Wednesday, March 05, 2014 - Not Much Change

Not Much Change

by Sinclair Noe

DOW – 35 = 16,360
SPX – 0.1 = 1873
NAS + 6 = 4357
10 YR YLD + .01 = 2.70%
OIL – 2.40 = 100.93
GOLD + 2.40 = 1337.80
SILV + .02 = 21.26

ADP, a payroll processing company, reports its own monthly jobs estimate each month, just before the government comes out with its monthly jobs report. Today, ADP said the economy added 139,000 new jobs in February; they revised the January number down to 127,000 from the previously reported 175,000. When the Labor Department reports on jobs Friday morning the best guess is about 150,000 jobs and the unemployment rate holding at 6.6%. So, the ADP report is reasonably close.

Separately, initial jobless claims for the past week did not point to any improvement in the labor market with initial claims up 14,000 in the February 22 week to a 348,000 level.

In other news, the Institute for Supply Management’s non-manufacturing index slipped to 53.5 in February from 54 the previous month.

This afternoon the Federal Reserve published its Beige Book, which is a compilation of reports and observations from the 12 Fed districts. Growth slowed in Chicago and activity was stable in Kansas City. While the other eight districts reported growth, the Fed said it was characterized as "modest to moderate" in most cases, an overall downgrade from its last report on January 15, which showed "moderate" growth in nine regions. Business contacts were still upbeat, and real estate activity picked up in some areas, and travel and tourism remained strong. Retail sales growth softened in most districts, partly due to weather. Factory output and sales were affected in regions including Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, and Dallas, where the weather was blamed for utility outages, disrupted supply chains and a slowdown in hiring.

So, the latest Beige Book still reflects weather disruptions. If you were waiting for clean data, this wasn’t it. We might not get clean data from the Friday jobs report. We may need to rethink our idea of data clean from weather disruptions because it seems we are experiencing bad weather with regularity, whether it be the polar vortex or ice storms or drought or hurricanes or tornadoes. If it’s not one thing it’s another.

The big brouhaha in Ukraine seems to be a bit calmer today. The European Union is ready to provide $15 billion of financial support to Ukraine over the next couple of years by way of a series of loans and grants. The assistance would be delivered in coordination with the European Bank for Reconstruction and Development and the European Investment Bank, and is in part contingent on Ukraine signing a deal with the International Monetary Fund. Yesterday, Secretary of State John Kerry visited Kiev to offer moral support and a $1 billion aid package to a Ukraine fighting to fend off bankruptcy. Money soothes the savage beast. And so, there is no fighting today; that’s good.

In time we will probably find out more and more details about who and how this Ukrainian revolution came to be and why; and the best guess is that it was not quite an organic uprising of the masses; and it was probably not a coincidence that a nostalgic stroll along old Cold War paths coincided with Defense Secretary Chuck Hagel’s proposal to cut back Pentagon spending. This is not to say there are no problems in the Ukraine, there are. Internal divisions in Ukraine are real and enduring. Russian aggression in Ukraine is bad, and there really is no justification for this kind of military intervention. US credibility and security is not at stake and there really isn’t anything we can do anyway, short of a full-fledged return to the Cold War. Some people may want that but I don’t much care for the notion.

It’s a good story to imagine the downtrodden Ukrainian everyman fighting for freedom from the Russian overlords, but there’s a better chance that the real story will be told by following the money trail.

In 1998, Washington state voters raised the state’s minimum wage and linked it to the cost of living. Over the past 15 years, the minimum wage in Washington has climbed to $9.32 an hour, the highest in the country. Payrolls at Washington's restaurants and bars, portrayed as particularly vulnerable to higher wage costs, expanded by 21%. Poverty has trailed the US level for at least 7 years.

According to a Congressional Budget Office report published February 18, increasing the minimum wage would lift 900,000 people out of poverty and add $31 billion to the earnings of low-wage Americans, but it might reduce employment by up to a million jobs; actually that last point is an area where the CBO report was fuzzy, saying it might cost up to a million jobs or it might not reduce  employment; as a result, most people split the difference and say it will reduce employment by 500,000, but that’s not what the report says, and it’s  not what the data from Washington state says.

One possible explanation is that businesses have plenty of ways besides job cuts to absorb the costs of a minimum-wage increase: price increases, reductions in profits and savings from lower turnover can help soak up the shock.

As of January, 21 states and the District of Columbia had a higher minimum wage than the federal floor. Cities including San Francisco and Santa Fe, New Mexico, require even higher hourly earnings than the proposed federal level, at $10.74 and $10.66 respectively.

New Jersey voters in November approved increasing the minimum wage by $1 an hour to $8.25, tying future increases to the consumer price index. In January, after the raise took effect, private employers added 8,320 jobs in New Jersey, according to ADP Research Institute. That was the fastest pace of job growth since December 2012.

Today, the Center for American Progress issued a report showing that raising the minimum wage from $7.25 to $10.10 an hour would reduce federal food stamp spending by $4.6 billion a year. Last year, a report done by researchers at Berkeley and the University of Illinois asserted that taxpayers are spending nearly $7 billion a year to supplement the wages of fast-food workers, many of whom earn the minimum wage or close to it.

Now, let’s get caught up on banks behaving badly. The latest news on this front regards Citigroup which disclosed on Friday that it had been defrauded of $400 million in a scheme involving a financially shaky oil services company in Mexico. And while that was going on, a Citigroup affiliate based in Los Angeles received a grand jury subpoena from federal prosecutors in Massachusetts related to anti-money-laundering compliance. The focus of the subpoenas is unclear.

The affiliate has also received a subpoena from the Federal Deposit Insurance Corporation related to its anti-money-laundering program and the Bank Secrecy Act. The affiliate, Banamex USA, provides banking services to individuals and small businesses in the United States and Mexico. Until recently, it was a large player in transferring money across the border between family members.

Apparently the two issues, one involving fraud and the other involving money-laundering compliance, are unrelated.

In 2006, the bank’s computer systems got fouled up and certain business units failed to process Citi’s foreign transactions to ensure compliance with anti-money laundering regulations for about 4 years until the computer error was fixed. In 2012, Banamex USA entered into a consent order with the FDIC and California Department of Financial Institutions to improve its oversight and tracking systems. In 2013, Citigroup entered into another consent order with the Federal Reserve and agreed to take companywide actions also intended to bolster its compliance efforts. Now we have subpoenas in the case.

Meanwhile, the New York Times is reporting that the Treasury Inspector General believed that JP Morgan had used attorneys to “investigate” its conduct in dealing with Bernie Madoff with the intent of impeding regulatory scrutiny and allowing staff to get away with perjury. In this case it goes back to the idea of what JP Morgan knew about Madoff’s Ponzi scheme and when did they know it.

We know that JPMorgan was Madoff’s banker. JPMorgan hired lawyers to investigate, or maybe they hired outside law firms as a way to put a shield around the questionable activity, to impede regulators from getting to the bottom of criminal or merely potentially costly conduct. This raises the question of attorney client privilege.

Federal regulators at the Office of the Comptroller of the Currency sought copies of the lawyers’ interview notes, hoping they would open a window into the bank’s actions. The issue gained urgency in 2012, when the comptroller’s office conducted its own interviews with JPMorgan employees and discovered a “pattern of forgetfulness.”

Suspicious that the memory lapses were feigned, the regulators renewed their request for the interview notes held by JPMorgan’s lawyers. But JPMorgan, which produced other materials and made witnesses available to the comptroller’s office, declined to share those notes. In its denial, the bank cited confidentiality requirements like the attorney-client privilege. The inspector general argued that the lawyers’ interviews were essentially “made for the purpose of getting advice for the commission of a fraud or crime.” The reporters also stress that the use of attorneys as an information shield for banks is already troublingly widespread.

But the Department of Justice will not pursue subpoenas of the potential perjury or potential obstruction of justice, because, according to a DOJ letter the action would “risk developing negative precedent that could result in harm to the long-term institutional interests of the United States.”

Just in case you were wondering, too big to fail and too big to jail is still the law of the land. 

Tuesday, February 05, 2013 - Cutting to Spite Ourselves

Cutting to Spite Ourselves

by Sinclair Noe

DOW + 99 = 13,979
SPX + 15 = 1511
NAS + 40 = 3171
10 YR YLD +.04 = 2.02%
OIL + .47 = 96.64
GOLD – 1.40 = 1674.00
SILV +.06 = 31.92

The Congressional Budget Office released revised budget projections that show the federal deficit will drop to $845 billion this year, the first time during Obama's presidency that the red ink would fall below $1 trillion. The budget office also said the economy will grow slowly in 2013. The reason for the slowdown is a tax increase in January and spending cuts coming in the next couple of months.

A few minutes after the CBO report, President Obama spoke to the press and said those spending cuts would damage the economy and must be avoided. He asked Congress for a short-term deficit reduction package that will delay deeper cuts past the automatic start date of March 1, also known as the sequester.

The automatic cuts are part of a 10-year, $1 trillion deficit reduction plan that was supposed to spur Congress and the administration to act on long-term fiscal policies that would stabilize the nation's debt. Though Congress and the White House have agreed on about $2.6 trillion in cuts and higher taxes since the beginning of 2011, they have been unable to close the deal on their ultimate goal of reducing deficits by about $4 trillion over a decade.

If the automatic cuts are allowed to kick in, they would reduce Pentagon spending by 7.9 percent and domestic programs by 5.3 percent. Food stamps and Medicaid would be exempt, but Medicare could take up to a 2 percent reduction, under the plan.

White House aides say the president's plan for long-term deficit reduction would increase tax revenue by about $600 billion to $700 billion over 10 years as well as reduce mandatory health care spending, primarily in Medicare, by about $400 billion over the next decade. It would also change an inflation formula that would reduce cost-of-living adjustments for beneficiaries of government programs, including Social Security. Republicans have called for a more comprehensive overhaul of government entitlement programs.

For now, the President is asking for a short-term deficit reduction package of spending cuts and tax revenue that will delay the sequester, and give Congress time to chip away at the problem.

Part of what we should have learned is that austerity is not the answer. Europe has shown that. When economists talk about the role of government in economic recovery, they often focus on the question of whether or not we need more economic stimulus. Government participation in the economy does not just stimulate private sector activity.  Government is itself a large, diverse and important sphere of economic enterprise.  Our federal, state and local governments produce and deliver important goods and service, things that people want and need, and that they have asked their representatives to create and maintain.   And governments employ millions of people in income-earning positions to carry out all of this production.  Ordinarily, we would expect that as a society grows, government will grow commensurately along with everything else.  As our population grows and private enterprises proliferate, we need more schools and teachers, more courthouses and police stations, more public parks, more inspectors and regulators, more paved roads and street lights, and more government clerical workers.  So while it is true that government spending also stimulates additional economic activity in the private sector – just as any economic enterprise stimulates economic activity in the other enterprises it touches and affects – it is also true that the public enterprises governments oversee and the tasks governments perform are all by themselves an important component of overall economic activity.

The part of government spending that is devoted to purchases made in the production of goods and services is called “consumption and gross investment” , or CGI, and it amounts to about 15% to 20% of GDP.  Government consumption and gross investment (CGI) can be contrasted with other forms of government spending that do not contribute to GDP, such as transfer payments to the public under social insurance programs like Social Security and unemployment insurance programs.

CGI started to dry up after the stimulus package started to wear off in 2011, and public enterprise also started to decline. Paul Krugman asked: “How big a deal is this? Government consumption and investment is about $3 trillion; if it had grown as fast this time as it did in the Bush years, it would be 12 percent, or $360 billion, higher. Given a multiplier of more than one, which is what the IMF among others now thinks reasonable under current conditions, that ends up meaning GDP something like $450 billion higher, which is 3 percent — and an unemployment rate 1.5 points lower. So fiscal austerity is the difference between where we are now and an unemployment rate not much above 6 percent.”

For the past couple of years we've heard bipartisan talk about grand bargains, fiscal cliffs, sequestration, and debt ceilings, with different strategies granted, but with a common theme to shrink government.

 Obama actually told us government must shrink because we are “out of money”.  But notice how absurd it would be if the leaders of private sector industry were to say that the private sector economy has to shrink because it is out of money.  Everybody recognizes that if our economy is to grow and progress, private enterprise needs to spend and invest, and that the means of financing are created along with the initiatives that are financed.   In the case of government, the financial constraint is even less relevant, I mean they print the currency, so there are no real constraints due to a lack of money.

Yesterday I told you to look for a lawsuit against S&P. As expected, the government is seeking more than $5 billion in a civil lawsuit against Standard & Poor's and parent company McGraw-Hill over mortgage-bond ratings, marking the first federal enforcement action against a credit rating agency over alleged illegal behavior tied to the recent financial crisis. S&P reportedly had a chance to settle for about $1 billion, but they felt the price was too high. Attorney General Eric Holder said at a news conference that S&P misled investors, causing them to lose billions, and that its ratings were affected by "significant conflicts of interests." He said that while analysts raised red flags as early as 2003, S&P executives ignored questions about ratings.

In the filing Monday, the government said: "Considerations regarding fees, market share, profits, and relationships with issuers improperly influenced S&P's rating criteria and models." In other words, they sold their ratings to the highest bidder and didn't give a damn about honesty. So, the question is why did it take so long to bring civil charges against the ratings agency?

Well, the lawyer defending S&P says the government intensified its investigation after S&P downgraded the government's credit rating in 2011, following the debt ceiling dysfunction. I'll give the lawyer credit for misdirection, if nothing else. S&P will likely use the same defense the industry has been using for years to explain the seemingly misguided ratings -- their right to free speech. S&P and other credit rating agencies have claimed that their ratings were merely free speech and are therefore protected under the First Amendment. 

There is a paper trail of damaging emails. You've heard about this before. And when those emails are read aloud in court, the best hope will be to make jurors think that maybe it's just a government vendetta. But listen to some of the emails:

In an April 2007 email, an analyst quoted in the lawsuit told an investment banking client that the priorities inside S&P were not centered on providing accurate ratings, but rather were focused on not “p*ssing off too many clients and jumping the gun ahead of [competitors] Fitch and Moody’s.”

The banker emailed back: “I mean come on we pay you to rate our deals, and the better the rating the more money we make?!?! What’s up with that? How are you possibly supposed to be impartial????”

Another S&P analyst wrote: "We rate every deal … it could be structured by cows and we would rate it.”

The email complaints about the integrity of the ratings were so numerous that S&P management directed analysts to stop sending complaints via email. But the emails continued. They wrote about allowing bankers to have greater input into the ratings process; let the bankers help make the grades for the products they were selling; and all designed to increase revenue for S&P. One email that seems particularly damaging came from a director in charge of rating CDOs in late 2006. He wrote: “this market is a wildly spinning top which is going to end badly.”

The paper trail is long and extremely damaging. So, what does it take to come up with criminal charges against a large financial institution? Seriously, what does it take to get a criminal charge started?

Today, Barclays, the British bank, announced it is provisioning another $1.3 billion in its Q4 results to settle claims it mis-sold financial products, bringing total provisions to about $3.5 billion. And UBS, the Swiss banking giant, announced a a $2.1 billion dollar fourth quarter loss, with $1.5 billion of that coming from fines for manipulating Libor interest rates. The Libor rate affects the prices of hundreds of trillions of dollars of financial products; everything from credit cards to mortgages to municipal bonds. Basically, the price of everything in the world the price is somehow connected to Libor. And these guys were monkeying around with this for individual profit. But nothing illegal happened.

And finally, Dell Computer will be taken private by founder Michael Dell and Silver Lake Partners in a $24.4 billion dollar deal. It works out to about $13.60 per share, roughly one-quarter Dell's all-time high 12 years ago. Still, it's the biggest buy out in years.