Tuesday, July 08, 2014 - Everything Except Productive Purpose

Everything Except Productive Purpose
by Sinclair Noe

DOW – 117 = 16,906
SPX – 13 = 1963
NAS – 60 = 4391
10 YR YLD - .05 = 2.56%
OIL - .13 = 103.40
GOLD - .40 = 1320.60
SILV - .03 = 21.12

Down 2 days and already I’m seeing the financial talking heads asking if this is the start of a correction. Just a reminder that markets go up and down and sometimes sideways. The markets don’t need a big reason to move. Right now, we’re heading into earnings reporting season, and a few things happen; first, some investors might look at a position and determine that prospects for earnings are not so great, or some investors are taking the opportunity to put some cash in their pockets, just in case they see a bargain basement opportunity.

A trend in place is more likely to continue than it is to reverse, and it reverses when we can see clear evidence of a reversal. Yes, the market looks overvalued by many metrics, yes there seems to be irrational exuberance; but the markets can remain irrational longer than you can remain solvent; yes, we’ve seen a couple of down days but we’ve gone 33 months without a correction, but we’ve had a bunch of down days during that same time. Right now, we’re seeing a minor pullback into a trading range as we await earnings season.

Should you stay or should you go? The markets have hit recent highs, and so you have to wonder if you get out when the getting is good. After hitting record highs, the past 2 days have seen declines; let me be very clear, 2 down days do not constitute a trend; not unless you trade the minute bars. Still, it can be sickening to see profits melt away. Conversely, cutting exposure with the aim of putting cash back to work when valuations drop can be soothing at first, but maddening if stocks continue climbing. There is a fine line between adjusting exposure based on valuations and timing the market; and either way it’s a real trick heading into earnings reporting season.

With interest rates at historic lows and stocks climbing, holding cash in a portfolio has been costly, but on the flip side, cash can serve as a buffer against market pullbacks and corrections, and it provides flexibility to buy again if prices drop; in other words, you keep your powder dry. The real return on cash has to consider the idea that you can use it to make even more money down the road. Of course, for that strategy to work, you have to reinvest the cash; you have to look for bargains or look for other opportunities. If you aren’t willing or able to do that analysis then the risk is that you build up cash and don’t know when to get more invested.

This is where the idea of rebalancing comes in; it doesn’t require sophisticated analysis; you just sell high and buy low. If your risk tolerance points you toward a 60% allocation in stocks, and the stocks go up in price and now you hold 70% in stocks, cash out, to bring the equity allocation back to 60%; turn around and put that cash into a part of the portfolio that has dropped. The idea is that you are buying low; the unfortunate side effect is that you might be dumping your winnings into a losing position. A variation on the theme is sell high and buy something you don’t already hold.

But then the question is where do you go to find value? An article in the New York Times suggests that everything is in bubble territory. The chief investment strategist at BlackRock, one of the world’s biggest asset managers, spends his days searching for potential opportunities for investors to get a better return relative to the risks they are taking on, and he says there are very few cheap assets these days. At the current level of the Standard & Poor’s 500 index, every dollar invested in stocks buys you about 5.5 cents of corporate earnings, down from 7.4 cents two years ago, and lower than just before the global financial crisis in 2007-2008.

Bonds offer next to nothing in the way of returns, and if you want to chase yield in the debt markets, you’ll find some of the riskiest issues can’t even breach 5%. Real estate has spiked in many locations, even farmland has rocketed. It’s not that any one area is outrageously overvalued. Most people would agree that stock valuations are lower than 2000, and real estate peaked in 2006, and we haven’t really recovered to those levels. It’s just that everything that could be considered a financial asset has gone up. And of course, as prices go up, the potential future returns drop.

Maybe that’s a reflection of a slowing global economy. Maybe it’s a result of the central bankers printing lots of money, but not directing where the money would go; and so the money was parked on the sidelines, and not put to productive use, not being invested in things like factories or infrastructure. And then the risk is that folks chasing yield take on more and more risk until something pops.

Taking a look at economic data today, the Federal Reserve report on consumer debt for May showed debt increased $19.6 billion, not including mortgage or real estate related lending; that’s down from a $26.1 billion increase in April. Revolving debt, including credit-card balances, rose $1.79 billion in May following an $8.85 billion April advance that was the biggest since November 2007. Non-revolving debt, which includes car and education loans, gained $17.8 billion in May, the biggest increase since February 2013, after climbing $17.3 billion in the previous month. Car sales continue be show strength, reaching a 16.9 million annual rate last month, the fastest pace since July 2006.

The JOLT survey, or Job Openings and Labor Turnover survey shows that as of the end of May, companies increased the number of job openings almost back to pre-recession levels. Despite greater demand for workers, pay scales have not budged much.  Wages for all private-sector employees increased 2% in the year ended in June, according to the Labor Department, exactly where wage growth has trended through all of this recovery.

News from the small-business sector, however, suggests pay growth is ready to break out of the 2% range. According to the June survey of small firm owners by the National Federation of Independent Business, a net 21% of small businesses report lifting compensation in the last few months. That is the highest reading since the end of 2007. So, it looks like we are getting closer to seeing wage growth in the near future, but we’re not quite there yet. And since we aren’t seeing actual proof of wage inflation, it could be argued that the Fed should wait a bit longer before tapping the brakes. And for that matter, even if we start to see signs of wage inflation, that might be a good thing.

Federal Reserve Bank of Richmond President Jeffrey Lacker said in a speech today that “subdued productivity gains” along with “moderate” increases in consumer spending and “more tempered” growth in housing construction, will lead to economic growth in the range of 2% to 2.5%, well below the Fed consensus of 3% growth. Lacker says “broad-based advances in technology are far less likely than in the past, and that we should prepare for relatively stagnant productivity growth trends going forward.”

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said today that inflation will likely stay quite low for about 4 or 5 years. Kocherlakota says the Fed is “undershooting its price stability goal” of 2% inflation and will likely continue to do so for some time to come; he sees the probability of inflation averaging more than 2% over the next four years as being “considerably lower” than the probability of inflation coming in less than 2% over the same time period. Kocherlakota is skeptical of improvements in the jobs market, saying “much of the decline in the unemployment rate since October 2009 has occurred because the fraction of people who are looking for work has fallen.” That means the Fed is also failing to meet its job creation goal, which is damaging for the economy.

When you look at last week’s jobs numbers something doesn’t seem to add up, at least it gives pause to consider the numbers. GDP growth equals productivity growth plus job growth, or at least growth in hours worked. We’ve been adding jobs at a good pace, but the economy contracted 2.9% in the first quarter. That leaves productivity, and it turns out that there is a long term trend in decelerating productivity growth. And the problem with productivity is not that workers aren’t working hard; the problem is that we haven’t been investing in the right tools for the job.

Earnings season kicked off with a report from Alcoa. It was better than expected. Including all charges, the company earned $138 million or 12 cents a share during the quarter. That reverses the company’s $148 million loss in the same period a year ago. Revenue also came in ahead of expectations. Alcoa reported revenue of $5.8 billion, which is 2.6% higher than expected. Revenue is flat from the year-ago period.

Earlier Samsung issued an earnings warnings, claiming profits could fall as much as 26% from a year earlier. Smartphone and tablet sales took a pretty big beating. Samsung put out a statement that says tablet sales are slow because consumers are slower to upgrade tablets compared to upgrading smart phones. They also blamed the rising Korean won, which is up 9% against the dollar in the past 3 months; they blamed excess inventory in Europe, and competition in the mid and low-end of the market, and a few other excuses as well.

Monday, December 09, 2013 - Corrupt Practices

Corrupt Practices

by Sinclair Noe

DOW + 5 = 16,025
SPX + 3 = 1808
NAS + 6 = 4068
10 YR YLD + .01 = 2.75%
OIL - .41 = 97.24
GOLD + 9.70 = 1241.40
SILV + .30 = 19.94

Next week the Fed FOMC will meet to determine policy. Today, three Fed big wigs gave speeches. We start with James Bullard, president of the St. Louis Federal Reserve Bank; Bullard says: “A small taper might recognize labor market improvement while still providing the [Fed] the opportunity to carefully monitor inflation during the first half of 2014,” and if inflation doesn't return to something approaching a target of 2%, well the Fed could pause the taper.

In separate remarks, Richmond Fed President Jeffrey Lacker said that the central bankers would discuss pulling back the pace of its asset purchase program but gave no indication of how the discussion could go.

 Dallas Fed President Richard Fisher said the central bank should begin to scale back its bond-buying “at the earliest opportunity,” because, “Money is cheap and liquidity is abundant. Indeed, it is coursing over the gunwales of the ship of our economy, placing us at risk of being submerged in financial shenanigans rather than in conducting business based on fundamentals.”

The taper talk spooked Wall Street traders but it's unlikely the Fed will taper at the December meeting. There is little harm in postponing the decision till the new year, particularly compared to the risks of pulling back too soon.

Meanwhile, the Federal Reserve reports that US net worth, a measure of household wealth, rose 2.6% to $77.3 trillion from July through September. Net worth reflects the value of homes, stocks, bank accounts and other assets minus mortgages, credit cards and other debts.

Net worth peaked at $69.1 trillion in Q3 2007, then dropped to $55.7 trillion in Q1 2009, for a loss of more than $13 trillion, and now it is up $21.6 trillion to $77.3 trillion. Adjusted for inflation, net worth is still about 1 percent below its pre-crisis peak, but both the stock market and home prices have continued to increase in the current October-December quarter.  Rising stock prices boosted Americans’ net worth $917 billion. Higher home values added another $428 billion.

The gains haven’t been equally distributed. The wealthiest 10 percent of households own about 80 percent of stocks. And home ownership has declined since the recession, particularly among lower-income Americans.

Total mortgage debt rose 0.9 percent from the previous quarter. Americans are also holding more consumer debt outside of mortgages, in the form of student loans, auto loans and credit cards. Consumer debt rose 6 percent from the previous quarter.

The flow of funds data from the Fed would indicate that QE has had an effect on the economy, it's still accurate to say it has been an unequal redistribution of wealth; with most of the gains going to Wall Street and little to none making it to Main Street. And then there is a question of the sustainability of the gains.

The other day, I talked about the fines in the JPMorgan $13 billion settlement and I raised the question of how the fines were calculated. Well it turns out they weren't really calculated as much as they were negotiated. It looks like the settlement agreement does not quantify the losses that form the basis for the civil penalty, or even provide an indication of how many violations the government determined occurred in connection with the issuance of the mortgage securities; according to the government, JPMorgan bankers regularly included loans in deals that did not meet the bank's underwriting guidelines and were "not otherwise appropriate for securitization." We just don't know the quantity and the actual losses associated with these toxic mortgages.

The breakdown of the $13 billion settlement with JPMorgan includes a $2 billion fine to prosecutors in Sacramento and $4 billion in relief to struggling homeowners in hard-hit areas like Detroit and certain neighborhoods in New York. The government earmarked the other $7 billion as compensation to federal agencies and state attorneys general across the country. In some settlements, the beneficiary of the fines is often the United States Treasury.

But the 8^th Amendment prohibits excessive fines; something the Supreme Court has defined as fines that would be grossly disproportional to the gravity of the offense. The government can look beyond the actual amount involved in the case and also consider the harm done to others, the need for deterrence, and such other matters as justice may require. And since the settlement was negotiated, JPMorgan could hardly argue now that the fines are excessive.

As far as the deterrence factor, the government failed horribly on that front. JPMorgan CEO Jamie Dimon probably had little to no direct involvement in the troubled mortgage deals, even if he did preside over the company and set policies. He did sign off on the annual reports, and under Sarbanes Oxley, he should have had, at the very least, some awareness. Dimon walks scot-free.

But what about the investment bankers who were involved in underwriting and selling the dubious mortgage deals that led to the massive penalty? They appear to be doing just fine as well. Indeed, until last month, three of the top bankers responsible for the deals still worked at JPMorgan. And one of them, the guy in charge of managing risk for the securitization group, is now in charge of the division that monitors risk for the entire bank.

JPMorgan claims that many of the toxic mortgages originated through Bear Stearns and Washington Mutual, the two failed financial institutions that JPMorgan scooped up in the financial crisis. What about the investment bankers who were involved in underwriting and selling the dubious mortgage deals at Bear and WaMu? Well, the head of Bear Stearns' mortgage division (also named in the suit) is now a partner at Goldman Sachs and he's the global head of the bank's mortgage trading division. Another head from Bear's bond business (also named in the suit) is now the head of Deutsche Bank's corporate banking and securities division. Another mortgage chief from Bear ended up as a chief of mortgage products for Bank of America. Other bankers involved in the mortgage scam have retired, but there doesn't seem to be anything in the settlement that would prevent them from continuing in the industry.

So, the bottom line is that there was no individual accountability in the settlement, there was not full disclosure of crimes committed, or any significant attempt to quantify the actual losses, and of course there was no admission of wrongdoing; absent those factors, settlements like these continue to reward and incentivize illegal conduct.

Meanwhile, you'll recall that in August JPMorgan disclosed that the SEC was investigating the bank's hiring practices in China; specifically that the bank favored hiring people from prominent Chinese families in order to win investment banking business. Over the weekend, the New York Times reported that emails uncovered in that investigation appear to clearly indicate that they knew they were crossing the line. In one email, an executive said that hiring sons and daughters of powerful people in China "almost has a linear relationship" with winning assignments. The documents even include spreadsheets that list the bank's "track record" for converting hires into business deals. And the email goes on: “You all know I have always been a big believer of the Sons and Daughters program."

So, the program even had a name, and everybody knew it, except apparently for the upper level executives back in New York, who remarkably remained clueless about the Sons and Daughters program, or the types of trades executed by the London Whale, or the toxicity of the mortgage loans by the mortgage department, or anything else.

Anyway, JPMorgan could be indicted under the Foreign Corrupt Practices Act which prohibits American companies from paying money or offering anything of value to foreign officials for the purpose of "securing any improper advantage."  Under the Act, the gift doesn't have to be linked to any particular benefit to the American firm as long as it's intended to generate an advantage its competitors don't enjoy. Of course, JPMorgan has spreadsheets to prove they got a big bang for their bribery buck. But the point is that the Foreign Corrupt Practices Act is strict.

By comparison, we don't even require that American corporations disclose to their own shareholders the payments they make to American politicians. If a Wall Street bank wants to hire the child of a prominent politician – go ahead. And of course the politicians and the technocrats regularly enjoy the revolving door between Washington DC politics and Wall Street corporate offices.

The list of public officials with past or present ties to Wall Street reads like a government phone book: Treasury Secretary Tim Geithner is now head of Warburg Pincus; budget director Peter Orszag works for Citigroup; Don Regan (Merril Lynch); Robert Rubin (Goldman, Citigroup); Phil Gramm (UBS); Alan Greenspan (Pimco); and that's just a quick sample.

In the Citizens United case, Justice Anthony Kennedy wrote for the majority: “if the First Amendment has any force it prohibits Congress from fining or jailing citizens, or associations of citizens, for simply engaging in political speech.”

Of course, we all know that money talks. JPMorgan has the spreadsheets that prove that money talks in China. And we have to Foreign Corrupt Practices Act to punish bribery. But in the US, we don't have a strict Corrupt Practices Act because the people that write the laws sold us out. Sorry, but you know it's true.

Monday, July 09, 2012 - Barclays Did Not Act Alone - Reaching Into the Upper Echelon

Barclays Did Not Act Alone - Reaching Into the Upper Echelon
-by Sinclair Noe


DOW – 36 = 12,736
SPX – 2 = 1352
NAS – 5 = 2931
10 YR YLD -.03 = 1.51
OIL -.34 = 85.65
GOLD + 4.90 = 1588.30
SILV  + .24 = 27.44
PLAT – 2.00 = 1449.00


Alcoa kicked off the second quarter earnings reporting season. Alcoa has the ticker symbol AA and they are one of the 30 stocks in the Dow Industrials, so they start the earnings season based on alphabetical order and size and a little bit of tradition. Alcoa lost $2 million for the quarter. With an overhang of high inventories and a 20 percent drop in prices since March, many aluminum producers are losing money. Excluding items, also known as the cost of doing business, Alcoa earned $61 million from continuing operations, or 6 cents per share, which topped estimates of 5 cents per share. Later this week we'll have earnings reports from some of the big banks, so it seems appropriate that Alcoa start earnings reporting season with some flashy accounting. Based upon this loss, they will probably get a tax refund. 




President Obama called on Congress to extend tax cuts for families earning less than $250,000 a year while allowing taxes to rise for households making more.


Obama said: “Let’s not hold the vast majority of Americans and our economy hostage while we debate the merits of another tax cut for the wealthy.”


Obama wants Congress to pass a one-year extension of the Bush-era tax cuts for households making less than $250,000 before they expire at the end of the year. He said the outcome of his November election contest with Republican rival Mitt Romney would then determine the fate of the tax cuts for higher income earners. The Census Bureau estimates that out of 118.7 million U.S. households in 2010, about 2.5 million had incomes of $250,000 or more. Romney supports extending the tax cuts for all income earners. His campaign spokeswoman says that Obama’s proposal amounted to a “massive tax increase.” Of course the Democrats and Republicans are sharply divided on this one, so they're going to drive that same old truck right back to the edge of the fiscal cliff.




Britain’s Serious Fraud Office says it has formally opened a criminal investigation into the Barclays rate rigging scandal. Bank of England Deputy Governor Paul Tucker faced questions from the UK Treasury select committee over claims Barclays was encouraged to manipulate rates. Tucker completely rejected suggestions that government ministers had pressured him to encourage banks to manipulate Libor. He said the Bank of England was not aware of Libor manipulation, or any allegations of dishonesty, despite chairing a meeting that discussed the low-balling of Libor in 2007. Tucker counters that he thought they were talking about banks misunderstanding one another, not "cheating". Asked whether Libor is clean now, Tucker says: “I can't be confident of anything after learning about this cesspit.”


This is front page news in London. The Economist magazine had a dramatic cover this weekend, it reads: “Banksters, Britain's price-fixing scandal and its global impact.” In typical Economist style they recommend a go-slow approach to investigating the problem; drag it out and hope the masses become distracted. 


The US media hasn't touched the story, but it will almost certainly affect us. Wall Street will be implicated in the scandal. The biggest Wall Street banks – including JP Morgan Chase, Citigroup and Bank of America – were almost certainly involved in rate rigging the Libor. Barclay's couldn't have rigged the Libor without their involvement. Barclays' defense has been that every major bank was fixing Libor in the same way, and for the same reason. Barclays is co-operating with the justice department and other regulators; rolling over on their competitors. US regulators would have to be incredibly incompetent for this not to result in steeper penalties and criminal prosecutions – and this is a possibility, but really, we should see perp walks. 


In 2007, Barclays and other big banks submitted false Libor rates; manipulated to make the rates look lower in order to give the impression they still had financial strength. The next question is whether the Federal Reserve, administration officials and regulators were aware of this manipulation and complicit, or unaware and incompetent. Research papers indicate the Fed was aware of and worried about Libor manipulation as early as February 1998 but there is no indication they took any actions. The scandal is already moving into the upper echelon of British government; it would be naive to imagine it didn't reach into US government. 


The other part of the scandal is that Barclays traders were manipulating interest rates so they could place bets in the derivatives markets using customers deposits; this is more egregious than insider trading; it is out and out cheating. And Barclays traders were not the only big bank traders who were cheating; and this was cheating in an enormous market, more than $800 trillion dollars per year over several years. 


So far, there has been no movement to clean up the mess in the cesspit; not a single top financial executive has been charged with a crime in connection with the meltdown of 2008. Rather, the banks were bailed out, the bankers got bonuses, the lobbyists were paid handsomely to prevent any regulation from slowing down the pillaging. We know that the big banksters have been stealing at an unprecedented pace but they remain unfettered by conscience or law or public outrage. 


That is simply criminal. The system has failed. More evidence of that this weekend when confidential emails were revealed  from Swiss bank giant UBS. The advice, in a note titled "Reducing Libor, improving lending conditions", was sent from UBS to the British Treasury at a time when lending between banks had all but dried up over fears they might collapse. The Labour Party claims the document, published in the Financial Times, "simply proposes legitimate policy improvements" to reduce the cost of banks lending to each other during the credit crunch. Part of the problem is that banks now instruct the Treasury how to conduct business and this is considered legitimate policy. Legitimate policy is representing the people, not supporting schemes to defraud the people. 


And since we didn't fix the problems of the past five years, this next round of corruption will be bigger and more painful. The problems are coming around again, and just like the last time, the US media is oblivious. In a couple of years, they'll be telling us how nobody could have anticipated what happened. I can’t give you an exact time-line or specifics of how this will play out.  Eventually, this tsunami will reach our shores, and this time, it looks like a big one. 




Meanwhile, Euro-zone finance ministers are meeting this week in Brussels to try to figure out something to do with Spain. The interest rate, or yield, on Spain’s 10-year bonds hit 7 percent, a level that market-watchers consider is unaffordable for a country to raise money on the bond markets in the long term and the point at which Greece, Ireland and Portugal all sought an international bailout.


Greek Prime Minister Antonis Samaras won a vote of confidence in his new government, setting the stage for a showdown with the European Union over easing the terms of its bailout.




Four top Federal Reserve officials made speeches today, three of the Fed heads were laying the groundwork, for the possibility of more quantitative easing. San Francisco Fed President John Williams speaking in Idaho said: "We are right at that edge, that if economic data keep coming in below our expectations -- and our view is we are not making progress on our mandates, or we don't expect to make progress on our mandates -- then I think we would need more accommodation.”


Speaking in Bangkok earlier Chicago Federal Reserve Bank President Charles Evans said: "Additional monetary accommodation is needed to more quickly boost output to its full potential level. The economic circumstances warrant extremely strong accommodation."


Boston Federal Reserve President Eric Rosengren said: “So far data has been coming in weak and I gave a weak forecast myself. I think it's appropriate to have more quantitative easing."


Richmond Fed President Jeffrey Lacker reiterated his opposition to a new round of stimulus.


The Fed next meets to discuss policy on July 31 to August 1, and then on September 12 to 13. All four Fed officials speaking today noted the threat to the U.S. from Europe's crisis, and even Lacker, the policy hawk, said he was not worried about inflation.


So, 3 out of 4 Fed officials today are calling for QE3. The dissenter was Federal Reserve Bank of Richmond President Jeffrey Lacker. Today, in a radio interview, Lacker said the US may already be close to maximum employment from a monetary policy standpoint and that policy makers can’t do much more to cut the jobless rate.


Lacker said: “Given what’s happened to this economy, I think we’re pretty close to maximum employment right now. That might be shocking. That might be surprising.” Yep, in fact Lacker might be stupid. 


Granted, the Fed probably has limited control over the jobless rate because the employment level is driven by “non-monetary factors that affect the structure and dynamics of the labor market,” according to the January statement from the Federal Open Market Committee. 


Lacker, who has dissented from all four FOMC decisions this year, is at odds with colleagues on what the Fed should do to boost the economy. He said in a June 22 statement that he opposed the FOMC’s $267 billion extension of its Operation Twist program because it may spur inflation and won’t give the economy a significant boost. QE might not be the right solution but Lacker has the reasoning all screwed up. 


The world has simply gotten itself into too much debt. There are creditors that expect to be paid, and debtors that are having an increasingly difficult time making payments. No amount of political or policy intervention is going to change that reality. Americans put more on their credit cards in May than in any single month since November 2007, but overall credit card use is still well below where it was just before the downturn. Consumer borrowing rose by $17.1 billion in May from April. The gain drove total borrowing to a seasonally adjusted $2.57 trillion, nearly matching the all-time high reached in July 2008. Borrowing has increased steadily over the past two years, but most of the gains have been driven by auto and student loans, which rose to a record level of $1.7 trillion in May.


The Consumer debt is just a small part of the big picture. Markets now trade more than $800 trillion a year in Libor related derivatives; that's 12 times more than the Gross Domestic Product of the world. The reckless use of leverage has resulted in a chasm between total credit and the money that can service it.


So how will this debt overhang be resolved? The Central banks will attempt to deleverage, or unwind the debt, by printing money, and lots of it. There are two ways to deleverage. One is to let credit deteriorate on its own in the marketplace, essentially through default. And the other is to manufacture new currency or bank reserves. Those are the only two ways to deleverage a balance sheet.


What policy makers do not want to see is bank asset deterioration, or default. That is not the preferred central banker method because banks fail and bank systems fail; creditors and debtors fail and it would just feed on itself in an accelerating fashion. And so monetary policy makers have no choice but to deleverage in the other way, which is to print money; to manufacture electronic credits and call them bank reserves.


If you want to get a gauge of the economic pulse of the globe, just take a quick look at the central banks. Last week the ECB cut rates, the Bank of England announced it would pump billions into the system. The People's Bank of China announced the second rate cut in a month. When it comes to the global financial system, all countries are eventually interconnected. The primary job of a central bank is to lend money – or to provide liquidity. Yet a lack of liquidity is not the major problem of our times. We are suffering from a lack of demand. 






Morgan Stanley has been tracking stock trades for the past 10 years and they've learned that only 16% of the stock market is traded by flesh-and-blood human beings. Computerized high-frequency trades (HFTs) dominate the other 84%. These trades, known as “black box” trades, are governed by complex algorithms that analyze data and transact orders in massive quantities faster than you can blink.


What if we had a stock market and nobody gave a damn?

Tuesday, June 26, 2012 - Grapes of Wrath

Grapes of Wrath 
by Sinclair Noe


DOW + 32 = 12,534
SPX + 6 = 1319
NAS + 17 = 2854
10 YR YLD +.02 = 1.63%
OIL +.23 = 79.59
GOLD – 12.70 = 1573.60
SILV - .43 = 27.21
PLAT – 17.00 = 1433.00




The S&P/Case-Shiller reports shows home prices rose 1.3% in April.  The Conference boards Consumer Confidence Index fell for a fourth straight month; the index hit 62 last month, which is still above average and better than last year at this time. We are not officially in the Dog Days of Summer; it just feels like it. 


The European Union has released a road map outlining the path to tighter fiscal integration. Nothing too flashy and it might take a year or more to implement. German Chancellor Angela Merkel  had played down large moves such as the issuance of common debt until euro-area countries agree to broad oversight of their budgets.  Egan Jones downgraded Germany from A+ to AA-. 


Today, Reuters reported Merkel told politicians in her ruling coalition that Europe would not have shared total debt liability “as long as I live.” So, that pretty much kills any idea of a euro-bond. Mario Monti, the technocratic non-elected Prime Minister of Italy now denies he said: “Eurobonds or I resign.” 


Meanwhile, Spanish and Italian bonds aren't feeling healthy as yields rose again. Spain had to pay the highest yields since last November to sell 3.08 billion euros in short-term debt as demand from its ailing banks dwindled. Spain has officially requested a $125 billion dollar bank bailout. Details are being worked out. There are calls to just directly inject the money straight into the banks. Nobody is calling it theft. I don't know why not. Bondholders would be forced to take haircuts. 


Cyprus is bust and they need 10 billion euro but nobody is rushing in because it might set a bad example for those pushing the idea that suffering is good and mitigating pain might somehow be a bad thing. 


Another emergency Euro-summit starts on Thursday in Brussels. France will push a growth package. Germany will push for more pain. The United States will push for something, anything that looks like progress, and everyone will mildly disappointed except for the waffles and chocolates and beer. I'm not suggesting the players are taking this lightly. Deep economic collapses are dangerous. I think that is accepted. 




 In Europe, whether it’s Greece or Spain or Italy, they have insolvent banks that are in a deadly embrace with insolvent states. So, the states borrow money from the Euro-institutions in order to give to the banks and banks borrow to give to the state and both banks and states are sort of locked into a deadly embrace and they are sinking, unable to even tread water. 


So what can be done to break this  death bond  between insolvent banks and insolvent states? It will go one of two ways: either, to unify the banking system, and have it being funded directly not through national governments. Or, allow the banks to fail.  As for Greece, it has failed. Greece is in a depression. Think Oklahoma, circa 1931, Tom Joad- opoulous. Grapes of Wrath. 




The quote of the day: "An imbalance between rich and poor is the oldest and most fatal ailment of all republics." -Plutarch


A new book by Joe Stiglitz on Inequality. He wrote a piece for the Financial Times, and I'm sure the editors at the FT didn't quite comprehend the import. Here are the key ideas via Economist's View:


US inequality is at its highest point for nearly a century. ... One might feel better about inequality if there were a grain of truth in trickle-down economics. But the median income of Americans today is lower than it was a decade and a half ago... Meanwhile, those at the top have never had it so good. ...


Markets are shaped by the rules of the game. Our political system has written rules that benefit the rich at the expense of others. ... There is good news in this: by reducing rent-seeking ... and the distortions that give rise to so much of America’s inequality we can achieve a fairer society and a better-performing economy. …


America used to be thought of as the land of opportunity. Today, a child’s life chances are more dependent on the income of his or her parents than in Europe, or any other of the advanced industrial countries for which there are data. …


We can once again become a land of opportunity but it will not happen on its own... The country will have to make a choice: if it continues as it has in recent decades, the lack of opportunity will mean a more divided society, marked by lower growth and higher social, political and economic instability. Or it can recognize that the economy has lost its balance. The gilded age led to the progressive era, the excesses of the Roaring Twenties led to the Depression, which in turn led to the New Deal. Each time, the country saw the extremes to which it was going and pulled back. The question is, will it do so once again?


I promised I would follow up on a question from a listener on Friday. 


Hong Kong Exchanges and Clearing agreed on Friday to buy the London Metal Exchange for $2.14 billion, The deal will be presented to the London exchange’s shareholders by the end of July. The deal requires approval of at least 50 percent of the L.M.E.’s shareholders, who hold more than 75 percent of the firm’s stock. It also requires approval of British regulators.


The acquisition could provide a windfall for JPMorgan Chase and Goldman Sachs, which collectively own a 20 percent stake in the London-based exchange. The banks could pocket a combined $436 million through the transaction. This seemed to be the focus of the Financial Times' reporting on the story; they seemed entirely focused  on the sale as a liquidity event for the shareholder-members of the LME; indeed, they will have a nifty payday. They will collect their lucre and be long gone before there are any consequences. 


For the Asian investors, there is a longer term view. This represents another sign of Asia’s importance to the world’s commodities industry. The Asian bourse, one of the world’s biggest financial exchanges based on market capitalization, outbid several American rivals for control of the 135-year-old London firm.


Despite concerns that the Chinese economy may be slowing down, the country and other emerging markets in the region now are the largest buyers of a number of commodities, such as iron ore and coal, as their domestic markets continue to report high levels of growth. The latest acquisition will help the Asian bourse take advantage of this demand. 




The Fed last week decided to extend through the end of the year a bond maturity-extension program called Operation Twist, in which the central bank replaces short-term debt it holds with longer-term securities. Operation Twist had been due to end this week. Dallas Federal Reserve Bank President Richard Fisher says:
"My suspicion is Operation Twist is having a very minor effect and I have argued that the benefits do not exceed the costs; the costs exceed the benefits, and that's why I personally didn't support the program. But I was in a minority." 


I’m not sure what the costs are because it is basically a wash. Sell short buy long.


Fisher, an inflation hawk, has been a staunch opponent of further Fed easing. Though he does not have a vote on the Fed's policy-setting panel this year, he participates in the committee's deliberations. All but one voting member on the panel supported last week's extension of Operation Twist.


"In practical terms, there's a limit to what we can do without distorting the marketplace," he said. "And that's a subject of much debate at the committee."

Jeffrey Lacker, the president of the Richmond Federal Reserve Bank says it is doubtful that another round of bond buying would boost economic growth. "The impediments to growth are things that monetary policy is really not that capable of offsetting," Lacker was the one dissenting vote against the extension of Operation Twist. 


Lacker said he expects inflation to stay close to the Fed's 2% target despite the recent softness in oil prices. Lacker said he favors steady policy and now sees the first rate hike coming in "late" 2013 due to the recent slowdown, later than the "mid" 2013 projection he made last month.

So, we have a couple of Fed heads saying they’ve hit the 2% inflation target actually, the core number is below 2%, and they are impotent to use monetary policy to boost growth, or they just don’t give a damn about their mandate to achieve maximum employment. 


What does the Fed propose doing about the situation? Almost nothing. Last week the Fed announced some actions that would supposedly boost the economy, extending the Twist. This helps a little with housing and mortgage rates but it does nothing for employment; it was the bare minimum the Fed could do to deflect accusations that it is doing nothing at all.


Why won’t the Fed act? The Fed, like the European Central Bank, like the U.S. Congress, like the government of Germany, has decided that avoiding economic disaster is somebody else's responsibility.  The fundamentals of the world economy aren’t, in themselves, all that scary; the building blocks for providing food and jobs and housing and care for the world's population – that's all within our reach – we can do it; but there has been a shift from those in positions to make a difference and those in positions of power that don’t want things to change for the better. It’s the almost universal abdication of responsibility that should scare the beejeesus out of you.