Friday, May 31, 2013 - Economic Wallbanger

Economic Wallbanger

by Sinclair Noe

DOW – 208 = 15,115
SPX – 23 = 1630
NAS – 35 = 3455
10 YR YLD + .04 = 2.16%
OIL – 1.98 = 91.63

GOLD – 25.40 = 1389.30
SILV - .51 = 22.37

We finish the month of May with the Dow Industrials up 1.9% on the month; the S&P 500 posted a monthly gain of 2.1%, and the Nasdaq Composite added 3.8% for the month. With this week's declines, the MACD indicator for the Sell in May strategy, finally turned negative, just in case you had been waiting. The S&P 500 marked seventh monthly advance, its longest monthly winning streak since one ending in September 2009. The Dow industrials recorded their sixth straight monthly gain.

Treasury prices dropped again today to finish their worst monthly performance since December 2010; the yield on the 10-year note climbed 46 basis points on the month. At one point during today's trading, the yield topped 2.20%.

Next week, we'll see how the labor market is behaving. Today we found out that the unemployment rate for the 17 nation Eurozone has increased to 12.2%, the highest level since data has been compiled starting in 1995. Consumer price inflation was far below the ECB’s target of just below 2%, coming in at 1.4% in May, slightly above April’s 1.2% rate.

Price increases may quiet concerns about deflation, but the deepening unemployment crisis is a threat to the social fabric of the eurozone, with almost two-thirds of young Greeks unable to find work exemplifying southern Europe’s threat of creating a ‘lost generation’. In France, Europe’s second largest economy, the number of jobless rose to a record in April, while in Italy, the unemployment rate hit its highest level in at least 36 years, with 40% of young people out of work. Youth unemployment across the Eurozone came in at 24.4%, double the wider jobless rate and up from 24.3% in March.

In the past, the eurozone has needed economic growth of around 1.5% to create new jobs. With the Organisation for Economic Cooperation and Development forecasting this week that the eurozone economy would contract by 0.6% this year, unemployment is set to worsen long before it turns around.

The next formal meeting of the ECB is June 6. EU leaders are scheduled to meet in Brussels at the end of June. Rate cuts and quantitative easing might be on the agenda, but it will take much more than that. The main problem for the Eurozone economy is no longer market driven factors, but the possibility of social breakdown.

Several thousand protesters blocked the ECB offices in Frankurt today. The subway workers were on strike in Lisbon yesterday. Portuguese teachers are scheduled to strike next month. It is a similar story across large parts of the eurozone. There have been mass protests in Madrid, Dublin and Athens against policies designed to reduce budget deficits and bring about economic reform.

The European commission has told six countries – France, Spain, Portugal, Poland, the Netherlands and Slovenia – that they will have up to two extra years to put their public finances in order. In truth Brussels had little choice, because weak growth had reduced tax revenues and made it impossible for exacting budget targets to be met. The continued depression in parts of the Eurozone means that people think austerity on its own is a doomed strategy. And so the IMF, spurred on by an Obama regime deeply troubled by the depression in the Eurozone, has been advising member governments to ease up. Politically, austerity is no longer feasible. Of course, that doesn't mean that the Eurozone governments have adopted pro-growth policies; they haven't moved from a pro-cyclical fiscal stance to a neutral one, let alone a counter-cyclical position. There are still big differences between the French, Spanish, and Italians on one side and the Germans and a few other countries on the other side. For now it's a standoff, and not much is getting done. Eurozone austerity isn't dead, they just pressed the pause button.

Deficit reduction efforts in the rest of the world seem to clearly show that austerity efforts have been unsuccessful nearly always and everywhere in that their costs in economic damage have been far greater than any gains that have been made by nations purposefully pursuing these efforts. In the Eurozone, deficit reduction efforts have actually made debt problems worse than they were before austerity cuts were made, because their negative effects on national economies and employment have also reduced tax revenues by more than the savings achieved from cutting government programs.

Austerity in the US is far from dead. In the US, our cuts have been shallow but wide; meaning the cuts have been scheduled to be spread out over several years. Which means the economy has been improving, but not enough to reach solid, sustainable growth. Sometimes the absence of pain feels like pleasure. Today's economic reports are the case in point.

The final May reading of the University of Michigan and Thomson Reuters consumer-sentiment index jumped to 84.5 — the highest level since July 2007 — from 76.4 in April. That puts consumer-sentiment back to the level of 2007.

Meanwhile, the Commerce Department reports consumer spending fell 0.2% in April. Income growth was flat in April. Adjusted for inflation, disposable income declined by 0.1% last month. Disposable income is the money left after people pay taxes. Soft consumer spending in April points to a weaker reading on second quarter gross domestic product, barring a sharp uptick in May and June. GDP is expected to slow to 1.9% from 2.4% in the first quarter.

The personal savings rate has dropped to 2.5%, which means consumers have very little room to increase spending unless they get more income, or more wealth, or more debt. Most consumers don't want more debt or find it difficult to get more debt. The fiscal policy out of Washington has been pushing down income, as we're just starting to see the effects of sequester cuts. The Federal Reserve is finding there are limits to the possible benefits of the wealth effect to stimulate the economy.

And when we have semi-decent economic reports, like today, it just worries the market that the Fed will take away the stimulus and cut the $85 billion per month in bond purchases. If the absence of pain starts to feel too pleasurable, just bang your head against the wall for a while.

And now, the latest on Monsanto. Last month an Oregon farmer sprayed one of his fields with Roundup weed killer, only to find that several wheat plants survived. He had the wheat tested, and the Department of Agriculture determined that the plants were an unapproved genetically modified strain made by the biotech giant Monsanto. So-called “Roundup Ready” modifications allow farmers to apply much higher levels of pesticides without harming crops, and are common in soy and corn; the thinking is that those plants are used more for animal feed; of course, humans then feed on the animals, but don't let that stop you. Wheat is ingested directly, and most people aren't ready to go there. No GM wheat is currently approved for sale or production in the US, or anywhere else in the world.

The wheat is probably not harmful to humans—although since testing was never completed, we can’t be sure.  Nevertheless, most of Asia (not to mention Europe and a certain portion of the United States) is firmly opposed to GM crops made for human consumption. Where did the wheat come from? Well, in the 1990s Monsanto conducted field tests of wheat in 16 states. Monsanto dropped the wheat project. It never asked for government approval, and it ended its field trials of wheat in 2005. The last field test in Oregon stopped in 2001. The reality of GM testing a product in open fields is that it’s quite easy for cross-contamination. It’s like the dinosaurs in “Jurassic Park”—no matter how well-designed the safeguards, life always finds a way to jump the fence.

Japan has canceled its imports of some types of US wheat. Japan imports around five million tons of wheat a year, 60 percent of which is from the US, making it one of the largest importers of the crop. It does not allow GM wheat. Imports make up 90 percent of the wheat the country consumes.

China, South Korea and the Philippines have all said that they are monitoring the ongoing US investigation, and the European Union said it was stepping up testing. The US supplies about 20% of the global supplies of wheat.

Extra Notes: 

The financial crisis destroyed some $16 trillion in household wealth. Americans have only recovered 45 percent of that amount, according to the Fed report. But when you break down that wealth recovery by income level, it gets worse. The Fed estimates that 62 percent of that wealth people have regained since the depths of the recession has come in the form of higher stock prices. And 80 percent of stock wealth is held by people in the top 10 percent of the income distribution. "Recent gains in the stock market mean that the recovery of wealth is nearly complete for white and Asian households and older Americans,"

But many families have not experienced any recovery at all, and some are still losing wealth, William Emmons, chief economist for at the St. Louis Fed’s Center for Household Financial Stability, told the Post. "The families that lost homes are not the families making money off stocks," Mui notes. Though the number of foreclosures has dropped off a lot, it is still more than double what it was pre-crisis.

The report found that the most vulnerable households tended to be either relatively young and/or black or Hispanic, and not well-educated. Those families had low savings and high debt and had gained most of their wealth through their homes.

It gets worse. Because the housing market is improving overall, there is less of an incentive for the government to push any new measures to help underwater homeowners. Prominent economists say that allowing initiatives that would reduce borrowers' loan principle balances is the single most important thing the administration could do to help the Americans who lost all that home wealth. But for more than a year, the head of the Federal Housing Finance Agency (FHFA), which oversees the government-backed home-loan giants Fannie Mae and Freddie Mac, blocked initiatives that would have done just that. President Barack Obama has nominated a new FHFA director, but as a report released Friday by the Progressive Policy Institute notes, it might be too late: "US housing markets have come roaring back to life, and while that's great news, it has probably closed the window for principal reduction."

The wealthiest 1 percent now control 39 percent of the world's wealth, and their share is likely to grow in the coming years, according to a new report.

The world's total private wealth grew 7.8 percent last year to $135 trillion, according to the Boston Consulting Group's Global Wealth report. The top 1 percent control $52.8 trillion, and those worth $5 million or more control nearly a quarter of the world's wealth.

That concentration is likely to increase in the coming years as the wealth of the wealthy grows faster than overall global wealth. The number of millionaires in the world surged by 10 percent year, reaching 13.8 million. The study predicts that global wealth will grow around 4.8 percent a year over the next five years-though millionaires will see their wealth grow nearly twice as fast.

Those worth $5 million or more will see their wealth grow 8 percent, while those worth more than $100 million will see their wealth grow 9.2 percent. The $100-million-plus group will see their share of global wealth grow to 6.8 percent in 2017 from the current 5.5 percent.

What's driving the wealth of the wealthy? It depends on the country. In the developed world-the U.S. and Europe- it's mainly stocks. And stocks have been on a tear this year in the U.S., which has mainly benefited the top 5 percent, who own 60 percent of all individually held stocks.

In developing markets, the main wealth creator is economic growth and savings. Yet the amount of wealth held in stocks and in offshore wealth (again mainly held by the wealthy) in developing countries is also growing. The amount of wealth held in equities in Asia (excluding Japan) surged by 21.9 percent in 2012.

Wednesday, February 20, 2013 - Seeds of Change

Seeds of Change

by Sinclair Noe

DOW – 108 = 13,927
SPX – 18 = 1511
NAS – 49 = 3164
10 YR YLD - .01 = 2.02%
OIL – 2.28 = 94.82
GOLD – 40.50 = 1565.10
SILV - .87 = 28.67

We may be seeing the seeds of change. Today, the Federal Reserve released the minutes from the January 30 meeting of the Federal Open Market Committee. The minutes reveal that several FOMC policymakers think it might be time to shake things up, vary the pace of their $85 billion dollar per month bond purchase program. According to the minutes, the debate “emphasized that the committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved.”

The minutes of the FOMC meeting states: “Several participants noted that a very large portfolio of long-duration assets would, under certain circumstances, expose the Federal Reserve to significant capital losses when these holdings were unwound. Others pointed to offsetting factors, and one noted that losses would not impede the effective operation of monetary policy.”

The Fed  at its January meeting decided to continue buying $45 billion a month of Treasuries and $40 billion in mortgage- debt without setting a limit on the duration or total size of the purchases. Policy makers also affirmed their pledge to keep the target interest rate near zero “at least as long” as unemployment remains above 6.5 percent and inflation is projected to be no more than 2.5 percent. And the Fed's balance sheet has grown to more than $3 trillion and will likely grow by another $1 trillion this year, and the policymakers are getting nervous; maybe not so nervous, just prudently checking to make sure they're not painting themselves into a corner.

The bond market might already be influencing Fed confidence; there is a fairly significant pattern of reaching for yield behavior emerging in corporate credit. One concern is that the Fed might trigger instability in the financial markets when it starts selling bonds. As long as the Fed continues their QE to infinity and beyond, bond-buying program, the equity markets feel like they have a bid underneath it, a safety net. And the Fed isn't going to pull the safety net in the face of sequester and a possible debt ceiling shutdown. It would be good to see a stimulus plan that does more for Main Street than Wall Street, but that is not what the Fed does. A new report shows the bankers are flush with cash and unwilling to lend it out. The biggest banks are lending the smallest portion of their deposits in five years. The average loan-to-deposit ratio for the top eight commercial banks fell to 84% in the fourth quarter from 87% a year earlier.  Putting more of the unused money to work could boost profit and help turn around the economy, but the banks are stuck, kind of like the Fed itself.

And the latest inflation report will do nothing to alter the Fed's stimulus plans. The Labor Department reports inflation on the wholesale level is tame; over the past 12 months the increase in producer prices is just 1.4%, barely changed from the prior month. A couple of interesting points: Energy prices fell a seasonally adjusted 0.4%, but the index failed to capture the surge in gasoline costs that started shortly after the new year began. Higher fuel costs are expected to show up in the February PPI report. Also, the cost of food increased 0.7%. Cold weather in the West was the blame. Vegetable prices were up 39%.

And that brings us to the curious case of Vernon Bowman, a 75 year old farmer in Indiana. A few years back, Vernon bought some soybean seeds; as far as he knew they were just soybean seeds; he planted the seeds, and then saved seeds from the resulting harvest, which he planted, grew, and harvested yet again. Vernon did this for about 3 years. It sounds like the very definition of farming. Monsanto calls it patent infringement. They sued Vernon. A federal judge ordered Vernon to pay $84,000, and an appeals court upheld the decision. Yesterday, Vernon went before the Supreme Court to argue that he had a right to replicate the seeds.

At issue is whether patent rights extend to seeds and other entities that can "replicate themselves beyond the first generation.” The justices realize that the case is bigger than that. The Software Industry lobbying group weighed in on the case of Bowman v. Monsanto. A legal rule eliminating patent protection for 'self-replicating' seeds that had the same result with respect to temporary copies of software programs would facilitate software piracy on a broad scale. But there is a difference between seeds and software, and the most basic question is whether anyone, or any corporation should be able to control a product of life.

For most of this country's history, and for most of all history, seeds have been a part of the public domain - available for farmers to exchange, save, and modify through plant breeding and replanting. Through this process, farmers developed a diverse array of plants that could thrive in various geographies, soils, climates and ecosystems. But today this history of seeds is seemingly forgotten in light of a patent system that, since the mid-1980s, has allowed corporations to own products of life.

One of Monsanto's arguments is that when farmers save seed from a crop grown from patented seed and then use that seed for another crop, they are illegally replicating, or "making," Monsanto's proprietary seeds instead of legally "using” the seeds by planting them one time, and then buying more seeds from Monsanto for each subsequent crop. Farmers who buy the seeds must generally sign a contract promising not to save seeds from the resulting crop. Vern Bowman thought he found a loophole when he bought undifferentiated seeds.

The reach of Monsanto’s theory, is that once that seed is sold, even though title has passed to the farmer, and the farmer assumes all risks associated with farming, that they can still control the ownership of that seed, control how that seed is used.

What makes these seeds different? They are known as Roundup ready seeds; they are resistant to glyphosate, the weed killing ingredient in Roundup herbicide spray. The Roundup Ready soybean seed is now grown by more than 90 percent of the 275,000 soybean farms in the US. There is an old saying: Mother Nature bats last.

One of the interesting side effects, which the Supreme Court will probably not pay attention to, is the side effects of Roundup Ready soybeans. Last month, Farm Industry News reported that more than 61 million acres of US cropland is infested with glyphosate resistant weeds; Super weeds that no longer can be sprayed away with Roundup. In response, farmers resort to more soil-eroding tillage operations to combat the weeds, and they turn to more toxic chemicals. Based on data from the USDA, as much as 26% more pesticides per acre were used on genetically engineered crops than on conventional crops. The agrochemical companies are responding with even more chemicals, while accepting none of the liabilities.

The farmers don't have much choice. Ten agrochemical companies now control two-thirds of global commercial seed for major crops. The high adoption rate of genetically engineered seed is largely because the companies have stopped offering conventional seed. Over an 11-year period, the cost per acre of planting soybeans has risen a dramatic 325%. At a certain point, farmers will recognize the economic advantage of avoiding genetically modified seeds, but by then, the GM seeds will be ubiquitous.

So, the case of Bowman v. Monsanto went before the Supreme Court, and the justices will issue an opinion later this year, and that opinion will likely set precedent for patent law. I have no idea what they will decide. Farmer Bowman's lawyers argued a point known as the exhaustion doctrine, or first sale doctrine; this is a concept that limits the extent to which patent holders can control an individual article of a patented product after an authorized sale. Under the doctrine, once an unrestricted, authorized sale of a patented article occurs, the patent holder’s exclusive rights to control the use and sale of that article are exhausted, and the purchaser is free to use or resell that article without further restraint from patent law. Note, however, that under current law, the patent owner retains the right to exclude purchasers of the articles from making the patented invention anew, unless it is specifically authorized by the patentee.

The exhaustion doctrine was always limited to the particular article sold, a new crop of soybeans, three or four crops removed might be considered an entirely new article. Justice Breyer made a reference to a 1927 opinion by Justice Oliver Wendell holmes, in which Holmes sought to justify the forced sterilization of a woman with mental disabilities. “Three generations of imbeciles are enough,” Justice Holmes wrote.

Justice Breyer said: “There are three generations of seeds. Maybe three generations of seeds is enough.” Breyer was, of course making a lawyerly joke, but it brings up the question: what's next? Can a corporation control the entire food chain? Can we have patents on human genes? What is the appropriate role of ownership and control over the very elements of life?

I'll be speaking at the Wealth Protection Conference April 4. Click here for info.