure starts for June rose 18% from a year ago. That pushed California into the top position in the nation for foreclosures. It was the first time California’s foreclosure rate ranked No. 1 since January 2005.


RealtyTrac reported one housing unit in every 177 in San Bernardino and Riverside counties was in a phase of foreclosure in June. That has kept the two-county Inland area in the No. 3 spot for foreclosure activity across all metropolitan areas. The top two regions were Stockton and Modesto.


Additional scrutiny on how lenders and service providers process foreclosures, plus aggressive foreclosure prevention efforts by federal and state governments, have kept a lid on the foreclosure problem. At the same time foreclosure starts began boiling over in more markets in the first half of the year, particularly in the second quarter. 


A report from the Federal Reserve Bank of New York suggests that the bulk of equity returns for more than a decade are due to actions by the Fed. Theoretically, the S&P 500 would be more than 50 percent lower if the bullish price action preceding Fed announcements was excluded. The Fed posted this info on their website and it looks at the periods immediately before FOMC announcements on interest rates and monetary policy; and there are spikes in the stock market, and the Fed just wanted to say we would all be burning in hell right now, were it not for their beneficence. PTF, Praise the Fed, and say hallelujah! 

What moves the markets? Free money from the Fed. Unfortunately, the old fundamentals like companies that make something and sell it for a profit, that stuff doesn't have much effect on the markets. 


I don't know if the Fed can rightly take the credit for stocks moving higher, maybe they did nothing but set up trades for the High Frequency traders. And if the Fed is to take credit, then they should also take the blame for the downturns right? Nope, that's why we have Congress. 


For the past four years I've been saying the United States is in a small “d” depression. Every now and then I hear about economists and Nobel Prize winners that agree with me. David Rosenberg, chief economist for Gluskin Sheff, explains why the current economy has analysts so puzzled. The United States economy is not heading into the second dip of a double-dip recession as many economists believe; rather, it is merely at the halfway mark of a full-blown depression.


To support his theory, Rosenberg points to economic statistics that support the inescapable conclusion that not only is the economy in worse shape than anyone wants to admit, but that this recovery will be much longer and more drawn-out than any the country has seen in generations.


For example the current economic downturn has lingered longer than any other since the end of World War II in spite of unprecedented government efforts to generate a rapid recovery. If the prevailing wisdom among economists is correct, this recession is now three years into its recovery. Yet the nation is experiencing less than two percent annual Gross Domestic Product (GDP) growth. Historically, by three years into an economic recovery, the country’s average GDP growth rate has been above five percent.


Rosenberg also cites the lingering softness in the housing market, as well as dismal employment statistics. One of every seven homeowners is currently in default on their mortgages, and many are in the midst of foreclosure. On the employment front, there are five million fewer jobs today than there were in 2007, and the U6 employment figures show an unemployment and underemployment rate of nearly 15 percent. In addition, the government recently released statistics that show that the median net worth of American households dropped an 40 percent from 2007 to 2009.


All these dismal statistics come in the context of the largest effort ever made by any administration in the history of the United States to shore up the nation’s economy. The government’s concerted efforts to create a false bottom for the economic crisis have served only to prolong the agony. In the absence of government intervention, the pain of the recession would have been much greater, but the suffering would have been over much more quickly. As it is, Rosenberg predicts another three years of recovery before the economy returns to the state it was in before the downturn began.