Friday, August 15, 2014 - Don't Worry

Don’t Worry

by Sinclair Noe

DOW – 50 = 16, 662
SPX – 0.12 = 1955
NAS + 11 = 4464
10 YR YLD - .06 = 2.35%
OIL + 1.49 = 97.07
GOLD – 8.40 = 1305.50
SILV - .31 = 19.65

For the week, the Dow rose 0.7%, the S&P 500 gained 1.2% and the Nasdaq climbed 2.2%.

The Federal Reserve said factory production jumped 1.0% last month after rising 0.3% in June. That was the largest gain since February and reflected increases across all major categories. Auto production surged 10.1%, the biggest rise since July 2009. There were also solid gains in the production of machinery and computers and electronic goods; yesterday we talked about the importance of capex and business spending; maybe we’re seeing signs of that.

Or not. In a separate report, the New York Fed said its "Empire State" general business conditions index fell to 14.69 this month from 25.60 in July.

A preliminary August reading on the University of Michigan/Thomson Reuters consumer-sentiment index fell to the lowest level in 9 months, 79.2 down from a final July level of 81.8.

Producer prices, or prices at the wholesale level increased 0.1% in July, with 0.5% growth for transportation and warehousing prices; goods prices were unchanged; food prices rose 0.4%; energy prices dropped 0.6%. Overall producer prices rose 1.7% over the 12 months that ended in July, down from June’s annual-growth rate of 1.9%.

But the economic news carried little weight today, as attention once again focused on geopolitics. That might not be totally accurate; Wall Street looks at geopolitical hotspots but it can’t hold their focus. A new survey of institutional money managers around the world by Bank of America Merrill Lynch has found a sudden surge in worry and fear, and a rise in the number buying “protection” against a crash; which means derivatives such as put options or credit default swaps.

Money managers are worried about the markets and the Fed raising interest rates and geopolitical events and the baggage retrieval system at Heathrow, and so, over the past month they have raised their cash positions from 4.5% to 5.1%. Which doesn’t sound very defensive; in fact, it sounds like money managers are still excessively bullish on stocks.

Yesterday Russian President Putin talked about how he wanted to avoid confrontation in Ukraine. Last night a Russian armored column crossed the border into Ukraine; they started firing artillery at Ukrainian forces, which exchanged shellfire. Ukrainian President Petro said a "significant" part of the Russian column had been destroyed. Russia's government denied its forces had crossed into Ukraine. NATO said there had been a Russian incursion into Ukraine but would not go so far as to call it an invasion.

After Ukraine reported the invasion, Russia's ruble weakened against both the dollar and the euro. Russian shares were also dragged lower. International markets moved lower. European Union governments warned they are ready to expand sanctions against Russia if the conflict in Ukraine intensifies.  US markets initially moved lower. The yield on the ten year treasury dropped 6 basis points to 2.35%; Treasuries are usually considered a safe haven. The yield on German bunds, or 10 year bonds, dropped under 1%. The escalating clash is now haunting the European economy, already on the brink of fresh recession, with a string of southern states in debt-deflation.

All of a sudden, the euro crisis is back, though in truth it never really went away. The latest economic figures from the eurozone make bleak reading. Across the eurozone, which is struggling to get banks lending to businesses, economic growth is expected to be 1.1% this year. All three of the euro area’s biggest economies — Germany, France and Italy — are failing. Germany’s output actually fell in the second quarter. Italy is suffering through a triple dip recession. The French economy has stagnated. Analysts expect it to grow by less than one per cent this year. Italy has dropped back into recession, or maybe it never got out of recession. The closest thing approximating good news was that Spain's dead-cat bounce recovery continued with 0.6% growth. But it still has 24.5% unemployment. The eurozone economy is still far smaller than six years ago, by about 1.9%; unemployment is in double figures and debt burdens in some areas are high.

In June, the ECB cut its key interest rates and introduced a new program of cheap loans to banks that are intended to be passed on to businesses. Some economists say the European Central Bank should go further and engage in large-scale purchases of public and private debt to reduce borrowing costs and add to the money supply. ECB President Mario Draghi is under fire to do more to resuscitate growth. He, in turn, argues that “monetary policy can only achieve so much, with government reform required to do the heavy lifting,” and he is probably right, but there doesn’t seem to be much appetite for reform. Monetary stimulus is simply not remotely an adequate substitute for government spending. Even the austerian IMF has been forced to acknowledge that fact.

The Ukraine crisis has drawn the EU into an economic confrontation with Russia, which is not only the principal supplier of energy to many eurozone countries but is also a significant trading partner and export market for European goods. This is hardly designed to improve the economic outlook, and the eurozone remains too weak to withstand external shocks. And Eurozone weakness was already in place before the most recent economic sanctions against Russia; the unfortunate reality is that nobody really knows how Russian sanctions will play out. There will be costs associated with sanctions; many of them unexpected.

Next week, the Federal Reserve will hold its annual Jackson Hole retreat. Janet Yellen will speak on labor markets. The labor market has improved but still looks weak. Various Fed officials have various theories on the labor markets, but not much in the way of solutions, and so, not surprisingly, they have different views on Fed policy.

Jeremy Stein left the Fed Board of Governors earlier in the year to return to a teaching gig at Harvard. Last week Stein said whatever the Fed does, we can expect less financial stability. Stein says that the process of exiting QE and raising interest rates has “no real precedent”. Yellen devoted an entire speech to the subject of financial stability last month at the IMF, where she said the Fed had devoted “substantially increased resources” to monitoring stability and acknowledged that the Fed’s low-interest rate policy had spurred “households and businesses to take on the risk of potentially productive investments.” But, she went on, “Such risk-taking can go too far, thereby contributing to fragility in the financial system.”

Yesterday, St. Louis Federal Reserve President James Bullard said he believes financial markets are probably mistaken if they’re counting on Fed interest rate increases to occur more slowly than policy makers forecast. Bullard says the Fed will raise the interest rate target in the first quarter of 2015. Bullard said: “We’re way ahead of where we expected to be” in terms of the Fed’s employment mandate, and “If that strength continues in the second half of the year here, then the conversation on a little more hawkish direction of monetary policy will heat up.”

Today, Minneapolis Fed President Narayana Kocherlakota offered a contrasting view, saying: “The FOMC is still a long way from meeting its targeted goal of price stability” because of excess slack in the job market, and “progress in the decline of the unemployment rate masks continued weakness in labor markets,” which would keep the inflation rate below the Fed’s 2% target until 2018. Kocherlakota pointed to the participation rate among people between the ages of 25 to 54, the prime working years; another especially significant” measure of slack is the “historically high” percentage of workers who would like full-time jobs but can only find part-time work. The U-6 unemployment rate, a broad measure of unemployment that includes people working part time because they can’t find full-time jobs rose to 12.2% in July after declining one percentage point over the first six months of the year.

One of the biggest changes in the US labor market over the past two decades has been the increasing number of people working over the age of 55. From the end of World War II until the early 1990s, a smaller and smaller share remained in the labor force but since the 1990s that trend reversed. In 1993, only 29% of people that age were in the labor force. The vast majority were retired. But participation has been rising and by 2012 more than 41% of people in that age group were still in the labor force, the highest since the early 1960s. Clearly, something has changed about people’s attitudes toward retirement. A survey from the Federal Reserve last week provided some clues. Around 21% of people said their plan for retirement is simply “to work as long as possible” and the number of people giving this response increases by age.

In addition to the Fed’s get-together in Jackson Hole, next week’s economic calendar includes minutes from the Fed’s July 30^th FOMC meeting; on Thursday we’ll get a report on July existing home sales from the National Association of Realtors; Tuesday brings an update on July housing starts. Housing starts tumbled 9.3% in June. The Labor Department will release the consumer price index report on Tuesday; the CPI measures inflation at the retail level; it’s been running near 2%, more or less.

Tuesday, June 03, 2014 - Always Look on the Bright Side

Always Look on the Bright Side
by Sinclair Noe

DOW – 21 = 16,722
SPX – 0.73 = 1924
NAS – 3 = 4234
10 YR YLD + .06 = 2.59%
OIL + .37 = 102.84
GOLD + 1.40 = 1245.90
SILV + .05 = 18.91

Automakers reported strong sales of new cars in May, the strongest annual sales rate since before the 2008 financial crisis. Industry sales rose 11.3%. Chrysler and GM had their best month of May in 7 years. A record number of recalls at GM since the first of the year did not crimp demand for the automaker's new vehicles. Average transaction price for a new vehicle in May was $32,307, according to research firm Kelley Blue Book, which said average new-car prices were up $653 from a year ago, but down slightly from April.

The city council of Seattle Washington has voted to raise the city’s minimum wage to $15 an hour, the highest level of any major US city. Wages would begin to rise next year, ultimately reaching $15 from Washington state's minimum of $9.32 over three to seven years, depending on the business. Under the plan, firms with more than 500 employees nationally will be given at least three years to phase in the increase, those who provide health insurance subsidies would get four years and smaller businesses would be given seven years. US minimum wage is $7.25, although 38 states have set higher levels. The states of California, Connecticut and Maryland have recently passed laws increasing their respective wages to $10 or more in coming years.

Yesterday we heard the EPA proposal to cut power plant carbon emissions by 30% over the next 15 years. Even before the announcement we heard concerns about how that might affect jobs, most of it conjecture. In 2010 when the country was debating a clean energy bill aimed at cutting carbon emissions by 17%, the Congressional Budget Office predicted how destructive the law would be for American jobs. The CBO report concluded it wouldn’t be destructive at all, rather it would probably add more jobs than it killed.

The report found that overall, unemployment would probably increase in the short term. Workers may lose jobs by the thousands across industries that include coal mining, oil and gas extraction and transportation, the report said. And, it added, people who found new jobs by relocating or by learning new skills would probably be earning lower wages than before.

But the CBO report also said that, as polluting industries like coal mining shrink, industries with fewer carbon emissions would expand by as many as a half-million new jobs by 2025. States that are heavily coal-dependent will have to shift to some degree away from coal and to other, new resources; but the electricity has to come from somewhere, so there will be new facilities built to produce it.

In general, the debate about how environmental regulation will affect the economy is so polarized that studies end up with contradictory conclusions. In a 2012 review of more than two dozen such studies, a team of researchers at a New York University think tank found that studies commissioned by big energy companies usually found that regulations increase unemployment, while those by environmental groups found the opposite.

You’ve probably heard about the controversy surrounding the book Capital in the 21^st Century by Thomas Pikkety. A reporter from the Financial Times says some of Pikkety’s statistics are flawed. Pikkety responded by saying his research is solid. Now we have a new source to support Pikkety. According to a new report by stock market strategists at Bank of America Merrill Lynch, the rich are going to keep getting richer all over the world, pretty much just as French economist Thomas Piketty describes in his bestselling book.

And according to the folks at Merrill Lynch, this represents an opportunity for Merrill Lynch. They write: "We are aware of the controversy over Piketty’s math (see the FT Money Supply blog), but are generally comfortable with the thrust of his analysis, having read his 577-pager, looked at his (problematic) spreadsheets, and cross-checked his data with alternative, credible sources. His questionable assumptions do not detract from the power of his thesis."

Merrill pointed out that it has been predicting the rise of "plutonomies -- economies where economic growth is powered by and largely consumed by the wealthy few" -- for the past decade. While this might sound like a nightmare world for some of us, it is also a chance to make a bunch of money, for those mostly rich people with the means to invest in companies that most profit from the wealthy elite. This includes luxury goods makers, money managers and private banks.

Always look on the bright side.

For the past two years, European Central Bank President Mario Draghi has been saying “whatever it takes”, giving the impression the ECB was ready to take on a stimulus program, jawboning the markets with the hint of bold monetary action, right around the corner. Today, a report showed Eurozone inflation at just 0.5% in May. A separate report showed the Eurozone jobless rate at 11.7% in April, ticking down from 11.8% in March, but still more than 25% in Spain and Greece. For 2 years Draghi said “whatever it takes” and for 2 years he has done nothing. On Thursday, the ECB meets to determine monetary policy and Draghi is expected to do something, and it better be something worth the wait.

It is widely anticipated the ECB will cut its target on loans from one-quarter percent to 0.1%, maybe down to a flat zero; and they are expected to eliminate paying banks on their deposits, cutting that into negative territory, essentially charging the banks to park cash at the central bank. And if that’s all the ECB does, it will probably be considered a huge disappointment; cutting rates won’t change borrowing conditions materially for most companies and it won’t be enough to lift the Eurozone out of the deflationary cycle.

It’s time for another edition of banks behaving badly. This is really an ongoing saga but sometimes we turn our gaze away and focus on other important issues; you might think that means the banksters haven’t been misbehaving, but the truth is their transgressions are never-ending.

Last month, Credit Suisse agreed to plead guilty to criminal charges of helping tax cheats avoid paying US taxes. Credit Suisse was fined $2.6 billion, which is a hefty fine but the bank basically got off with punishment fitting a civil suit. Still, it sent a message.

The Treasury Department announced that more than 77,000 foreign banks from 70 countries have agreed to share information about US account holders as part of a crackdown on offshore tax evasion. Participating countries include all the world's financial giants, as well as many places where Americans have traditionally hid assets, including Switzerland, the Cayman Islands and the Bahamas. Under the law, foreign banks that do not agree to share information with the IRS face steep penalties when doing business in the US. The law requires American banks to withhold 30% of certain payments to foreign banks that don't participate in the program. And if the US banks fail to withhold the tax, they would be liable for it themselves.

Next on the list is BNP Paribas; the Justice Department is looking into claims the French bank broke trade sanctions against Sudan, Iran, and Cuba between 2002 and 2009; essentially, international money laundering. BNP Paribas is facing possible criminal charges and possible penalties of $10 billion. In December 2012, HSBC faced similar charges that it breached US sanctions and laws against money laundering; HSBC agreed to pay $1.9 billion in civil penalties.

 Now, US authorities are seeking criminal charges and a stiffer fine, the equivalent of a year’s profit for the French bank. The precise amount of the fines and the conditions attached to them is still a matter of speculation and probably negotiation. The crimes of BNP are probably no more egregious than the wrongdoing of HSBC, but for a long time BNP refused to admit wrongdoing. If you’ve ever watched a cop show on TV, you know how that works; cooperate and the punishment will be more lenient.

President Obama is traveling to France on Thursday to commemorate the 70^th anniversary of D-Day, the landing at Normandy. And while the visit is supposed to be a celebration of the liberation of France by its allies, relations between France and the US are a bit rocky. Many in France are concerned that America lets its own banks off rather lightly and cracks down on foreign banks instead to appease voters’ hatred of the banksters. American rules sometimes differ from European rules, and criminalize behavior that might be legal in the banks’ home country. And two more French banks, Societe Generale and Credit Agricole, are also thought to be in the crosshairs of American authorities for allegedly breaking sanctions and money laundering.

The French are getting nervous. The French foreign minister says the fine against BNP would be unfair and it would hit BNP Paribas' funds and result in fewer loans for French businesses. They claim the US is using its position as the leading global financial market to bully their banks. So on Thursday, Presidents Obama and Hollande will get together for D-Day festivities and dinner and conversation. The banking fines will be a major topic, but there are other acrimonious subjects; France seems determined to continue military hardware sales to Russia, which might not violate the recently imposed sanctions but certainly violates the spirit of the sanctions.

The US has embarked on a new way of fighting, and it involves sanctions and economic weapons; it is certainly preferable to the battles waged 70 years ago in Europe, but it won’t work if the banksters put their greed ahead of other priorities. The French politicians might whine about the hardships, but they need to get their banks in order, and for that matter so does the US.

Friday, May 30, 2014 - Record Highs, Bonds, Coal Mines

Record Highs, Bonds, Coal Mines
by Sinclair Noe

DOW + 18 = 16,717
SPX + 3 = 1923 (another record)
NAS – 5 = 4242 (not a record)
10 YR YLD + .01 = 2.45%
OIL - .71 =  102.87
GOLD – 4.60 = 1252.30
SILV - .23 = 18.91

For the week, the Dow rose 0.7%, the S&P 500 gained 1.2% and the Nasdaq added 1.4%. For the month of May, the Dow gained 0.8%, the S&P 500 rose 2.1% and the Nasdaq climbed 3.1%. Meanwhile, if you are looking for action, the bond market is the place; the yield on the 10 year note has dropped from 2.65% to 2.45% this month.

Nearly everyone is looking for an explanation as to why longer-term interest rates continue to fall in the face of reduced Fed support and what is being hyped as better economic data. This wasn’t supposed to happen. The Federal Reserve has been propping up Treasury bond prices, and suppressing yields, for the past several years by buying large quantities of bonds each month in an effort to increase investment and consumption, and force investors into riskier assets. To some extent, the Fed’s QE purchases have worked; ultra-low interest rates have supported housing price increases and have led to skyrocketing stock prices.  Household net worth has increased by $25 trillion from the financial-crisis lows in the first quarter of 2009.  However, these gains in net worth have overwhelmingly accrued to the well-to-do while low- to moderate-income folks continue to suffer from poor employment opportunities, stagnant incomes, inadequate retirement savings, and rising costs for everything from food and energy to health care and education.  In other words, the economy hasn’t really improved but the Fed may have created financial asset bubbles.

Last December the Fed began winding down its large scale asset purchases by tapering, or incrementally reducing the amount of purchases over a scheduled period of a year or so. Back in December the Fed was buying $85 billion a month in mortgage backed securities and treasuries; they have now cut that to just $45 billion a month, and by the end of the year they anticipate they will end the large scale asset purchases. This means that demand for treasuries and MBS has, or should have dropped significantly. If there is less demand and the supply stays the same, then prices should fall and bond yields should be moving higher. The exact opposite has been happening; long term bond prices have increased and bond yields have been falling; and the timing of this increase in prices and drop in yields coincides with the start of the Fed taper.

Is there something wrong with the supply/demand equation? Is there invisible demand out there? Well, treasuries are considered a safe haven investment, and if we saw volatility in the stock market, we might expect a move to the safe haven of treasuries. Right now the CBOE Volatility Index known as the VIX, is down. As the 10-year yield touches the 2.4% level, its lowest in nearly a year, the VIX is hovering around 11.5, near its lowest levels since before the financial crisis.

The VIX measures volatility in the US market, so maybe we need to broaden out horizons. Europe is experiencing low-flation, and in some Euro countries the low-flation has turned to deflation; as a consequence, the rates in Europe are very low: German 10 year bonds yield 1.36%, France yields 1.75%, Spain 10 year notes yield 2.86%. In a global market there is something wrong with pricing. Why is the US bond yield higher than the French bond yield? That does not compute.

Of course, one explanation is that foreign investors are looking for a place to park money and if you can get a better yield on US treasuries compared to French bonds, it just makes sense that you wouldn’t buy the French bonds; add in the idea that buying US treasuries serves as an effective hedge against home currency depreciation and treasuries should be attracting money that might be held in emerging market economies.

In general, if economic growth is expected to accelerate, interest rates should rise as well.  The reason for this is fairly straightforward.  Increased demand for goods and services should lead to price increases.  Inflation is one component of "nominal" interest rates.  The other component is called the "real" rate of interest, and it is determined by the demand for money.  As economic growth accelerates, the demand for money should increase as people become more confident in making spending and investment decisions.  Therefore, higher inflation expectations and higher demand for money should lead to higher interest rates in a strengthening economy; but they haven't. Perhaps the weak economy of the Eurozone is holding back rates in the US, or maybe the US economy isn’t as strong as we imagine.

Another consideration has us going back to the supply-demand equation; if supply dries up faster than demand dries up, then that would push prices higher. Remember that the federal deficit has been trimmed to the lowest levels in about 13 years and that means the government isn’t issuing as much new debt. And the housing market has slowed and that means there should be less in the way of mortgage backed securities.

That was certainly the case for the first quarter; the US economy shrank. And there are no real signs of inflation in the US, or at least we didn’t see inflation for quite some time. That may be changing; the April CPI and PPI showed a minor pop in prices; the low interest rate environment has boosted financial asset prices, so stocks and housing prices have moved higher; food prices are also higher but they tend to be overlooked as a weather related aberration, although I doubt that is temporary; the labor market is still weak and despite the unemployment rate dropping to 6.3% there is tremendous slack and little participation and there doesn’t seem to be any wage inflation. The Fed might claim the economy is getting stronger and the Fed might not consider deflation to be a problem, but the bond market seems to be saying the recovery is sick. At least for the Main Street economy.

Further proof today showing American shoppers dialed it back in April. Household purchases fell 0.1%, the first decrease in a year, and following a 1% gain in March; that was the bounce back from the pent up demand of the frozen winter. After adjusting the figure to account for inflation, the news was worse; spending dropped by the most since September 2009 as income growth cooled. Incomes advanced just 0.3% in April, and without pay gains, consumers lack confidence. Consumer sentiment dropped from 84.1 in April to 81.9 in May. What we’re seeing is the failure of trickledown. The stock market may be strong, the well-off may be better off, but it doesn’t trickle down. The economy is never going to recovery without broad based demand, and that will only happen when the labor market gets strong, until then, the Fed is pushing on a string with QE and the Zero Interest Rate Policy.

There are many possible reasons behind the move in bonds, but a big part still has to do with the economy, even with all the subplots of the international markets and the inflation-deflation debate, we get back to the idea that the economy is weak, and the recovery is uneven. The first quarter GDP contraction was certainly weather related but that doesn’t mean the economy will bounce like a quarter on a trampoline. Second quarter GDP should be positive but probably not sizzling hot. I don’t buy that story, and apparently the bond market isn’t buying it either.

Next week’s economic calendar includes the ISM surveys of business activity in the manufacturing and services sector. What will be important to the outlook is what the surveys say about employment, export prospects and inventories. On Wednesday the Fed will release its Beige Book of regional economic reports. The next Fed FOMC meeting is June 17-18. Next Friday is the monthly jobs report; the unemployment rate, the headline number is at 6.3%, but that’s based on a participation rate at 62.8%. If the participation rate moves higher, look for the unemployment rate to jump.

Another big event next week, President Obama on Monday will unveil a plan to cut carbon pollution from power plants and promote cap-and-trade, undertaking the most significant action on climate change in American history. The proposed regulations could cut carbon pollution by as much as 25% from about 1,600 power plants in operation today. Power plants are the country's single biggest source of carbon pollution; responsible for up to 40% of the country's emissions.

The rules, which were drafted by the Environmental Protection Agency and are under review by the White House, are expected to put America on course to meet its international climate goal, and put US diplomats in a better position to leverage climate commitments from big polluters such as China and India. The plan is certain to result in political backlash with critics making doomsday claims about the costs of cutting carbon. Coal mining companies, power plant operators and others are already lining up for legal challenges to the executive action, claiming the approach oversteps the EPA’s authority.

Tuesday, May 08, 2012 - The Situation in Europe Isn't What You Think

DOW – 76 = 12,932
SPX – 5 = 1363
NAS – 11 = 2946
10 YR YLD - .04 = 1.84%
OIL - .46 = 97.30
GOLD – 33.70 = 1605.80
SILV - .62 = 29.57
PLAT – 18.00 = 1517.00

The markets did a double take. We knew what was happening in Europe. Yesterday, the markets acted as if nothing had happened. This morning, the sky was falling. And then as the day progressed, the markets realized the sky wasn't falling, or  perhaps the markets remembered that the Federal Reserve will backstop the markets. And the Fed meets again in June 19^th, and that's not too far away. Of course, before the Fed can make an announcement on yet another round of Quantitative Easing, the sky has to fall, at least a little; stock markets have to wobble, oil prices need to slip, gold prices need to be slapped around. And just when you imagine there is a deep dark deflationary abyss, the Fed can ride to the rescue with another round of cheap money for undeserving bankers.

The euro fell for a seventh straight session against the dollar, dropping below $1.30, which was considered a fairly significant level of support. Today's euro weakness is overwhelmingly tied to Greece's difficulty putting together a government. Greece's two main pro-bailout parties failed to win a majority in weekend elections, leaving questions over the country's ability to avert bankruptcy and stay in the euro. Greece's Left Coalition party has a chance to form a government opposed to the country's EU/IMF  bailout after the mainstream conservatives failed to cobble together a coalition. The chances are looking like slim and none. The Left Coalition is trying to back away from pledges made in exchange for a EU/ IMF bailout; this basically means they want to tell the bankers to go to hell and they don't care if they get kicked out of the Euro as a result. The right wing is saying Greece must accept the bailout deal and remain in the EU; the left wing is saying the popular verdict renders the bailout deal invalid. If a government can't be formed, then they will call for another round of elections.

So, the next question is: what happens if Greece exits the Euro? Not much. If you haven't seen this coming, you haven't been paying attention. International banks have sharply reduced their exposure to Greek and other peripheral government debt. If Greece leaves, it is already baked into the cake and it may be the best thing for the Greek people. Except... if Greece leaves, then Spain and Portugal and Italy might consider leaving the Euro or renegotiating their deals. That does not mean there would be no market impact. The premium investors demand to hold peripheral debt rather than German benchmarks would rise and the euro might fall even more. Overall, the situation in Greece is important politically but not financially. France is another story.

François Hollande, the newly elected Socialist French president, demands a change to the EU's economic policies, with a shift from austerity to growth. European Union leaders are to hold an emergency summit; not today; the summit will be held May 25^th. Germany and France are battling over the euro-zone’s "fiskalpakt", signed by 25 EU countries, that enshrines austerity measures into European treaty law and requires countries to change their constitutions to outlaw high levels of state spending. Mr Hollande is refusing to back such a change or to allow the EU courts new powers to strike down national budgets that breach the fiscal pact's "golden rule", and wants to renegotiate it to dilute the focus on austerity in favor of growth.

So, the elections in Europe showed voters were fed up with austerity, and they prefer a growth policy. Well, yes, sort of. There is more to it. The voters were also expressing their disgust with German imposed austerity. Germany is the instigator for austerity imposed on the periphery countries, and even on France. Germany wants more cutbacks in social spending, it wants higher taxes on the average citizen, and it wants friendlier policies for corporations; the Germans don't want these policies for Germany but they would like to impose this on the southern Euro-countries. And what we have heard is that the southern Euro-countries are lazy, and living off government handouts, while the Germans are hard working, productive, efficient, and thrifty.  What you are not hearing is that this is a Euro version of the 99 Percent movement.

The German version of austerity calls for austerity for the 99%, but not for the wealthiest One-Percent. We've seen this playbook before. It is the Federal Reserve playbook and it calls for an enormous amount of liquidity to be fed into the economy by the central banks. The liquidity is injected directly into the banking system and provides the banks with reserves as the central banks buy up toxic assets in exchange. A zero interest rate policy also provides banks with essentially free loans which can then be used to speculate in various markets. Theoretically, you might think the money injected into the banking system would be circulated throughout the economy to juice growth, but that's not how it works. The banks hoard the money and they gamble with the money. Instead of jobs, growth and stability, the opposite happens; growth is stifled, jobs destroyed, and wealth is redistributed to the small minority known as the one-percent.

Nobody likes to have austerity imposed on them, yet most people realize that emerging from tremendous debt will be difficult and require some sacrifice; the voters were saying the burden should be shared by the people who most benefited in the past from this corporatist plutocracy, who are manipulating the system currently to avoid any harm to themselves, and who show not the slightest concern about the burdens imposed on 99% of the population.  The elections were not necessarily a mandate for a new round of massive expansion of government debt, rather it was telling governments to redirect the current government spending away from propping up the corrupt corporate oligarchy. The Greek people are suffering economically. Goldman Sachs played a significant part in making the Greek debt situation worse. Goldman Sachs received hundreds of millions. Goldman Sachs made out like thieves in the night.

So, why not take away the bailouts? Why not stop the equity extraction businesses, the vulture capitalism, the excessive leverage, the stock option programs that reward short term corporate profits at the expense of long term viability and jobs? Why not reinstate discipline that punishes unsound judgment with the loss of jobs and wealth, not with golden parachutes? Why shouldn't badly run companies be allowed to fail? Why shouldn't success in business be predicated on more than the ability to bribe government officials with campaign contributions to grease the way for unfair advantages and special privileges.

Cases in point: a kid steals a 12 pack of beer from the 7-11 and ends up in prison; John Corzine steals $1.2 billion from client funds and we're still waiting for the police to show up. Or what do you think would happen to you if you forged a check and got caught? Prison, followed by probation. Forge tens of thousands of names and create bogus notaries for mortgage notes – no problem for the banksters. A student hacks into Sarah Palin's phone and gets indicted and convicted in a flash. Rupert Murdoch hacks into a dead student's phone and he gets a pie in the face and a slap on the wrist. You give a cop 20 bucks to fix a ticket and you'll be busted for bribery. JP Morgan gives the New York Police Department $1 million dollars and they have their own private security force; better yet, Goldman Sachs coughs up a few million in campaign bribes, or donations, and they get one of their guys appointed as Treasury Secretary. The list goes on, and on, and on.

We hear malarkey about how the voters went for communists and socialists and neo-nazis. The Europeans have dealt with a corrupt corporate oligarchy in the past; maybe they really wanted to vote for capitalism but there isn't anybody representing that ideal. Maybe they just wanted a level playing field. Maybe we shouldn't fear the socialists in France; maybe we should fear what they're replacing. Maybe we should hope they're going to effectuate change, because if they don't get change with their votes, they may move on to more drastic solutions.

Bank of America has started sending letters to thousands of homeowners, offering to forgive a portion of the principal balance on their mortgages by an average of $150,000 each. The principal reduction offers from Bank of America Home Loans are the result the $25 billion dollar multi-state settlement that came about in the wake of the robo-signing scandal. BofA  started making prinicpal reduction offers in March to a narrow group of homeowners who were already in the process of seeking mortgage modification. The bank estimated that the earlier wave of trial reduction offers to about 5,000 people could amount to more than $700 million in forgiven principal. But homeowners have to make at least three timely payments for the reductions to become permanent. This is BofA's punishment for robosigning; of course many of these mortgages being modified might have ended up in default, so it works out pretty good for the bank.., as always.

BofA holds its annual shareholder meeting tomorrow in Charlotte, NC. Expect protesters, maybe quite a few. In response, the city of Charlotte is beefing up police presence in a two-block radius surrounding the bank's headquarters, where the meeting will be held. Earlier in the year, the city deemed it an "extraordinary event," which allows the Charlotte police force to reallocate officers as it sees fit.  The bank also  hired off-duty Charlotte police officers to sit inside the meeting, as well as a private security firm to work outside.

Senate Republicans on Tuesday blocked consideration of a Democratic bill to prevent the doubling of interest rates on some student loans. Along party lines, the Senate voted 52 to 45 on a key procedural motion, failing to reach the 60 votes needed to beat back a filibuster and begin debating the measure.  Republicans say they want to extend Democratic legislation passed in 2007 that temporarily reduced interest rates for low- and middle-income undergraduates who receive subsidized Stafford loans to 3.4 percent from 6.8 percent. But the Republicans would not accept the Senate Democrats’ proposal to pay for a one-year extension by changing a law that allows some wealthy taxpayers to avoid paying Social Security and Medicare taxes by classifying their pay as dividends, not cash income.

Doubts about Europe’s political and economic future drove prices down for a wide range of commodities. Metals prices were hit hard. Gold, silver, platinum and palladium all fell. Energy and agricultural products were mixed. You might think there would have been a flight to safety, but that flight was for Treasuries, not metals. That might change soon.

Monday, May 7, 2012 - The Revolution in Greece and France

DOW – 29 = 13,008
SPX +.48 = 1369
NAS + 1 = 2957
10 YR YLD unch = 1.88%

OIL +.07 = 98.01
GOLD – 3.60 = 1639.50
SILV -.25 = 30.19
PLAT + 2.00 = 1535.00


The results pretty much followed expectations: An anti-austerity backlash by voters in Greece an France. First attempt at forming Greek coalition fails. Hollande seeks to augment fiscal pact with growth plan. Merkel tells French president-elect "no renegotiation".

Greece, where Europe's sovereign debt crisis began in 2009, was slightly discombobulated after the election boosted left and right-wing fringe parties, stripping the two mainstream parties that backed a the EU/IMF bailout of their parliamentary majority. Uncertainty over whether the country could avert bankruptcy and stay in the euro deepened on Monday when the leader of the conservative New Democracy party which won the biggest share of the vote, failed within hours to cobble together a government. The leaders of the New Democracy party had been given 3 days to form a government but this morning they said it was impossible.

Next in line to try to form a government will be Left Coalition leaders, whose party came second on a platform of rejecting the austerity conditions of Greece's latest bailout program. So, that might be interesting. The Left Coalition is considered a splinter group of the communist party, and now they are in the spotlight because the socialists were too centrist. The far right Golden Dawn party, essentially neo-nazis, achieved a parliamentary breakthrough. In hard times, voters are receptive to extreme ideas. It is easier for a politician to blame immigrants rather than address the real problems. That is a troubling trend.

Greece had appeared to have averted a disorderly default and euro exit in December when a technocratic government led by former central banker Lucas Papademos, and supported by the two main parties, agreed on a second international bailout under which private bondholders accepted sharp write-downs on their holdings. Supporting the technocrats backfired. After four straight years of recession, wage and pension cuts and still rising mass unemployment drove angry Greeks further to the left and right.

Greece consistently missed targets under its first program, which led to the restructuring of its private-sector debt under the second package. Officials say any further backsliding now will not be tolerated, especially with the International Monetary Fund a reluctant partner in the second program. Harsh words. Voters had a louder voice this weekend. Greek finance ministry officials say the country might run out of cash by the end of June if it does not have a government in place to negotiate the next installment of EU/IMF aid and projected state revenues fall short.

Euro zone leaders have tried to avoid a Greek default and departure from the euro, which Merkel has said would be a catastrophe, mainly because it could set a precedent for other troubled south European countries. There is no public support for further bailouts among the lenders, and clearly the Greek voters find the terms onerous. Some European diplomats and economists have been predicting the possibility of Greece leaving the euro area for months.

In France, it was a clear victory for Socialist Francois Hollande, who wants to change Europe's policy focus from austerity to restoring growth, Hollande clobbered conservative incumbent Nicolas Sarkozy. German Chancellor Angela Merkel, who had openly supported Sarkozy, her partner in euro zone crisis management, promised to welcome Hollande "with open arms" and work with him to maintain strong Franco-German cooperation at the heart of Europe but she also made clear there could be no renegotiation of a fiscal discipline treaty. Hollande has said France will not ratify it unless measures are added to promote economic growth.

Merkel sent her message through journalists, saying: "We in Germany are of the opinion, and so am I personally, that the fiscal pact is not negotiable. It has been negotiated and has been signed by 25 countries. We are in the middle of a debate to which France, of course, under its new president will bring its own emphasis. But we are talking about two sides of the same coin - progress is only achievable via solid finances plus growth. "

Jean-Claude Juncker, head of the Eurogroup of euro zone finance ministers, said he had told Hollande on that the European Union's fiscal pact could not be renegotiated. Juncker said: "It will not be possible to change the substance of the fiscal pact, there will not be a formal new negotiation in that respect." However, he added: "It is possible to add growth elements, not necessarily in the form of a treaty.”

Of course, the reality is that everything is negotiable. The next question is whether it is workable and whether there will be any cooperation, any real attempt to help growth or whether it will become an ideological battleground, where right and wrong lose ground to left and right. Hollande's election gave leaders of southern European countries a new ally in their effort to temper the German drive for austerity that has exacerbated their problems. Italian Prime Minister Mario Monti promised to cooperate with Hollande on refocusing European policy towards growth.

However, International Monetary Fund Managing Director Christine Lagarde said that the world's advanced economies still had to cut their debts or face even more pain. In a speech in Zurich she said: "The most important element is to lay out a credible medium-term plan to lower debt. Without such a plan, countries will be forced to make an even bigger adjustment soon."

Lagarde also said "austerity versus growth" was a false debate as it was possible for countries to make policies that were both good for stability and growth. The rhetoric is already shifting.

European stocks slipped early in the day on the Greek news but most recovered later, except the Athens stock exchange, down 6.67 percent. French debt was spared from the selloff, in a sign that markets are more relaxed about the moderate Hollande. The yield on French 10-year bonds fell to its lowest in seven months.

The elections in Europe will be analyzed for some time. Maybe the results had more to do with deep seated resentment for Germany than anything else. It is fairly clear that the French and the Greeks revolted. The elections were in effect referendums on the current European economic strategy, and in both countries voters turned two thumbs down. It’s far from clear how soon the votes will lead to changes in actual policy, but time is clearly running out for the strategy of recovery through austerity. So what are the alternatives? Break up the euro. Greece and Spain would have a quick way to restore cost-competitiveness and boost exports, by way of devaluation. German leaders claim their economy should be a model. What they don’t like to acknowledge is that the German recovery was driven by a huge trade surplus with other European countries, specifically the nations now in crisis; which were booming, and experiencing above-normal inflation, thanks to low interest rates. Europe’s crisis countries might be able to emulate Germany’s success if they faced a comparably favorable environment; that is, if the rest of Europe, especially Germany, experienced a bit of an inflationary boom, it would drive demand to the periphery.

British Prime Minister David Cameron wrote today in an article in the conservative Daily Telegraph: “When people think about the economy they don’t see it through the dry numbers of the deficit figures, trade balances or inflation forecasts — but instead the things that make the difference between a life that’s worth living and a daily grind that drags them down.” This is the old question: What's the economy for anyway? The daily grind seems to be dragging down most Brits, and even Cameron's government. Britain’s conservatives have been taking a beating.

The choice isn’t simply between budget-cutting austerity, on the one hand, and growth and jobs on the other. It’s a question of timing. If government cuts spending too early, when unemployment is high and growth is slowing, it makes the debt situation far worse. GDP slows faster than debt, and the ratio is skewed. The proper sequence is for government to keep spending until jobs and growth are restored, and only then to take out the budget axe. The problem is that the budget axe is never a welcome sight because it might just be your neck on the block. If Hollande’s new government pushes Merkel in this direction, he might end up saving the euro and, ironically, the jobs of many conservative leaders throughout Europe.And we'll be watching in the United States. If it plays in Brussels, it'll play in Washington. America has a long-term budget deficit that’s scary. So does Europe. There is a chance the voters in Athens will influence the voters in Athens Georgia, and the voters in Paris might have something to say to voters in Paris Texas.

Ron Paul is still a candidate for the Republican nomination for President. He won't win, but he is a candidate. He is also still a congressman, and as such he will preside over hearings that take aim at the institution Paul has criticized throughout his political career: the Federal Reserve. On Tuesday, the House subcommittee on domestic monetary policy and technology, which Paul chairs, will consider various proposals to overhaul the Fed. Paul argues that the Federal Reserve is the root of many economic evils and should be eliminated. His ideas, which for most of his career have been considered to be on the fringe, have moved into the mainstream.

One proposal is being introduced by Indiana Republican Mike Pence, would limit the Fed’s responsibilities to controlling inflation. Another Republican proposal, the Sound Dollar Act, would shift control of some aspects of monetary policy to the regional Federal Reserve banks and out of Washington.

And to confirm the old saying that politics makes strange bedfellows, Democrats and liberal groups have also attacked Federal Reserve Chairman Ben Bernanke’s policies. They’ll have their day at Paul’s hearing, too. The Occupy movement claims that the Fed is held captive by the interests of major banks. Massachusetts Representative Barney Frank has a bill that would centralize even more control in Washington, moving it away from the regional banks. Representative Marcy Kaptur (D-Ohio) would curtail the influence of industry by cutting the 14-year terms of Fed governors in half and doubling the amount of time a retiring member of the Fed must wait before taking a job at a bank. Dennis Kucinich (D-Ohio) would take even more power from the Fed: He’d make it part of the Treasury Department.

Now if only we could get Kucinich and Paul to run together on the same ticket. I'd vote for that, if only for the entertainment value.