Wednesday, May 21, 2014 - Congratulations Graduates, Yada, Yada, Yada

Congratulations Graduates, Yada, Yada, Yada

by Sinclair Noe

DOW + 158 = 16,533
SPX + 15 = 1888
NAS + 34 = 4131
10 YR + .02 = 2.53%
OIL – .33 = 103.74
GOLD – 2.40 = 1292.90
SIL  un = 19.49

Earnings season is winding down; about 96% of S&P 500 companies have reported results, with profit growth this quarter of 5.5% and revenue up 2.8%. While more companies have topped earnings expectations than usual, fewer have beat on the revenue side. This has been an ongoing theme for corporate profits; bottom line growth without corresponding sales. If this formula sounds unsustainable, it is, unless there is some other factor pumping up the markets.

Follow-up from yesterday: China has signed a 30-year deal to buy Russian natural gas worth about $400 billion. The gas deal gives Moscow an economic boost at a time when Washington and the European Union have imposed visa bans and asset freezes on dozens of Russian officials and several companies over Ukraine. It allows Russia to diversify its markets for gas, which now goes mostly to Europe; essentially opening the door to Asia’s gas market and potentially closing the door on the petro-dollar.

The Federal Reserve today released the minutes of the most recent FOMC meeting. Fed policymakers considered several approaches to tightening monetary policy, but decided to remain flexible; which is another way of saying QE is a big experiment and they are just hoping nothing explodes in their face. By making no decisions, the Fed is making it difficult for Wall Street to be spooked by tightening talk, at least for now.

In the minutes, the Fed made no decisions on which tools to use. One great advantage of extending the debate about how to tighten is that it keeps the question of when stuck in background. If the Fed laid out a detailed exit strategy the markets would start to trade the strategy and essentially kill it in its tracks.

The minutes show the Fed still thinks the first quarter slowdown was weather related, and things will pick up, any day now. Fed officials still see slack in the labor force, but there wasn’t consensus on how much slack or what to do about it. Inflation is picking up just a little, but is regarded as stable and not a problem.

After the minutes were published, we heard from several Fed officials, starting with Janet Yellen delivering a commencement address to NYU grads. Yellen delivered what you might expect, and nothing to do with monetary policy: graduates, she said, should “tend the fires of curiosity,” listen to others, show grit in the face of failure, and the courage of her hero Ben Bernanke (yada, yada, yada).

Federal Reserve Bank of San Francisco President John Williams said he’s inclined to delay any action that would allow the central bank’s balance sheet to get smaller until after the Fed has lifted interest rates for the first time. Williams  believes the Fed needs to take into account the troubles it had last year when it first floated plans to wind down its bond-buying policy, and make sure markets understand what the central bank does with its bond holdings is entirely different than what it does with short-term rates.

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the Fed is still failing to deliver on its employment and inflation goals. Kocherlakota says the current unemployment rate of 6.3% overstates the nature of the improvement. He said the labor market is not healthy but he didn’t call for additional levels of stimulus, but he did say it was possible for the Fed to switch to a system where instead of targeting a specific level of inflation, it could shift to a regime where it allowed inflation to rise above target to make up for past shortfalls.

One area of agreement in the FOMC minutes is that officials are concerned about weakness in the housing market; citing factors like higher home prices, construction bottlenecks from a shortage of labor and harsh winter weather, as well as tight credit.

Former White House advisor Larry Summers thinks student debt is slowing the housing market, which in turn is slowing the broader economy. Since 2003, student loan balances have nearly quadrupled to $1.2 trillion, during a period when mortgage debt rose “only” 65% to $8.2 trillion and credit card debt actually declined by 4.2% to $660 billion. The burden of servicing that ever growing student loan debt is eating into other forms of borrowing and spending, such as the purchase of a home. And so the proportion of first-time buyers has been shrinking for years.

Over 70% of the students who are sitting through a commencement speech this spring have student loans. They will start their career, if any, with about $33,000 in debt. Even when adjusted for inflation, it’s about twice as much as 20 years ago. Back then, only 43% of students graduated with student loans. And as education costs have jumped, the idea of working your way through school just doesn’t work anymore.

One of the reasons why education costs have jumped is because of austerity. States cut back on funding for state universities; the schools raised tuition and they discovered they could charge whatever they want, or get away with, because the students just borrow the money. Once upon a time state governments held the reins of university budgets and they would tighten their grip occasionally; no more; and through the student loan programs, designed with whatever intentions, the government is simply aiding and abetting colleges in extracting ever more money from the future lives of their students.

And so for the Class of 2014, you now face the prospect of rising interest rates, a mountain of student loan debt, almost no chance of buying a home in the foreseeable future, and the prospects for a good job in your chosen field are not looking good. Congratulations, don’t despair, just have the grit and courage of Ben Bernanke (yada, yada, yada) and you’ll work your way out of your parents’ basement in 10 or 15 years.

Earlier this week, the Oregon Legislature approved a plan that could pave the way for college students to finance their education by selling equity stakes in their future income. It’s an interesting idea. With both unsubsidized and subsidized Federal loan rates now at 6.8%, and Grad PLUS rates even higher, the student loan burden that comes with an undergraduate degree, let alone further education can be daunting. Unfortunately, Federal loans are often the only option that a student has to pay for school nowadays.

Equity financing would allow these students to avoid debt in exchange for a portion of their future income for a set number of years. Proponents of the Oregon plan claim that 3% per year for 20 years would be enough to keep the program afloat. One concern is that students who expect to be high earners will not participate if it could mean they end up paying more in tuition when all is said and done. Equity financing would be costly for a medical student. A cap on repayment could help solve such a problem. The cap would still have to be higher than the average tuition rate charged by the school. Meanwhile, a equity financing might be a sweet deal for a student taking classes that don’t lead to a big paycheck; it might even encourage them to pursue higher education without regard to finance.

The best that can be said for the plan is that it is a tax on future earnings, the worst is that it is a newfangled name for indentured servitude.

So, back to the housing market for a moment; you have a massive number of young adults living at home with very little financial means for purchasing a home. The recent argument was that as economies grew, this wealth would eventually lift the standard of living for all. There is new economic research showing that this isn’t always the case especially when a rentier class emerges. In fact, this wealth gap is being fully visualized through real estate. Some analysts have been scratching their heads wondering how housing prices could go up while homeownership is actually falling.

How do you have soaring home prices with household incomes dropping? The fact that investors are dominating in the housing market shows how large and powerful these big pools of money have become. The financial sector rarely had an interest in being actual property owners until the housing market imploded. But in the first quarter of this year, cash sales from investors reached an all-time high; that isn’t Mom and Pop buying a crib with cash and it certainly isn’t the first time buyer a few years removed from college.

Since 2005, we have increased the number of rental households by roughly 7 million (a 21 percent increase). Interestingly enough, we have a foreclosure graveyard of 7 million over this same period. Owner occupied housing has actually fallen over this period. We are looking at close to one decade of data and we have fewer individual homeowners today than we did in 2004.

In previous recoveries, you would also see home building picking steam up but that hasn’t happened. In better days, we would see more than 2 million housing starts per year. In this recovery, we’ve been doing our best to close in on 1 million.

And when the Fed last year floated the idea of taper, the markets responded with a taper tantrum, and rates increased, modestly, but an increase; and that was enough to slam the brakes on regular home buyers last year. Mortgage apps are now near an all-time generational low. Regular buyers are becoming a minority. Many of the “pent up demand” argument assumes first, that younger buyers have the means to buy. Second, it also assumes homes are affordable based on their income (which they are not). And so we have cash investors, spurred on by strong stock returns, but what happens if or when the inevitable stock market correction comes along?

Thursday, May 16, 2013 - What's Next For the Fed

What's Next For the Fed

by Sinclair Noe

DOW – 42 = 15,233
SPX – 8 = 1650
NAS – 6 = 3465
10 YR YLD - .08 = 1.87%
OIL + .95 = 95.25
GOLD – 6.60 = 1386.90
SILV + .10 = 22.79

The Labor Department reports the consumer price index dropped 0.4% in April from March, the biggest monthly drop since December 2008. The main reason the index fell was that gas prices plunged 8.1 percent. Excluding the drop in fuel costs, prices were largely unchanged. For the 12 months that ended in April, overall prices rose 1.1 percent — the smallest year-over-year increase in 2½ years. Excluding volatile energy and food costs, “core” prices ticked up 0.1 percent last month. Core prices have risen only 1.7 percent in the past 12 months. That’s below the Federal Reserve’s 2 percent inflation target. Yesterday, we reported that wholesale prices declined last month.

Inflation is not the problem right now; it might be a problem at some point down the road, but not now.

John Williams, the San Francisco Fed president gave a speech in Portland and he indicated that the Fed's Quantitative Easing program can be reduced soon, and that the whole program may be halted this year. He pointed out the pace of job growth has picked up since the program was launched in September, with an average pace of job growth of 200,000 over the last six months.

Williams said: “Assuming my economic forecast holds true and various labor-market indicators continue to register appreciable improvement in coming months, we could reduce somewhat the pace of our securities purchases, perhaps as early as this summer. Then, if all goes as hoped, we could end the purchase program sometime late this year.”

Williams was open to the idea of ramping up bond purchases if the economy slows down.

So, let's go back to the Federal Reserve's dual mandate of price stability and maximum employment. Right now, prices are stable; even a little bit of disinflation based upon this week's producer-price index and consumer-price index. No need to taper off.

On the maximum employment side of the mandate, the Fed set a target of 6.5% unemployment, which is still a long way from it's mandate of maximum employment. One of the reasons the unemployment rate has dropped to 7.5% is because the participation rate has dropped; fewer people are considered to be in the labor pool. The economy has been adding about 200,000 jobs per month, on average, over the last six months. We know that many of those jobs are temp jobs; many are part-time jobs; many are lower paying jobs. But they are net new jobs. The problem is that 200,000 jobs is not enough to lower the unemployment rate, unless a lot more people fall out of the labor market.

This morning, the Department of Labor reported initial claims for unemployment increased 32,000 to 360,000.

So, why do we have all this talk of tapering off from QE?

In order for QE to work, rather than just inflate asset prices, there needs to be viable investment opportunities that create productive jobs in the short, medium, and long term. Infrastructure would qualify as filling the bill, but not just building bridges to nowhere. And this is the flawed premise of QE, according to a recent speech by Dallas Federal Reserve President Richard Fisher: “by driving rates to historical lows along the entire length of the yield curve, investors will rebalance their portfolios and reach out to riskier assets, providing the financial wherewithal for businesses to increase capital expenditures and reengage workers, expand payrolls and regenerate consumption. Rising prices of bonds, stocks and other financial instruments will bolster consumer confidence. The CliffsNotes account of this play has the widely heralded “wealth effect” paving the way for economic expansion, thus saving the day.”

Fisher went on to add: “Until job creators are properly incentivized by fiscal and regulatory policy to harness the cheap and abundant money we at the Fed have engineered, these funds will predominantly benefit those with the means to speculate, tilling the fields of finance for returns that are enabled by historically low rates but do not readily result in job expansion.”

There are a few problems here. Cheap money does not encourage speculation. Cheap money encourages prudent lending. If you can only get a small rate on your loan, you are more likely to make certain that loan will be repaid. This is why triple-A rated corporate bonds pay less than junk bonds. This is also why the residential housing mortgages written in the past two years are a much better vintage than the mortgages written in 2005. High rates encourage speculation. The risk is not in the low rates, but rather that the low rates push prudent potential lenders to seek higher returns elsewhere, like in the stock market.

The result, and it must be scaring the Fed, is that we are headed for a speculative bubble. If you always do what you've always done, you'll always get what you've always gotten. The Fed actually has some history with bubbles. The next time you read that a new era has dawned, that the old rules of economics don't apply, and that some asset class or other that’s been rising steadily for a while now is certain to keep on to infinity and beyond; that's just wrong. It really is that simple.  

The problem is that the Fed has been passing out cheap money to speculators and gamblers. And now they're shocked, shocked I tell you, to discover that the speculators are gambling with the cheap money. Speculation demands high rates as compensation for high risk, but the Fed has been passing out super-low rate money to the most high risk players.

And the banksters continue with their rotten ways. They take the zero-interest money from the Fed and they screw anybody and everybody they can. Today a case in point.

In 2006, Congress passed the Military Lending Act, which was designed to prevent predatory lenders from targeting men and women in uniform. But a new report from ProPublica and Marketplace entitled Beyond Payday Loans suggests aggressive lenders have merely shifted tactics and are still very actively going after military personnel.

Rather than a loophole, installment loan companies and so-called payday lenders have found huge gaps in the Military Lending Act. The Military Lending Act set a national interest rate cap of 36 percent APR (annual percentage rate) for loans to military members and their families (excluding mortgages and auto finance loans).

The Act covered three specific types of loans: payday loans (short-term, due in one lump sum after a borrower’s payroll check clears); car-title loans; and tax refund anticipation loans. Further, the loan-terms covered were restricted: 91 days or less for a payday loan, 181 days or less for a car-title loan.

As a result, lenders are offerings payday loans, which typically have annual percentage rates over 400%, with a duration of five months instead of three. Same is true of auto-title loans, which are secured by the vehicle’s title and typically have rates above 100%.

And yes it is the banksters that back the payday lenders, or in many cases the big banks are the payday lenders, through a different division of the company. QE and the other tools of the Fed have not cleaned up some of the worst abuses in the system.

Today, the International Monetary Fund weighed in, claiming the Quantitative Easing by the Fed, and the ECB, and the Bank of Japan had helped to stabilize financial markets and push asset prices higher. The IMF figured that: “While additional unconventional measures may be appropriate in some circumstances, there may be diminishing returns, and benefits will need to be balanced against potential costs.”

Maybe it is time to ask whether the Fed has been effective in its policy over the past five years. Yes, the Fed policy helped avert a global financial meltdown. Yes, the Fed policy prevented the collapse of the biggest banks. Yes, the Fed policy was a part in turning around massive job losses and helping bring down unemployment in a less-than-robust manner. No, the Fed hasn't done much to regulate the financial institutions that caused the problems in the first place. The Fed doesn't seem to believe in regulation; which is kind of like a Pope that doesn't believe in religion.

The Fed hasn't been particularly successful in its mandates. Perhaps the time is coming where they need to change the tools they're using. Maybe it is time to break away from Quantitative Easing, which mainly helps the banks, and maybe they need to start using tools that will promote a healthy economy, with maximum employment – not just a target of 6.5% unemployment – and help people find productive employment. And then they could use their regulatory tools to help ensure financial stability in what has become a casino market.

One of the better moves the Fed could consider is to open up low interest rates to entities other than the member banks; this probably exceeds the Feds generally accepted role, but not the technical limits of its tool box. Infrastructure investment still looks like the best, least speculative way to achieve the dual mandate. Imagine a country with a continental railroad - like what Lincoln did, or an nationwide highway system – like what Eisenhower did, or a country that develop science to the point we could fly to the moon – Kennedy and Johnson. Now imagine a country that is energy independent.

The time is coming for the Fed to move beyond Quantitative Easing, and this is why we've been hearing about tapering off. QE is not as effective as it once was, and it has never been as effective as it should have been. So, maybe a change is coming. The big question is where they go next.

Wednesday, April 03, 2013 - Traps Set

Mark your Calendar, April 5 & 6 and make your reservations for the 2013 Wealth Protection Conference in Tempe, AZ. For conference information visit www.buysilvernow.com or click here or call 480-820-5877. This year's conference features Roger Weigand, Nathan Liles, David Smith, Mark Liebovit, Arch Crawford, Ian McAvity, Bill Tatro, and I will speak on Friday. There is an expanded Q&A session with all speakers on Saturday. I hope you can attend.

Traps Set

by Sinclair Noe

DOW – 111 = 14,550
SPX – 16 = 1553
NAS – 36 = 3218
10 YR YLD - .05 = 1.81%
OIL – 2.72 = 94.47
GOLD – 18.30 = 1558.90
SILV - .28 = 27.08

We have a day like today and we are reminded of the fleeting nature of a bull run. The Russell 2000 cracked this week. It tried to get up yesterday, but small-caps couldn’t hold their ground. Transports followed with a thud. Both the transports and the Russell registered slightly lower highs to kick off the second quarter. Commodities have moved lower as of late; gold, silver, platinum, copper all sneaking back to support. Physical demand for the metals remains very strong and there appears to be a disconnect between the paper market and the physical market. It feels like someone is trying to set a trap for a greater fool.

I don't know whether this is a technical move, or if there is a fundamental reason. The news doesn't always help. The big news story of the day is that the Rutgers basketball coach yelled at the players and the school fired the coach. Yeah that's it. North Korea is purportedly ready to nuke the world, Syria continues to crumble under the brutality of a sick dictator, Egypt is arresting comedians, Italy elected comedian and he doesn't want a government, Europe is borderline in a Depression, depending on which line of which border, Eurozone unemployment reached a record 12pc in February and looks certain to ratchet higher as fiscal cuts deepen and manufacturing continues to struggle, raising the spectre of social explosion across southern Europe, the US is supposed to have a great recovery except we all know it isn't great, and the stock market seems wildly disconnected from reality.

So, I'm not really sure what the fundamentals are telling us, and the technicals aren't quite conclusive, and it really doesn't matter. Selling is selling. In the market, the final word, the ultimate arbiter of any dispute, is always price. There is no guarantee we will see a major sell-off this month, or even in May, or even a summer swoon. We've weathered the fiscal cliff, the sequester, and the Cyprus Bank Heist; which simply means that anything bigger than a nice orderly pullback would be unexpected; not out of the question, just unexpected.

The stock market is propped up to the tune of $85 billion a month in Federal Reserve Treasury and mortgage backed securities purchases. Today, John Williams, the president of the Federal Reserve Bank of San Francisco, floated a trial balloon, and it didn't float very well. When the Fed might begin tapering off quantitative easing has been a key question for markets since the Fed’s policy meeting in March. The Fed has said it would continue the purchase program until it sees “substantial” improvement in the labor market.

In a speech today, Williams said: “Assuming my economic forecast holds true, I expect we will meet the test for substantial improvement in the outlook for the labor market by this summer. If that happens we could start tapering our purchases then. If all goes as hoped, we could end the purchase program sometime late this year.”

Williams compared Fed policy to driving a car up a long, steep hill. The Fed is pushing down hard on the gas pedal but once the road gets flatter- the Fed “will have to lighten up on the accelerator a bit.” It sounds like a good analogy, but it's not accurate. A better analogy is that the Fed has been throwing money out of a helicopter hovering directly over Wall Street, and this has made Wall Street a ton of money while having a very minimal impact on the rest of the country. And if the Fed lightens up on the money dump, Wall Street will throw a tantrum.

Williams said that ending the bond purchases is not a tightening of policy and the Fed’s $3 trillion balance sheet will add stimulus and put downward pressure on rates. Wall Street responded like a baby that just had his candy stolen.

Today, the ADP jobs report for March was the fifth economic indicator in the past week to disappoint investors with a lower-than-expected reading.  ADP said the private sector generated 158,000 jobs in March.  The pace of hiring was revised up sharply in February, but that tells us little about where the economy is headed in the second quarter of the year. The ADP report is not great at forecasting the government's monthly jobs numbers due Friday morning; estimates are calling for about 190,000 new jobs, so although not a predictor, today's report was disappointing.

Last month, the Department of Labor released new job market numbers, which suggests that the economic recovery is perpetuating the trend of college graduates turning to minimum wage jobs. Though there has been significant employment gains, many recent college graduates have been forced to resort to low-wage, low-skilled jobs. There are now 13.4 million college graduates working for hourly pay, up 19 percent since the start of the recession.

According to the Department of Labor, there are about 284,000 graduates with at least a bachelor’s degree that were working minimum wage jobs in 2012.

In a recent study released by NELP, the National Employment Law Project, the low-wage occupational sector is the fastest growing sector in the economy, even though this sector only lost about one-fifth of its jobs. Meanwhile, the middle-wage job sector—which usually serves as the pathway into the workforce for many recent graduates—was hardest hit, and has been the slowest to recover.

According to the NELP study: Lower-wage occupations were 21 percent of recession losses, but 58 percent of recovery growth; Mid-wage occupations were 60 percent of recession losses, but only 22 percent of recovery growth.

I'm guessing student loan debt is part of the problem here.

There are jobs, they're just lousy jobs. The Bureau of Labor Stats reports Workers in seven of the 10 largest occupations typically earn less than $30,000 a year, a far cry from the nation's average annual pay of $45,790. Food prep workers are the third most-common job in the U.S., but have the lowest pay, at a mere $18,720 a year for 2012. Cashiers and waiters are also popular professions, but the average pay at these jobs tallies up to less than $21,000 annually. There are 4.3 million retail sales workers out there, making them the most common job, but the position pays only $25,310 for the year.

Among the 10 most popular professions, only the nation's 2.6 million registered nurses earn a good living, bringing home nearly $68,000 a year on average; and they work hard for every dime.

Wages have been in the spotlight this year as the debate over income inequality intensified. Middle-class Americans have been losing ground, as median household income dropped by more than $4,000 since 2000. Part of this decline stems from a disappearance of middle-class jobs and an explosion of lower-paying ones. Some 58% of the jobs created during the recovery have been low-wage positions, according to a 2012 report by the National Employment Law Project. These low-wage jobs had a median hourly wage of $13.83 or less.

The problem with inequality is the same problem a kid faces when he's playing the board game Monopoly with his parents. The kid knows that if he beats his parents, if he gets all the money and all the properties, he wins the game, but the game ends and he gets sent to bed. Somewhere we forgot that when one player, or a very small group of elite players end up with all the money, the game is over. That's a great analogy I read in a book called “Down the Up Escalator”.

After the shot across the bow in 2008, you might have expected that regulators and market participants would use the experience to change for the better, to become more prudent, and to reduce the sorts of risky behaviors that almost crashed the entire system. Instead of having been reduced, financial risks loom larger than ever. It's why the next downturn will be just as bad – if not worse – than the last one. Nothing has been learned, and nothing has been changed. The most basic of human behaviors, the tendency towards moral hazard (so well understood by the insurance industry) has been completely overlooked by the Fed. The very same Fed that could not and did not see that a housing bubble was forming is now equally complacent about corporate bond yields touching all-time record lows across the entire spectrum, right down to CCC junk that sits one skinny notch above default.  Stocks are for show, but bonds are for dough, so the saying goes;and with bonds now priced for perfection if not for something even better, there's no room for error.

I'm not ready to raise the crash flag, but I keep getting this uneasy feeling that we're walking into a trap.

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?