Wednesday, June 05, 2013 - Agree to Disagree

Agree to Disagree

by Sinclair Noe

DOW – 216 = 14,960
SPX – 22 = 1608
NAS  - 43 = 3401

10 YR YLD 0 .03 = 2.10%
OIL + .38 = 93.69
GOLD + 2.70 = 1403.70
SILV unch = 22.65

The big economic news this week will be the Friday morning jobs report. ADP, the payroll processing company does its own jobs report, and today they estimated the economy added 119,000 new jobs in May. The ADP report is not a good indicator of Friday's report, but taken on its own, today's analysis shows a softening labor market, dragged down by the sequester.

Then, this afternoon we read the Federal Reserve Beige Book; here's how they described things:

“Overall economic activity increased at a modest to moderate pace since the previous report across all Federal Reserve Districts except the Dallas District, which reported strong economic growth. The manufacturing sector expanded in most Districts since the previous Beige Book. Most Districts noted slight to moderate gains in consumer spending and a moderate increase in vehicle sales. Tourism showed signs of strength in several Districts. A wide variety of business services expanded, and transportation traffic increased for producer, consumer, and trade goods. Residential real estate and construction activity increased at a moderate to strong pace in all Districts. Commercial real estate and construction activity grew at a modest to moderate pace in most Districts.”

And fade to beige, actually a modest to moderate shade of beige. After reading the Beige Book, I know what you're probably thinking; yes, it is properly titled. I really don't think we need to spend more time on that report because it's pretty obvious the Fed didn't spend much time on the report. Yes, we should all pitch in to send them a thesaurus.

You'll notice that the Federal Reserve did not use words like: fantastic, robust, overheated, exuberant, or even copacetic. I've been trying to tell you that there is a disconnect between the economy and the stock market.

Part of the problem is the Fed lives in a land of make believe and isolation. This week, Federal Reserve Governor Sarah Bloom Raskin was speaking on a panel at a conference on joblessness. Seems she left her ivory tower and went to a job fair in her hometown and she was shocked to find that most of the jobs were for security guards, restaurant workers and even life guards.

So, she  investigated the type of jobs that have been gained since the economy emerged from recession. She found half of all those hired received low pay jobs, but two-thirds of the jobs lost in the recession were middle income jobs like factory and construction workers. Ms. Raskin said she is concerned about “the quality of jobs available.”

The low quality of jobs added in the recovery explains why wages have mostly stagnated even while unemployment has declined in recent years. Ms. Raskin said the phenomenon suggests there is a disconnect between education and the skills employers need; which may be partially true, but also demonstrates the need for Ms. Raskin to get out a little more.

She also said the current unemployment rate, which still remains high despite its gradual improvement, underestimates the true scope of the unemployment problem. And she said the “real risk” of long-term unemployment is that the longer a worker stays unemployed, the more unemployable they grow. Firms are increasingly reluctant to hire people who have been out of the workforce for long stretches, which leads to those workers losing skills and ultimately the ability to ever reenter the workforce.

She didn't talk about monetary policy.

The SEC has come up with a proposal to make sure the money market fund industry doesn't “break the buck” again. The funds would be required to fundamentally change how it prices its shares in an effort to reduce the risk of abrupt withdrawals, also know as a run. You'll love this; the idea to stop a run on the funds is to charge withdrawal fees and delay the return of funds to customers in times of financial distress.

In other words, once the money market funds get their hands on your money, it's not really your money anymore, it's their money and you don't have much say.

In 2008, the Reserve Primary Fund, one of the largest money funds, suffered losses on Lehman Brothers debt and could not maintain its $1 per share price, known as "breaking the buck." That ignited a run by investors across the money fund industry, cutting off a major source of overnight funding for many corporations. I remember talking about that with you, and telling you back then that there was a real problem.

In 2010, the SEC adopted rules that bolstered fund transparency, tightened credit quality standards, shortened the maturities of fund investments and imposed a new liquidity requirement.  For years, proponents of further reform have raised concerns that money market funds, mutual funds that invest in short-term debt securities, can be considered as safe as bank deposits even though they do not have a government guarantee.

In a compromise move, the SEC's plan mostly focuses on prime funds for institutional investors, which are seen as more prone to runs because those investors are more sophisticated and more likely to pull large blocks of money first if there is a panic.

The SEC estimated that institutional funds represent 37 percent of the market with $1 trillion in assets. The SEC's plan calls for two alternative proposals that it said could be adopted alone or in combination.

The first piece would require prime funds used by institutional investors to transition from a stable, $1 per share, to a floating net asset value (NAV) - a move designed to reduce the risk of runs like those during the financial crisis. The SEC said that retail and government funds, which are not considered to be at the same risk for runs, would not have to move to a floating NAV. That one dollar price seems appealing even if it is not an accurate price of the net asset value. It's smoke and mirrors and a big pile of garbage, but it gives the illusion of stability.

The second proposal, meanwhile, would give fund boards for institutional and retail funds the authority to impose so-called "liquidity fees and redemption gates" during times of stress. That would give funds the power to stop an outflow of investor money.

Goldman Sachs wants you to believe that Too Big To Fail banks do not actually enjoy a funding advantage. Goldman put out a paper with the mild title of "Measuring the TBTF effect on bond pricing." It argues that the commonly-held view that TBTF banks can borrow cheaply because bond investors expect the government will support them used to be a little bit correct. Then it became very correct during the financial crisis. But now is totally incorrect.

The study argues that that six banks with more than $500 billion in assets paid interest rates on their bonds that were an average six basis-points lower than smaller banks from 1999 to mid-2007. When the financial crisis struck, the funding advantage grew far wider. But beginning in 2011, the funding difference reversed, with the biggest banks now paying an average of 10 basis points more than smaller banks.

It sounds like a good argument but it isn't exactly true. The TBTF funding has never been about absolute funding levels of big banks or even the funding levels of big banks relative to smaller banks, rather it is that the big banks get government support that lowers the cost of funds compared to what they should be.

Goldman has much lower capital reserves, or a cushion to protect against bad bets, and they tend to bet much bigger, therefore they should be paying a significant premium for capital. They don't. So, there is a TBTF subsidy. It's not as large as it once was, probably because the financial crisis made it clear that the largest financial institutions are far more fragile than almost anyone suspected prior to 2008. But it's there and plain enough to see.

It's a bit disturbing that Goldman doesn't seem to understand this. Their misperception means that they are likely to misread or ignore market signals about the risks they take. Goldman—and the other TBTF banks—seem to still be blind to their own vulnerability—which is what got us in the financial crisis mess in the first place.

Tomorrow, the International Monetary Fund is expected to issue a report on Greece, a mea culpa, or as they describe it: In an internal document marked “strictly confidential,” the IMF said it badly underestimated the damage that its prescriptions of austerity would do to Greece’s economy, which has been mired in recession for years.

Seems the IMF ignored its own criteria for qualification, then maybe decided Greece should not have been eligible for assistance, then they thought Greek debt was sustainable, then they thought the Greeks would cut all government spending, then they realized that couldn't happen, but then they decided to hold the Greeks for ransom until they cut more than they could, then they wondered why the economy didn't respond like they hoped, then they postponed the restructuring for 2 years because they were worried the Greeks couldn't be trusted with a new credit card, then that made everything more expensive for the Greeks, then they didn't count very well, then they failed to identify growth enhancing structural reforms, and all the IMF mistakes didn't help Greece, but it did help the wider Eurozone and especially the Euro-banks, and the whole country just went down the toilet and it's a crying shame, and oopsie, the IMF is sorry about that, but now they conducted a study and determined that despite all those things that might seem on the surface to be IMF mistakes, in the end, it was the Greek government that is to blame.

Monday, March 18, 2013 - Cyprus Extraction

Cyprus Extraction

by Sinclair Noe

DOW – 62 = 14452
SPX – 8 = 1552
NAS – 11 = 3237
10 YR yLD - .04 = 1.96%

OIL +.42 = 93.87
GOLD + 12.90 = 1606.80
SILV+.13 = 29.00

We start with some traditional Cypriot music plaing in the background. It seemed like a good idea, until we learned there was a levy of almost 10%

Last Friday, we weren't even thinking about Cyprus, a tiny island country, south of Turkey, east of Greece, roughly 900,000 people. Maybe you knew about their financial problems: a credit downgrade to junk status, a 4 billion-euro bailout for the Cypriot banks. Maybe you remember that it started with the Greek breakdown and how the Greek bondholders got haircuts on Greek bonds, and Cyprus does business with Greece. And then we all forgot about Cyprus.

Until this weekend. The Cyprus banks are on the verge of failure and they need a 10 billion-euro bailout. The IMF and the ECB came up with a plan over the weekend, but it wasn't a bailout; they call it a bail in. The idea they concocted was to tax bank deposits: 6.5% on bank accounts up to 100 thousand-euros and 9.9% on bank accounts over 100 thousand-euros. Not really a tax; a levy; or maybe a haircut. Actually, they are going to steal the money.

Cyprus will receive a loan of about half the requested size under the usual austerity conditions. And in the unlikely event that all goes well, the government of Cyprus will get some cash to cover the loan offered by the Euro-partners who just stole from the Cypriots, but the cash won't be enough to cover the loan and the Cypriot banks will collapse anyway.

The benign scenario is that depositors will accept the tax and keep their money where it is. Depositors in other troubled countries will accept that Cyprus is special. A less benign scenario is that depositors fear another round of levies because if the policy makers can get away with it once, they can do it twice. Next hing you know, there are massive bank runs.

Today is a holiday in Cyprus. The banks were scheduled to be closed and they will stay closed till Wednesday; an extended bank holiday. Cyprus's banking association are calling on people to remain calm, saying it would implement measures to protect the stability of the banking sector. A crowd of protesters gathered at the presidential palace and they were not happy. And if you're thinking FDIC insurance on bank accounts, well, they have a version of that in the Eurozone, protects accounts up to 100 thousand-euro.

Side bar to this: Foreign deposits made up 26 billion-euro of the total 64 billion-euro in deposits as of December and 14 billion-euro were from Russian depositors. Cyprus banks are like Cayman Island banks for unsavory Russian tax evaders. Putin described the bailout plan as “unfair, unprofessional, and dangerous.”

Trying to deflect criticism, the German finance minister said: “the levy on deposits below 100,000 euros was not the creation of the German government. If one reached another solution, we would not have the slightest problem.”

The president of Cyprus said he had been blackmailed into accepting the deal.

The confiscation opens a Pandora's box. Moody's warned the decision was a significant departure from past instances of support. It triggers euro area policy makers willingness to risk wider financial market disruptions in pursuit of other policy goals.

And then the Cypriots might have something to say about the thieves that broke into their bank accounts.

What does it mean to you. Not much. Euro-exchanges were lower and US exchanges were lower, but we just went through 11 winning sessions and the Dow hit records, S&P was close to records. A pullback or a little pause is healthy. The markets don't go straight up. And the markets did not flame out. The world didn't end. It's just a little island in the Mediterranean.

There is no indication we are headed for a 2008-style meltdown. Of course banks runs are ugly; they start with one person and then there are lines; pandemics start with a sniffle; contagion starts with a sneeze. Today, the markets did not blink. One reason is because the stock markets are the thieves' den.

The IMF on behalf of the big global banks it serves and the ECB on behalf of the big Euro-banks it serves, is stealing without any authority whatsoever depositors' money in Cyprus. Because the banks that lent to the Cyprus banks to keep them in business are now about to get shafted and rather than get shafted, they enforce their right to get bailed out and in turn, shaft the people of Cyprus.

The banks will deputize the the Euro Commission to go in, with the backing of the IMF and the ECB, to steal the money to give back to themselves. This is so they can use what they steal as “reserves” to make themselves look better. That, in turn makes the ECB and IMF look better, so they can lend more money to the same banks in Cyprus, whose depositors they just stole from, to bail them out. Sounds like pretzel logic, except the banksters always win. If you can't make money the old fashioned way, just steal it. The only really unique part is the central bankers are looking into the eyes of depositors and saying “It's our money anyway.”

And that in turn raises a basic question: What function does a bank provide to the larger community? Does it provide a medium of exchange to aid businesses within that community (fiat money and credit/debt money under charter by the government)? Or does it use this medium as a told to extract rents from the community? A service or rent extraction? The answer is rent extraction.

On a per capita basis the 5.8 billion-euro bailout/extraction works out to about $25,000 dollars per Cypriot. Imagine if the Federal Reserve tried this trick in America, stealing $25 k fro every US bank account. I mean outright stealing, not the slow motion theft by inflation that we've all grown accustomed to.

It did set up a little bounce for gold. Nothing like a good old fashioned Eurozone mess to give gold a boost above $1600.

Friday, November 30, 2012 - We're All Just Muppets Living in a Fairy World

We're All Just Muppets Living in a Fairy World

by Sinclair Noe

DOW + 3 = 13,025
SPX +0.23 = 1416
NAS – 1 = 3010
10 YR YLD - .01 = 1.61%
OIL + .88 = 88.95
GOLD – 10.60 = 1716.20
SILV - .85 – 33.54

October 31 Closing Numbers:      

DOW                                                13096
SPX                                                 1412
NAS                                                 2977
10 YR YLD                                      1.69%

OIL                                                   88.51
GOLD                                              1721.20
SILV                                                 32.36

So for all the talk about the fiscal cliff, the election, Hurricane Sandy, The Euro-Debt Crisis, the unrest in the Middle East; for all that and more, the markets gave a big yawn in the month of November.

So, yesterday afternoon the House Republicans told reporters that the White House plan to avert the fiscal cliff was nothing more than a “joke”, an “insult”, and a “complete break from reality.” Mitch McConnell said he “burst into laughter. John Boehner said: “It was not a serious proposal.”  The plan, or the opening salvo from the White House calls for $1.6 trillion in tax increases spread out over ten years, $50 billion in additional stimulus spending, and $400 billion in spending cuts over ten years, plus an extension of the 2 percentage point payroll tax deduction or something comparable to it, and a permanent extension on the debt ceiling.

Meanwhile, the Republican plan is, well, it's still something of a mystery but we know they want cuts to entitlement programs, and no they're not referring to the corporate welfare programs that allow $1.5 trillion in corporate profits to be booked offshore, or the other corporate welfare loopholes. No, the Republicans are kinda-sorta arguing for the Ryan Budget, with its deep cuts to entitlements and other spending, and with a zero percent chance of getting through the Senate, just as the Obama plan has a zero percent chance of getting through the House. We are still in the initial phase of negotiating; it's all about tactics, not final numbers.

And so President Obama hit the road today to rustle support for his side. He traveled to Pennsylvania to make the case that Congress should immediately extend the Bush-era tax cuts on income under $250,000 per year. He went to a toy manufacturer in Hatfield, PA, the obvious graphic being that his plan will mean a tax break for most, that the companies depend on consumer spending, and that the extension of the tax cut will help keep the company making toys and employing workers; everybody gets a Merry Christmas, and toys under the tree.

Adding to the discussion today, a New York Times article that says most Americans in 2010 paid far less in total taxes — federal, state and local — than they would have paid 30 years ago. The combination of all income taxes, sales taxes and property taxes took a smaller share of their income than it took from households with the same inflation-adjusted income in 1980.

Households earning more than $200,000 benefited from the largest percentage declines in total taxation as a share of income. Middle-income households benefited, too. More than 85 percent of households with earnings above $25,000 paid less in total taxes than comparable households in 1980.

Lower-income households, however, saved little or nothing. Many pay no federal income taxes, but they do pay a range of other levies, like federal payroll taxes, state sales taxes and local property taxes. Only about half of taxpaying households with incomes below $25,000 paid less in 2010.

The analysis shows that the overall burden of taxation declined as a share of income in the 1980s, rose to a new peak in the 1990s and fell again in the 2000s. Tax rates at most income levels were lower in 2010 than at any point during the 1980s.

This week the Euro-Union, and specifically Germany's parliament approved a debt restructuring plan that essentially allowed Greece to hit the pause button on its debt. It didn't resolve the Greeks debt problem and it didn't create a plan for rebuilding the Greek economy, but it kicked the can down the road. The Euro-zone's crisis is far from over. Today, European Central Bank President Mario Draghi said Euro-zone members must tighten budgets and form a banking union to leave behind the “fairy world” that allowed problems to grow.

Draghi's call for reform was echoed by International Monetary Fund chief Christine Lagarde, who said implementing a banking union with powers to supervise all banks in the Euro-zone should be the currency bloc's top priority. The economic data from the EU today was bleak. Another 173,000 people joined the ranks of the jobless in October, and German retail sales and French consumer spending dropped more than expected.

And the Greek deal is looking like it might not hold together, as banks and pension funds balk at fresh losses, raising fears that the package could unravel before a deadline in mid-December.The International Monetary Fund said it would not disburse funds under its part of the EU-IMF package unless the euro-zone delivers on a bond "buy-back" scheme, which is supposed to cut Greece’s burden by 10% of GDP. The dispute comes as Moody’s said the EU-IMF deal to unlock $56 billion in bail-out payments to Athens merely papers over cracks and does little to alleviate Greece’s "extreme economic and social fragility". Moody's says: "We believe that the country’s debt burden remains unsustainable."

Leaked documents have already cast serious doubts on that Greece can reach its debt reduction target, much to the irritation of the IMF, which fears that its own credibility is being damaged by the continued fudge over figures that appear to be extracted out of thin air and have repeatedly proved wide of the mark over the past two years.

There is mounting irritation among the Asian and Latin American members of the IMF Board - as well as the US - at the failure of the Europeans to deploy their full wealth to clean up an internal EMU problem. It is a long way away from the permanent fix that the IMF had been insisting upon. It is just one more big kick of the can down the road. And so, Draghi is calling for a banking union to leave behind the fairy world.

Sometimes this economic stuff makes sense, sometimes it doesn't.

The Chinese government would like to develop Shanghai into a major gold trading center; to that end, beginning Monday, they will allow over-the-counter gold trading between banks for the first time. The introduction of interbank trading is intended to develop China into a liquid market such as London, and demonstrates the government’s readiness to open the market to greater participation by international banks. Chinese banks already play a significant role in determining international gold prices, so the move will have a limited impact on prices.

China offers a massive gold market, albeit one that is tightly controlled. The country is the world’s biggest gold producer and ranked as the No. 2 gold consumer in the third quarter of this year. It has official gold reserves of 1,054 metric tons, the world’s sixth-largest. But gold exports are banned and only a handful of banks hold import licenses.

Until now, member banks have been able to trade physical gold between themselves on the Shanghai Gold Exchange, but the absence of an over-the-counter market restricted them from becoming market makers in gold. In an over-the-counter market, transactions are quoted and conducted between parties on a principal-to-principal basis rather than being traded through a broker on an exchange.

So, you're looking around for a nice place to invest these days. Where do you go? Subprime mortgage indexes have rebounded substantially – one is up 39% already this year. Goldman Sachs is telling its clients to invest in some of the ABX subprime mortgage indexes that it helped create back before the crisis. What could go wrong? Wait a minute, you say, aren't those the same subprime garbage Goldman Sachs bet against? Well, yes, but they paid a $550 million dollar fine for selling toxic collateral debt obligations and then betting against their own clients; and $550 million is a big fine, it's a couple of days work for Goldman. I know what you're thinking; these guys are still the same Muppet milking masters of the universe they used to be; they would sell their own grandmother to Somali pirates if they held credit default swaps on her. And its not like they had to admit wrongdoing, so they can just go back to the same old, same old. Everything is cool now.

Monday, November 26, 2012 - Shopping, Cliffs, Greece, Two-Tiered Justice, Doha, Infrastructure

Shopping, Cliffs, Greece, Two-Tiered Justice, Doha, Infrastructure
by Sinclair Noe

DOW – 42 = 12,967
SPX – 2 = 1406
NAS + 9 = 2976
10 YR YLD -.03 = 1.66%
OIL + 1.22 = 86.67
GOLD – 2.50 = 1750.40
SILV + .05 = 34.28

Well, I survived Black Friday, which actually creeped into Black Thursday; I made it through Shop Small Saturday, and I've arrived at Cyber Monday. Tomorrow will be Buyers' Remorse Tuesday. Don't forget Credit Card Shock January. I have not and will not go into debt for the holidays. Consumer debt is the worst.

A rebound in housing and the job market, along with a drop in household debt, has led additional consumers to say they’ll buy more this holiday. A new survey from the Credit Union National Association and the Consumer Federation of America shows 12 percent said they would boost spending, the highest level since 15 percent in 2007, while 38 percent said they would spend less.

According to the National Retail Federation, retail sales for the weekend are up about 13% from a year ago. Online shopping on Black Friday rose 26 percent to exceed $1 billion for the first time. Spending in stores and online rose to $59 billion in the four days starting Nov. 22. Customers spent $423 on average this weekend, up 6.3 percent from last year. The 13 percent jump in total spending suggests that some sales were pulled ahead from December and that retailers will have to keep up the promotions to avoid a lull. Retailers are going to have to get creative, such as price discounts or special events, to keep the customer engaged

Major indexes last week gained 3 to 4 percent, with the Dow above 13,000 and the S&P above 1,400 for the first time since November 6. Those gains represented a turnaround from recent losses founded on worries about Washington's ability to solve budgetary problems.

Once again today, the fiscal cliff and the Euro-crisis seemed to weigh on Wall Street, or maybe it was just a good excuse. The White House threw cold water on a proposal that tried to avoid the "fiscal cliff" of spending cuts and tax hikes by limiting tax deductions and loopholes, instead of allowing tax rates to rise for the richest Americans. Investors are hoping for advances in talks over the $600 billion in spending cuts and tax hikes scheduled to begin next year, which threaten to drag the U.S. economy back into recession.

The White House released a report today that warns of the catastrophic consequences if Republicans allow the tax bill for the middle class to rise $2,200 by not freezing middle class tax cuts. The report says that going over the cliff could take a combined $800 billion or so, out of the economy.

In its report, entitled “The Middle-Class Tax Cuts’ Impact on Consumer Spending & Retailers,” prepared by the National Economic Council and the Council of Economic Advisers, the White House argues that if Congress allows the middle-class tax cuts to expire, the economy would be devastated—the growth of the GDP could be slowed by 1.4 percentage points and consumers could spend an estimated $200 billion less than they would have in 2013 just because of the higher taxes. While Republicans are trying to get Democrats to agree to larger cuts in entitlements, Democrats are trying to hold the line on entitlement cuts while getting Republicans to agree on tax hikes for the wealthy.

In an op-ed article in the New York Times today, Warren Buffet Buffett asks readers to imagine they've been offered a great investment opportunity. The Oracle of Omaha concludes from his decades of experience in the investment world that most wouldn't shy away from an opportunity just because they might have to pay more in taxes. "Only in Grover Norquist’s imagination does such a response exist," Buffett writes.

Buffet writes that solving the country's deficit problem and getting the economy on track requires raising taxes on the rich and higher taxes won't keep the super-rich from trying to make money. He calls for a minimum 30% tax on incomes between $1 million and $10 million. At first blush, his position seems noble: A rich guy says that people like him should pay more to support the commonwealth. But on closer examination, one realizes that Mr Buffett never mentions doing anything to eliminate the tax-avoidance strategies that he uses most aggressively. And don't forget, we have been talking for a couple of years about the fact that Buffet pays less tax than his secretary, which means there is a huge gap between tax rates in theory and tax rates after the accountants have shredded the code.

The brunt of the cliff could be delayed, however. For instance, the Treasury Department and the Internal Revenue Service could wait to adjust withholding tax tables, which determine how much money is taken out of paychecks. Tax rates could also be fixed retroactively. The Federal Reserve is clothed in immense monetary power and has a few tricks up its sleeve that could keep money flowing to the government despite Congress. And the spending cuts to defense and domestic programs may be phased in over time rather than crashing down all at once at the beginning of January.

Part of the strategy might be to go over the cliff and let the blame fall; knowing that wherever the blame falls, that party will be forced to cave in. Of course, the whole process is being painted as a potential catastrophe, when it is in fact just politics as usual.

Finance ministers from the 17 countries sharing the euro, the European Central Bank and the IMF were locked in a third round of talks today to decide how to make Greek debt, expected to rise to 190 percent of GDP next year, more sustainable by reducing it to 120 percent or below by 2020. The International Monetary Fund wants Euro-zone finance ministers to agree to cut Greece's debt by 20 percent of GDP now and commit to further debt reduction in the future to get the country's finances back on a sustainable path. The IMF and the ministers are at odds on how to achieve the goal, with the IMF pushing for a bolder reduction of Greek debt through the forgiveness of some of the official loans to Athens which now make up the bulk of the country's obligations. Greece's biggest creditor, Germany, opposes any debt forgiveness for Athens.

The IMF argues that if there is no debt reduction up front, the Greek economy will not grow, nobody will invest and Greeks themselves will not spend, derailing other macro-economic assumptions of its adjustment program.

Mary Schapiro will step down as chairman of the Securities and Exchange Commission next month; Schapiro has lead the SEC since being appointed in 2009. President Obama designated Elisse Walter, an SEC commissioner, to replace Schapiro.

Under Schapiro, the SEC reached its largest settlement ever with a financial institution. Goldman Sachs agreed in July 2010 to pay $550 million to settle civil fraud charges that it misled investors about mortgage securities before the housing market collapsed in 2007. Similar settlements followed with Citigroup, JPMorgan Chase and others. The SEC has authority to pursue civil charges.

Although there were large fines, there was little accountability required by Schapiro's SEC. For example, in the Goldman Sachs case: no senior executives were singled out. The penalty amounted to roughly two weeks of earnings at Goldman. And Goldman was allowed to settle the charges without admitting or denying any wrongdoing, as were other large banks that faced similar charges.

Among the leading critics was U.S. District Judge Jed Rakoff, who questioned how the SEC could allow an institution to settle serious securities fraud without any admission or denial of guilt. Rakoff later threw out a $285 million deal with Citigroup because of that aspect of the deal.

Regulators sued Intrade today. Intrade is the online prediction market that gained popularity as an informal oddsmaker for the presidential election, saying it illegally let customers bet on future economic data, the price of gold and even acts of war. The Commodity Futures Trading Commission said in a complaint in federal court that Intrade and its operator solicited customers to trade investment contracts that technically are options. Options must be traded on approved, regulated exchanges.

The private Swiss bank, Pictet, is under investigation by US authorities trying to determine if the bank helped wealthy Americans seeking to avoid paying taxes. The investigation is part of a global offensive on the tradition of strict banking secrecy that has helped Switzerland build up a $2 trillion offshore wealth management industry. UBS was the first Swiss bank to come under scrutiny by the US authorities in a tax evasion crackdown, an investigation it settled in 2009 by handing over client data, admitting wrongdoing, and paying a $780 million fine to avert prosecution. US officials have subsequently mined the UBS data as well as a flood of voluntary disclosures by U.S. citizens and have widened their investigation to other Swiss banks, including Credit Suisse and Julius Baer. Switzerland is trying to get those investigations dropped in return for the payment of fines and the transfer of names of US clients. It is also seeking a deal to shield the remainder of its 300 or so banks from US prosecution.

Tax avoidance, flash crash trading from Knight Capital, insider trading at SAC, don't forget MF Global. The new head of the SEC should get busy, and please, please no more deals that don't admit or deny guilt. I'm getting sick of two-tiered justice.

That radical green pressure group PriceWaterhouseCoopers warns that even if the current rate of global decarbonisation were to double, we would still be on course for six degrees of warming by the end of the century. Confining the rise to two degrees requires a sixfold reduction in carbon intensity: far beyond the scope of current policies. The World Bank, another group of tree-huggers, expects warming in the range of 4 degrees.

And that Brings us to Doha 2012, in the gas-rich, gas-flaring nation of Qatar. The tiny Persian Gulf emirate owes its wealth to large deposits of gas and oil, and it emits more greenhouse gases per capita than any other nation. And it is now playing host to a United Nations climate change summit, which tend to be messy affairs, going back to the 1997 conference that produced the Kyoto Protocol, which has now largely unraveled. While there is always the potential for a diplomatic disaster at any negotiation involving 194 countries, the agenda for the two-week Doha convention includes an array of highly technical matters but nothing that is likely to bring the process to a screaming halt.

Despite the occasional chaos at the summits over the past three years, negotiators achieved a number of significant steps, including pledges by most major countries to reduce their emissions of climate-altering gases, a promise by rich nations to mobilize $100 billion a year by 2020 to help more vulnerable states adapt to climate change, a system for verifying emissions cuts and programs to help slow deforestation. The delegates in Doha hope to firm up these promises and create the concrete means to fulfill them.

The success of the Doha 2012 talks will likely hinge on the approach of the world’s two biggest greenhouse gas emitters and robust economies, the United States and China.

In the aftermath of Hurricane Sandy, which inflicted tens of billions of dollars in damage, it’s might sound like a good idea to take some preventive measures. Sandy was not an isolated incident: only last year, Hurricane Irene caused nearly sixteen billion dollars in damage, and there is a growing consensus that extreme weather events are becoming more common and more damaging. The annual cost of natural disasters in the US has doubled over the past two decades. Instead of just cleaning up after disasters hit, we would be wise to take steps to make them less destructive in the first place.

There are several interesting ideas, including building seawalls , burying power lines, and elevating buildings and subway entrances. The question is whether we can find the political will to invest in such ideas. Several new York politicians have called for major new investment in disaster prevention, but it appears Congress is more willing to spend money on relief than on preparedness. That’s what history would lead you to expect: for the most part, the U.S. has shown a marked bias toward relieving victims of disaster, while underinvesting in prevention. A study by the economist Andrew Healy and the political scientist Neil Malhotra showed that, between 1985 and 2004, the government spent annually, on average, fifteen times as much on disaster relief as on preparedness.

Politically speaking, it’s always easier to shell out money for a disaster that has already happened, with clearly identifiable victims, than to invest money in protecting against something that may or may not happen in the future. Voters reward politicians for spending money on post-disaster cleanup, but not for investing in disaster prevention, and it’s only natural that politicians respond to this incentive. The federal system complicates matters, too: local governments want decision-making authority, but major disaster-prevention projects are bound to require federal money. And much crucial infrastructure in the U.S. is owned by the private sector, not the government, which makes it harder to do something like bury power lines.

We’ve been skimping on maintenance of roads and bridges for decades. In 2009, the American Society of Civil Engineers gave our infrastructure a D grade, and estimated that we’d need $2.2 trillion to bring it up to snuff. Our power grid is, by the standards of the developed world, shockingly unreliable. A study by three Carnegie Mellon professors in 2006 found that average annual power outages in the U.S. last four times as long as those in France and seven times as long as those in the Netherlands.

Disaster-prevention measures are expensive: a New York seawall might cost from ten to twenty billion dollars. Yet inaction can be even more expensive; after Katrina, the government had to spend more than a hundred billion dollars on relief and reconstruction; and there are good reasons to believe that disaster-control measures could save money in the long run. The A.S.C.E. estimates that federal spending on levees pays for itself six times over, and studies of other flood-control measures find benefit-to-cost ratios of three or four to one. A 2005 independent study of disaster-mitigation grants made by FEMA found that every dollar in grants ended up saving taxpayers $3.65 in avoided costs. Right now, it's cheap to borrow money for infrastructure; the projects would create immediate employment.

The size of our current deficit does not change the math.

Monday, November 12, 2012 - Render Unto Caesar, and Don’t Forget Interest

Render Unto Caesar, and Don’t Forget Interest
By Sinclair Noe

DOW – 0.31 = 12,815
SPX + 0.18 = 1380
NAS -0.62 = 2904
10 YR YLD = 1.60%
OIL - .50 = 85.57
GLD – 2.00 = 1729.80
SLV - .21 = 32.52

British lawmakers have criticized executives of Starbucks, Google and Amazon on Monday for not paying more tax in Britain and Amazon said it had received a $252 million demand for back taxes from France. Britain and Germany last week announced plans to push the Group of 20 economic powers to make multinational companies pay their "fair share" of taxes following reports of large firms exploiting loopholes to avoid taxes. One of the members of Parliament explained the problem: “You're either running the business badly, or there's some fiddle going on."

Starbucks seems to be selling a lot of coffee in the UK; over the past 3 years they’ve sold more than 3 billion pounds (weight) of coffee but they haven’t paid any tax. (fiddle) Amazon just refuses to answer questions by the British tax authorities.(fiddle)

And Google has apparently been playing the game. Google's filings show it had $4 billion of sales in the UK last year, but despite having a group-wide profit margin of 33 percent, its main UK unit reported a loss in 2011 and 2010. It had a tax charge of just 3.4 million pounds in 2011. (fiddle)

The search engine provider books European sales via an Irish unit, an arrangement that allowed it to pay taxes at a rate of 3.2 percent on non-US profits last year. Google is under audit by the French tax authority regarding its structure, but the company denied a newspaper report last month that it had received a back tax claim for 1 billion euros.

Meanwhile, a report in the Guardian shows:  that at least $21 trillion – perhaps up to $31 trillion – has leaked out of scores of countries into secretive jurisdictions such as Switzerland and the Cayman Islands with the help of private banks, which vie to attract the assets of so-called high net-worth individuals. Their wealth is protected by a highly paid, industrious bevy of professional enablers in the private banking, legal, accounting and investment industries taking advantage of the increasingly borderless, frictionless global economy…,  the top 10 private banks, which include UBS and Credit Suisse in Switzerland, as well as the US investment bank Goldman Sachs, managed more than $6 trillion in 2010”…, a nearly 3-fold increase from 5 years earlier.

The report’s analysis, based on data from many sources including the Bank of International Settlements and the International Monetary Fund, indicates that enough money has left some developing countries since the 1970s to pay off all their debts to the rest of the world. “The problem here is that the assets of these countries are held by a small number of wealthy individuals while the debts are shouldered by the ordinary people of these countries through their governments.”

The reason the Europeans are focusing on tax havens and collecting taxes is because they can’t squeeze blood out of a turnip, or in this case, they can’t get more taxes out of struggling average taxpayers. The economic outlook in the euro-zone is bleak. Meanwhile, the dollar was up against the euro,a s the dollar became a safe haven play despite the looming . "fiscal cliff," a combination of big spending cuts and tax increases if Congress does not act to curb the budget deficit that some believe has the potential to send the economy into another recession.

Greece stood at the forefront of investor concerns as euro zone governments disagreed on whether to disburse more money to the debt-ravaged country on Monday. Worries persisted even though the Greek government approved a tough 2013 budget, because of the lack so far of a consensus on how to make Greece's debts sustainable into the next decade. Despite the Greek parliament passing an austerity-filled budget this weekend, investors are still concerned that Greece will not receive its next tranche of funds in time to avoid defaulting on its loans.

No matter how bad things seem to be, there are always ways for them to become worse. While the campaign against Medicare and Social Security is being couched as an inevitability that has become familiar via European austerity measures, other lame duck session measures are moving forward in the hope no one will notice.

The Senate Homeland Security and Governmental Affairs Committee, under the direction of outgoing chair Joe Lieberman, plans to pass the Independent Agency Regulatory Analysis Act, S.3468, out of committee and into a fast track process. Mark Warner, Susan Collins and Rob Portman are the drives forces behind it. Americans for Financial Reform and other groups have raised alarms about it.

The bill would, according to AFR, strip away independence from various regulatory agencies, including the Securities and Exchange Commission, Commodity Futures Trading Commission, OSHA, the Nuclear Regulatory Commission, the FCC and the Consumer Financial Protection Bureau. These and more agencies would have to submit additional cost-benefit analyses to the executive branch, as well as submitting their rules and regulations for executive branch review. The immediate effect of this would be to slow implementation of things like Dodd-Frank. Review processes take time, and adding an executive branch layer gives Wall Street and other corporate interests another point of attack against various regulations. Heads of all the major regulatory agencies have already complained in a joint letter that the bill would give the executive branch far too much ability to influence their policy decisions.

Existing cost-benefit analysis requirements, and related legal challenges, are already a major source of delay in financial rulemaking. S. 3468 would add at least thirteen new resource-intensive analyses of regulatory costs before a rule can be finalized. In addition, the Office of Information and Regulatory Affairs (OIRA) would get to review any significant new rule, guidance, or policy – a process could add far more time and possibly lead to new rules being abandoned altogether. OIRA has a long standing reputation for blocking environmental and safety regulations, as well as generally being sympathetic to industry arguments that regulation is excessively costly. The big banks could use their influence to turn this tiny office into a bottleneck for all financial regulation. Wall Street lobbyists would have another powerful set of tools to delay and derail the implementation of the safeguards that are needed to protect our banking system and the wider economy.

“Under current law, on January 1, 2013, there’s going to be a massive fiscal cliff of large spending cuts and tax increases.”  – Ben Bernanke, first usage of “fiscal cliff”, 29 Feb 2012

If policymakers don’t work out a solution by January 1st, the harm is not immediate. Nor is it irreversible, nor is it even all that perilous at first. And even to describe the various components as a single item is problematic: each would have a different effect on the economy. Last Friday the Congressional Budget Office released its latest forecasts for how damaging to next year’s economy each policy would be if left alone. But the forecasts assume either that the various policies going into effect on January 1 would remain in place throughout all of 2013, or that they would not be offset by some other negotiated measure. But this is unlikely; something that can be negotiated on December 28 can also be negotiated on January 4 or January 14 with only trivial economic damage in the meantime.

How do you raise taxes without raising taxes? The Tax Policy Center’s estimates for capping itemized deductions at $50,000. It would raise $749 billion over 10 years, within the $800 billion that Mr Boehner has previously agreed to. That’s also more than the $429 billion yielded from returning the two top rates to their pre 2001 levels.

The appeal for Republicans is that no one’s rates go up, and the preferential rate for capital gains and dividends is preserved. The appeal for Mr Obama is that it is highly progressive. According to the TPC, less than 1% of the bottom 60% of households would pay more tax while the top 1% would pay 79% of the additional revenue. The average tax rate for the bottom 60% wouldn’t change, while it would go up 2 percentage points for the top 1%.

The International Energy Agency (IEA) says the United States will overtake Saudi Arabia and Russia as the world's top oil producer by 2017, with North America becoming a net oil exporter by around 2030 and the United States becoming almost self-sufficient in energy by 2035. The United States could overtake Russia as the biggest gas producer by a significant margin by 2015. If fewer steps are taken to promote renewable energy and curb carbon dioxide emissions, oil was likely to exceed $250 per barrel in nominal terms by 2035 and reach $145 in real terms -- almost level with the record highs seen four years ago. The share of coal in primary energy demand will fall only slightly by 2035. Fossil fuels in general will remain dominant in the global energy mix, supported by subsidies that, in 2011, jumped by almost 30 percent to $523 billion

What is your biggest single expense. It might just be interest;  a stunning 35% to 40% of everything we buy goes to interest.  This interest goes to bankers, financiers, and bondholders, who take a 35% to 40% cut of our GDP.  You’ve heard the old saying, the rich get richer and the poor get poorer; the reason is the simple arithmetic of our private banking system.

Compound interest is baked into the formula for most mortgages.  And if credit cards aren't paid within the one-month grace period, interest charges are compounded daily. Even if you pay within the grace period, you are paying 2% to 3% for the use of the card, since merchants pass their merchant fees on to the consumer.  Visa-MasterCard and the banks are at both ends of these interchange transactions charge; and even debit cards charge an average fee of 44 cents per transaction--though the cost to them is about four cents.   

Maybe you are one of those rare birds who do not have a mortgage, no car loan, no student debt, and you pay off your credit card immediately. Maybe you think you aren’t paying interest – think again. Tradesmen, suppliers, wholesalers and retailers all along the chain of production rely on credit to pay their bills.  They must pay for labor and materials before they have a product to sell and before the end buyer pays for the product 90 days later.  Each supplier in the chain adds interest to its production costs, which are passed on to the ultimate consumer.  And so it is interest layered on top of interest.

In 2006, the financial sector in the US was responsible for a whopping 40% of business profits; that’s up from 7% of profits made by the banking sector in 1980.  Bank assets, financial profits, interest, and debt have all been growing exponentially.  Exponential growth in financial sector profits has occurred at the expense of the non-financial sectors, where incomes have at best grown linearly.

By 2010, 1% of the population owned 42% of financial wealth, while 80% of the population owned only 5% percent of financial wealth.  The bottom 80% pay the hidden interest charges that the top 10% collect, making interest a strongly regressive tax that the poor pay to the rich.

Exponential growth is unsustainable.  In nature, sustainable growth progresses in a logarithmic curve that grows increasingly more slowly until it levels off.  Exponential growth does the reverse: it begins slowly and increases over time, until the curve shoots up vertically. Exponential growth is seen in parasites, cancers . . . and compound interest.  When the parasite runs out of its food source, the growth curve suddenly collapses.    

The implications of all this are stunning. In 2011, the U.S. federal government paid $454 billion in interest on the federal debt--nearly one-third the total $1,100 billion paid in personal income taxes that year.  If the government had been borrowing directly from the Federal Reserve--which has the power to create credit on its books and now rebates its profits directly to the government--personal income taxes could have been cut by a third.  Borrowing from its own central bank interest-free might even allow a government to eliminate its national debt altogether.  No spendthrift government can be blamed in this case. Compound interest explains it all!

It is not just federal governments that could eliminate their interest charges in this way.  State and local governments could do it too.  Consider California.  At the end of 2010, it had general obligation and revenue bond debt of $158 billion.  Of this, $70 billion, or 44%, was owed for interest.  If the state had incurred that debt to its own bank--which then returned the profits to the state--California could be $70 billion richer today.  Instead of slashing services, selling off public assets, and laying off employees, it could be adding services and repairing its decaying infrastructure.

The only US state to own its own depository bank today is North Dakota.  North Dakota is also the only state to have escaped the 2008 banking crisis, sporting a sizable budget surplus every year since then.  It has the lowest unemployment rate in the country, the lowest foreclosure rate, and the lowest default rate on credit card debt.

The Bank of North Dakota underwrites the bond issues of municipal governments, saving them from the vagaries of the "bond vigilantes" and speculators, as well as from the high fees of Wall Street underwriters and the risk of coming out on the wrong side of interest rate swaps required by the underwriters as "insurance."