Monday, May 14, 2012 - Problems in Greece, Euro, California, and JPMorgan - No Surprise

DOW – 125 = 12,695
SPX – 15 = 1338
NAS – 31 = 2902
10 YR YLD -.05 = 1.79%
OIL - .70 = 94.08
GOLD – 23.80 = 1557.50
SILV - .71 = 28.28
PLAT – 29.00 = 1442.00

Back in early April I started telling you to heed the old market maxim: “Sell in May and Stay Away”. You are welcome. The Dow Industrial Average has now dropped 8 out of the last 9 sessions; no surprise.

Of course, we had the weekend to think about the shenanigans of JPMorgan Chase; a too big to fail bank acting irresponsibly while simultaneously demanding less regulation; no surprise.

Today's declines started in Europe; no surprise. In Germany, Angela Merkel's Christian Democratic Union Party suffered more losses in a local election for the second straight week. Merkel's CDU party received just 26% of the vote while a coalition of left-leaning Social Democrats and Green party candidates received over 50%. In light of the recent French elections, we are starting to see a trend.

In Greece, the various leaders of the various political parties failed to form a coalition government over the weekend; no surprise. The Greeks will likely need to call another election. And the fate of Greece hangs over the markets just as the possibility of exiting the Euro-Union hangs over the heads of the Greeks. And I think that is the correct application of the metaphor, with Angela Merkel in the role of Dionysius and the Greeks in the role of Damocles. I don't know whether the next Act in the tragedy comes from “The Merchant of Venice”: The quality of mercy is not strained, or “Brer Rabbit”: Brer Fox I don’t mind if you eat me. But, oh, whatever you do don’t throw me in that briar patch; or maybe “Hamlet”: To be or not to be, that is the question. Whether 'tis nobler to suffer the slings and arrows of outrageous austerity, Or to take arms against a sea of troubles, And by opposing them end them?

Which is the long way of getting round to the point that the final chapter has not been writ and so there are infinite options in Euro-land. The Greeks are coming to the realization that the plan of essentially indentured servitude to their northern masters might have shortcomings and they reject this as a false choice, although the alternatives are still a bit vague. The Greeks might like to stay in the Euro-zone and reject the harsh budget-balancing measures Europe has demanded in return for the money Greece needs to remain solvent. That, at least, was the message of the recent election in which the two dominant parties that had signed off on the terms of Greece’s 130 billion euro bailout deal took a drubbing. So, why can't the Greeks increase wages, halt public sector layoffs and repudiate Greece’s debt, and stay in the Euro-Union?

Of course, that is dangerous thinking for the powers that be. If Greece does not buckle under the crack of the bankers' whips, there is little chance the Portuguese and Spanish and Italians and Irish, and then the Union will dissolve and Greece will be shown the exit. This is the claim. The Greeks say it is a bluff. The ECB and the IMF must surely be flustered. They can't even have a good standoff until the Greeks can cobble together a government and the next election won't happen until mid-June.

It appears to be the European hard-liners that have been pushing austerity that has destroyed the political center and radicalized the extreme right and left. What's the worst that could happen? Greece gets tossed back into the briar patch once known as the drachma. They won't be buying new cars or computers or importing much of anything but they'll export like crazy; tourism will flourish; before you know it they'll be standing on the Acropolis, combing the tar out of their fur and laughing at the IMF.

With a month to go until the next election, is it possible the hard-liners will soften their demands? After all, how can you get money out of a bankrupt country? And don't forget who gets the bailout money; it's not the Greeks, it's the Euro-banks. All these billions of dollars of funds aren't going into the pockets of people in Athens, the money goes to the banksters. And the Greeks have come up with the radical idea that they don't care if the banksters get paid.

The threat to kick Greece out of the Euro-Union is very real but it would require the votes of 16 countries to do it. What happens if Portugal or Spain sides with Greece? How long would it take for that vote? Germany may talk tough but they don't have much firepower behind their rhetoric, and the German voters don't seem to have the stomach for discipline.

Though this be madness, yet there is method in't.

There is a chance that Greece might find some coalition of pro-austerity parties and remain in a debt purgatory while applying Teutonic discipline, or there is a possibility the Greeks will lead a Euro-revolt against austerity and various elections will serve as happy rapprochment between the debt slaves and the cracking whip. Of course, there is still a huge downside to all of this; global credit markets could freeze, global equity markets could tumble, global capital markets could be trashed, and governments could nationalize, and the banksters could be bailed out again, or not, and we could have a global financial meltdown – you know, almost like the one we had in 2008, and then did nothing to correct.

And make no mistake, we are not immune; it is just a matter of time before the basic problems of Europe come to the United States; it could hit us any day; maybe today.

And that brings us to California, which still has a budget problem; no surprise. Governor Jerry Brown is proposing more than $8 billion in cuts to close the state budget deficit and he is touting a tax hike initiative for the November ballot. And the combo might fill the revised $15.7 billion budget shortfall for the fiscal year that starts July 1. That is up from an earlier estimate of a $9.2 billion gap projected in January.

The Legislature had cut tens of billions of dollars from schools, social services, universities, courts, and health care programs for the poor. The cuts in higher education have sparked demonstrations at regents' meetings and on college campuses.

Brown said the size of the deficit makes it virtually impossible to balance the budget with spending cuts alone, so his budget balances the cuts with the revenue he anticipates if voters approve his proposal to increase the statewide sales tax by a quarter cent and boost income taxes on those who make more than $250,000 a year. Both tax increases would be temporary. Brown's budget proposes $8.3 billion in cuts, $5.9 billion from the tax increases and $2.5 billion in a variety of other solutions.

Jamie Dimon has been trying to gut the Dodd-Frank reforms, specifically the Volcker rule. Apparently JPM was so confident that their interpretation of the hedging exemption would prevail, that they got ahead of themselves and operated as if this loophople were in effect. That is part of what the Too Big To Fail Banks have been doing. Paying the lobbyists and the legislators to eviscerate the reforms, while continuing to act like the rule of law doesn't apply to them. Maybe it doesn't. A new article from Matt Taibbi, How Wall Street Killed Financial Reform. This is a good article, and it really points out just how broken Congress and the electoral system are.

Let me share with you part of what Taibbi wrote:

The giant reform bill turned out to be like the fish reeled in by Hemingway's Old Man -- no sooner caught than set upon by sharks that strip it to nothing long before it ever reaches the shore. In a furious below-the-radar effort at gutting the law -- roundly despised by Washington's Wall Street paymasters -- a troop of water-carrying Eric Cantor Republicans are speeding nine separate bills through the House, all designed to roll back the few genuinely toothy portions left in Dodd-Frank. With the Quislingian covert assistance of Democrats, both in Congress and in the White House, those bills could pass through the House and the Senate with little or no debate, with simple floor votes -- by a process usually reserved for things like the renaming of post offices or a nonbinding resolution celebrating Amelia Earhart's birthday.

The fate of Dodd-Frank over the past two years is an object lesson in the government's inability to institute even the simplest and most obvious reforms, especially if those reforms happen to clash with powerful financial interests. From the moment it was signed into law, lobbyists and lawyers have fought regulators over every line in the rulemaking process. Congressmen and presidents may be able to get a law passed once in a while -- but they can no longer make sure it stays passed. You win the modern financial-regulation game by filing the most motions, attending the most hearings, giving the most money to the most politicians and, above all, by keeping at it, day after day, year after fiscal year, until stealing is legal again. "It's like a scorched-earth policy," says Michael Greenberger, a former regulator who was heavily involved with the drafting of Dodd-Frank. "It requires constant combat. And it never, ever ends."

That the banks have just about succeeded in strangling Dodd-Frank is probably not news to most Americans -- it's how they succeeded that's the scary part. The banks followed a five-point strategy that offers a dependable blueprint for defeating any regulation -- and for guaranteeing that when it comes to the economy, might will always equal right.

Here's a list of the five ways,. The article gives great detail on how each of these work and were accomplished for the Dodd-Frank legislation. 

STEP 1: STRANGLE IT IN THE WOMB

STEP 2: SUE, SUE, SUE

STEP 3: IF YOU CAN'T WIN, STALL

STEP 4: BULLY THE REGULATORS

STEP 5: PASS A GAZILLION LOOPHOLES

Taibbi concludes this lengthy article, saying, "But money never gets tired. It never gets frustrated. And it thinks that drilling holes in Dodd-Frank is every bit as interesting asThe Book of Mormon or Kate Upton naked. The system has become too complex for flesh-and-blood people, who make the mistake of thinking that passing a new law means the end of the discussion, when it's really just the beginning of a war."

Thursday, May 3, 2012 - Jobs More or Less, Europe More or Less, HSBC Mess

DOW – 16 = 13, 206
SPX – 10 = 1391
NAS – 35 = 3024
10 YR YLD unchanged = 1.92%
OIL +.09 = 102.63
GOLD – 17.90 = 1636.80
SILV - .58 = 30.17
PLAT – 28.00 = 1540.00

Tomorrow the government releases the employment report for April. Economists predict the U.S. gained 160k to 175k jobs last month, up from a disappointing 120,000 in March. The preliminary increase in March was the lowest in five months and fell well short of the 246,000 average from December to February.

We've seen several reports on jobs that might give a hint on tomorrow's report:

The four-week average of initial jobless claims was 383,500.Jobless claims declined by 27,000 to a seasonally adjusted 365,000 in the week ended April 28.

The Labor Department said continuing claims decreased by 53,000 to a seasonally adjusted 3.28 million in the week ended April 21. Continuing claims reflect people already receiving benefits. ADP’s report on private-sector payrolls slowed to 119,000 from 201,000 in March. The employment component of the Institute for Supply Management’s manufacturing report rose to 57.3% from 56.1%, on a scale where readings over 50% indicate expansion. The employment component of the Institute for Supply Management’s services report slowed to 54.2% from 56.7%, on a scale where readings over 50% indicate expansion. Planned layoff announcements rose 7% to 40,559, according to Challenger, Gray & Christmas.

What does it mean? It means wait until tomorrow's report and we'll find out. This is not the kind of report that you bet on. This is a report that calls for caution. There is a good chance the report could disappoint the market, no matter what the number. I say that because the market looks like it's ready for a sell-off. We've talked about the seasonality of the market, and for the past month I've been telling you to sell in May and go away. It's May already.

The Labor Department estimated productivity fell at an annual rate of 0.5% in the first quarter, down from a revised gain of 1.2% in the fourth quarter. The fourth-quarter increase was previously reported as 0.9%. All of the decline took place outside the manufacturing sector. Manufacturers, which have led the recovery since the U.S. exited recession in 2009, boosted productivity by 5.9%, as output jumped 10.8% and hours worked increased by 4.6%. Much of the gain likely stemmed from a big pickup in auto sales.

Excluding extraordinary items, GM reported a profit of 93 cents a share. That’s 8 cents more than Wall Street expected. GM’s North American operations made money. The company is relying less on incentives than it did a year ago. That means its unit margins are much healthier. GM saw record first-quarter demand for its cars in China, helping to boost revenue 4% to $37.8 billion. Even though GM posted a profit of more than $1 billion dollars, GM's European operations lost money.

In Europe, ECB President Mario Draghi did not offer any indications that further monetary stimulus is on the horizon. Speaking at a Euro-zone conference, Draghi said the most recent economic indicators “are not enough to change our baseline scenario, which foresees a gradual recovery in the course of the year.” At the same time, Draghi said it remained “premature” to begin discussing “exit strategies” from the central bank’s efforts to shore up liquidity across the euro zone. He said policy makers felt monetary policy remained “accommodative” given historically low nominal interest rates and negative real interest rates—interest rates minus inflation—across much of the euro zone.

The ECB’s Governing Council, meeting today in Barcelona, left the bank’s key lending rate unchanged at 1%, as expected. At least 11 euro-zone countries have seen at least two consecutive quarters of shrinking gross domestic product, meeting the widely-used definition of a recession, and more data in the next few weeks is likely to show the broader Euro-zone is in a recession, even while some countries appear to be in a full blown depression. Unemployment in March topped 10.9% for the Euro-zone, that's up from 9.9% one year ago. Even Germany, could feel the ill-effects.

Draghi stirred the growth-versus-austerity debate himself last week by urging European leaders to adopt a “growth compact” alongside the recently adopted “fiscal pact,” which aims to enshrine tough budget rules. Today, Draghi said he saw “no contradiction” between the pair. We'll see about that.

Francoise Hollande looks to be the next President of France. He leads the incumbent, Sarkozy, by several points in the polls. Sarkozy has been loyal to German Chancellor Merkel, praising the German economy as a model for France and rejecting the possibility that strong countries such as France and Germany would provide guarantees for joint euro bonds.

Hollande pledged to renegotiate the new fiscal pact if he is elected, Merkel wants none of that, saying: “The fiscal pact has been negotiated, it was signed by 25 government heads and is already ratified by Portugal and Greece. It is not renegotiable.”

Hollande responded immediately in a television interview, indicating he was not alone in rejecting the pact as it stands: “It is not for Germany to decide for the rest of Europe. I’m getting lots of signals, direct and indirect, from other governments, even if they are conservative.”

In his debate with Sarkozy, Hollande noted that it is the two countries that have not adopted severe austerity measures — Germany and the United States — that have shown stronger economic growth in the wake of the financial crisis and recession. Who will buy German manufactured goods when nobody else in Europe has any money? You could ask the same question about who will be left to buy US exports.

Germany, which benefited from 10 years of highly favorable terms of trade under the euro, has not needed to run up its debt or cut its government spending. The U.S. under the Obama administration opted for fiscal stimulus to counter the deflationary impact of the crisis. Hollande appears to be on the same page and his election could tip the balance in favor of those who see growth as necessary to save the euro, not unmitigated austerity. Of course, there is still the matter of an election this weekend.

Mortgage rates hit new record lows last week. Now we question the why and wherefore. Are low rates symptomatic of underwhelming growth and economic concerns? Are low rates signaling that we haven't really hit a bottom in the housing market? Or , are the low rates providing the fuel that is indeed lifting the housing market? Freddie Mac said the 30-year mortgage rate fell for a second week, to 3.84%, down from its previous all-time record low of 3.87% on February 9. The 15-year fixed average also fell to a new all-time low of 3.11%.

The Boston Fed has released a research paper on the cause of the housing crisis. They conclude the financial industry did not deceive mortgage borrowers and investors but instead everybody was just overly optimistic about house prices. There was no problem with the mortgages, no problem with the synthetic derivatives, no problem with transparency and disclosure. I think I'll file that one under “self serving bull”.

In 2003, the Federal Reserve Bank of New York and New York state bank regulators ordered HSBC Bank USA to do a better job of policing itself for suspicious money flows. The bank promised to beef up its anti-money laundering division. HSBC told regulators that it would fully address all deficiencies in the bank's anti-money laundering policies and procedures. Now Reuters is reporting that HSBC has fallen short. They reviewed documents from law enforcement officials that show that from 2005, the bank violated the Bank Secrecy Act and other anti-money laundering laws on a massive scale. HSBC did so, they say, by not adequately reviewing hundreds of billions of dollars in transactions for any that might have links to drug trafficking, terrorist financing and other criminal activity.

In some of the documents, prosecutors allege that HSBC intentionally flouted the law. The bank created an operation that was a "systemically flawed sham paper-product designed solely to make it appear that the Bank has complied" with the Bank Secrecy Act and is able to detect money laundering

In the Miami office - an important center for HSBC's private-banking and retail operations - a longtime private banker was fired for alleged sexual harassment after he warned compliance officers that clients were engaged in shady dealings.

In one email exchange submitted as evidence in that case, employees debated whether the bank should help a Miami client get around U.S. sanctions by moving the client's business to HSBC's Hong Kong office. 

The revelations come as HSBC confronts multiple investigations into its internal policing abilities. The Justice Department, the Federal Reserve, the Office of the Comptroller of the Currency, the Manhattan district attorney, the Office of Foreign Assets Control and the Senate Permanent Subcommittee on Investigations are scrutinizing client activities such as cross-border movements of bulk cash, and transactions linked to Iran and other parties under U.S. economic sanctions. HSBC said in its February filing that it was likely to face criminal or civil charges related to the probes.

To date, the only enforcement action detailing any anti-money laundering shortcomings at HSBC was a 2010 consent order from the Office of the Comptroller of the Currency, the Treasury agency that is HSBC's chief regulator. The OCC, calling HSBC's compliance program "ineffective," told the bank to conduct a review to identify suspicious activity. This "look-back" was expected to yield a report to HSBC and regulators. The status of the report isn't known.

Some of the problems uncovered in the investigation: The bank understaffed its anti-money laundering compliance division and hired "gullible, poorly trained, and otherwise incompetent personnel." HSBC failed to review thousands of internal anti-money laundering alerts and generate legally required suspicious activity reports, or SARs, on transactions picked up by the bank's internal monitoring system.   In May 2010, the bank's backlog of alerts was nearly 50,000 and "growing exponentially each month."  Hundreds of billions of dollars moved unchecked each year through various bank operations because of lax due diligence and monitoring of accounts with foreign correspondent banks.

 In some instances, "management intentionally decided" not to review alerts of suspicious activity. An investigation summary also says, "There appear to be instances where Bank employees are misrepresenting" data sent to senior managers, and where management altered risk ratings on certain clients so that suspect transactions didn't set off alarms.

Since 2005, the bank has filed only 19 suspicious activity reports relative to the receipt of bulk cash and banknote activities. People familiar with HSBC and the reports said 19 is a low number given the risk of the clients. Between 2005 and 2010, banks and other depository institutions filed more than 3.8 million SARs, according to the Financial Crimes Enforcement Network, a bureau of the Treasury Department.

HSBC is the fifth-largest bank in the world in terms of market value, HSBC had $2.6 trillion in assets at the end of 2011 and operations in 85 countries and territories. Its North American business, which includes HSBC Bank USA and a consumer finance unit, accounts for about 5 percent of HSBC's profit.

There is a tendency for cases like this to end up in settlement, a possible fine, and no admission of wrongdoing. You have to wonder what it would take for a big bank like HSBC to lose its bank charter. But for now, the banks act as if they are entitled to do whatever they want, and since they have big political influence – they get away with it. What does it take to destroy a bank charter? Money laundering, tax evasion, supporting terrorists, drug trafficking – that's just business as usual. 

Wednesday, May 02, 2012 - Jobs Report, Euro Elections, California Budget, and Watching Paint Dry

DOW – 10 = 13,268
SPX – 3 = 1402
NAS + 9 = 3059
10 YR YLD -.03 = 1.92
OIL +.14 = 105.36
GOLD – 8.50 = 1654.70
SILV - .32 = 30.75
PLAT – 9.00 = 1569.00

This is shaping up to be a wild weekend. Friday we get the jobs report. Then, in Europe there will be elections in France and Greece. On a personal note, I'm going to paint the patio on my house, so I'll be watching paint dry, just to counterbalance the rest of the world.

The monthly jobs report, already the most highly anticipated data of the month, will be getting a little extra attention this Friday after a disappointing report on GDP late last week. A bad jobs report and a weak GDP report might be enough to trigger another round of Quantitative Easing from the Federal Reserve. The economy is adding and will continue to add jobs; that is not in question. It is the rate of job growth.

Expectations are that there were about 160k to 175k new jobs created in April, up from 120,000 in March, and an unemployment rate that remains steady at 8.2%. The lowball guesses are for only about 125k jobs. With the addition of 120,000 jobs, March marked the 15th straight month of jobs growth, but it broke a three-month streak in which the economy had added more than 200,000 jobs.

Now we are only a couple days away from finding out whether March's report was a fluke or the beginning of a new, disappointing trend of declining growth in the labor market. A not-so-promising sign: The private sector added only 119,000 jobs in April, down from a downwardly revised 201,000 in March and well short of expectations. The ADP report is not always a good indicator for the monthly report.

Manufacturing grew in April at the fastest pace in almost a year, propelled by a pickup in orders that signaled factories will remain a source of strength for the US Expansion; that according to a report yesterday from the ISM. Still the numbers seem disappointing and the outlook less than bright. Overseas demand for US made-goods risks fading as global growth slows.

Spain's economy contracted in the first quarter, putting the euro region's fourth-largest economy into its second recession since 2009, and at some point, you have to consider multiple, rolling recessions are in truth, a depression. S&P downgraded Spain last week,and today the Spanish IBEX traded below the March 2009 closing lows and near the lows of 2003. The US markets didn't seem to be bothered by the problems in Europe. You love to see a market move higher on bad news, but sometimes that is just a chance for the smart money to time an exit.

The U.K. economy shrank 0.2 percent in the first quarter after contracting 0.3 percent in the prior three months as Britain slid into its first double dip recession since the 1970s. Defenders of British policies dismiss any call for a rethinking of these policies, despite their evident failure to deliver, on the grounds that any relaxation of austerity would cause borrowing costs to soar.

In France, the Socialist candidate Mr. Hollande beat out Sarkozy in a runoff a couple of weeks ago and is favored to win this week. Mr. Hollande opposes austerity and will cause more thana few headaches for German chief Angela Merkel. This could be a problem for Merkel or for Mr. Hollande; we'll see.. The bottom line is the market has realized Mr. Sarkozy probably isn't going to win.

The global economy is uneven. The growth has slowed in China and India. And North Americas is a recovering but far from fully recovered economic environment.

There is no recovery. There is a slow grinding improvement, not enough to lift us to that righteous circle of sustainability, but enough to keep us afloat on vast mountains of stimulus, mainly from the Fed. And so we'll watch the results of the jobs report, and we'll see if there is any indication the Fed will move again. Meanwhile, we'll be reminded that the Fed has been acting and not acting on the monetary policy and over on the fiscal policy side, we've seen deadlock for quite some time. Our response has been wrong for quite some time. It isn't just a recession, or the possibility of a double dip. We entered a depression, a small “d” depression, and we failed to recognize it and we failed to respond appropriately; quite a mistake for great student of the Great Depression, Bernanke. We are living in a world of zombie economics, just shuffling along, and very little sign of higher level intellect guiding our path.

Real wages for real workers are not growing and America’s crushing debt is strangling growth, and maybe that means we would be lucky to see 2% GDP growth, maybe we're lucky to see any growth at all. Both political parties can share blame for the trouble; the Republicans want to limit spending and Democrats don’t want to cut programs, and so they are at an impasse. Little is likely to change regardless of this year’s presidential election.

And what we are likely to see in the markets is a slow grinding decline into the summer. Not because the economy is so terrible but because it isn't so great. The Fed has been propping up the markets with monetary policy but that hasn't helped Main Street and it hasn't done much – or rather it hasn't done enough to improve the jobs report. We have the most stimulative fiscal and monetary policy in the history of this country and here we are three years into the recession and it's not ended. Does that mean the policy is a failure or does it mean that we weren't really in a recession but rather in a small “d” depression?

Even in an election year we have to deal with the seasonal nature of the markets. Sell in May and go away. And by the time we come back, we should have a good idea about how this whole austerity issue is working out, and how the 99 percent are fairing against the 1 percent, and how the red and blue are fairing against each other, and how monetary policy is fairing against fiscal policy.

Sometimes, the best choice is to just step aside. Take the summer off. That's about the best investment advice there is, unless your just a high frequency trader with a USB port on the back of your neck. Take some time off, visit the family and friends. Some of you have already started doing this. You've turned off CNBC. Maybe we are finally spitting out the lure.

I heard a great investment analogy this weekend. The idea was that as investors we should act like a trout. The trout tends to take a position in the stream and just hang out waiting for the passing current to deliver a tasty morsel. It's a low energy solution, effective even if it is a little boring - kind of like watching paint dry.

The legislative analyst’s office has a new number for California: $3 billion. That’s the total amount that tax revenue has lagged behind goals set by Gov. Jerry Brown’s administration in the current fiscal year. Much of that gap comes from a disappointing April, the most important month for income taxes. Income taxes were $2 billion short of the $9.4-billion goal, and corporate taxes fell $143 million short of an expected $1.53 billion.

When April's poor results are tacked on to earlier shortfalls, the state has fallen about $3 billion behind tax goals. Yesterday, the ratings agency Standard & Poor's already warned that poor tax revenue was imperiling California's financial recovery. It's unclear exactly how much this year's budget deficit will grow because of the tax shortfall. Brown's administration estimated the gap at $9.2 billion in January, but has since said it will grow. The updated budget proposal that is expected by May 14.

Fitch Ratings, in conjunction with Oxford Economics, issued a new report today and it claims that without the unprecedented stimulus actions by the federal government triggered by the 2008 financial crisis, the Great Recession might still be going on. But those actions came with a price -- soaring budget deficits and rock-bottom interest rates that hurt savers.

The actions by policymakers in Washington -- including the $700-billion bailout fund, the $831-billion stimulus package and the Fed's ZIRP, zero interest rate policy -- continued to boost the nation's total economic output by more than 4% annually two and three years after the end of the Great Recession in mid-2009.

The boost from those policies helped the U.S. gross domestic product increase 3% in 2010 and 1.7% last year, "implying that the U.S. might still be mired in a recession absent this stimulus."

The U.S. economy would have seen little or no growth in the two years after the recession technically ended in June 2009 without the policies. And the stimulus actions appear "to have significantly softened the severity of the decline" in GDP in the year immediately after the recession.

Though the Fed's monetary policy actions were helpful, fiscal stimulus by Congress and the White House "had the strongest positive impact on consumption during the recent recovery.”

The conclusions mirror findings in February by the Congressional Budget Office and a 2010 study on the economic effect of the $831-billion stimulus package known as the American Recovery and Reinvestment Act.

The Fitch analysis looked more broadly at all federal stimulus policies, such as the large-scale asset purchases by the Fed. And although the study said the stimulus policies "appeared to have achieve their intended effect," it warned that the actions have come with negative consequences.

"The very high deficits of the last few years have led to unprecedented levels of government indebtedness, which will weigh on the federal government for years and require contraction in spending. Furthermore, while low rates clearly benefit borrowers, at the same time, they hurt savers."

The deficits, and the inability of the Obama administration and lawmakers to make deep enough cuts in a deal last summer to raise the debt ceiling, led Standard & Poor's to downgrade the U.S. credit rating.

For the past couple of years we've been hearing that the response to a depressed economy is to cut spending and balance budgets. While there is no question that cleaning up indebtedness will take time and effort, the calls for austerity are creating a bigger mess. All around Europe’s periphery, from Spain to Latvia, austerity policies have produced Depression-level slumps and Depression-level unemployment. European leaders spent years in denial, insisting that their policies would start working any day now; three years into its austerity program, Ireland has yet to show any sign of real recovery from a slump that has driven the unemployment rate to almost 15 percent.

There seems to be a shift in sentiment. Several events — the collapse of the Dutch government over proposed austerity measures, the strong showing of the vaguely anti-austerity François Hollande in the first round of France’s presidential election, and an economic report showing that Britain is doing worse in the current slump than it did in the 1930s — seem to have finally broken through the wall of denial. Suddenly, everyone is admitting that austerity isn’t working.

What happens next? The push for national-level austerity across the euro zone is undermining integration and thereby exacerbating the crisis. And the only ones that seem to benefit are the speculators and the bond vigilantes. Ultimately, Spain, Greece, Italy, the Netherlands, and others do have an alternative to endless austerity, one that may be forced on them by events: exit the euro, with all the financial and political fallout that follows. And on the current course, that’s what’s coming. For California, the choice is not a possibility.

Tuesday, April 24, 2012 - As the Euro Turns, Counting Protesters at Shareholder Meetings

DOW + 74 = 13,001

SPX + 5 = 1371
NAS – 8 = 2961
10 YR YLD +.03 = 1.96%
OIL +.20 = 103.75
GOLD + 3.20 = 1642.50
SILV -.03 = 30.93
PLAT – 14.00 = 1550.00

Yesterday's edition of “As the Euro Turns” included the collapse of the government in the Netherlands when it could not agree with a key allied party on budget cuts to bring the deficit below the EU-mandated 3 percent. In France, Socialist Francois Hollande led the first round of presidential elections; he has vowed to renegotiate a European treaty tightening rules on debt. All that was absorbed today. After all, the Dutch still have a Triple-A credit rating; they will probably pay their bonds.

It does appear, at least for today, that the Euro has turned; as if a sudden transformation has swept the continent. Austerity is dead. Keynes has been resurrected and placed on a pedestal in Brussels, right next to a chocolate covered waffle. There was a mass awakening that countries cannot cut their way to prosperity. Angela Merkel is fighting back against the austerity backlash; she argues the “credibility” of the Eurozone is at risk without more austerity and continuing cutbacks. But austerity isn't working and its hard to maintain credibility in the face of failed policy.

Here is the problem: If a government (say Greece) has a massive deficit and now they are trying to balance their budget, the government will be making the situation worse by imposing cuts, both because government expenditure is part of the GDP, and because of the multiplier effect of government deficits on the economy. A government trying to cut deficits by reducing government expenditures and raising taxes is bound to make their economy contract, which would then have a negative impact on tax collection, and consequently make the deficit worse. At the same time, because GDP contracts, the government is making the denominator of the debt-to-GDP ratio decrease, making the situation worse in such a metric. Sisyphus never had it this tough.

The Europeans have tried austerity and it hasn't been fun and the overall economy is now probably in a second recession, largely caused by slowing demand, caused by (drum roll please) austerity! And, worst of all, the economy may be entering a negative feedback loop: low demand leads to more unemployment which leads to lower demand ... you get the idea. As for the whole "confidence will return" argument: businesses don't invest in slow-growth environments when there is obviously slack demand.

And Merkel is facing opposition. A criminal lawsuit has been filed against the Bundesbank, accusing the board of disguising the true scale of risk born by German citizens. It's thought the bailouts could leave the Germans on the hook for trillions of euros. And the euro system is splitting friendly countries into blocs of mutually hostile creditors and debtors; not exactly the original idea behind a European Union. Merkel’s reputation as a hardliner for fiscal reform is wobbly. She’s about to lose her only ally (Sarkozy) in the push for austerity. And this is happening while inflation is rising in Germany, the economy is contracting – possibly heading into recession - and Germans are openly outraged regarding the EU bailouts.

The French still have a couple of weeks to decide if they want to dump the far right conservative Sarkozy in favor of the far left socialist Hollande.. The rhetoric is getting interesting: Francois Hollande, the Socialist presidential front-runner in France, doing his best Andy Jackson imitation: “Let me tell you who my rival is. It does not bear a name or have a face, it’s the finance industry. In the past twenty years, the financial industry has taken control of our societies, of our lives and threatens our states.”

Sarkozy set the standard for France’s approach to bank regulation by passing a 0.1 percent tax on all financial transactions within the country. Sarkozy tried to promote the tax worldwide but his proposal was too far to the left for the.... (wait for it) Obama administration. Hollande, meanwhile wants to go even further, separating retail and investment banking, banning “toxic” financial products, and preventing French banks from operating in tax havens. The third place in the runoff election went to Marine Le Pen, considered very far right. After the vote of Sunday she said: “We have blown apart the monopoly of the two parties of banking, finance and multinationals.” The far right is running against big business and the financial industry.

Wells Fargo held its annual shareholder meeting in San Francisco today. Depending on who you read, a couple of hundred, or 500, or a thousand or thousands (plural) of protesters showed up. Some of the more clever protesters actually hold stock certificates and they were able to get inside. I still haven't seen reports on what they may or may not have said inside the meeting. Six protesters were arrested.

Protests are planned for General Electric's shareholder meeting in Detroit tomorrow. A couple of thousand are expected to protest. Protesters interrupted a speech by GE Chief Executive Jeff Immelt in Detroit today, yelling "pay your fair share," before being escorted out of the event. A Citizens for Tax Justice report released in February said GE had an effective tax rate of 11 percent in 2011. GE disclosed in filings with the U.S. Securities and Exchange Commission that its overall tax rate - on both foreign and US earnings - was 7 percent in 2010 and negative 12 percent in 2009.

Morgan Stanley says U.S. high-yield obligations, otherwise known as junk bonds, were in a “sweet spot” as borrowers cut their debt loads. JPMorgan said junk yields will fall more than half a percentage point by year-end. Bank of America favors debentures rated in the middle tier of speculative grade. Gains on U.S. high-yield, high-risk bonds, which are little changed since the end of February, are set to accelerate as central banks respond more aggressively to contain Europe’s fiscal imbalances, Morgan Stanley and JPMorgan said. While forecasting the default rate will rise this year, Moody’s Investors Service says the figure will stay below historic averages.

The Justice Department says a BP engineer intentionally deleted more than 300 text messages that said the company's efforts to control the Gulf of Mexico oil spill were failing, and that the amount of oil leaking was far more than what the company reported. Criminal charges have been filed against the engineer, Kurt Mix of Texas. Two years after the explosion that killed 11 men and spilled millions of gallons of toxic oil into the Gulf, and destroyed unknown amounts of marine life and crippled the livelihood of millions of residents of the Gulf – and we finally have a criminal charge – the first criminal charge - for obstruction of justice.

The Federal Reserve's top policymakers are meeting behind closed doors for two days, tweaking their economic forecasts and reevaluating their game plan for boosting the US recovery. Or maybe they'll order pizza and play pinochle. And then tomorrow morning, they'll announce the same thing they announced a few weeks back. They can't raise rates; they will continue to have a very accommodative monetary policy which they will not call QE3

A new case of mad cow disease has surfaced in a dairy cow in California. Mad cow disease, or bovine spongiform encephalopathy (BSE), can be fatal to humans who eat tainted beef. The World Health Organization has said that tests show that humans cannot be infected by drinking milk from BSE-infected animals. The disease is always fatal in cattle, however. There have been three confirmed cases of BSE in the United states, in a Canadian-born cow in 2003 in Washington state, in 2005 in Texas and in 2006 in Alabama.

Apple sold 11.8 million iPads in the last quarter, the latest version of which hit store shelves in mid-March. That compared with the average forecast of up to 13 million. Apple sold 35.1 million iPhones - which accounts for about half its revenue; and that was a little better than expected. Net income rose to $11.6 billion, or $12.30 a share, from $6 billion, or $6.40 per share, a year earlier. That also outpaced Wall Street's target of $10.04 a share. There margins are freaky high and they just might take over the world at this rate.