Monday, March 17, 2014 - Empty Chambers and the Tools in the Toolbox

Empty Chambers and the Tools in the Toolbox

by Sinclair Noe

DOW + 181 = 16,247
SPX + 17 = 1858
NAS + 34 = 4279
10 YR YLD + .05 = 2.70%
OIL- .90 = 97.99
GOLD – 14.50 = 1368.50
SILV - .27 = 21.29

Russia held a referendum vote on taking Crimea from Ukraine. Crimean voters approved the takeover with 98% voting in favor; the 2% of voters who opposed the take-over are probably on a slow train to Siberia. Global financial markets ignored the annexation, and they went up in what was described as a “relief rally”.  Stock markets in the US, Europe, and even Russia all moved higher.

The United States and European Union countries imposed a new round of sanctions on 11 Russian and Ukrainian political figures, freezing assets and banning visas for Russians deemed responsible for interfering in Ukrainian sovereignty. The order means that any assets owned by the targeted Russians in the United States will be frozen and Americans will not be allowed to do business with them.

Few Americans are truly concerned about Ukraine, nor should they be. The United States has no real national interests there, and whether Crimea becomes part of Russia is irrelevant to broader US national security issues.

That doesn’t mean we shouldn’t pay attention; annexation of Crimea by Russia, and especially a further push by Moscow into Ukraine, would poison US-Russian relations for many, many years to come, and it will make cooperating with Russia on Syria, Iran and Afghanistan much more complicated. The cause for concern is that ill will between Washington and Moscow and a spiraling down of relations will have a devastating ripple effect on much else in international relations. It will also intensify pressure on the White House to halt the cuts in the Pentagon’s budget that Obama and Secretary of Defense Hagel have already proposed.

In this game of Russian roulette, the trigger was pulled and the chamber was empty. So, the referendum played out as expected; sanctions are in place; it’s an ugly spat, but no bombs are flying; what a relief; the Dow Industrials jump 181. I don’t know if there is any connection, or if the stocks moved higher because they’ve been down for the last 6 sessions.

The Federal Reserve FOMC is meeting this week to determine monetary policy. We will get the FOMC statement on Wednesday and Fed Chairwoman Janet Yellen will hold a press conference. It is widely anticipated the Fed will continue to taper off its bond purchase program by about $10 billion; the Fed is also expected to reiterate its commitment to keeping interest rates low for a long time. The Fed’s current pledge is to hold rates steady until “well past” the point when the unemployment rate falls below 6.5%. The unemployment rate is currently 6.7%, so the Fed might want to rethink that 6.5% unemployment target because we are so close to it. Most likely, the Fed will stay the course, with just minor nuances in their statement giving hints to the direction of the economy.

And that is the important thing to remember: the economy. Everybody is trying to figure out if it has gained some traction. For the past few months we’ve heard the argument that the weather has been hampering the economy; maybe, when the never-ending winter ends the economy will blossom; on the flip side, if the economy really has underlying strength then we shouldn’t have to listen to all these excuses about the weather.  

Whether it feels like it or not, the economy is improving; government is cutting a little less, businesses are hiring a little more, and consumers are spending a little more; not exactly the formula for an economic blastoff, but things are getting better. Even so, much of the American public is still not over the financial downturn. A Pew Research Center January survey found 16% of people rate the national economy as excellent or good while 83% rate it as fair or poor; that is pretty much in range with our opinions on the economy for the past 6 years. And only 39% rated their own personal financial situation as excellent or good. There has clearly been some improvement in the economy in the last 5 years, but our mood remains dark.

Whether you are optimistic or pessimistic depends in part on your partisan politics. Through George W. Bush’s two terms, Democrats were much less likely than others to say the economy was in excellent or good shape. Then, with Obama’s election, the reverse became true. Republicans became less positive and more pessimistic than Democrats. In Pew Research’s February poll, fully 47% of Republicans but only 17% of Democrats said they were hearing mostly bad economic news.

Another factor is your personal income; if your household earns north of $100,000 per year, the chances are you feel pretty good; less than that, not so much. In 2008, 53% of families felt they were in the middle class; that has now dropped to 43%. How can the economy be getting better when so many are families are falling out of the middle class?

Clearly the economic recovery has been uneven. Clearly the stock market is higher than it was 5 years ago, but if you don’t own stocks and if you don’t have a job, the stock market is not an important part of your life. Clearly housing prices have increased but if you lost your house to foreclosure 4 years ago, the housing recovery is working against you. Clearly the unemployment rate has dropped from 10% to 6.7%, and that’s good, but it doesn’t reflect the quality of jobs, the loss of benefits, and the stagnation of wages.

There are plenty of reasons for Americans to feel bad about the economy, but the pessimism started before the Great Recession or small “d” depression. Back in January 2000, 52% of all Americans termed economic conditions as good, and an additional 19% rated the economy as excellent. No more. By the end of 2000, the markets took a hit, and another hit in 2001; in 2006, the housing market bubble started to burst; and then the financial meltdown of 2008. That boom bust cycle has grown tiresome and debilitating.

So, the Federal Reserve is meeting this week and part of their challenge is to avoid booms and busts; part of their challenge is to equalize the recovery, and the simple fact is that their toolbox of quantitative easing and Zero Interest Rate Policy is ill-suited for the job. In the past year, as we’ve watched the Fed think about taper, threaten taper, head fake on taper, and then actually start to taper, we’ve seen some securities prone to large price movements related to the Fed’s maneuvers. Some of the securities that load on Fed risk are somewhat obvious: investment grade corporates and US government bonds are exposed primarily to interest rate and inflation risk, which the Fed can impact directly. Others are not so obvious: emerging market equity funds, consumer staples, and utilities, for example.

What we haven’t seen is the Fed being able to change the jobs picture, which is part of their dual mandate. Former Fed Chair Bernanke tried to take credit for the lower unemployment rate but it is questionable that the Fed’s policy had as much impact on the labor market as it did on the stock and bond markets.

And now we’re starting to hear some Fed policymakers talk about tight labor markets. It's hard to believe that this is even a debate when unemployment is still at 6.7% and inflation is about 1%. The new inflation hawks argue that these headline numbers overstate how much slack is left in the economy; that the labor force is smaller than it sounds, because firms won't even consider hiring the long-term unemployed; that our productive capacity is lower than it sounds, because we haven't invested in new factories for too long. And that wages and prices will start rising as companies pay more for the workers and work that they want. In other words, they think that the financial crisis has made us permanently poorer. That the economy can't grow as fast as it used to, so inflation will pick up sooner than it used to, and we need to get ready to raise rates. Welcome to the new normal.

If tighter labor markets were causing wage inflation, they'd have caused wage inflation, but that hasn't happened. There was a minor uptick in wages in February, but that was almost certainly weather related. The bad weather kept people off the job, and that tends to affect hourly workers more than salaried ones. So higher-paid people probably made up a bigger share of the workforce last month, and voilà, it looked like wages rose. But that was just statistical noise, and if you look at the bigger picture, wage growth is still stagnant and actually a little lower than before the financial meltdown.

Nobody knows how many of the people who stopped looking for work the past five years will start looking again now. Some of them retired, and won't return. But others just went back to school or temporarily gave up looking because things seemed so hopeless—and will come back sooner or later. A strong job market sucks workers back in. Look at the participation rate, and it is clear that isn’t happening.

At some point the Fed will need to look beyond their inflation fears and try to come up with some new tools to fulfill their dual mandate; and if they don’t have the tools in the toolbox, maybe they can shame the politicians into enacting fiscal policy to get people back on the ladder of opportunity. 

Monday, April 29, 2013 - A Busy Week Heading in the Same Direction

A Busy Week Heading in the Same Direction

by Sinclair Noe

DOW + 106 = 14,818
SPX + 11 = 1593
NAS + 27 = 3307
10 YR YLD + .01 = 1.67%
OIL + .58 = 93.58
GOLD + 13.60 = 1477.50
SILV + .55 = 24.69

 The S&P 500 index ended at an all-time high. We have a celebration when the Dow Industrial Average closes at an all time high; no party for the S&P 500. I wish I could give you a valid reason for this but it defies logic. There is no law that says you can't enjoy milk and cookies anyway.

This week offers a packed economic calendar,with ISM manufacturing data Wednesday, and PMI manufacturing reports for the euro zone and China on Thursday. The week ends with Friday's U.S. employment report, expected to show 150,000 new nonfarm payrolls in April; and the backdrop to all the information is last Friday's initial report on first quarter GDP, which came in at 2.5%, short of the consensus forecast of 3%. 

Also, we'll compare and contrast this week's news with last week's reports out of Europe showing economic weakness in Germany as well really bad weakness in the peripheral countires where unemployment is rising from one awful record to another. In Spain, for example, the rate increased to 27.2%, with an even more stunning 57.2% rate among the young. In Greece, the unemployment rate tops 27% and the government is cutting thousands more jobs to qualify for more ECB bailout money.

The European Central Bank will face increasing pressure to cut its interest rate, currently at 0.75%, and to loosen monetary conditions, and to cut back on draconian austerity requirements. Italian Prime Minister Enrico Letta urged a focus on growth policies and away from austerity measures in his inaugural speech. Money market traders are evenly split on whether the ECB will cut rates at its meeting.

The ECB may well disappoint next week, since several influential decision makers oppose a rate cut. Even if the ECB does act, a quarter-point cut will do nothing for growth. And most importantly, such a tiny rate cut, if it happens, will simply underline the ECB’s refusal to follow the Federal Reserve, the Bank of Japan, the Bank of England and the Swiss National Bank in expanding the money supply or taking other “unconventional” measures that could potentially have a much greater financial impact than any marginal fiddling with interest rates. 

The Bank of Japan has already pulled out the big bazookas to loosen monetary policy and to jump into the bond markets. The result has been a roaring bull market in Japan.

In the US, corporate earnings show companies are still able to counter a worrisome revenue situation by cutting costs. Just 38 percent of the 271 S&P 500 companies that had reported through Friday topped revenue estimates, with the aggregate figure actually showing a sales decline of 1.45 percent. Weak corporate top-line growth is likely to spell an equally troubled bottom line for the 11.7 million unemployed. 

 And even as we continue to hit record highs in the stock markets; unfortunately, the broader economy hasn't joined in the party. The vast majority of US households face declining incomes and lower savings rates. This morning, the Commerce Department reported household purchases rose just 0.2%. Ultimately, it is households that provide demand for what companies make and sell. Cost cutting benefits are finite.

Last week, a Pew Research study showed that the top 7% of the population got richer during the past 5 years, while the remaining 93% lost. An Allstate/National Journal Heartland Monitor poll released Thursday found that while most Americans (56 percent) hold out hope that they‘ll be in a higher class at some point, even more Americans (59 percent) are worried about falling out of their current class over the next few years. In fact, more than eight in 10 Americans believe that more people have fallen out of the middle class than moved into it in the past few years.

Even more arresting was the extent to which things that used to be the unquestioned trappings of middle-class life have come to be seen as upper-class luxuries. Nearly half – 46 percent – of the respondents who described themselves as middle class said that being able to pay for children’s college education was possible only for the upper class. Forty-three percent thought that only the upper class had enough savings to deal with a job loss, and 40 percent believed only the upper class could save enough to retire comfortably.

For the land of opportunity, this is a seismic shift. America was created as a country where the middle class could prosper - Thomas Jefferson crowed that America had no paupers and few who were rich enough to live without labor.

This was supposed to be the place where, as Bill Clinton liked to put it, if you worked hard and played by the rules, you could get ahead. And Americans gloried in the fact that the world’s huddled masses regularly demonstrated their belief in the American dream by voting with their feet.

The respondents to the Heartland poll know the world has changed. Nearly two-thirds of those who described themselves as middle class said their generation had less job and financial security than their parents. More than half said they had less opportunity to advance.

The middle class is dying. Chart after chart, story after story, poll after poll, all show that the claim that we are a middle class nation are hollow fiction. People know things are bad, they know they are screwed, and they are coming to the realization that the problem is the giant corporations and their rapacious executives. A majority of people polled, 54%, believe that the actions of corporate CEOs have made things worse for the middle class. 

And so, that is the backdrop as the Federal Reserve FOMC starts two days of meetings tomorrow. Expect the FOMC to signal that the central bank is ready to step up to the plate – no backing down from accommodative monetary policy. In recent meetings the FOMC has indicated that it would like to taper off its $85 billion in monthly purchases of market securities, or at least they would like to know where the exit is located. Of course, the more the Fed looks for exits, the more the market players start eying exits. 

So, the Fed needs to come out and say QE will stick around for a while. This week, look for the Fed to offer reassurances of ongoing support, in large part because Congress is so dysfunctional that the Fed is the only way to support economic activity. And also because inflation is not a problem; the recent measures of inflation were running about 1.2% in the first quarter, well below target and even further from the limits. And last month's jobs report was sluggish at best.

Unfortunately, aggressive monetary policy is probably not enough to lift the economy; not enough for sustainable strong growth; and it can't last forever. At some point, high market valuations will either be validated by improving fundamentals or, if the fundamentals don't improve, they will eventually drag down the high valuations. Right now, valuations are high because the Fed is artificially pumping up the markets; it can't last forever but there is no reason for the Fed to stop the party right now. We hit a record high close on the S&P 500 today. A trend in place is more likely to remain in place than it is to reverse, until it reverses. Downside potential remains real; it could just be a tweet away.

It took only about five minutes for the market to tank and rebound after a group hacked the Associated Press’ Twitter feed to put out bogus information — and now the feds are taking a longer look to find out who got rich during the chaos.

The Securities and Exchange Commission and the Commodity Futures Trading Commission have each opened investigations into the hack that falsely reported “explosions in the White House and Barack Obama is injured” and briefly wiped away $136 billion in market value. Sources in and out of government say investigators will sort through the big financial winners and not just conduct a standard review of a market swing.

In addition to the SEC and the CFTC, the FBI is investigating the attack. Security and financial experts predicted the National Security Agency and the State Department, along with the Department of Homeland Security, would open their own inquiries.

The secretive NSA didn’t confirm any role, saying that Homeland Security “has the lead to secure civilian information and communications systems for the executive branch.”

A group called the Syrian Electronic Army immediately took credit for the attack last week, although terror experts note the Syrians don’t have the most sophisticated cyber-warriors.

One line of particular interest for investigators is that of lightning-fast “cheetah” traders who conduct deals with high-speed computers and who were trading in the market when the attack occurred.

Just a tweet away.

Wednesday, April 24, 2013 - God Bless the Child

God Bless the Child

by Sinclair Noe

DOW – 43 – 14,676
SPX +.01 = 1578
NAS +0.32 = 3269
10 YR YLD un = 1.70%
OIL + 2.43 = 91.61
GOLD + 17.90 = 1432.50
SILV + .22 = 23.26

Them that's got shall get; them that's not shall lose; so the Bible said, and it still is news. The Pew Research Center has analyzed the most recent date from the Census Bureau, and it turns out the rich got richer and the poor got poorer. During the first two years of the nation’s economic recovery, the mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%, while the mean net worth of households in the lower 93% dropped by 4%. From the end of the recession in 2009 through 2011 (the last year for which Census Bureau wealth data are available), the 8 million households in the US with a net worth above $836,033 saw their aggregate wealth rise by an estimated $5.6 trillion, while the 111 million households with a net worth at or below that level saw their aggregate wealth decline by an estimated $0.6 trillion.

Because of these differences, wealth inequality increased during the first two years of the recovery. The upper 7% of households saw their aggregate share of the nation’s overall household wealth pie rise to 63% in 2011, up from 56% in 2009. On an individual household basis, the mean wealth of households in this more affluent group was almost 24 times that of those in the less affluent group in 2011. At the start of the recovery in 2009, that ratio had been less than 18-to-1.

God Bless the child that's got his own.

But it's getting tougher. A new Frontline documentary aired last night and if you didn't see it, it's available online; it's called “The Retirement Gamble”. The basic premise is that even if you try to save for the future, Wall Street is stripping your retirement funds clean with fees and bad performance. The documentary spends a lot of time on a 2012 research paper by Robert Hiltonsmith of the think tank Demos, which found that a median-income, two-earner family will pay a staggering $155,000, all told, in 401(k) fees. That cash represents about 30 percent of the total retirement savings this hypothetical family would have had, if it had paid no fees.

Once upon a time, American workers were far more likely to work for a company that offered a defined-benefit pension plan, the cost of which was covered by the employer. Today, we are instead encouraged to invest in a 401(k) or similar retirement plan, which offer limited investment choices. Most of those choices are "actively managed" funds that try to beat the stock market, but charge higher fees for the privilege. It is often difficult to see what sort of investments these funds have made and the kinds of fees they are charging.

The first draft of first-quarter 2013 GDP is due on Friday, but it should be clearly noted that Friday's number is only an estimate; an initial guess; there will be revisions; the revisions might be substantial. Over the past week or so, there has been a big brouhaha over the revelation that economists Ken Rogoff and Carment Reinhart's research was wrong. They had determined that when a country's debt to GDP level reaches 90%, the result is that economic growth slows – it goes negative. Their research had a Microsoft Excel coding error, and a few problems with assumptions. And so the argument for austerity now has more holes than Swiss cheese. Unfortunately, the austerity theory was enforced and it has backfired, and there are consequences.

But if the idea of debt causing slow or no growth has been discredited, where does that leave us? Is it possible that slow economic growth causes more debt? And is economic growth really a good measure of economic performance? Can an economy be growing and still be lousy? Maybe.

Economic growth measures the increase in the gross domestic product. Economic growth only shows how much more wealth the country has as a whole. We've seen growth in GDP for about 4 years but we've also seen the gap between rich and poor growing wider and wider. Growth is not creating an equitable society; it is creating inequality. If you've ever played the board game Monopoly, you know that when one player gets all the properties and all the hotels and all the money, the game is over.

We've had growth but we haven't seen jobs; well, we've seen some jobs, just not enough. And the jobs that have been created are often in low paying fields. We're not seeing good solid job growth.

So, on Friday, we'll watch the report on GDP, but we'll watch with a skeptical eye.

Remember the sequester? When seven weeks ago the deadline to find a federal budget compromise came and went, there was much handwringing in Washington. In the event that no agreement was found there were to be cuts to public spending so severe and painful that no one would dare fail to agree. To deter Republicans from holding out, half the immediate spending savings of $85.4 billion was to be found from the defense budget, and, to ensure Democrats would work to find a deal, half from annually funded federal programs. Despite these encouragements to fiscal discipline, the March 1 deadline came and went.

We all grew sick of hearing about the sequester. This week the sequester broke surface when it began affecting air travel, causing long delays at airports, which is to be expected when you send 1,500 air traffic controllers home without pay. One in 10 controllers will stay at home on unpaid leave every day until October. With the vacation season looming, crowded airports full of frustrated passengers will become commonplace.

You may not see it but there are other problems with the sequester. Air traffic controllers are not the only federal employees being told to take the week off.

So far, the sequester appears to have pleased no one, except perhaps those fiscal hawks who agree to anything so long as the federal government is shrunk. The cuts are blind, irrational, hastily arranged, uncaring, arbitrary and dangerous. Few doubt that federal expenditure is too high, but even if one is persuaded that cuts need to be made right now – which, as we remain stuck in a stagnant economy, flies in the face of macroeconomic reason – the sequester is the wrong way to make cuts and is already cutting the wrong things. The Congressional Budget Office estimates that the sequester alone will cost 0.6 percent in GDP this year. The cuts are not merely the enemy of good economic management but an automatic depressant upon the nation’s economic health.

A government watchdog warned that regulators need to be more aggressive in reducing exposure among major Wall Street firms if they want to eliminate concerns about "too-big-to-fail" banks. Christy Romero, special inspector general for the $700 billion Troubled Asset Relief Program, said in a report that not enough has been done by government overseers to address the interconnected nature of the largest and most complex financial companies. The ties among major Wall Street firms that posed a challenge at the height of the 2008 financial crisis remain a problem.

The special inspector general's report comes amid a continuing debate over whether Washington has truly eliminated the chance a large financial firm on the verge of collapse would need to be rescued by the government. It's pretty clear that the market is saying too-big-to-fail is still a problem, that these huge Wall Street banks are too complex, too interconnected, too large. Romero suggested regulators use the detailed structural plans they are receiving from the largest banks, known as living wills, to identify and eliminate potential problem areas among major firms. Obama administration officials have stressed that the 2010 Dodd-Frank financial overhaul means no financial firm would again enjoy a government bailout. But not everyone is convinced. While current law prevents bailouts to specific institutions, there could still be a demand to use taxpayer dollars in the face of a future financial crisis.

Last week the International Monetary Fund hosted a conference of some of the world’s top macroeconomists to assess how the most intense crisis to have shaken the industrialized economies since the Great Depression has changed the profession’s collective understanding of how the world economy works. After five years of coping with the consequences of the disaster, there is still so much uncertainty about what policies are needed to prevent another financial shock from tipping the world economy into the abyss again a few years down the road.

In determining what is a sustainable level of government debt, or whether central banks should focus on anything other than inflation, or what should be done to prevent further bubbles from destabilizing economies, we still don't have the answers, even if we have learned that some of the answers we thought might work have been disproved.

If you are one of the nearly five million American workers who have been unemployed for over six months, or one of the six million Spaniards, three million Italians or 1.3 million Greeks without a job or a clear prospect of finding one, this amounts to a tragedy.

Considering that the large and complicated financial institutions that set off the crisis five years ago have only gotten bigger, too big to fail has grown even bigger than ever and if it's too big to jail, it probably its too big to be allowed to fail; and that means that the gap in knowledge is downright scary.

Some things never change. Them that's got shall get; them that's not shall lose; so the Bible said, and it still is news.

Tuesday, September 11, 2012 - I Woke Up Early Today

I Woke Up Early Today

- by Sinclair Noe

DOW + 69 = 13,323
SPX + 4 = 1433
NAS +0.50 = 3104
10 YR YLD +.01 = 1.70%
OIL - .37 = 96.80
GOLD + 7.70 = 1733.50
SILV + .14 = 33.58
PLAT + 12.00 = 1610.00

Rating agency Moody's says it likely would cut its "Aaa" rating on US government debt, probably by one notch, if negotiations on the federal budget fail. The lower rating by Moody's would be the equivalent of the rating that Standard & Poor's put on the US last year when it downgraded the rating following the debate over raising the debt ceiling. Moody's says that if Congress and the White House don't reach a budget deal, $1.2 trillion in spending cuts and tax increases will automatically kick in starting Jan. 2. House Speaker John Boehner says he's not confident that Congress can reach a deal and avoid a downgrade. No serious negotiations are expected until after the November elections.

The Federal Reserve's FOMC policy making meeting commences on Thursday and the central bank is all but certain to extend its plan to keep interest rates low, moving the possible cutoff to 2015 from 2014. Also, it is widely expected the Fed will launch a bond-buying program targeting the mortgage market, QE3, or some new name to describe the same. The guidance on interest rates is supposed to encourage businesses and consumers to invest and spend, stimulating the economy, while the bond purchases are designed to further lower interest rates. The Fed's economic prescription may be part of the problem; might even be counterproductive. The Fed's actions serve as acknowledgment that the economy is weak and requires help. This approach not only may make consumers and businesses fear a long period of economic malaise, but also suggests that the Fed will start to raise rates if the economy shows signs of recovery.

Fed officials are cognizant that their policies may not have sent as clear a signal as they hoped; they are surely aware of the idea their actions will have diminishing returns. So, look for the Fed to announce something like open-ended bond purchases until such time as the economy recovers. Of course, part of the Fed announcement will surely be influenced by Europe.

The ECB's new unlimited bond-buying program hasn't been enacted and it is already producing some results. The yield on Spanish 10-year government bonds fell below 6 percent for the first time since May. The risk premium, or the comparison of Spanish bonds to German bonds; that gap narrowed to 412 basis points, down 141 basis points on the week. On Thursday, the Germans will decide the constitutionality of the Euro-zone bailout schemes. Italy's Mario Monti, in a delusional outburst of irrational exuberance, says the Italians have averted the worst case scenario of the debt crisis. France, meanwhile, looks like its economy is shrinking after nine months of just stagnating. The Germans may not be happy about a euro-wide bailout but it seems like slow motion karma, and if they don't step up now, they'll just have to pay more later.

Here in the US, the rich aren't just getting richer, they're getting very rich. You're getting poorer. Most of you, anyway. The wealth gap between the richest and the typical family more than doubled over the past 50 years. The Economic Policy Institute report finds that the top 1% had 125 times the net worth of the median household as of 1962; but by 2010, the disparity reached 288 times. The median household saw its net worth drop to $57,000 in 2010, down from $73,000 in 1983. It would have been closer to $119,000 had wealth grown equally across households. The top 1%, meanwhile, saw their average wealth grow to $16.4 million, up from $9.6 million in 1983.

Meanwhile, a new survey from the Pew Research Center finds more Americans consider themselves to be part of a growing lower class. The group of people ages 18 to 29 who consider themselves in the lower class ballooned in 2012 to nearly 40% from 25% in 2008. The percentage shrinks with age – only 20% of Americans of retirement age feel the same.

If you are looking for a way to lift yourself from the lower economic rung, if you would like to lift yourself out of the middle class, we have a case study in quick wealth. The secret is to start by getting a job with a giant Swiss bank, like maybe UBS; help rich Americans to set up phony companies to conceal secret Swiss bank accounts; give those clients credit cards to access their hidden cash. Convert the wealthy Americans' money into diamonds, smuggle the diamonds to Switzerland. This, in and of itself, will only earn you a good salary. If you want the big liquidity event, you have to go a step beyond, and blow the whistle and report your US clients to the IRS.

This is the story of Bradley Birkenfield, and today he was awarded $104 million. UBS's tax avoidance program tried to hide more than $20 billion from the US taxman, but the scheme began to unravel in 2007 after Birkenfield spilled the beans on his former clients. UBS paid a $780 billion fine and agreed to disclose the names of 4,450 US clients. Of course, the story had a few twists along the way. Birkenfield was not exactly an angel, and he was charged with conspiracy related to the case; Birkenfield pleaded guilty and went to jail for a couple of years. He got out last month. To the best of my knowledge, no other UBS banking officials went to jail, just the whistleblower.

Pulling yourself out of the middle class is no easy accomplishment, it takes hard work, risk, and in the case of Bradley Birkenfield, it required conviction. And if you are in the upper class; if you are among the wealthiest Americans, and you think it is a clever idea to move some of your money offshore, the case of Bradley Birkenfield offers 104 million reasons why a tax avoidance scheme might not be so clever after all.

I have a correction. Yesterday, I told you about the problems with GoDaddy, the website domain company. Millions of their websites were shut down, to the great consternation of website owners. There was speculation the highly effective, activist hackers known as Anonymous may or may not have claimed credit for the shutdown. This afternoon GoDaddy said it didn't need any outside help to screw up its operations; it had done so by accident all by itself. So what looked like another in a long line of institutions being taken to task by Anonymous turns out to be just normal, run of the mill, day to day, GoDaddy incompetence.

Wednesday, August 22, 2012 - QE Soon, Inequality Grows

QE Soon, Inequality Grows
- by Sinclair Noe

DOW – 30 = 13,172
SPX + 0.32 = 1413
NAS + 6 = 3073
10 YR YLD -.09 = 1.72%
OIL - .28 = 96.40
GOLD + 15.50 = 1655.10
SILV + .50 = 29.93
PLAT + 26.00 = 1541.00

The Federal Reserve released minutes of their most recent Federal Open Market Committee meeting. Here’s the money quote from the FOMC minutes: “Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”

In other words, a majority of the FOMC members think it is time for QE3, unless we see an economic miracle, say hallelujah! So, when will they make an announcement? Well, there is a symposium in Jackson Hole, Wyoming on August 31. There is another FOMC meeting September 12 and 13. The language in today's minutes is not a guarantee of QE3, but if they do not make an announcement of QE3, then the lack of action will be interpreted as highly political and obstructionist. They have now obligated themselves to some sort of accommodation; it might not be called QE3, but a rose by any other name...

The economy is ready for help; GDP is growing at less than 2%; inflation is running less than 2%; unemployment is lingering at 8.3%; Europe could implode and hurt the US economy. So, what will happen when the Fed provides additional monetary accommodation? Kansas City Federal Reserve President Esther George thinks more easing won't work. She asks: “Is there anyone not borrowing today or purchasing a house because interest rates aren’t low enough? Do we expect that businesses will hire if their long-term rates are lower?”  And of course, the answers are no and no. 

That means the Fed had better go big, real big. Extending their zero interest rate policy another year is not enough. Revisiting the tired old bond buying program of QE 1&2 will likely fall flat. Boston Fed President Eric Rosengren thinks the new accommodation should be open-ended, with no specific time frame. How about adding a reduction in interest paid to member banks to park money with the Fed? What other tricks does the Fed have up its sleeve? If they have more tools in the toolbag, why haven't they used them? What are they waiting for? 

We have known and we have told you the Fed would have another round of accommodation; the only question was when. We now know the answer is sooner rather than later. 

There are, of course, limits to the efficacy of monetary policy. The Fed can't rescue Americans from the  fiscal follies of a dysfunctional Congress, hell bent on cliff diving. The Congressional Budget Office issued a fresh warning today on the fiscal cliff. They say the economy will grow at a 2.1% clip in 2012, but fall by 0.5% between the fourth quarter of 2012 and the fourth quarter of 2013 under the fiscal cliff scenario. If Congress can't get its act together, the unemployment rate will rise from 8.3% to 9.1%. Of  course, that is the worst case scenario for the fiscal cliff; that is when the politicians can't find any common ground, all the tax cuts expire and all the automatic spending cuts take effect. It could happen that way. If Congress manages to avoid the fiscal cliff altogether, then the CBO sees the economy growing by 1.7 percent next year and unemployment drifting lower to 8 percent. There is actually a solution that involves some tax increases and some spending cuts and life is beautiful and easy. 

It could happen.

I have a dream.

A new report from the Pew Research Center shows inequality increasing, the middle class shrinking and wealth concentrating at the top. Surprise, surprise.

The study shows that for the roughly 50 percent of adults defined as middle class, with household incomes ranging from $39,000 to $118,000, the past ten years were the "worst decade in modern history," as income dropped for the first time since the end of World War II.

Most middle class Americans say they have been forced to reduce spending in the past year; fewer now believe that hard work will allow them to get ahead in life. Families are now more likely to say their children's economic future will be the same or worse than their own. In all, 85 percent of middle class Americans say it is more difficult now than a decade ago to maintain their standard of living. 

In 1970, the share of income that went to the middle class was 62 percent, while wealthier Americans received 29 percent. But by 2010, the middle class earned just 45 percent of the nation's income, tying a low first reached in 2006, compared to 46 percent for upper-income Americans. 

Since 2000, the median income for America's middle class has fallen from $72,956 to $69,487.Median net worth for the middle class fell 28 percent over the last decade, from $129,000 in 2001 to $93,000, wiping out two decades of gains. Among upper-income families, net worth edged higher from $569,000 to $574,000. Lower-income families saw net worth fall 45 percent to $10,000. 

Roughly 42 percent of middle-class adults say their household's financial situation is worse now than before the recession began, compared to 32 percent who reported they are now better off and 23 percent who said their finances are unchanged. Of those who said they were worse off now, about 51 percent said it will take at least five years to recover, including 8 percent who said they will never recover.

Who's to blame?  By a wide margin, 62 percent say the blame lies with Congress. About 54 percent blame  banks and financial institutions, while 47 percent say large corporations, 44 percent point to the Bush administration, 39 percent cite foreign competition, and 34 percent find fault with the Obama administration. About 8 percent say the middle class itself deserves a lot of the blame.

One area where the middle class was hammered in the past few years was real estate; the dream of home ownership turned into an underwater nightmare. The National Association of Realtors reported today that July sales of existing homes increased to an annual rate of 4.47 million. They say the housing market is constrained by unnecessarily tight lending standards and shrinking inventory supplies. So, it is stabilizing but not close to normal. 

Public pension funds from Arkansas, Ohio, Oregon and Sweden will be lead plaintiffs in a group lawsuit against JPMorgan Chase over trades made by Bruno Iksil, also known as the London Whale. A district judge in New york ruled the lawsuits could be consolidated into a class action. The lead plaintiffs are the Arkansas Teacher Retirement System, Ohio Public Employee Retirement System, School Employees Retirement System of Ohio, State Teachers Retirement System of Ohio, Oregon Public Employee Retirement Fund and a Swedish pension fund. The pension funds allege they lost as much as $52 million because of fraudulent activities by JPMorgan’s London chief investment office, and that they were given false information that hid the nature of the bank's trades.