Thursday, October 31, 2013 - Halloween Miracles

Halloween Miracles

by Sinclair Noe

DOW – 73 = 15,545
SPX – 6 = 1756
NAS – 10= 3919
10 YR YLD + .02 = 2.54%
OIL - .53 = 96.24
GOLD – 20.20 = 1323.70
SILV - .83 = 22.01

The S&P closed near its intraday low, but it's been a good October. For the month, the Dow gained 2.8 percent, the S&P 500 added 4.5 percent and the Nasdaq rose 3.9 percent. The S&P 500 is up 23.2 percent for the year so far.

The S&P/Case-Shiller index showed that home prices in 20 large metro areas rose 1.3% from July and 12.8% from August 2012. Prices haven't risen this fast year over year since Feb. 2006. Still, there are signs of a cooling. The rate of monthly increases in the 20 large cities peaked in April. Since then home prices continued to rise, but at a slower pace each month. This month 16 cities reported smaller gains in August compared to July. Las Vegas saw the largest annual increases, with prices soaring from a year earlier  29.2%. In San Francisco prices jumped 25.4%; in Los Angeles 21.7%; in San Diego 21.5%.

The Chicago purchasing managers index jumped to a reading of 65.9 in October, up from 55.7 and well ahead of the consensus of 54.5. Readings above 50 indicate expansion.

The number of Americans filing first-time claims for unemployment insurance fell by 10,000 last week, to 340,000 from 350,000 the week before. Though it's the third straight week that claims have dropped, the number of applications is still within a range that signals a sluggish labor market. The unemployment rate at 7.2% is almost certain to climb in October because of the government shutdown. The jobless rate includes workers who are temporarily laid off from their jobs, even if they eventually get paid for time missed. As a result, the unemployment rate in October will include furloughed government workers as well as private-sector employees laid off by companies that rely heavily on federal contracts. The unemployment rate could jump up to 7.5%. The number of net jobs created, however, might not be affected nearly as much. That number is derived from a separate Labor Department survey of businesses about how many people they hired in a month.

The unemployment rate in the 17-nation eurozone remained unchanged in September at a record high of 12.2 percent. The number of unemployed rose by 60,000 to 19.45 million. The jobless rate for those aged under 25 edged up to 24.1 percent from 24 percent in August. The unemployment rate for the wider 28-nation European Union remained unchanged at 11 percent.

 Figures on government spending and debt were released today. The government's fiscal year runs Oct. 1 through Sept. 30. Total public debt subject to limit was $17.043 Trillion. The deficit through August dropped to $755 billion.

Settlement talks between the Justice Department and JPMorgan are in danger of breaking down over the bank’s demands that it avoid future criminal charges and that another government agency pay some of the $13 billion price tag.

Federal prosecutors have been working with JPMorgan for months to resolve allegations that the bank knowingly sold securities made up of low-quality mortgages in the lead-up to the financial crisis. As of last week, the nation’s largest bank had agreed to a tentaive $13 billion settlement that would expunge multiple government probes. Details of the agreement were being hashed out, but now the sides have reached an impasse.

Attorneys for JPMorgan proposed a deal that would give the bank protection from future criminal investigation. Federal prosecutors assumed that aspect of the deal was settled and were bothered when attorneys asked that the bank be released from future criminal prosecution. There also remains a standoff over whether JPMorgan or the Federal Deposit Insurance Corp. is responsible for losses on mortgage securities issued by Washington Mutual, the failed bank that JPMorgan bought out of receivership for $1.9 billion in 2008. Some of those securities are a part of the complaints that JPMorgan is trying to resolve in its settlement with the Justice Department.

Have your ever heard of the push-out provision? It's a little known provision in the Dodd Frank reforms, and the bank lobbyists have killed it, and lawmakers came together in bipartisan unity to bury it. The idea behind the push-out provision is that the banks would have to separate their swaps trading units from the main bank, where funds are FDIC insured. So, now that the lobbyists have killed the push-out provision, they can gamble in derivatives trading using insured deposits.

Now, if you're wondering why or if this is significant, just look at Cyprus, or if you want to get a bit closer, look at Detroit. Both pensioners and bond holders argue they should have priority in claiming a stake in the city's assets in the bankruptcy process. However, a different class of creditor has legally senior status. Holders of financial derivatives enjoy super-priority in bankruptcy, thank to changes in the bankruptcy law of 2005; they are not subject to the ‘automatic stay’ provision intended to prevent a disorderly grab for collateral by competing creditors. They can press their claim immediately, prior to bankruptcy proceedings and therefore before claims by competing creditors are considered. This may potentially leave nothing for other creditors to divide during subsequent proceedings.

The latest court proceeding in Detroit was to determine if retired city workers might get 16 cents on the dollar, even though the Michigan constitution contains a provision which bans any action to cut pension benefits of public employees, or whether the federal bankruptcy code trumps the state constitution. And if you think Detroit is the only city with these kinds of problems, think again. And if you think it only applies to retirement plans, remember what I just told you about the push-out provision. That's right, the super-priority position of financial derivatives also applies to your FDIC insured bank account.

Bill Gross, the billionaire founder and chief investment officer of Pacific Investment Management Co., also known as PIMCO, writes an investment outlook; kind of a regular newsletter that he posts on the website. The latest from Bill Gross is a bit of a surprise. He says wealthy people need to stop whining about the taxes they pay, realize their success is mostly dumb luck and pay even higher taxes to help the less fortunate. Gross writes in his latest monthly missive, entitled "Scrooge McDucks,": "Having gotten rich at the expense of labor, the guilt sets in and I begin to feel sorry for the less well-off." It's a Halloween miracle. 

And he continues: “Admit that you, and I and others in the magnificent '1%' grew up in a gilded age of credit, where those who borrowed money or charged fees on expanding financial assets had a much better chance of making it to the big tent than those who used their hands for a living.”

And Gross suggests the soaring income inequality of the past few decades is a serious problem for the entire US economy: “Developed economies work best when inequality of incomes are at a minimum. Right now, the U.S. ranks 16th on a Gini coefficient for developed countries, barely ahead of Spain and Greece. By reducing the 20% of national income that “golden scrooges” now earn, by implementing more equitable tax reform that equalizes capital gains, carried interest and nominal income tax rates, we might move up the list to challenge more productive economies such as Germany and Canada.

“I would ask the Scrooge McDucks of the world who so vehemently criticize what they consider to be counterproductive, even crippling taxation of the wealthy in the midst of historically high corporate profits and personal income, to consider this: Instead of approaching the tax reform argument from the standpoint of what an enormous percentage of the overall income taxes the top 1% pay, consider how much of the national income you’ve been privileged to make.”

Gross notes that the 1 percent now take up 20 percent of U.S. income, up from 10 percent in the 1970s -- a fact he attributes at least partly to the massive tax cuts for the wealthy enacted by Presidents Ronald Reagan and George W. Bush.

Gross also points out that the wealthy have gotten all of the benefit of the explosive rise of the financial sector over the past several decades, along with a 30-year decline in interest rates. Together, these two factors lined the pockets of the wealthy, but left everybody else behind. And Gross offered a policy prescription: “If you’re in the privileged 1%, you should be paddling right alongside and willing to support higher taxes on carried interest, and certainly capital gains readjusted to existing marginal income tax rates. Stanley Druckenmiller and Warren Buffett have recently advocated similar proposals. The era of taxing ‘capital’ at lower rates than ‘labor’ should now end.”

And then Gross takes a shot at Carl Icahn, and probably quite a few other captains of industry by adding: “If X can’t grow revenues any more, if X company’s stock has only gone up because of expense cutting and stock buybacks, what does that say about the U.S. or many other global economies? Has our prosperity been based on money printing, credit expansion and cost cutting, instead of honest-to-goodness investment in the real economy?”

Tuesday, August 20, 2013 - 10 Year and Jackson Hole

10 Year and Jackson Hole

by Sinclair Noe

DOW – 7 = 15,002
SPX + 6 = 1652
NAS + 24 = 3613
10 YR YLD - .07 = 2.81%
OIL - .77 = 106.33
GOLD + 5.30 = 1371.90
SILV - .16 = 23.13

One number keeps standing out from the daily scorecard. The yield on the 10 year note. That is the benchmark for interest rates. As a standalone figure, of course, the yield on 10-year Treasuries is small. But the amount of money it impacts worldwide is flat-out staggering. Out of the estimated $1.5 quadrillion dollars' worth of derivatives on the planet right now, roughly $500 trillion is specifically related to interest rates. So you can see why the 10-year gets so much attention.

Many investors believe the Fed controls interest rates. That's not true; they merely influence them. Rates are set by trades in the market. And if interest rates rise much further, the support the Fed is counting on in the bond markets may not be there. In fact, it may be running the opposite direction. Foreign custody holdings of US Treasuries continue to decline, which implies that our trading partners are not comfortable with treasuries, so they're moving to other assets.

Meanwhile, emerging markets from Brazil to Indonesia have raised borrowing costs in 2013 to try to aid their currencies as the prospect of reduced US monetary stimulus curbs demand for assets in developing nations. The $3.9 trillion of cash that flowed into emerging markets over the past four years has started to reverse since taper talk started back in May. Asia still has potential in the next three years or more, but in the shorter term, momentum has turned a bit.

Institutional managers - read pension fund administrators, foreign banks, and ETFs - who would have normally been big buyers, are paring back because they don't want the exposure that comes with 10-year paper or longer-term assets in a rising rate environment.

Money managers are seeing extremely high levels of redemption requests and withdrawals from bonds. PIMCO, for example, experienced a $7.5 billion hit last month as money headed for the exits. The presumption is that the money is rotating into stocks, but the data suggests a solid portion is simply going back under the mattress. Somebody has to make up the gap; the only one big enough is the Fed. But if $85 billion a month isn't good enough, you've got to wonder how much is.

So, this week the Fed policymakers are headed to Jackson Hole Wyoming for an annual retreat. The Fed heads will talk about their role; the Fed followers will cogitate; the economic thinkers will theorize about the critical information regarding potential shifts in macroeconomic policy. Investors look to the meeting to bring a healthy, if fleeting, shot in the arm to the markets and share prices. Nearly any unexpected remark or errant word coming from the proceedings has the ability to rock the markets.

The markets have come increasingly unglued from economic reality, and are really just responding to Bernanke's speeches. Typically we see a bump folllowing the Jackson Hole get together. In each year, with each speech given in the Grand Tetons, the Dow has experienced triple-digit jumps: 119 points in 2007, 197 points in 2008, 155 points in 2009, last year it was a 151 point gain.

Perhaps unsurprisingly, in each instance but one (in 2009, when he announced the worst of the Great Recession was over), Bernanke spoke about or reiterated the Fed's willingness to intervene in difficult economic circumstances. These words were promptly followed up with a demonstration, most recently with the never-ending rounds of quantitative easing. Clearly, the markets love this talk, the markets have become addicted to the Fed juicing the markets, even if the juice hasn't spilled over to Main Street.

Bernanke has spoken at every Jackson Hole meeting since he took over the chairmanship. Chairmen Ben won't be in Jackson Hole this week. Bank of England Governor Mark Carney won't be there. The ECB Pres, Mario Draghi won't be there. Larry Summers won't be there. Janet Yellen will be there but she isn't scheduled to give a keynote speech. The conference still might move the markets, or it might prove a bit of a snoozer. As exciting as Jackson Hole has been for investors over the past three decades, it wouldn't be wise to plan for any triple-digit jumps this year. Anyone looking for a quick bump out of Jackson Hole should look elsewhere. Specifically, look to the next Fed meeting Sept. 18-19, when Bernanke has another press conference.

That's the sanguine outlook. Not much happens in Jackson Hole. But the Fed and talk of taper has been the prime mover in the market for the best part of the year (you could easily argue that it's been longer),

Thin summer volumes, bull trap head-fake and slightly better data exposed treasury market weakness; it’s no longer just fear of tapering but also uncertainty regarding the next Fed Chair. This past week the US rates market displayed unusual behavior as it didn’t require much in order for bonds to get crushed. We wait for the FOMC minutes and other key Fed events ahead to gauge what lies ahead for treasuries. The biggest risk to the bond market and tactical bullish trades is the combination of tapering fears and the election of a more hawkish Chairperson. In such a scenario it wouldn’t be surprising that investors just sit on the sidelines and see how high rates can go if a hawkish Fed nominee is announced, with an overshoot meaningfully above 3% possible. Stocks then would be under pressure as bonds become enticing again and asset allocation adjustments eventually reverse the flows back into bonds, at least on a short-term trade.

Intermediate, as in to the year end, there is a widespread expectation for us to pop out of the summer doldrums and enjoy a year end rally. When everyone expects something, anything can happen, and it's not always what everyone expects. In other words, we're starting to hear rumblings that the Fed is losing control of the bond markets, and as 10-year yields tap dance toward 3%, there is speculation and rumor, and some of the arguments are compelling, but only to a point.

Bottom line? The Fed is ultimately in control, contrary to what some are claiming. Might just be a little lag time in tamping down rates, that’s all. The lessons from the BOJ should be enough to quell those who doubt this. And the BOJ can do nothing that our Fed can’t do on this side of the pond. If the Fed wants a 2, 3 or 4% 10 yr treasury note then they’re damn well going to get just that. Maybe the FOMC likes rates at 2.8%. Maybe they like them at 3.5%. I just don’t think they like the parabolic rise. That can be fixed in due course if they so desire.

What else is going on in business? Well Barnes & Noble just reported stunning losses for the last quarter. At a conference call following the release of results, analysts called the company's leaders slow and ineffective. They zeroed in on the company's Nook e-reader as a sign of failure, demanding payout for "long-suffering" shareholders. Barnes & Noble reported a loss of $87 million in the last quarter, and it attributed about $54.6 million of that to its Nook unit. The struggle over the Nook comes at a time when e-books have decimated the traditional publishing business. The Nook has also struggled to compete with other tablets and e-readers, most notably the iPad and Kindle.

Retailers had a hard day today. JC Penney same store sales down 11% from a year ago in the quarter to August 3 as the department store posted a $586m net loss. But its shares, which closed 6 per cent higher, were bolstered by assurances from management that business was not as bad as it once was.

Best Buy, the electronics retailer, met a better reception from investors as cost cutting helped it to report its first net profit in a year, even though like-for-like sales – at stores open at least a year – fell 0.6 per cent. Its shares closed 13.2 per cent higher.

Meanwhile a bankruptcy judge has approved Kodak's plan to emerge from court oversight, paving the way for it to recreate itself as a new, much smaller company focused on commercial and packaging printing. Kodak said it hopes to emerge from bankruptcy protection as early as Sept. 3. Founded by George Eastman in 1880, Eastman Kodak Co. is credited with popularizing photography at the start of the 20th century and was known all over the world for its Brownie and Instamatic cameras and its yellow-and-red film boxes. The new company won't make cameras anymore.

The long, painful process for Detroit’s bankruptcy is under way.  Unlike corporations that file for Chapter 11 bankruptcy protection, municipalities and other governments seeking to file for Chapter 9 are required to prove that they are eligible. A trial to consider Detroit’s eligibility for bankruptcy is scheduled for Oct. 23. I think everyone conceded that Detroit was a municipality as required by the statute. But the public employees union did argue that Chapter 9 itself is unconstitutional

First is the argument that Michigan’s Constitution prohibits modification of the pensions, and thus prohibits a Chapter 9 filing, where they might be modified. What Michigan’s Constitution actually provides is that pension benefits “shall be a contractual obligation thereof which shall not be diminished or impaired thereby.” By calling the benefits a contract, the state’s Constitution invokes the federal Constitution, which has a Contracts Clause that prohibits the states from passing any law impairing contracts. The same kind of provision also appears in Article I, Section 10 of the Michigan Constitution. Then there is debate about whether pensioners or bondholders should be paid. There will be a lot of talk about morality as well as contractual obligations. I'd like to say this will be interesting, but the truth is it will just be sad.

Tuesday, June 04, 2013 - Systemically Dangerous

Systemically Dangerous

by Sinclair Noe

DOW – 76 = 15,177
SPX – 9 = 1631
NAS – 20 = 3445
10 YR YLD un = 2.13%
OIL + .38 = 93.83
GOLD – 11.20 = 1401.00
SILV - .20 = 22.65

Tuesday?? What happened? For 20 consecutive weeks, Tuesday was an up day on Wall Street; going back to January, every Tuesday was a winner. I don't know why. Maybe there was something going on in the shadows and dark corners of Wall Street, maybe it was just a fluke of nature; maybe it was a trend that started and continued as the algorithmic traders took notice.

The first rule of trends is that a trend in place is more likely to continue than it is to reverse, until it reverses. That sounds simple, but it isn't. Behind that concept is the idea that you follow the market rather than trying to impose your will, or your pre-conceived notions, or your bias on the market. Today, the trend reversed.

Federal regulators have proposed a group of firms that aren't banks to be deemed potential threats to the financial system that need stricter government oversight. The Financial Stability Oversight Council, which includes Treasury Secretary Jacob Lew and Federal Reserve Chairman Ben Bernanke, was created to help prevent another meltdown.

Nonbank financial firms include insurers, hedge funds, mutual fund companies and private equity firms. Those deemed "systemically important" would have to increase their cushion against losses, limit their use of borrowed money and submit to inspections by Fed examiners. These firms would have 30 days to notify the council that they're contesting the designation. The council would have to vote again to finalize each designation. The regulators didn't name the firms or say how many it wants to designate as so big and interconnected that their potential troubles could imperil the financial system.

Some of the usual suspects include the insurance firms, AIG and Prudential, they might include names like Pimco; we'll get to them in a moment. I'm not sure how much credence we lend to the regulators, especially considering they haven't been able to regulate the systemically dangerous banks. If they want to be taken seriously, the first step is to reinstate Glass-Steagall.

We don't know the firms on the list of nonbank, potentially dangerous financial firms, but it would seem that Pimco is pretty big – about $2 trillion, and before they could be labeled dangerous, bond guru Bill Gross has taken aim at the Federal Reserve and Ben Bernanke, charging that the Fed's super-easy monetary policies are dangerous to an economic recovery.

Gross is the founder and co-chief investment officer of Pimco and he writes a regular letter to investors which he posts on the firm's website. The latest letter is entitled “Wounded Heart” and he warns investors to reduce risk assets as a result of the weak rewards to be gained. Gross characterized the Fed's zero interest rate policy and quantitative easing as distorting markets by keeping interest rates artificially low and creating an insatiable demand for riskier, higher yielding assets.

Gross wrote: "Our global financial system at the zero-bound is beginning to resemble a leukemia patient with New Age chemotherapy, desperately attempting to cure an economy that requires structural as opposed to monetary solutions.”

Gross also wrote: “Central banks — including today’s superquant, Kuroda, leading the Bank of Japan — seem to believe that higher and higher asset prices produced necessarily by more and more QE check writing will inevitably stimulate real economic growth via the spillover wealth effect into consumption and real investment. That theory requires challenge if only because it doesn’t seem to be working very well.”

The quick version of Gross' thesis is that financial markets require “carry” to pump oxygen to the real economy; “Carry” is compressed – yields, spreads and volatility are near or at historical lows; the Fed's QE plan assumes higher asset prices will reinvigorate growth; it doesn't seem to be working; therefore reduce risk/carry related assets.

Gross may have a point, but then he missed his mark claiming that low rates create less incentive to take risk; and while that may be true, it is the wrong answer. Gross seems stuck in his supply-side world. The answer is not creating more credit, but creating more demand. Short-term the Fed has been able to re-inflate the stock market, and Bernanke makes no bones about that, but it is a dangerous game to inflate asset bubbles, and it doesn't really do much to create jobs. If the Fed really wants to lower the unemployment rate, they will have to change their tactics, and that seems to be what the Fed is priming the markets for right now.

Today,  Esther George, president and CEO of the Federal Reserve Bank of Kansas City and a member of the Federal Open Market Committee, which determines central bank monetary policy gave a speech and she said she is in support of "slowing the pace of asset purchases as an appropriate next step for monetary policy." While she acknowledged her views are not shared by the "majority" of the voting members of the FOMC, it created fresh uncertainty about when the Fed will start dialing down its stimulus. This is the dangerous gamble part of the Fed's asset bubble policy

George went on to say: "History suggests that waiting too long to acknowledge the economy's progress and prepare markets for more normal policy settings carries no less risk than tightening too soon," and "A slowing in the pace of purchases could be viewed as applying less pressure to the gas pedal, rather than stepping on the brake. Adjustments today can take a measured pace as the economy's progress unfolds." It's not so much a matter of applying the brakes, as it is that the Fed is in the wrong vehicle.

Back to those systemically dangerous, too big to fail institutions. Back in 1999, then deputy US attorney general Eric Holder wrote a memo entitled  “Bringing Criminal Charges Against Corporations,”  in which he argued that government officials could take into account “collateral consequences" when prosecuting corporate crimes.

That memo has resurfaced at a time when Holder, now U.S. attorney general, faces increasing criticism for the Department of Justice's reluctance to bring charges against white-collar criminals. Although it brought only a modest change in the way prosecutors evaluate whether to bring criminal charges against corporations, Holder's memo laid the groundwork for subsequent policies that allowed for more leeway when going after large firms.

In 1999, Holder highlighted the possibility of deferred prosecution -- an arrangement now common in the wake of the financial crisis -- whereby prosecutors essentially give defendants amnesty in exchange for paying a fine, enacting reforms and cooperating with investigators. Later, officials published further memos, turning the option into more of a recommendation. The policy was strengthened in response to the Arthur Andersen scandal of the early 2000s. After the government brought criminal charges against the consulting firm, the company failed, causing 28,000 workers -- many of whom likely had no role in any wrongdoing -- to lose their jobs. A court later overturned the charges.

Holder told the Wall Street Journal in 2006 that he drafted the memo in response to complaints that there seemed to be no uniform rules for deciding whether to bring charges in corporate cases: "[I] didn’t expect these issues would become as big as they were," Holder told the WSJ at the time. Indeed, they've only grown larger in the seven years since that interview.

The government has yet to prosecute any big banks or major executives for their role in the meltdown, and critics have derided Holder and his Justice Department for using the collateral damage argument as an excuse for not doing enough to hold those institutions accountable. The DOJ came under fire last year after declining to prosecute HSBC for years of money laundering violations, saying that to do so would bring too much damage to the global economy.

The government just backed down. Maybe there were reasons in 2008 to say maybe we shouldn’t indict any bank we can because it will just add to the systemic risk. But we were in 2012 to 2013 with HSBC -- that risk wasn’t there and we weren’t dealing with something that was relating to the activities that produced the 2008 crisis.

And finally today, we have a follow-up to the London Whale. Bloomberg Markets will report in its July Issue that Bruno Iksil, a Frenchman who would soon become known as the London Whale because of the size of his trades, knew that the trades were going very badly. On March 23, 2012 he wrote a message to an assoicate saying, “We are dead I tell you.”

Iksil had lost $44 million on corporate-credit bets three days earlier and was down more than $500 million for the year. He and junior trader Julien Grout, under pressure from their manager, had tried to hide the extent of losses that would swell to more than $6.2 billion, the bank’s biggest trading blunder ever.

“They are going to destroy us,” Iksil wrote to Grout that Friday in one of hundreds of e-mails, instant messages, transcripts of recorded conversations and other documents released in March by the U.S. Senate’s Permanent Subcommittee on Investigations after a nine-month probe.

In a 301-page report and at a hearing, the panel accused the largest and most profitable U.S. bank of hiding losses, deceiving regulators and misinforming investors.

The report, the bank’s own 129-page account and interviews with traders and current and former executives offer evidence of a widening spiral of panic as the losses became known beyond a small circle of traders and the extent of the damage reached top management, including Chief Executive OfficerJamie Dimon.

What the documents show is that Dimon presided over a company whose traders amassed growing positions in complex derivatives and whose executives offered rosy forecasts, withheld information from regulators and ignored risk limits that were breached 330 times in the first four months of 2012.

The records reveal how little has changed to prevent even the best-managed banks from speculating their way into trouble five years after the collapse of Lehman Brothers and three years after passage of the Dodd-Frank Act.

Tuesday, January 22, 2013 - Forward

Forward

by Sinclair Noe

DOW + 62 = 13,712
SPX + 6 = 1492
NAS + 8 = 3143
10 YR YLD - .01 = 1.84%
OIL + .63 =96.67
GOLD + 1.70 = 1692.80
SILV + .19 = 32.31

Yesterday was a fairly momentous day; the second inauguration of President Obama, featuring a fairly important inaugural speech laying out the major themes and vision for the next four years; it was also Martin Luther King, Jr. Day. The inauguration was fun to watch; it was also infuriating, and not just because of the hours of fawning media coverage on Michelle Obama's wardrobe. Literally, hours. Also a bit infuriating was the whole fuzzy picture of how the Inaugural was financed. The Presidential Inaugural Committee won’t say how much they have already collected or even what their goal was. Apparently these are “moving budgets,” which won’t stabilize until after the inauguration. Four years ago, promising a new openness, the president banned corporate giving to the inauguration, limited gifts from individuals to $50,000 and released a full accounting of donations. This year, the Inaugural Committee was offering packages between $10,000 and $1 million. Maybe you get a nice set of steak knives with the million dollar package. It will probably be a few months before we find out if they met their sales quota.

Still, it was a nice inauguration and the President's speech was interesting for multiple reasons. He hit on some big ideas: gay rights, climate change, immigration, and gun control. This weekend was also, by no mere coincidence, Gun Appreciation Day. A total of five people were injured in accidental shootings at gun shows in Indiana, Ohio, and North Carolina. And then today there was a shooting at a small college in Texas; three people injured.

Try to listen to the speech if you haven't, or listen to it again even if you did hear it. The speech lays out a vision, a theme for moving forward; and yesterday's speech is part of a package which includes the State of the Union Address, three weeks from today. The State of the Union will have the details. The Inaugural Speech was where Obama wants the country to be; the State of the Union speech will be the road-map to get there. Prior to today, there had been some talk that Obama would pursue deficit reduction, as part of his legacy project in his second term, but it's pretty clear that ship has sailed. During the debt ceiling fight and the fiscal cliff fight, Obama was (widely reportedly) willing to make cuts to entitlements in exchange for higher taxes from Republicans. They never found that deal.

It's still possible that something big could come out of the upcoming sequestration/budget battle, but most likely, Obama is done on the entitlement, spending front. And realistically, this may be the end of serious entitlement talk for a long while. Entitlement cutting had appeal with gigantic, trillion dollar deficits (even though entitlements were not driving said deficits). But as the deficit shrinks, the broader appetite for addressing any of these issues will fade.

Japan's central bank is borrowing a page from the Federal Reserve. The Bank of Japan set a target of 2% inflation and made an open-ended pledge to purchase government bonds until the economy revives or the inflation target is hit. Japan, the world's third-largest economy, saw negative growth in the third quarter of last year amid flagging exports and weak private spending, and is most likely to report further contraction for the fourth quarter. Deflation has long been a big part of Japan's economic problems, and the stimulus plan is aimed at long-running economic stagnation. The Bank of Japan's pledge to buy assets, known as quantitative easing, will involve total monthly purchases of 13 trillion yen, or about $147 billion, from January next year, most of it in U.S. Treasury bills. The Federal Reserve in December said it would continue to buy each month $45 billion of Treasury bonds as well as $40 billion of mortgage-backed securities. So, the bond market might turn some day; it might face trouble in the future, but for now, the old saying applies: don't fight the Fed, and the Bank of Japan.

There has been some economic recovery from the lows of 2008-2009, but the gains have been depressingly slow. Further fiscal expansion might be hampered by ongoing fiscal dysfunction and concerns about debt, and specifically debt to GDP. And the debate seems to be which targets to point at when creating new stimulus, rather than where the stimulus should be applied and if the stimulus will facilitate and foster long-term growth. The Bank of Japan targets inflation. The Fed targets unemployment and inflation. The Governor-elect of the Bank of England is on record as targeting nominal GDP, not necessarily GDP growth.

Just to refresh your memory; a nominal variable is one where the effects of inflation have not been accounted for. The Nominal Gross Domestic Product measures the value of all the goods and services produced expressed in current prices. On the other hand, Real Gross Domestic Product measures the value of all the goods and services produced expressed in the prices of some base year. So, the idea of a targeted nominal GDP suggests faster inflation might generate a faster, sustainable growth rate. Or it might just be acknowledgment that we haven't seen inflation in a while, and like the Bank of Japan, the worlds' economies aren't really concerned about inflation right now, rather the big concern is that economies grind to a standstill.

So, I hope this provides some background to the upcoming budgetary process. Considering the possibility of default or a potential government shutdown this spring, it is appropriate for policy to focus on reducing prospective deficits. Given all the uncertainties and current US debt levels, we should be planning to reduce debt ratios if the next decade goes well economically. Reducing prospective deficits should be a key priority but should not and probably will not, take over economic policy.

Even leaving aside any possible stimulus benefits, current economic conditions make this the ideal time for renewing the nation’s infrastructure. Such investments, borrowed at near-zero interest rates, need not increase debt ratios if their contribution to economic growth raises tax collections. We face deficits in other areas besides the debt ceiling.

Infrastructure represents what is and will become, an increasingly conspicuous deficit facing the United States. Nearly six years after the onset of financial crisis, we clearly are living with substantial deficits in jobs and growth. Consider that if an increase of just 0.15 percent in the economy’s growth rate were maintained over the next 10 years, the debt-to-GDP-ratio in 2023 would be reduced by about 2.5 percentage points. That’s an amount equal to the much debated year-end fiscal compromise that raised taxes. Increasing growth also creates jobs and raises incomes.

By all means, let’s address the budget deficit, but don't restrict the challenge to one blunt tool.

Earlier this month, a study by the World Economic Forum rated severe income inequality as the biggest risk facing the world, for the second year running. Also high on the list is climate change, which made its way into the inauguration speech yesterday; just in case you're looking for trends. The World Economic Forum is the official name of the Davos Rich Guys Conference held in Switzerland. They publish a study in the weeks before the annual conference. It is more than a little ironic that billionaires and millionaires meeting in the Swiss Alps, should make income inequality a top priority. I'm still not sure whether they consider it good or bad; only that it is a priority. Another irony is the concern about climate change from people jetting around the world in private jets.

In recent conferences, the economic health of the Euro-zone was a top priority, which is now seemingly under control. The current big concern about the Euro-zone is that leaders might become less vigilant now that the heat is off, ushering in a spate of new troubles that could dog the euro for years to come. In other words, they want the economic stimulus to continue. There is an enormous amount of global capital represented in Davos, but global capital does not solve big world issues: debt and financial crisis, political paralysis or gridlock, the transformative effects of the digital revolution, resource shortages, shifting demographics, climate change, and income inequality.

The Davos World Economic Forum is not known for transparency; in fact, it is known for a bunch of little side meetings where various deals may or may not get done; it is known for wheeling and dealing, especially among bankers. It is not known for accurate prognostications, but the itinerary of topics does tell us the issues of discussion among the rich and powerful. It is more than coincidental that the research report, which was released a couple of weeks ago, listed climate change as a major issue, and those words were uttered, for the very first time yesterday in an inauguration speech.

In 2009, Mohamed El-Erian, CEO of PIMCO, the world's largest bond fund manager, coined the term, “new normal” to describe the period of economic malaise the U.S. would experience in the wake of the biggest recession of a generation. The "new normal" was characterized by below trend growth, high unemployment, and ultra-low interest rates as the U.S. suffered the economic consequences of the crisis

Now, El-Erian says the "new normal" may soon be over. He wasn't quite ready to call the end of period, but he was getting close. Bigger picture, a lot of analysts are now calling The Big Turn. The consensus seems to be more “juice” from the Federal Reserve to propel the economy, at least in the first quarter.

Q1 GDP may be in the high 2% range, or perhaps even as high as 3%. That’s because the lifts from business investment, housing, inventories and trade may more than offset the expected hit to consumption from higher tax rates.

It also appears that real consumer spending ended the year on a strong note with real PCE rising up 0.3% month over month in December. This would put the December level 1.5% annualized above the Q4 average. This positive momentum will also help absorb some of the fiscal drag. All of this coincides with increasing evidence that the US is escaping the liquidity trap hat has made monetary policy so ineffective in the crisis era. It's not out of the woods yet, but even with all of the negativity surrounding the upcoming budget battles in Washington expected to unfold over the first quarter – and barring any shocks – the US economy may be closer to the end of the "new normal" than even El-Erian will admit.

Of course, that is barring shocks, and shocks can happen. Barely into 2013, Mali and Algeria are new sites of hot war and chilling fear. Where the tumult that began in the Arab Spring will end is still as unclear as when it erupted — far from Davos — two years ago. The challenge posed by the free flow of information in China went to the streets to ring in the New Year in Guangzhou.

Europe seems to have averted a collapse of the euro, but even in Germany, growth is anemic. Eleven members of the Eurozone have finally agreed to adopt a financial transaction tax often referred to as a ‘Robin Hood tax’ first discussed in September 2011. The tax will apply at the rate of 0.1% on stock and bond transactions and 0.01% on derivatives trades. It looks like Estonia is not afraid of derivatives traders.

Another example of how nations in transition are going their own way is Egypt, where President Mohamed Morsi seems to seek a geopolitical mix: a dose of Turkey, an Islamist-leaning democracy, with much-needed financial aid from China, and relations with Washington warm enough to garner more aid and collaborate on diplomacy like mediating the Israeli-Palestinian fighting over the Gaza Strip last November.

The fluid nature of this world is enhanced by digital communication. With the collapse in newspaper readership and the spread of social media, everyone gets little snippets of information, and never fully understands the implications. Very few people do deeper reading and thinking.

Washington’s feuding politicians walked up to the brink before resolving not to jump off the so-called fiscal cliff, though they might still split their head on the debt ceiling. The political gridlock in Washington really looks ugly from an outsider’s view.”

Crisis might be the new normal. Or the new norm might be the Big Turn; take your pick.

It's earnings reporting season and the stock markets are continuing with a feel good January, in part because nobody can come up with anything to be worried about. The VIX, the volatility Index is hanging out near a 52 week low of 12 and change. Complacency is rampant. Tonight is only going to exacerbate that.

Google turned in a better than expected report, up 3%. IBM beat expectations and the stock moved higher. Wells Fargo announced a dividend hike. The railroads, CSC and Norfolk Southern posted better than expected earnings. CSC was up and Norfolk was slightly lower; but it should bode well for the Dow Transports which were already hanging around record highs. And if you believe in Dow Theory, the Transports should drag the Industrials higher.

Sales of previously owned homes fell 1.0% in December from the prior month and were up 12.8% from December 2011. In total, the National Association of Realtors estimated that 4.65 million home sold last year, up from 9.2% in 2011. It was the highest level since 2007. Housing inventory dropped 8.5% in December to reach 1.82 million homes available for sale. That represents a supply of just under 4½ months. Unsold inventory is now at its lowest level since January 2001.

Monday, July 16, 2012 - Strong Demand for Negative Interest

Strong Demand for Negative Interest
-by Sinclair Noe


DOW – 49 = 12,727
SPX – 3 = 1353
NAS – 11 = 2896
10 YR YLD -.03 = 1.46%
OIL -.32 = 88.11
GOLD - .80 = 1589.60
SILV - .03 = 27.41
PLAT – 15.00 = 1423.00


The International Monetary Fund cut its forecast for global economic growth and warned that the outlook could get worse if policymakers in Europe do not act with enough force and speed to control the financial crisis. The IMF said emerging market nations, long a global bright spot, were now being dragged down by Europe. It said a drop in exports in these countries would combine with earlier policies meant to prevent overheating and slow growth more sharply than hoped. 


The IMF cut its 2013 forecast for global growth to 3.9 percent from the 4.1 percent it projected in April, trimming projections for most advanced and emerging economies. It left its 2012 forecast unchanged at 3.5 percent. The IMF said advanced economies would only grow 1.4 percent this year and 1.9 percent in 2013.


It also trimmed its forecast for emerging economies, projecting they will expand 5.9 percent in 2013 and 5.6 percent in 2012. Both figures are 0.1 of a percentage point lower than in April. The IMF cut its 2013 growth forecast for the crisis-hit euro zone to 0.7 percent, while maintaining its projection of a 0.3 percent contraction this year.




The IMF cut its US forecasts slightly, largely based on concerns over a political battle brewing in Washington over how to avoid painful automatic spending cuts and tax increases at the start of next year.


The IMF says the United States faces a "fiscal cliff" with the scheduled expiration of Bush-era tax cuts and $1.2 trillion in automatic spending reductions - enough budget tightening to knock the still-weak US economy back into recession.


Washington is also expected to run into the statutory $16.4 trillion cap on its debt before the end of the year, raising the prospect of a default absent congressional action to raise it.


While financial markets believe Congress and the White House will find a way to avoid a fiscal train wreck, the IMF warned of the "potential for a significant adverse market reaction" if that consensus view began to falter.


When Standard & Poor’s downgraded the government’s credit rating last August, which was the first jump off a fiscal cliff, predictions of serious fallout soon followed. Republican presidential candidate Mitt Romney described it as a “meltdown” reminiscent of the economic crises of Jimmy Carter’s presidency. He warned of higher long-term interest rates and damage to foreign investors’ confidence in the US. House Budget Committee Chairman Paul Ryan said the government’s loss of its AAA rating would raise the cost of mortgages and car loans. Mohamed El-Erian, chief executive officer of PIMCO, said over time the standing of the dollar and US financial markets would erode and credit costs rise “for virtually all American borrowers.” They were wrong. Almost a year later, mortgage rates have dropped to record lows, the government’s borrowing costs have eased, the dollar and the benchmark S&P stock index are up, and global investors’ enthusiasm for Treasury debt has strengthened.


Yield changes during the last year probably had nothing to do with the downgrade, but it had to do with everything else pushing yields lower. On the top of that list you have a massive flight to quality out of Europe. The US is the prettiest horse in the glue factory. Investors outside the US owned $5.16 trillion of US government debt as of April 30, compared with $4.7 trillion at the end of July 2011 before the credit-rating cut. The Treasury market remains liquid. That liquidity premium is not going to disappear no matter how many downgrades Moody’s or S&P give to it. Further, we should probably question who in the heck S&P is to be giving the country a credit rating. If S&P really wants to cut the credit rating to C+, go ahead, maybe we'll just send in the Navy Seals and then we'll see what kind of rating we get. Actually, there isn't much chance of a full fledged default; inflation – yes, some form of devaluation -yes. Actual default – not so much. 


 Merrill Lynch issued a revised projection for US second quarter GDP growth. Today’s weak retail sales report leaves Q2 GDP tracking at just 1.1%. They expect the economy to remain weak through the rest of the year with growth of only 1.3% in Q3 and 1.0% in Q4. This translates to GDP growth of only 1.3% Q4/Q4, significantly below the Fed’s forecast of 1.9-2.4%.  Separately, Merrill Lynch writes in a memo to wealthy clients (I can't explain how I got my hands on it): “It is time to abandon the idea that treasuries are a special asset class, let alone “risk-free”; this no longer makes sense in a G-zero world.” a G-zero world refers to the G-7 or the G-20, but in a G-zero world, no government really has the fortitude to lead. 




Federal Reserve Chairman Ben Bernanke delivers his semiannual report to Congress over the next two days. Do not expect Bernanke to announce QE3. Do not expect any pronouncements above passing out free money to Wall Street bankers.  Do not trade on Bernanke's utterances. Do not expect Bernanke to accept responsibility for failure to regulate Libor. Really, the only reason to watch is to  see whether the politicians can beat up on Bernanke for failure to regulate, or whether Bernanke beats up the politicians for running like lemmings toward the fiscal cliff. 


You've got to wonder when people will finally accept the idea that the big banks can't be trusted. The list of failures is long: subprime mortgages, fraudulent ratings, casino-like wagering on derivatives, selling clients one thing and then betting against it, robo-signing, MF Global, and just when you think they've can't get any worse - Libor manipulation. Prosecutors in New York and Connecticut are investigating whether their states incurred losses as a result of interest-rate manipulation by banks, a probe that could lead to a wider multi-state enforcement action. But the Federal Reserve has done a lousy job as a regulator. Someone has to ask Bernanke what the Fed knew about Libor and when they knew it, and why they didn't respond.


The Fed has also done a lousy job in their dual mandate of price stability and maximum employment. The price stability part is doing fine for now; the employment part is lousy. If the Fed's targets call for an inflation rate of 2% and an unemployment rate below 6%, then any balancing of the tradeoff between the two objectives would imply we'd want to see an inflation rate above 2% as long as unemployment remains at its current high levels.


A lower inflation rate is relevant for anticipating the Fed's next step. While the hawks on the FOMC are generally perceived as wanting to avoid inflation, they also are committed to avoiding deflation. Although we may disagree about how much a higher inflation rate might benefit the economy, there is much wider agreement that deflation would make our problems worse and is something the Fed can and should avoid. I don't get the sense that the Fed is overly concerned about unemployment but they are scared about deflation. Part of the response to deflation should also be positive to bringing down unemployment. 


Whatever the Fed is thinking, they are running out of options. In the press conference last month, Bernanke made it clear that further accommodation is very likely if employment indicators don't improve soon. He also pointed out that the Fed can't do any more "twisting" because of the lack of short duration securities.


And that strongly suggests QE3 sooner rather than later. Not at the Congressional testimony this week, that will mainly just be contentious, but Bernanke might offer metrics that he considers important, and then we can fill in the blanks. 


Let's look at the Real Libor Scandal and why it really poses some bigger problems. It is pretty clear that the big banks manipulated the Libor rates; the Bank of England and the Federal Reserve were complicit, at the very least in their failure to step up and stop the manipulation. The banks benefitted from the impression of financial strength during a trying time, also from borrowing at low rates. But wait, there's more.


Banks are not the only beneficiaries of lower Libor rates. Debtors (and investors) whose floating or variable rate loans are pegged in some way to Libor also benefit. One could argue that by fixing the rate low, the banks were cheating themselves out of interest income, because the effect of the low Libor rate is to lower the interest rate on customer loans, such as variable rate mortgages that banks possess in their portfolios. But the banks did not fix the Libor rate with their customers in mind. Instead, the fixed Libor rate enabled them to improve their balance sheets, as well as help to perpetuate the regime of low interest rates. The last thing the banks want is a rise in interest rates that would drive down the values of their holdings and reveal large losses masked by rigged interest rates.


But wait, there's more than big banks simply borrowing from one another at lower rates, banks gained far more from the rise in the prices, or higher evaluations of floating rate financial instruments (such as CDOs), that resulted from lower Libor rates. As prices of debt instruments all tend to move in the same direction, and in the opposite direction from interest rates (low interest rates mean high bond prices, and vice versa), the effect of lower Libor rates is to prop up the prices of bonds, asset-backed financial instruments, and other securities. The end result is that the banks' balance sheets look healthier than they really are.


On the losing side of the scandal are purchasers of interest rate swaps, savers who receive less interest on their accounts, and ultimately all bond holders when the bond bubble pops and prices collapse. Libor rates were manipulated lower as a means to bolster the prices of bonds and asset-backed securities. In the UK, as in the US, the interest rate on government bonds is less than the rate of inflation. The UK inflation rate is about 2.8%, and the interest rate on 20-year government bonds is 2.5%.  The US inflation rate is about 1.8% and the interest rate on 10-year treasury notes is about 1.5%. In both countries, the government debt to GDP ratio is rising. 


Why do investors purchase long term bonds, which pay less than the rate of inflation, from governments whose debt is rising as a share of GDP? One might think that investors would understand that they are losing money and sell the bonds, thus lowering their price and raising the interest rate.


Why isn't this happening? Why has there been a huge, bullish demand for less than nothing? Well, despite the negative interest rate, investors were making capital gains from their Treasury bond holdings, because the prices were rising as interest rates were pushed lower.


What was pushing the interest rates lower? Wall Street has been selling huge amounts of interest rate swaps, essentially a way of shorting interest rates and driving them down. Thus, causing bond prices to rise.


Secondly, fixing Libor at lower rates has the same effect. Lower UK interest rates on government bonds drive up their prices.


In other words, we would argue that the bailed-out banks in the US and UK are returning the favor that they received from the bailouts and from the Fed and Bank of England's low rate policy by rigging government bond prices, thus propping up a government bond market that would otherwise, one would think, be driven down by the abundance of new debt and monetization of this debt, or some part of it.


How long can the government bond bubble be sustained? How negative can interest rates be driven?Can a declining economy offset the impact on inflation of debt creation and its monetization, with the result that inflation falls to zero, thus making the low interest rates on government bonds positive?


According to his public statements, zero inflation is not the goal of the Federal Reserve chairman. He believes that some inflation is a spur to economic growth, and he has said that his target is 2% inflation. At current bond prices, that means a continuation of negative interest rates. Unless bond prices can continue to rise as new debt is issued, the era of rigged bond prices might be drawing to an end. It would seem to be only a matter of time before the bond bubble bursts.

Tuesday, June 5, 2012 - Waiting for Euro-Failure - by Sinclair Noe

DOW + 26 = 12,127

SPX + 7 = 1285
NAS + 18 = 2778
10 YR YLD +.03 = 1.56%

OIL - .23 = 83.75
GOLD – 1.40 = 1617.90
SILV +.27 = 28.63
PLAT + 10.00 = 1444.00

So, the G-7, the Group of 7 countries conferred on the Euro-zone's debt crisis; Spain announced it was losing access to credit markets; the situation appears bad. So, the G-7 finance chiefs came riding to the rescue. And they achieved almost zero.

Spain had a real estate bubble. Spanish banks are loaded down with bad debt. The premium investors demand to hold its 10-year Spanish debt over the German equivalent hit a euro era high last week on concerns it will eventually have to take a Greek-style bailout. Today, Spain's treasury minister said Spanish banks should be recapitalized through European mechanisms, in other words the Spanish banks need a bailout and Spain can't bail them out; this was a significant departure from the previous government line that Spain could raise the money on its own. And then Spanish government sources said ehhh, we're not sure about a bailout. And the G-7 did almost zero.

Observers of the G-7 conference say that there was talk about a bigger solution, a bigger response from the politicians in the form of a stronger economic union; and the talk was that it would probably take a few months to figure it out, maybe a few years; and it doesn't look like there is a quick fix.

The ECB holds its monthly rate-setting meeting on Wednesday and European Union leaders meet on June 28-29 to discuss a strategy for overcoming the crisis.

The G-7 meeting turned out to be the G-Zero meeting.

We have been told for many months that the Federal Reserve and the US Treasury and the European Central Bank and the IMF and all the big shot politicians were on top of the crisis. They now had the experience of the Lehman Brothers collapse and they have assigned multitudes of very smart boys and girls to address the Euro-crisis. No worries, everything is under control. The political and financial leaders continue to insist that solutions will be found to keep the system working. Italy likes the idea of euro-bonds. Germany is hesitant to put its credit rating on the line for such bonds. Spain is trying to act like they don't need help when everyone knows they are getting desperate. And don't forget Greece, which would like to stay in the Euro without being squashed by the Euro. Robert Zoellick, president of the World Bank, recently said the Euro-zone is approaching a “break the glass” moment, when somebody finally pulls the fire alarm.

Here is the problem; when it gets hot you turn on the AC, and if it isn't cooling the house or it's making funny noises, you call the repairman and you hope he can figure out the problem and you hope he won't rip you off. You have to trust the AC repair guy. Well, there are all these very smart boys and girls in the Fed and the ECB and the IMF and other places of power and they have been called in to fix the AC. We can hope they are competent, intelligent, informed, honest, and not working on some hidden agenda. Unfortunately, there is a good chance they are not competent and working at cross purposes, and that the problems in Europe are going to get real hot, real quick.

We know that past performance is no guarantee of future results, however this might be a good time to consider the track record of the smart boys and girls in positions of authority. Where shall we start?

How about the Nobel prize winning economists who created Long Term Capital Management, the speculative hedge fund that imploded and was bailed out in 1998? How about the traders that ran Enron? How about the accountants at Arthur Anderson that vouched for the psycho traders at Enron? Or how about WorldCom or Global Crossing or Chrysler or Government Motors or MF Global or Bernie Madoff? How about the banks that can track a debit card purchase of a cup of coffee half way around the world but can't figure out how to refinance a mortgage or modify a loan? How about all the economists who still haven't figure out that we have been in a depression for the past few years? How about Ben Bernanke, who thought the subprime problem didn't represent a serious threat to the economy and everything was fundamentally sound? How about the efficient response to Hurricane Katrina? How about the smart boys and girls that trusted the levees? How about Detroit? How about the Emergency Financial Managers in Benton Harbor or Flint? How about the lies that put hundreds of thousands of our bravest heroes in harm's way in Iraq? And how about the politicians who were too damn smug to do squat about the debt ceiling even if it meant a whack to the country's credit rating? How about Murdoch hacking into dead teenager's telephone to deliver the news? And how about Bank of America failing to tell the truth about Merrill Lynch? And how about Bear Stearns and IndyMac and Countrywide and Washington Mutual and Northern Rock and a few hundred others? And how about JPMorgan and the London Whale?

And don't forget Lehman Brothers. And don't forget the three page hand scribbled note that stole hundreds of billions from the US treasury; the crisis that threatened to jump up out of nowhere and threatened to destroy the global financial system in its entirety and leave you with malfunctioning credit cards. Who knew?

And then remember that none of those folks that threatened to destroy the economy, none of them has gone to jail – much less been indicted. And the rules haven't been changed to prevent future problems. And nothing has changed except the Too Big to Fail Banks have grown bigger and more dangerous.

And don't forget Greece. The birthplace of democracy which is now run by Vichy ECB technocrats. A new poll by Stern shows half the Germans surveyed want Greece out of the Euro, while 80% of the Greeks want to stay in the Euro. They point fingers at one another and nobody remembers to point the finger at Goldman Sachs which scammed the system years ago and started the ball rolling into a debt death spiral.

And remember about a week ago when the head of the World Bank warned financial markets faced a rerun of the Great Panic of 2008 and that Europe was in the danger zone. And then the rumors started swirling that Pimco, JP Morgan, and other financial companies were canceling summer vacations for employees so they could prepare for a major 'Lehman type' economic crash projected for the coming months. Who knows?

And so today the G-7 met and did G-Zero. I'm shocked, shocked I tell you.