Thursday, August 15, 2013 - Who's in Control?

Who's in Control?

by Sinclair Noe

DOW – 225 = 15,112
SPX – 24 = 1661
NAS – 63 = 3606
10 YR YLD +.04 = 2.75%
OIL + .41 = 107.26
GOLD + 29.60
SILV + 1.14 = 23.11

Let's start with the economic data:

The Labor Department said its producer price index (PPI) remained flat in July, surprising economists who were expecting a rise of 0.3%. Meanwhile, core prices, which exclude food and energy costs, edged 0.1% higher -- less than the 0.2% climb projected by economists. By comparison, June saw gains of 0.8% and 0.2%, respectively.

Meanwhile, the consumer price index (CPI) showed retail prices rose a seasonally adjusted 0.2% on gains for gasoline, housing, clothing and food, among other goods. Excluding energy and food, the core consumer-price index also rose 0.2%.

The core CPI increased 1.7% in July from the same period in the prior year, slightly up from June’s annual growth. Overall consumer prices have increased 2% over the past 12 months. That year-over-year growth in the overall CPI has trended higher in recent months.

Just the other day, James Bullard,  the St. Louis Fed president said he is concerned about low inflation levels, which he said will be a factor in whether the Fed will scale back its bond-buying program. Bullard said: "There has not been much indication, so far, that it has been ticking back up toward target."

Also, the number of people who applied for new regular state unemployment-insurance benefits fell 15,000 to 320,000 in the week that ended Aug. 10, hitting the lowest level of initial claims since October 2007.

Who's in control? 

The headlines at the Wall Street Journal this morning said:  "Stock and bond prices tumbled after stronger-than-expected economic data ..." The share of our national income which goes to corporate profit is the highest it's been since they started tracking it in 1929, while the share going to people -- as salary and wages -- is the lowest. And the percentage of that corporate profit which goes to Wall Street is also the highest on record.  We're becoming a financialized economy. Never before has the manipulation of money counted for so much and the real-world economy of people and consumer goods counted for so little.

Why would good news about the economy cause the stock market to fall? The sentences continues: "... raised investor anxiety about a pullback next month in central-bank support for financial markets... "

Investors had been relying on the Federal Reserve to keep pumping up the stock market's record run, but some mildly favorable economic reports raised fears that the Fed's market-friendly interventions might come to an end.

Who's in control?

Stocks had the biggest one-day percentage drop since late June; trading volume was higher than the recent averages; there were poor results and outlooks from Dow components Wal-Mart and Cisco.

Wal-Mart Stores' shares fell on a surprise decline in quarterly same-store sales and Cisco Systems shares dropped one day after the network equipment maker announced it was cutting 4,000 jobs. The Wal-Mart earnings report could be considered a macro indicator, almost a proxy for gross domestic product data. It shows that consumer spending isn't that strong yet; inflation is rising, wages are not, and unemployment is still pretty high as witnessed by the news from Cisco.

There's a conundrum in the labor market. Over the past 3 years the number of job openings has risen by almost 50% but actual hiring has gone up by less than 5%. Companies advertise job openings but they don't fill the openings. There may be several possible reasons. Some look at the possible skills gap, the mismatch between the work companies need done and the skills the workers have. Maybe that explains a few of the unfilled job openings but not all. Openings in the retail sector have doubled over the past 3 years but hiring has been flat. They can't find someone with the skills to work at JCPenney?

A second explanation is that employers are offering jobs at wages that are too low to attract good applicants. The long term high unemployment rates have put no upward pressure on wages and companies haven't adjusted their wage offers.

And yet another explanation is that the nature of the financial crisis, rooted in the housing market crash, made it very difficult for many people to move for a job, suggesting that companies respond by filling openings from within. The jobs are advertised, but they go to people already with the company. The final explanation is that companies advertise jobs without much intent to fill the jobs; they don't have to recruit; they don't have to look for talent; it comes to them, cheap and easy.

Everybody's worried about what the Fed might do, unless you followed the “Best Six Months, Worst Six Months” plan, which called for you to get out in May and stay away through October. Actually, the refined version said to get out on May 24^th. In July, that looked like a bad move, now it looks smart. Sell In May doesn't always work, and it might not work this year, but it works with enough regularity to warrant consideration. Why does it work? Go figure.

Who's in control?

More and more the answer is not who you think.

Websites belonging to the Washington Post, CNN, and Time have been attacked, apparently by supporters of Syrian President Bashar Assad. Some links on the sites were redirecting readers to the website of the Syrian Electronic Army (SEA).

The breaches have been blamed on a third-party link recommendation service that all three sites used. The SEA has hit several media companies in recent months, mostly via social media. In this attack, the group was able to manipulate links served by content recommendation service Outbrain, which has now been taken offline.

Yesterday, the New York Times website was knocked out of service, maybe it was just a celebration of the great Northeastern Blackout of 2003, which you may recall was caused by a software bug that failed to detect and respond to a power surge when a tree limb hit a power line. Yep, 55 million people cast into darkness because a tree limb was too close to a power line.

I don't know why the Times had a problem yesterday, they say it was a problem with scheduled maintenance. Maybe. They started out by tweeting the blackout. Then they started posting stories on their Facebook page.

Facebook may have been convenient, but that meant that the Times was no longer in control of its content. Facebook is not hosting this material for the sake of the Times or for people who want quality journalism. Facebook itself is an increasingly threatening competitor to the journalism industry, and it serves its own needs first.

The situation also highlighted a reality all news organizations, and all of us who rely on the web for much of what we read and say, need to understand better. Technology can be fragile. It can be hacked. And even if you don't get your news content from the web, remember that all it takes is an unpruned tree limb, and the power could be out. In other words, we all need a Plan B.

Who's in control?

In Egypt, the control appears to be tenuously hanging with the military, at a great cost. The death toll surpassed 600 today during Egypt’s bloodiest crackdown on supporters of its deposed Islamist president, as violent new protests erupted in the country and world condemnation widened, including an angry response by President Obama and calls for a suspension of European economic aid.

Egypt’s Interior Ministry warned protesters that police officers were authorized to use lethal force to protect themselves. The ministry also promised to punish any “terrorist actions and sabotage” after at least two government buildings were burned. It was easily the most violent of the three deadly suppressions since Morsi was forcibly removed from power by the armed forces six weeks ago, plunging the country into its worst crisis since the ouster of Mr. Morsi’s authoritarian predecessor, Hosni Mubarak, in the 2011 revolution.

 Mr. Obama strongly condemned the Egyptian government’s use of brute force to crush the protests and said the United States had canceled military exercises with the Egypt’s armed forces scheduled for next month. Mr. Obama also warned of further unspecified steps if Egypt’s interim leaders continued down what he called a “more dangerous path.”

But he said nothing about cutting the $1.3 billion in annual military aid that the United States provides to Egypt and acknowledged that the United States had historically regarded the country as a friend and a “cornerstone for peace in the Middle East.”

In Europe, some officials called for a suspension of aid by the European Union, and at least one member state, Denmark, cut off funds.

So, to recap. The military staged a coup. The civilian regime was a façade. The military's attempt to destroy the Muslim Brotherhood guarantees a violent future, likely including terrorism and perhaps ending in civil war. Despite having dumped $75 billion worth of "aid" into Cairo's coffers over the years, Washington has no "leverage."

Yet the Obama administration continues to mouth meaningless platitudes. President Barack Obama said that the violence "must stop." To make that happen he said the US was pulling out of planned joint military maneuvers with Egypt. Yea, that's not going to get it done.

Who's in control?

Thursday, July 25, 2013 - Big Finance Crushes Innovation

07252013 Script

Big Finance Crushes Innovation

DOW + 13 = 15,555
SPX + 4 = 1690
NAS + 25 = 3605
10 YR YLD + .02 = 2.60%
OIL + .22 = 105.61
GOLD + 12.50 = 1335.10
SILV + .10 = 20.35

Usually I write a daily post, based upon various sources, but today I ran across an article that seemed to express the idea of financialization quite well. I made minor changes for time for my daily broadcast, see Moneyradio.com, but I am including the full cross-post below, and if you go to the link, there are several good cross-links. - Sinclair

How Big Finance Crushes Innovation and Holds Back Our Economy

Bold economic thinkers warn that it's time to tame the financialization monster.

By Lynn Stuart Parramore

Whatever happened to innovation in America? President Obama told us that our future depends on it. Across the political spectrum, everyone pretty much agrees that innovation is vital to prosperity.

So why aren’t we getting the job done? Clearly, we’re in desperate need of clean technology that won’t poison us. Our information and communications systems are not up to snuff. Our infrastructure is outdated and crumbling before our eyes. We’re not investing enough in these areas, and it shows. Yet they’re necessary not only for America’s economic health, but for stability and prosperity around the globe.

The U.S. used to be the envy of the world when it came to innovation, making things that dazzled the world and enhanced the lives of millions. But the Information Technology & Innovation Foundation, a bipartisan think-tank that ranks 36 countries according to innovation-based competitiveness, tells us we’re getting pushed aside on the global innovation stage. In 2009, to the surprise of those conducting the study, the U.S. ranked #4 in innovation, behind Finland, Sweden and Singapore. In 2011, the U.S. ranking was unchanged. Worse, the U.S. ranked second to last in terms of progress over the last decade.

Research by the Organization for Economic Cooperation and Development (OECD) also shows that the U.S. is not making as many cutting-edge products as it used to, and that other countries with strong investment in the foundations of innovation, like education and research and development, and fewer of the things that hinder it, like income inequality, are making greater strides than we are.

What went wrong?

William Lazonick, an expert on the history of the American business corporation, points out that the U.S has enjoyed, over its history, an extremely productive economy. We still have important productive assets, but we’re now taking money out of our productive economy instead of investing in it. The shift has happened over time, but the mechanisms of extraction have become dangerously efficient. A giant financial sector and wealthy class are sucking money, vampire-like, out of the productive sector, where the goods, technologies and services that we want are created.

Financiers may appear to be simply “making money out of money,” but if you look closely, you can see that they are really getting rich on the backs of people producing useful things, like consumer electronics, and capital goods like factories and equipment. Good jobs, the health of the overall economy and society, growing incomes for the poor and middle class—all of these things have been put aside in the quest for more financial profits. The game is unsustainable. And it’s turning out badly.

To get the economy humming, argues Lazonick, you want to fuel the kind of growth that allows people to enjoy higher living standards. You want an economy that is stable and allows everyone to share in prosperity. But nowadays, the executives who are running large industrial corporations like GE, Dupont, Cisco and Microsoft are focused on making as much money as they can in the short-term for shareholders, and more importantly, themselves.

Unsurprisingly, they support the policies that allow them to do this: things like low taxes, risky speculation, sky-high executive pay, and pulling investment out of education and infrastructure. What happens to our economy in the long-term is not really their concern. There’s a motto on Wall Street: “I.B.G.-Y.B.G.” or “I’ll Be Gone, You’ll Be Gone.” As long as you’re making money right now, what happens tomorrow is not your problem.

It’s everyone else’s problem. Witness the decline in the number and quality of jobs, the middle class evaporating, and the financial instability that brought about the Great Recession.

A look back

It wasn’t always like this, as Lazonick and Damon Silvers have pointed out. It used to be that Wall Street made its money issuing long-term bonds that governments and corporations could then use to invest in America’s productive assets. Sure, there was trading in stocks and bonds, but you didn’t get huge increases in wealth funneled to Wall Street as a result. There was some speculation involved, but it was expensive for individuals to trade and such trading wasn’t designed to get huge amounts of volume.

The commercial banking system was well regulated, and household savings could be channeled to businesses at fairly good rates of return. Financial institutions were relatively stable and they could help industry to produce technological advances and economic development. Up until the 1960s, most Americans understood and accepted the importance of the federal government in helping to jumpstart innovation through things like defense and aerospace spending. Some of that money got channeled through universities, and some of it was directed to large corporations, which, like GE, could “bring good things to life.”

But in recent decades, several monkey wrenches got thrown into this system, starting in the 1960s with the trend of conglomeration, in which corporate titans built empires that gobbled up scores and even hundreds of companies. In the 1970s, as inflation grew and the Japanese economy took off, Wall Street shifted from investing to trading, and later, in the 1980s, executives came to adopt a harmful ideology known as “shareholder value,” which held that shareholders are the only people who deserve returns from corporations — forget about the taxpayers and the employees without whose support, sweat and risk such companies would not exist. Corporations started focusing on manipulating stock prices to realize short-term gains, and conducting stock buybacks to enrich executives at the expense of research and development or investing in the skills of workers.

Wall Street banks started moving into higher margin businesses. They were no longer regulated utilities, but high-risk, high-return institutions. This destabilized their basic credit intermediation function. Up to the 1970s the productive system dominated the financial system. But from the 1980s on, the balance of power was reversed.

The financialization monster

Think about it: what GE product did you recently purchase that enhanced your life? In the era of financialization, big companies like GE have turned their attention to making quick Wall Street profits instead of fabulous products. In the 1980s, for example, GE’s Jack Welch rapidly expanded the company’s business into issuing credit cards, mortgage lending and other financial activities. It wouldn’t be long before financial operations accounted for almost half of the company's profit.

Eventually we ended up with a situation in which, as my colleague Joshua Holland has noted, a corporate executive will starve the company of needed resources and hinder its ability to be productive in the interest of short-term gains. In his book The Speculation Economy, Lawrence Mitchell of George Washington University points out that a recent survey of CEOs of major American corporations revealed that nearly 80 percent would have "at least moderately mutilated their businesses in order to meet [financial] analysts’ quarterly profit estimates."

Silvers notes that as financialization fever took over, the U.S. developed a dangerous imbalance between private and public finance, and we promoted public policy founded on the strange idea that there really is no such thing as a public good. We embraced the idea that capital markets are more efficient if regulators step aside, and we subscribed to the faulty notion that deregulation of financial institutions would help the economy prosper.

Without regulation and strong unions to ensure that the U.S. kept steadily and thoughtfully channeling money into productive investments like training workers and creating stable jobs with reasonable incomes, the economy essentially became a casino and the gap between the rich and the rest grew wider. We became known less for innovation that enriched people’s lives than for creating complicated financial instruments that are designed to rip people off. From 2004-2008, for example, when other advanced economies were pouring money into clean technology, the U.S. financial markets were rapidly innovating new financial products that served to extract yet more wealth from the productive parts of our economy.

The wrong kind of innovation

Paul Volcker once famously quipped that the ATM is the only useful financial innovation he’s seen in the last 20 years. It seems that while we haven’t gotten around to things like clean technology, we’ve created lots of innovative ways for ordinary people to lose money—things like lines of credits on homes that tend to thrust people into debt more quickly and force them to bear the burden of Wall Street’s obsession with making bigger returns at any cost.

Jan Kregel and Leonardo Burlamaqui have examined how as the financial sector has grown larger, the U.S. has ceased to be a center for developing new knowledge. Finance is no longer playing the role of the “handmaiden of creative destruction” that allows industry to produce technological advance and economic development.

Kregel and Burlamaqui also observe that the financial services industry has special features which create economic instability in a variety of ways, for example, using things like derivatives packages to shift risk from financial firms onto those less able to bear that risk. Bubbles followed by catastrophic crashes become inevitable: eventually, the weight of financial speculation becomes so great that it overwhelms the system, as we saw in the late 1920s, and in the 2007-08 financial crisis. When these crises occur, speculation decreases for a time, but as we can see now, the financial sector is hell-bent on restoring profits— not for the sake of the economy and jobs, but for the sake of their incomes.

Damon Silvers has also pointed out that the costs of financial bubbles include the effects of the failure to productively invest capital, including the decline of government investment in research and development. Income inequality keeps growing, and Wall Street types push the false idea that any money they make is made fairly and that the government should never intervene. Wages are pressed down and yet wealth keeps on building— but only for the very few.

What to do?

Bottom line: the U.S. financial sector no longer serves the productive sector—in fact, it may be killing it. But can it be stopped?

Taming the financialization monster won’t happen through volunteerism. Through our increasingly corrupt political system, the titans of the financial sector pull more of the strings in Washington, and they’re not likely to speak out against things like skyrocketing executive pay, one of the forces driving income inequality, vaporizing jobs, and diverting money from more productive channels. According to a report by the Economic Policy Institute, American CEOs now earn 273 times the average worker’s salary. Thirty years ago, the average chief executive of a large public company took in less than 30 times the pay of the typical worker. Have CEOs really become that much more valuable?

As Lazonick points out, social norms have to change. In Japan, stratospheric executive pay is considered unacceptable because there’s an understanding that making a company work is a collective endeavor. That’s an important social value. In Europe, there’s a movement to curb executive pay at bailed-out banks. Senior staff at banks that enjoy state funding would only be able to earn 15 times the national average salary or 10 times the wages of the average worker at the bank. Bonuses would be capped at twice fixed salary.

That’s a good idea, and something we need to be discussing in the U.S., where executive pay is not only extremely high compared to the rest of the world, but often arbitrary and shockingly detached from performance.

Lazonick thinks what we really need is a whole new mindset about the economy. He recommends several things that would help get us back on track:

• Understand that markets don’t create value, but that organizations investing in productive capabilities, like business, governments, and households do.

• Ban stock repurchases by U.S. corporations so corporate financial resources can be channeled to innovation and job creation instead of wasted for the purpose of jacking up companies’ stock prices.

• Realize that the shareholder value ideology is destructive and will cause us to lag behind other countries that don’t subscribe to it.

• Regulate employment contracts to ensure that workers who contribute to the innovation process get to share in the gains from innovation.

• Create work programs that make use of and enhance the productive capabilities of educated and experienced workers whose human capital would otherwise deteriorate through lack of other relevant employment.

• Move toward a tax system that channels some of the money made on the gains from innovation toward government agencies that can invest in the public knowledge base needed for the next round of innovation.

We’ve still got plenty of innovation left in us, but we have to change our priorities and make the financial economy subordinate to the productive economy. That would go a long way toward getting Wall Street off our backs and allowing America to once again be a place where energetic people thrive and work together to produce great things.

Tuesday, July 16, 2013 - No Inflation Except if You Drive

No Inflation Except if You Drive

by Sinclair Noe

DOW - 32 = 15,451
SPX - 6 = 1676
NAS – 8 = 3598
10 YR YLD - .02 = 2.53%
OIL - .55 = 105.77
GOLD + 8.30 = 1292.50
SILV + .08 = 21.11

Start with the big economic report of the day; the Consumer Price Index, or CPI, which measures inflation at the retail level, increased 0.5% in June. A 6.3 percent surge in gasoline prices accounted for about two thirds of the increase. In the 12 months through June, the CPI advanced 1.8 percent. Stripping out energy and food, consumer prices increased 0.2 percent for a second straight month. That took the increase over the past 12 months to 1.6 percent, the smallest rise since June 2011. No real inflation except for energy prices.

A separate report from the Fed showed output at the nation's factories, mines and utilities rose 0.3 percent in June after a flat reading in May.

Another report showed confidence among single-family home builders at a 7-1/2 year high in July, with expectations of stronger sales and buyer traffic.

In earnings news, Coca Cola reported earnings of $2.6 billion, down from $2.7 billion a year ago. They tried to blame the shortfall on bad weather but I think people are cutting back on drinking soda.

Goldman Sachs posted second quarter net income of $1.9 billion compared with $962 million, in the period a year earlier. So, profits are up 100 percent. How is that possible, especially considering the new capital requirements and all those terrible regulations being forced on the big banks? And it's not just Goldman. Just the other day, JPMorgan reported a 33% increase in profits and Wells Fargo reported a 19% jump, and Citigroup's profits are up 42%. Banks are smashing their old profit records in a sluggish economy, with moderate M&A activity, and all sorts of regulations that were supposed to keep the banks from becoming unmanageable behemoths.

Actually, most of the regulations aren't really in place, only about 40% of the rules are affecting the banks, and they are still fighting the rest of the regulations; so maybe they don't really want to talk too loudly about record profits in a harsher regulatory environment. It's like the kid who's forced to take medicine, and his health improves, but he still cries about having to take the medicine.

Tomorrow morning, Fed Chairman Bernanke will appear before the House Financial Services Committee as part of his 2 day testimony before Congress on the economy and monetary policy. He'll deliver prepared remarks and then there will be a question and answer session, which generally provides the Congressmen a chance to demonstrate their economic incompetence and for Bernanke to speak without saying anything. Sometimes Bernanke slips and there is a nugget of information. He might just give a hint about when the Fed will exit QE, or what might serve as a trigger for taper; but mainly he'll repeat the mantra that monetary policy will remain accommodative from here to eternity. Expect a boring recitation of what Bernanke has been trying to repeat and repeat again and again; that essentially QE continues. Of course, you never know. Bernanke is going to leave his role at the Fed, so maybe he could just break out and speak truth.

That might be fun. Can you imagine if Bernanke, or even Greenspan before him, had decided to cut through the Fedspeak and tell the blunt, plain truth to the politicians? Maybe Bernanke could talk about how the Fed really made the crisis of 2008 much worse than it should have been; maybe he could talk about how the Fed has failed in its role as a regulator of the big banks, and now they represent an even bigger risk than in 2008; maybe he could tell the politicians how the sequester and austerity moves are hurting the economy, and the fiscal policy is akin to bleeding a patient to restore health.

Maybe Bernanke could tell Washington that the last four years have offered the federal government a borrowing and investment opportunity that's unprecedented in modern history; and that window of opportunity won't last forever. Interest rates have been at World War II-era levels, thanks to ZIRP, while investor confidence in Uncle Sam (and fears about other investments) created a situation where they were effectively paying the government to borrow money.

We could borrow the money, invest it in job creation, and be rewarded with an expanding economy that pays us back for our investment in both human and financial terms. And it's not like we'd be creating make-work. America's falling down. Our highways and bridges are crumbling; our electric grid is vulnerable; our water systems are antiquated; our public transportation is a joke, only surpassed by the cellular network; and that's just for starters. Maybe Bernanke could tell the politicians that we are on the verge of missing a once in a lifetime opportunity to really make a difference.

Yea, that's not going to happen.

But then who would have thought the politicians would agree on anything; turns out they can, and did. The Senate has voted to confirm Richard Cordray as director of the Consumer Financial Protection Bureau, as senators approved the first of a batch of President Barack Obama's nominations freed for votes by a bipartisan agreement.

The vote came hours after Senate leaders worked out a deal freeing up seven stalled appointments for the consumer bureau and other agencies for simple majority votes by the chamber. In exchange, Democrats agreed to abandon for now an effort to change Senate rules to weaken the minority party's ability to block nominations with filibusters, and Obama agreed to submit two different nominees for two labor posts.

Obama had used a recess appointment to put Cordray in charge of the agency, an appointment that expires in January. Republicans had solidly opposed Cordray's nomination, demanding that Obama first agree to change the agency's financing and structure.

So, this proves that politicians can come together, and all it took was the threat of the “nuclear option” on filibusters. Simple.

You Will Be Paying Higher Gasoline Prices. It Is Essential You Begin to Understand Why!

In the face of escalating gas prices, the oil patch, their allies and Wall Street are counting on your ignorance permitting them to pick your pockets, spoon-feeding you nonsense while they cash in massively. Oil prices recently touched $107, a level during the current run-up not reached since May of last year. This while inventories in the U.S. are near all-time record levels, U.S. production is accelerating, the world is awash in oil, and natural gas in the U.S. is selling at an equivalent BTU content to that of oil costing $24 a barrel or less.

It just doesn't make sense, and it is not explained away by the usual industry placebos: "The driving season is upon us", "production difficulties in Libya, Nigeria or you name it," "Iran is becoming recalcitrant," "Egypt is falling apart," "the dollar is weakening," "Chinese consumption is impacting markets," and so forth. Lots of hot air without real substance nor actual impact on the price of oil at Cushing, Texas, the delivery point for WTI crude. Misinformation propagated often enough both by the industry and a somnolent press to make an otherwise bilked public (paying extortionate levels for gas and petroleum products) blindly accept the oil industry's palaver. This combined with massive industry lobbying resulting in a total lack of effectual oversight of oil industry pricing and Commodity Exchange excess and the gross distortions resulting from the financialization of energy markets.

My saying so doesn't necessarily make it so. But consider the following- only yesterday Mr. Joe Petrowski, the CEO of Gulf Oil, posited on CNBC that the price of oil should be half of yesterday's $105/bbl exchange-quoted price or closer to $50 a barrel. He cited that record amounts of oil are being produced in the United States and Canada, and that OPEC supplies are higher.

Add to this the comments of Rex Tillerson, Chairman and CEO of ExxonMobil. In case you missed it, only last week, Exxon's 2012 earnings were cited as the second most profitable corporate earnings in the world, ever.

Yet some two years ago, before a Senate Committee, the same Rex Tillerson testified that the price of crude oil was $30 to $40 higher (at that time quoted at $100/bbl on the exchanges) than it should have been were it not for the "financialization" of energy futures and options on the Commodity Exchanges. With this coming from a man of Tillerson's stature and expertise on the issue, one would have expected that someone in government would have acted to protect the public's interest, but clearly the 'oiligopoly' and the commodity exchanges have a higher priority in Washington and the Beltway.

As an example of the excesses of the financialization of oil and energy derivatives trading and how they have lost all bearing to 'supply and demand' of physical product, let me cite but one example. On Feb 8, 2012 the Chicago Mercantile Exchange Group (CME), the world's leading derivatives marketplace, announced it set a new record for trading volumes of its energy products on February 7, 2012. Their trading volume for energy futures and options contracts totaled 3,489,302 contracts higher than the previous record of 3,098,129 contracts on 02.22.10 The CME group controls more than 90 percent of listed U.S Futures Trading including the New York Mercantile Exchange (NYMERC) and according to theWall Street Journal has outspent rivals on lobbying in Washington to ensure its views are heard.

Consider trading 3,489,302 energy or crude oil equivalent contracts in one day represents 3.48 billion barrels of oil (each oil futures or option contract is for 1,000 barrels). With world consumption some 85 million barrels a day, this would mean that in one day's trading on the New York Merc, the equivalent of 41 days of the total WORLD'S consumption will have been traded. And then we are told, of course, that it's all about supply and demand.

Remember, your silence is letting the oil boys and the oil desks of the bank-holding companies and the myriad speculators take you to the cleaners.

 

Friday, June 28, 2013 - Halftime

Halftime

by Sinclair Noe

DOW – 114 = 14,909
SPX – 6 = 1606
NAS + 1 = 3403
10 YR YLD - .05 = 2.48%
OIL - .49 = 96.49
GOLD + 34.50 = 1236.30
SILV + 1.15 = 19.76

What a long strange trip it's been, and we've only just reached the halfway mark of 2013.

It started with the fiscal cliff, and after the lemmings jumped, we still had payroll tax hikes, debt ceiling battles, sequestration, mixed with assorted dysfunction; and through it all the stock market climbed. The S&P 500 hit a record high of 1687 in May; the Dow hit a high of 15,542. Those were the days of milk and cookies.

And then Bernanke did a little tap dance around the punchbowl, sparking the animal spirits of the marketplace, and transforming bond market vigilantes into feral hogs, raising their snouts in the air and sniffing a whiff of blood. Volatility spiked, with more than 15 consecutive days of 100-point swings for the Dow. The bond market swooned, and June turned gloomy.

Still, the first half was generally positive. The best first half for stocks since 1998. The S&P 500 closed the first half of 2013 up 12.6 percent. For the second quarter, the Dow rose 2.3%, the S&P 500 gained 2.4% and the Nasdaq Composite climbed 4.2%

We are at a policy inflection point, or at least we are at a point where we can think about an inflection point, which may or may not be a bad thing if it is accompanied by good economic news. So, let's see where the markets stand in relation to the beginning of QE2 back in the autumn of 2010. Not much change really. Bond yields are just a little lower than in November of 2010. The dollar has been on a roller coaster ride, but it recovered all the lost ground. Gold, which was beaten bloody in the last quarter, was just a smidge higher in late 2010. Three rounds of QE failed to produce hyper inflation, or even any kind of inflation; the price of milk and bread is the same as it was five years ago; maybe all that QE avoided deflation. Even though the Fed expanded its balance sheet, the money never made it into the broader economy, with the possible exception of stocks. Stocks looked bubbly, at least until a month ago. The jobs picture has improved, but not enough.

Gold plunged to a 34-month low, set for a record quarterly drop. Gold has dropped 23 percent this quarter, heading for its biggest loss since at least 1920 in London.  Silver futures fell to the lowest since August 2010. About $60 billion was wiped from the value of precious metals exchange-traded product holdings this year.  Silver futures are down 34 percent this quarter, set for the biggest drop since the start of 1980. It’s the worst performer this year on the Standard & Poor GSCI Spot Index of 24 commodities. The index is down 5.5 percent this year. The current gold to silver ratio is about 64 to 1; which might indicate that silver is over-sold, or might indicate that gold still has more to drop. China announced today that they would buy gold to support their currency. Even as the paper metals have dropped, the premium for physical metal has been growing. So, it should go up, but remember that market can remain irrational long than you can remain solvent.

The dollar index has been on a bit of a rally the past couple of weeks, and for the year the dollar has climbed from around 80 to 83; cementing it's status as the prettiest horse in the glue factory. By the way, a New Mexico company has received permits from the USDA to open a horse meat plant. It would be the only one in the country, at least for now, to slaughter horses for human consumption. Just a side note there.

Bonds have been hammered as of late. The benchmark 10 year note rose 64 basis points over the last three months in the largest quarterly yield rise since the fourth quarter of 2010. The 10-year yield is up 33 basis points on the month.  Bond mutual funds and bond ETFs saw $62 billion in outflows through the first 3 weeks of June. The withdrawals wiped out over half of the $115 billion deposited into bond funds through the first five months of the year. Emerging market debt and high yield were among the casualties, with losses of 8.8% and 4.2% respectively. NYSE margin debt declined to $377 million in May from April’s record reading of $384 million. This was the first decline on a monthly basis since last June. Historically, margin debt has a strong correlation with the S&P 500 as investors tend to lever up as the market advances and the mood shifts from risk off to risk on. Mortgage rates jumped to the highest level in 2 years. The average rate on the 30-year fixed is 4.46%.

It seems like we've been on a wild ride this week. There were Supreme Court rulings: voting rights, affirmative action, Doma, Prop 8. You heard all about those. You probably didn't hear about a few others. Vance v. ball State and University of Texas v. Nassar involved employment discrimination and both make it significantly more difficult for employees to sue employers for workplace discrimination. In Koontz v. St. Johns River Water Management, the Court ruled that a man trying to develop property in a wetlands region did not have to pay money to improve wetlands in other areas to counteract the effects of his development. This decision makes it more difficult for localities to demand financial compensation to enforce environmental regulations. And in Mutual Pharmaceutical v. Bartlett, the Court ruled a woman could not sue a pharmaceutical company for the side effects of a generic drug she took which caused her to go blind, put her in a coma, and made most of her skin fall off. By the way, the drug is called Clinoril, a generic form of sulindac, and it's still on the market.

Jon Corzine has finally been charged, in a civil suit, for losing $1 billion dollars of MF Global's clients' money. A civil suit. And before you say there is no justice in this country. I present the case of Robert Bracone and Rene Torres. This is a New York City story of corruption; filthy, dirty corruption. The two men are accused and pleaded guilty to accepting cash payments to remove the filth from New York. Specifically, they each accepted a $5 dollar tip for cleaning up trash in an alley. The guys were sanitation workers, trash men; more than 25 years on the job. They have lost their jobs, and they have each paid a $2,000 fine. Finally, there is justice in New York City.

And then there was a little bit of data that slipped by almost un-noticed. It comes from the Wealth Data Book. It confirms some of what we know. America has more millionaires than any other country; more billionaires, too. We have tall buildings and fast cars and shiny airplanes, and that must mean we are the richest country in the world, why, we must be the richest country in the history of the world. Not exactly.

Kind of depends on how you measure things. The most telling comparative measurement is median wealth (per adult). It describes the amount of wealth accumulated by the person precisely in the middle of the wealth distribution -- fifty percent of the adult population has more wealth, while fifty percent has less. You can't get more middle than that. And when it comes to median wealth, we're not Number One. We're not even in the Top Ten. We're Number 27!

And according to the Global Wage Report, the number one reason why we're number 27 isn't globalization, or new technologies, or poor social safety nets; the reason is fiancialization.

"Financialization means the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies."

This includes such trends as:

• The corporate change during the 1980s to make shareholder value the ultimate goal.

• The deregulation of Wall Street that allowed for the creation of a vast array of new financial instruments for gambling.

• Allowing private equity firm to buy companies, load them up with debt, extract enormous returns, and then kiss them good-by.

• The growth of hedge funds that suck productive wealth out of the economy.

• The myriad of barely regulated world financial markets that finance the globalization of production, combined with so-call "free trade" agreements.

• The increased share of all corporate profits that go to the financial sector.

• The ever-increasing size of too-big-to-fail banks.

• The fact that many of our best students rush to Wall Street instead of careers in science, medicine or education.

In short, financialization is when making money from money becomes more important that providing real goods and services.

With all that going on, you may have missed the speech by President Obama on Tuesday. It was the first time a President has acknowledged global warming and set out to change policy to address the problem. The main thing I got from it was bad for coal, good for fracking.

A few weeks back, someone called in and asked about problems with the Vatican Bank. I hadn't been following it but I did a little research and yes, there was an investigation into money laundering. When Pope Francis took office, he pledged to clean up the Holy See's scandal plagued government. For the past two years, Italian prosecutors have been investigating money laundering at the Vatican Bank, formally known as the institute of Religious Works. That investigation revealed an alleged plot to smuggle $26 million from secret Swiss bank accounts into Italy. Today, Italian financial police detained a Vatican accountant, a financial broker, and a former member of the country's secret services. 

There seems to be something about banking that is repellant to the notion of good deeds; perhaps it is the idea that usury is considered a sin; perhaps it goes back to the idea of casting out the money changers from the Temple. Whatever the root, the problems with the Vatican Bank underscores the challenges the Pope faces in trying to recast the Catholic Church as more humble and serving the poor. 

So, where are we going in the second half? What do you think about the Supremes? Now that we have a policy dealing with global climate change, do you believe in climate change? Have you been outside today?

Deficits, Militarization, Privatization, Financialization

by Sinclair Noe

DOW – 126 = 14,995
SPX – 13 = 1612
NAS – 36 = 3400
10 YR YLD + .03 = 2.23%
OIL + .38 = 95.76
GOLD + 10.20 = 1389.40
SILV + .10 = 21.89

Pretty much all markets looked a little weak today, except maybe precious metals, but its hard to call that market strong right now. Quantitative easing, the $85 billion per month shelled out by the Federal Reserve, comes down to the purchase of two kinds of securities: Treasury paper and mortgage-backed securities. The Fed buys the Treasury paper from the federal government and the mortgage-backed securities from commercial banks. The first is a direct form of monetization (money printing); the second is an indirect form since a good portion of those funds is in turn also used by the banks to purchase Treasury paper. The two together comprise the bulk of what appears on the Fed's balance sheet as "reserve bank credit"; that figure stands at just over $3.2 trillion; up about $2.4 trillion since late 2008. At first glance, it looks like reserve bank credit and the gold price are correlated, but what is really going on with this tandem is that they are both being pushed by the same force - a bad economy. It causes the Fed to print money and investors to buy gold.

The government reported Wednesday that the US budget deficit widened in May by $139 billion. But the annual deficit stayed on track to finish below $1 trillion for the first time since 2008. With the May increase, the deficit through the first eight months of this budget year totaled $626 billion, according to the Treasury. That's down $218 billion lower than the same period last year. And that means we are on track to the smallest deficit in 5 years.

Many analysts believed the huge revenue gains seen in the first few months of 2013 would fade away as we moved into spring. Higher taxes, and a big increase in dividends which were pushed forward to beat the fiscal cliff, and other income in 2012 helped create huge tax liabilities that people had to pay in the early months of 2013. Yet in May, revenues again rose sharply from May 2012. They came in at $197 billion, compared with $180 billion in May 2012, or up 9.1 percent. Through the year thus far, revenues are up 15 percent from the year before.

The spending side was a little different. In general, the trend so far this year has been for spending to be down a bit, thanks to the sequester, and less spending on defense and unemployment benefits. Thus far this year, spending is up about 1 percent.

Next, consider that for the next four months, assuming no big shocks or great changes, the government will essentially break even. That hasn’t been done in well over a decade. In the first eight months of the fiscal year the deficit was $626 billion, down about 25 percent from the first eight months of fiscal 2012. But the Congressional Budget Office is predicting that’s all the red ink we’ll print this fiscal year. It is projecting the deficit for the entire fiscal year will be $642 billion.

One area of government that is growing is data collection, the amount of surveillance information that the government collects is enormous and growing really fast; in fact the new name for it is metadata, and we have no idea how it is used by the government, how long it is held and which agencies, or companies, have access to it. The culture of secrecy that pervades Washington borders on the absurd. American officials say they cannot discuss “classified” U.S. counter-terrorism tactics that are well-known worldwide, including data mining.

From drone strikes to eavesdropping to torture, the American public is not allowed to know the rules and results of U.S. counterterrorism policies. At the same time, a sprawling secrecy industrial complex does. More than 4.9 million Americans now have government security clearances, and another 1.4 million have top secret clearance.  Major U.S. civilian government agencies — from the CIA to State Department — have become dependent on contractors to operate. Today, the federal government pays contractors $300 billion a year, according to the Project on Government Oversight, a watchdog group. Many are believed to operate in intelligence agencies.

Contracting has become a huge profit center for defense contractors and Wall Street alike. Ed Snowden is the guy who leaked the most recent info about the government's data mining. Snowden worked for a private contractor, Booz Allen, which was purchased by the Carlyle Group in 2008. Last year, 99 percent of the Booz’s $3.8 billion in revenue came from government contracts. Booz Allen, which employs 24,500, had a net profit of $219 million on revenue of nearly $5.8 billion for the fiscal year ended March 31. For the same period ending in 2010, the year the company went public, the company earned $25 million on $5.1 billion in revenue. Whatever they do, they've figured out a way to improve the margins. Unfortunately, the margins are paid with tax dollars.

Snowden is now believed to be somewhere in Hong Kong, and he keeps releasing info; the latest is that the US government has been hacking the Chinese since at least 2009. The National Security Agency, Central Intelligence Agency and Defense Intelligence Agency, for example, all rely heavily on contractors to operate. Roughly 480,000 — one-third of the 1.4 million people with security clearances — are contractors.

Of course, private sector and public sector work in different ways. The major motivation for the private sector is profit. How does a firm increase profit? Do they mine more data? Do they promote more fear? Surely, complacency would be bad for business. You wouldn't want to make a mistake with your biggest client, which is what Booz Allen Hamilton did in the case of Snowden. But government contracting is a different ballgame. When a company screws up, the government delivers a slap on the wrist—and then awards the company with new contracts.

This is the way the government has grown the military industrial complex, and it doesn't seem to matter if Lockheed Martin overcharges for fighter jets, or if Boeing goes over budget on helicopters, or if Haliburton builds latrines for soldiers in Iraq and happens to electrocute a few in the process; in these cases, the new contracts continued to flow.

The reality is that these contractors have become part of the government. The national-security and defense apparatus needs them to carry out essential operations as much as the private companies need their federal benefactor to deliver returns to the shareholder. Government agencies these days simply lack the resources, permissions, and wherewithal to hire all the people they need to conduct operations. Using contractors is a necessity. At least that's the argument of the contractors.

On the one hand, it is a fiercely competitive industry in which big firms compete with one another. On the other hand, the fix is in. The government spreads its contracts around between large companies. Small businesses and start-ups have a tough time competing for the biggest of the contracts. And there is a limited number of domestic large players, especially in sensitive defense areas. Lobbying also plays an important role. Big contractors hire lobbyists and make campaign donations in order to work the system.

In its recent annual report, Booz Allen said that the main risks to its business includes changes to “U.S. government spending and mission priorities” (like the sequester) and “mishandling or the perception of mishandling of sensitive information, such as our failure to maintain the confidentiality of the existence of our business relationships with certain of our clients or a failure to maintain adequate protection against security breaches,” which “could harm our relationship with U.S. government agencies.”

Ed Snowden, the guy who leaked the stories, is a 29-year old, reportedly making $122,000 a year at Booz Allen, until they fired him this week. That means this guy made more than most Army Colonels.

Maybe another risk to the profits of these companies is that the public reconsiders the price we pay for privatization of national defense, and maybe we just get tired of paying companies to snoop into our phone calls and emails.

Yesterday I talked about the financialization of the economy, and how an ever-growing financial sector was actually hurting the economy and hurting the prospects for jobs growth. So, let's go back just a little bit; remember the Libor rate rigging scandal? About a year ago we heard that there was widespread manipulation of the London Interbank Offered Rate, which is the benchmark interest rate that affects borrowing costs around the world. A handful of big banks have already paid fines in that case, and some traders have been fired. Given that set of fairly manageable consequences, it's understandable that traders would continue to find different things to manipulate for fun and profit.

And then we heard about credit swap derivatives being manipulated via something called the ISDA Fix; then there was the gold and silver markets, and the British natural gas market, and the crude oil market. This is going to shock you; it's hard to believe, but there is even more manipulation. Bloomberg is reporting that the Forex market, which is where currency is traded, has been manipulated for at least the past ten years. One trader compared it to the Wild West, which I think is an insult to the Wild West.

One thing that makes the alleged currency-market manipulation especially unpleasant is that this apparently involved front-running client trades. So, they are literally stepping in front of someone's trade and stealing a little. And traders allegedly worked together with traders of other banks to do this, in order to spread the wealth around -- to everybody but the poor dumb clients, that is.