Friday, June 13th, 2014 - Infallible Source Predicts Economic Collapse!

Infallible Source Predicts Economic Collapse!
by Sinclair Noe

DOW + 41 = 16,775
SPX + 6 = 1936
NAS + 13 = 4310
10 YRYLD + .02 = 2.60%
OIL + .38 = 106.91
GOLD + 2.80 = 1276.90
SILV + .15 = 19.77

For the week, the Dow was down 0.9%, the S&P fell 0.7 percent and the Nasdaq was down 0.25%. The week's decline was the first after three weeks of consecutive gains on the S&P 500. For the year, the broad market index is up about 4.8%. So, it was a rough week, but a good Friday the 13^th.

The Producer Price Index measures prices at the wholesale level; the PPI was down 0.2% in May. The decline was driven lower by cheaper food and gas, and follows two months of strong gains. In the past 12 months, producer prices have risen 2%, matching the Federal Reserve's inflation target. That's down from an annual gain of 2.1% in April. Excluding the volatile food, energy and profit margin categories, (for all you people who don’t eat food or drive in cars) core producer prices were unchanged in May. Inflation, as measured by the consumer price index, has been mostly below 2% for the past two years.

Of course, that might change, at least for people who eat and drive cars. The price of oil has jumped the past few days, now standing at $106.91 a barrel, mainly on fears of a civil war in Iraq. The International Energy Agency played down fears over the possible loss of oil exports from Iraq in its monthly Oil Market Report, writing: "Concerning as the latest events in Iraq may be, they might not for now, if the conflict does not spread further, put additional Iraqi oil supplies immediately at risk." Oil futures in New York rose 4.1% this week.

A very nasty group of rebels known as ISIS is closing in on Baghdad. ISIS stands for the Islamic State of Iraq and Syria, or the Islamic State of Iraq and Levant, and they are made of Sunnis. The government of Iraq is controlled by Shi’ites. ISIS has taken over the second largest city of Mosul; they have surrounded the largest oil refinery in the country, and they are moving to the capitol of Baghdad. So far, the Iraqi soldiers have been running away, but today a message from the Grand Ayatollah Ali al-Sistani, who is the highest religious authority for Shi'ites in Iraq, said people should unite to fight back.

In an interesting twist, before ISIS started ramping up the fight in Iraq, they were fighting in Syria, against the government of Bashar al Assad.

President Obama told reporters at the White House he would not send US troops back into combat in Iraq but had asked his national security team to prepare "a range of other options" to help Iraqi security forces. He specifically did not rule out the use of military action, which might include the possibility of air attacks to slow the rebel advance.

Pope Francis says the global economic system is near collapse. In an interview with la Vanguardia, the Pope said he was especially concerned about youth unemployment, and he denounced the influence of war and the military on the global economy, saying: “We discard a whole generation to maintain an economic system that no longer endures, a system that to survive has to make war, as the big empires have always done. Since we cannot wage the Third World War, we make regional wars. And what does that mean? That we make and sell arms. And with that the balance sheets of the idolatrous economies -- the big world economies that sacrifice man at the feet of the idol of money -- are obviously cleaned up."

The pope said there was enough food to feed all the world's hungry, and people’s needs should be at the heart of the economic system.

Following the elections in the European Union, France issued a report on debt, which contained several key findings, including the idea that the rise in the state’s debt in the past decades cannot be explained by an increase in public spending. The report also says that no one actually knows who holds the French debt. And the big conclusion of the report is that some 60% of the French public debt is illegitimate. An illegitimate debt is one that grew in the service of private interests, and not the wellbeing of the people. Therefore the French people have a right to demand a moratorium on the payment of the debt, and the cancellation of at least part of it.

Goldman Sachs and Bain Capital have agreed to pay a combined $121 million to settle a lawsuit that accused them and other firms of colluding to drive down the prices of takeovers before the financial crisis, according to a court filing on Wednesday. The deal, if approved by the court, would bring closure for Goldman and Bain of a seven-year-old lawsuit filed by former shareholders of the acquired companies, who claimed that private equity firms teaming up to do deals were partners in an illegal conspiracy to reduce competition.

The settlement deal also raises the stakes for the remaining defendants, which include some of private equity’s biggest firms. The Blackstone Group, Kohlberg Kravis Roberts, TPG Capital, Silver Lake and the Carlyle Group are scheduled to head to trial in November. Now the $121 million dollar settlement is fairly small, but now that Goldman and Bains have broken ranks with the other defendants, the lawyers for the plaintiffs may gain additional bargaining power. The plaintiffs are seeking billions of dollars in damages, but because of the mechanics of antitrust law, the defendants could be liable for a multiple of that amount if they lose at trial.

The Justice Department has asked Citigroup for more than $10 billion to settle a probe into the bank’s sale of mortgage-backed bonds before the 2008 financial crisis. Prosecutors broke off talks with Citigroup earlier this week and are preparing to sue the bank after it offered less than $4 billion ($1 billion cash and the rest in consumer relief) to resolve the matter. The Justice Department could file a lawsuit as early as next week.

The department is taking a similar approach with Bank of America. Prosecutors also halted talks with the bank June 9 after it offered to pay more than $12 billion, short of the department’s $17 billion request. And then there is the outstanding case against BNP Paribas, where prosecutors are believed to be calling for more than $10 billion in fines for money laundering and sanctions violations. And this all follows on the heels of the Credit Suisse $2.6 billion fine and criminal guilty plea in a tax evasion case. No word whether prosecutors are looking at criminal charges against BofA or Citigroup. What we are seeing is that the fines are getting larger, but somehow with billions of dollars of penalties and multiple billions of dollars of wrongdoing, nobody ever goes to jail.

If you wonder why the prisons aren't filled with banksters, just follow the money from Wall Street to Capitol Hill. Earlier this week we saw one of Wall Street's favorite politicians of the decade, Eric Cantor, destroyed by a random teabagger who railed against him endlessly for pushing through Bush's TARP bailout of the big banks. Just this cycle, the financial sector had contributed $1,396,450 to Cantor's campaign coffers. And Cantor was just one of the politicians getting their wallets fluffed by Wall Street, a quick list of Wall Street favorites includes John Boehner, Spencer Bachus, Jeb Hensarling, and Democrats including Charlie Rangel, and Heny Stoyer. We have finally found one thing in Washington that is bipartisan – bribery, or should I say campaign finance…no, it’s bribery.

Elon Musk has announced that Tesla will let other companies use its inventions under an open-source-inspired agenda at the company. Here’s how Musk put it in a blog post:”Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology.”

Tesla has hundreds of approved patents, and many pending applications, for all manner of inventions tied to electric-vehicle technology. Tesla pioneered innovations that lowered the cost and increased the safety of battery packs. Its cars recharge much faster than others on the market, thanks to connector, software, and power-management advances. Now this public company will offer these smarts up to its rivals and ask nothing but goodwill in return.

And while it sounds like a radical idea, it might be a very smart business move. One thing that is required for electric cars is charging stations, as ubiquitous as gas stations. And even though Tesla has patents on battery technology, and they have some of the best batteries around with longer range and faster recharging, they still need to improve the technology. And Musk apparently isn’t concerned with the competition, saying: “You want to be innovating so fast that you invalidate your prior patents, in terms of what really matters. It’s the velocity of innovation that matters.”

Here’s an amazing statistic, compliments of a Tweet from Bill Gates. From 1901 to 2000, the United States built millions of miles of roads and interstate highways, plus Hoover Dam, plus many other damns, plus an incredible number of building; and during that 100 year period, we used 4.5 gigatons of concrete. In the past 3 ½ years, China has been on a building boom that has consumed 6.6 gigatons of concrete.

Thursday, March 13, 2014 - White Smoke

White Smoke
by Sinclair Noe

DOW – 231 = 16,108
SPX – 21 = 1846
NAS – 62 = 4260
10 YR YLD - .07 = 2.65%
OIL + .25 = 98.24
GOLD + 3.90 = 1372.10
SILV - .15 = 21.28

Let’s start with some economic news, and then we’ll get to today’s anniversary (yes, we have another one to talk about).

The federal budget deficit narrowed in February, shrinking 5% from a year earlier as receipts jumped and spending only modestly rose. The shortfall was $194 billion for February, versus the $204 billion recorded in the same month a year ago. The deficit has been steadily improving in the past several years, dropping to $680 billion in fiscal 2013.

Retail sales increased 0.3% from January to February; December to January sales were revised lower by 0.4%; sales were up 1.5% from February a year ago. Retail sales excluding gasoline increased by 2.2% on a year to year basis.

Initial claims for unemployment benefits for the week ending March 8, decreased by 9,000 to 315,000.

Since federal unemployment insurance expired on Dec. 28, an estimated two million Americans have missed out on the benefits. Today, a bipartisan group of Senators reached a deal to extend federal long-term unemployment insurance for 5 months. The deal would be distributed retroactively to when benefits ended in December. The cost of about $10 billion would be offset by some tricky accounting known as “pension smoothing”. The bill still needs to clear a Senate vote, probably in late March; then it would go to the House of Representatives, where it would likely face a quick demise.

Earlier today President Obama signed a memo directing the Labor Department to rework the rules regarding overtime. The reforms are expected to raise the salary threshold that currently allows employers to exclude workers from overtime pay under the Fair Labor Standards Act. It hasn't been raised in more than a decade. The threshold was last raised in 2004 to $455 per week under Bush, less than half of what it was almost 40 years ago on an inflation-adjusted basis. Obama said businesses are classifying all kinds of employees as professional or administrative, including some who make as little as $23,660 a year, thereby exempting them from overtime requirements under current law.

The situation in Ukraine is still a mess. Russia is conducting military exercises near its border with Ukraine. German Chancellor Angela Merkel warns of a “catastrophe” unless Russia changes course. US Secretary of State John Kerry said serious steps would be imposed Monday by the US and Europe if a referendum on Crimea joining Russia takes place on Sunday as planned. The referendum will probably happen. The serious steps refers to trade sanctions, bans on visas, a freeze on assets.

The EU has offered Ukraine 11 billion euros in aid, except it isn’t really aid, it is actually loans; it includes acceptance of an IMF austerity plan. Remember how the IMF helped Greece turn a recession into a full blown depression? One thing the past few years have done is provide a proving ground for austerity, and the results appear conclusive; budget tightening results in economic contraction or at a minimum, stagnant growth. So, it appears the only yields from Putin’s intervention in Crimea will be much pointless suffering among Ukrainians and life for years to come in the smothering embrace of a Russian bear or the smothering belt-tightening of the IMF.

The escalating situation would hurt an already stagnating Russia, where the Russian stock market hit a 4 year low, down about 20% year to date. The EuroZone can probably survive if Russia turns off supplies of natural gas, because we are now moving into spring. Within the EU, Germany tends to trade with Russia more than other countries. German exporters would take a hit; the German economy has been the strongest in the EU and if it catches cold, the rest of the EU catches pneumonia. And then the Euro banks get involved. Russia has more than $700 billion in foreign debt, and just a small bit of that is sovereign debt, most of it is private debt owed by banks and corporations, largely controlled or owned by the Kremlin. Euro banks have lined their vaults with potentially toxic Russian debt.

The thing about debt is that it comes due; when that happens, the options are to pay it off, roll it over or default. If sanctions are imposed and in place for any length of time, default will be the likely result. At this point it is becoming clear that the best possible scenario is one where bombs are not flying.

Don’t worry about the US banks, they only have about $24 billion in Russian debt; just a drop in the bucket. The New York State comptroller yesterday released estimates that Wall Street pulled in $26.7 billion in cash bonuses last year; up 15% for a year earlier; it works out to $164,530 per person when split up among the industry’s 165,200 employees in New York. Of course that’s not how it’s split up; some get more, some get less.

To put it in perspective, the Institute for Policy Studies figures that Wall Street’s bonus cash is nearly double what the country’s 1.085 million full-time minimum wage workers earned all of last year, which works out to $15.1 billion. Here’s the bad news; they also looked at the multiplier effect of that $26 billion pile of bonus money. The Wall Street crowd is more likely to hold onto their bonuses, and so bonuses impact the economy to the tune of $10.4 billion, whereas minimum wage workers spend almost all of their money, impacting the economy to the tune of $32.3 billion.

And that brings us to today’s anniversary. This week we’ve noted the 5 year anniversary of the current bull market, the bear market of 2000, the 25^th anniversary of the WorldWideWeb, and the 3 year anniversary of Fukushima. One year ago, Jorge Bergoglio of Argentia was elected as Pope. In recognition of St. Francis of Assisi he adopted the title of Pope Francis, and like his namesake he has focused his attention on caring for the poor and marginalized.

Pope Francis moved quickly to offset the influence of the Curia by appointing a standing advisory council made up of eight Cardinals from around the world, a move that also signaled his interest in a more decentralized governance within the church. Pope Francis created the position of the Secretariat of the Economy to oversee the finances and administrative functions of the Holy See and appointed Australian Cardinal George Pell to head the Secretariat. The move weakens the power of the Vatican Secretary of State. The change is one more step in Pope Francis' campaign to transform the Curia with a special focus on the scandal plagued Vatican Bank.

The new Pope elevated 19 Catholic leaders to the level of cardinals, including 5 from Latin America, and one from Haiti and one from Burkina Faso, a couple of the poorest countries in the world.

Two weeks after he was elected, Pope Francis left the walls of the Vatican to visit a juvenile detention center where he washed and kissed the feet of 12 prisoners incarcerated in Rome as part of the traditional Holy Thursday rite. Last summer, the Pope went to Brazil where he conducted a mass before about 3 million people on the beaches of Copacabana; he also visited hospitals, prisons, and a favela, earning the nickname the “Slum Pope”.

On the plane back from Brazil, the Pope told a group of reporters, "Who am I to judge a gay person of goodwill who seeks the Lord?" and opened up a new conversation about gay rights within the Catholic Church. Since that first quote, Francis has continued to make statements on gays that amount to a shift in tone for the Vatican if not a change in doctrine.

Recently the Pope has encountered criticism for defending the church on the issue of sexual abuse. Pope Francis appointed a commission on sex abuse led by Cardinal Sean O'Malley, the archbishop of Boston, but as of yet has not met with any abuse victims. This is an issue that remains a stain on the church and will need to be addressed, but it was not the only controversial issue.

In November, Pope Francis published an apostolic exhortation titled “Joy of the Gospel” offering a platform for a good and faithful life. The papal pronouncement also condemned the “new tyranny” of unrestrained capitalism, causing income inequality and poverty, and calling on leaders to curb “the absolute autonomy of the marketplace and financial speculation,” to reject the “new idolatry of money”, and act “for the common good.” 

He noted that “the earnings of a minority are growing exponentially, so too is the gap separating the majority from the prosperity enjoyed by those happy few.”  He called for “more politicians who are genuinely disturbed by the state of society, the people, the lives of the poor,” and for the commitment of political and financial leaders to “ensure that all citizens have dignified work, education and healthcare.”

Francis warned that our economic systems will “devour everything which stands in the way of increased profits, whatever is fragile, like the environment, is defenseless before the interests of a deified market.”

Francis broadened the definition of the commandment “thou shalt not kill,” by saying, “today we also have to say ‘thou shalt not’ to an economy of exclusion and inequality. Such an economy kills.” In striking terms he asked “How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses 2 points?”  He repeated his warning that “Money must serve, not rule.”

Tuesday, January 21, 2014 - Real Risks

Real Risks

by Sinclair Noe

DOW – 44= 16,414
SPX + 5 = 1843
NAS + 28 = 4225
10 YR YLD unch = 2.82%
OIL + .67 = 95.26
GOLD – 13.00 = 1242.70
SILV - .41 = 20.01

Wall Street’s attention this week will mainly focus on earnings reports given the dearth of economic data. There are only a few important economic reports this week, all of which will be released on Thursday. Thursday’s reports include the November FHFA housing price index (expected +0.3% m/m), December existing home sales (expected +1.0%), and December leading indicators (expected +0.2%). The Treasury on Thursday will sell $15 billion of 10-year TIPS. The markets will be looking to next week’s FOMC meeting where the consensus is that the FOMC will taper QE3 by another $10 billion to $65 billion per month.

Global stocks found support as Chinese money-market rates dropped after the People’s Bank of China added funds and expanded access to a lending facility after the 7-day repurchase rate had surged 153 basis points to a 1-month high of 6.32% on Monday. In an attempt to alleviate a liquidity squeeze, the PBOC added more than 255 billion yuan ($42 billion) into the financial system and will allow small and medium-sized Chinese banks to access its Standing Lending Facility for loans of up to 2-weeks on a trial basis before China's Lunar New Year holiday begins on Jan 31; this was in addition to a liquidity injection made just yesterday for an unspecified amount.

The yield on Portugal's 10-year government bond fell below 5.00% for the first time since Aug 2010, reducing concerns about sovereign debt. Gains in European stocks were muted. The German January investor confidence unexpectedly dropped for the first time in 6 months. Japanese Economy Minister Amari warned that his country still faced the risk of falling back into deflation, which undercut the yen on speculation the BOJ may press ahead with additional stimulus.

The International Monetary Fund is slightly more optimistic about the world’s economies this year than it was three months ago.  The IMF updated its forecasts that the world economy will grow 3.7% in 2014 and that the US economy will grow 2.8%. The global forecast is 0.1 percentage point higher and the US forecast 0.2 point higher than the IMF's October forecast.

After a sluggish start, global economic growth picked up in the second half of 2013. As a result, growth amounted to 3% last year. The IMF expects it will be even stronger growth this year.

The IMF forecasts that the US economy grew 1.9% last year, and they are forecasting 2.8% growth for this year, which would match US growth in 2012. Part of the anticipated improvement is based on expectations for less drag from higher US taxes and across-the-board spending cuts. By 2015, the IMF forecast the US economy will grow 3%, or 0.4 percentage point lower than its October forecast. So, 2014 revised higher and 2015 revised lower. The IMF reduced its outlook because a recent budget agreement left in place most of the spending cuts. The IMF had expected most of those cuts to have been eliminated by next year.

The IMF forecasts stronger growth for the Eurozone as it tries to emerge from recession after a lingering debt crisis.  Economic activity shrank 0.7% in 2012 and 0.4% in 2013. But this year the IMF projects 1% growth and 1.4% in 2015. Germany, the biggest economy in Europe, will grow 1.6% this year it projects, up from 0.5% growth in 2013.

China is expected to grow 7.5% in 2014 and 7.3% in 2015. Both 2014 and 2015 projections were slightly higher than the IMF's October forecast, but lower than the 7.7% growth reported for 2013.  The IMF said that growth in China, the world's second-largest economy, had rebounded strongly in the second half of 2013 due to acceleration in investment. But the IMF said the growth will moderate because of actions by the government to slow growth in credit.

For Japan, the IMF forecast growth of 1.7% this year, the same as 2013, but a slowdown to 1% growth in 2015.

Citing high unemployment and low inflation, the IMF said that the United States and other major economies should be careful not to pull back prematurely on the economic support being provided by the Fed and other central banks.

A survey finds that CEOs around the world are more confident in the global economy. Accounting and consulting firm PricewaterhouseCoopers, which conducted the survey, said the world's corporate leaders are "gradually switching from survival mode to growth mode." That improved optimism could lead to more investment, growth and jobs.

Activists, however, warn that wealth inequality is a growing and pressing concern that needs to be addressed. PwC's findings came as political and business leaders gathered in the Swiss ski resort of Davos. Each year they got together on a mountaintop to congratulate themselves, network with each other and confer about how best to bring order and prosperity to humankind; and of course, how they can profit.

Nobody at Davos will come right out and say that they are trying to rule the world; that would be far too crass; especially in light of the World Economic Forum’s most recent publication, Global Risks 2014. The study, issued by the charitable organization Oxfam concludes that the “the chronic gap between the incomes of the richest and poorest citizens” is the greatest threat to stability that looms in the next decade.

The study revealed some remarkable statistics. The 85 richest people on Earth have the same amount of wealth as the bottom half of the population. Those wealthy individuals are a small part of the richest 1% of the population, which combined owns about 46% of global wealth. The study found the richest 1% had $110 trillion in wealth -- 65 times the total wealth of the bottom half of the population. Seven out of 10 people live in countries where economic inequality has increased in the last 30 years.

That bottom half of the population owned about $1.7 trillion, or about 0.7% of the world's wealth. That's the same amount as owned by the 85 richest people. It is a little crazy that more than 3.5 billion people own less than 85 people, roughly the number of people who could comfortably sit on a bus – not that they would actually sit on a bus. Nowhere is inequality more pronounced than the United States, where the very greatest amount of resources are owned by the very fewest people. In the US, the wealthiest one per cent captured 95% of post-financial crisis growth since 2009, while the bottom 90% became poorer.

The Oxfam report says that the global economy has become so skewed in favor of the rich that economic growth in many countries today “amounts to little more than a ‘winner takes all’ windfall for the richest.” The report warns that democratic institutions are being undermined as an increasing amount of wealth is concentrated in the hands of the richest, making it ever easier for them to influence policy to enrich themselves further. The report calls this process “political capture.”

Oxfam sees a risk to both democratic institutions and to social stability in these trends. The report does recognize that “some economic inequality is essential to drive growth and progress, rewarding those with talent, hard earned skills, and the ambition to innovate and take entrepreneurial risks.”; but “the extreme levels of wealth concentration occurring today threaten to exclude hundreds of millions of people from realizing the benefits of their talents and hard work.”

Pope Francis challenged business leaders assembled in Davos to put their wealth at the service of humanity instead of leaving most of the world's population in poverty and insecurity. The Pope’s message said, in part: "I ask you to ensure that humanity is served by wealth and not ruled by it," and it went on: "The growth of equality demands something more than economic growth, even though it presupposes it. It demands first of all 'a transcendent vision of the person'."

The World Economic Forum is looking at other threats, not just inequality. The recent hack of Target merely reinforced the possibility of “Cybergeddon” in the online world, and that possibility, taken to just a little extreme could result in a frozen neural network which controls, among other things, the global financial system. Once again, the Masters of the Universe gathered at Davos will talk about the challenge of climate changes and the related hurricanes, floods, polar vortexes, droughts, and other extreme weather. Once again, the Masters of the Universe will face the reality that they can’t control the weather. And there will be a bunch of people guessing who among the 85 is in attendance.

Maybe that guy, maybe that guy, maybe some other guy. There are lots of guys in Davos this week; not many women; only about 15% of the 2,500 attendees. Organizers say it’s simply the reality of today’s world.

So back to the real concern for the Davos attendees – how to make more money. For the answers we turn to the global central bankers. After an unprecedented bout of experimental monetary policy and money printing, the Federal Reserve wants to reset policy to the pre-crisis mode to avoid another credit bubble. Meanwhile, China is trying to implement financial sector reforms to bring a credit bubble to an end. So, the real risks look  like slower than forecast US growth, possible Eurozone deflation, not enough structural reforms in Japan, and bad loans in China; there will doubtless be other risks that crop up.

Tuesday, December 17, 2013 - The Year in Financial Review

The Year in Financial Review

by Sinclair Noe

They say you can't know where you're going if you don't know where you're coming from, so today on the Review, we'll review some of the financial milestones of 2013.

You may recall that 12 months ago, we were headed over the fiscal cliff. The fiscal cliff really started in 2001 with the Economic Growth and Tax Relief Reconciliation Act, also known as the Bush tax cuts; after various extensions, they were set to expire at the end of 2012. And they did. In the end, Congress did not approve an extension of most of the tax cuts until late on New Year’s Day. Because all the Bush tax cuts had technically expired, Republicans could say they had not violated their No New Taxes pledge. The marginal rate on incomes over $400k increased, plus cap gains, and qualified dividends for high-income taxpayers, plus some estate tax changes, and the holiday on the payroll tax ended; just to be sure everybody felt some pain.

President Obama signed the American Taxpayer Relief Act of 2012 on January 2. The ATRA is usually described as a tax increase although technically it might be a tax cut. The confusion arises because there were so many expiring provisions at the end of 2012.  ATRA could be described as either a $618 billion tax increase, relative to maintenance of all of the provisions that had been in place – that is, relative to so-called “current policy”; or a $4 trillion tax cut, relative to the actual law.

It was an inauspicious start to the new year.

Wall Street found comfort in the resolution of the fiscal cliff, and of course the never-ending flow of free money from Quantitative Easing. Equity traders partied like it was 1999. Stock funds took in some $134 billion in the first ten months of this year. The Dow Industrial Average started the new year at 13,100, and never looked back. There were a few minor pullbacks but no significant corrections; just a string of record highs for the Dow, the S&P 500, and even the Nasdaq Comp hit the highest levels in 13 years. Milk and cookies indeed.

Turns out, the stock market wasn't dead,it just needed some juice from the Fed. The Federal Reserve had a major role in propping up Wall Street. The Fed's balance sheet grew by more than $1 trillion just since the start of the year, and not stands slightly north of 25% of GDP. Overlay a chart of the Fed's balance sheet with a chart of the S&P 500; carrots and peas; Fred and Ginger.

Bond markets had been absolutely giddy with QE. The yield on the 10-year note touched 1.39% back in the summer of 2012. Heading into the summer of 2013, Ben Bernanke sent up a trial balloon that the Fed had actually thought about how they might exit QE; not that they had any plans to exit; not that there was anything in reality; just a little contemplation. The bond market freaked, and threw a taper tantrum. In the process, conservative income investors were shocked to learn that bond funds can lose value. Who knew? And that is how the 30 year bond bull died.

Meanwhile, across the Pacific, Japan had been catatonic for 2 decades until Japan's new Prime Minister Shinzo Abe somehow got a hold of the Federal Reserve's playbook; but something was lost in translation. Instead of just applying enough stimulus to prop up the banks, Abe tripled the stimulus, and kicked in fiscal reform and structural reform. He tied a sack of bricks around the yen and tossed it in deep waters. The results were predictable; a smidge of inflation replaced deflation; the Japanese economy will expand about 2% for the year, and Japanese stocks are on pace for more than a 50% gain this year.

Who knew? Certainly not Ken Rogoff and Carmen Reinhart, who unfortunately became famous for their worst work – the sarcastically titled book: “This Time Is Different”. Not exactly. Turns out there was a miscalculation with the Excel spreadsheets and there isn't a real precise line where the ratio of debt to GDP becomes malignant. Simple error by a couple of academic wonks, except their theories had served as a template for economic reforms around the globe, with less than satisfactory results. If you followed the Rogoff-Reinhart Rule, you would have tightened the belt in the face of an economic slowdown; think Greece, Spain, Portugal, and to some extent, the US. The result in the Eurozone was narrowing credit spreads and scary spikes in unemployment; that eventually forced ECB chief Mario Draghi to announce “the ECB is ready to do whatever it takes.”

The Draghi Put sounded good, except to the Germans, and even after the Rogoff-Reinhart spreadsheet blunder became clear, Draghi still hasn't used the OMT, Outright Monetary Transactions, he promised back in 2012, and Euro-austerity has lead to even higher debt to GDP ratios in the most indebted Euro nations, and the ECB and IMF have denounced austerity, but they still haven't dared to experiment as boldly as the Japanese.

Meanwhile. the BRICS, Brazil, Russia, India, China, and South Africa were clobbered. In November, the Organization for Economic Cooperation and Development, the rich world's number-crunching club, lowered its global growth forecast for 2014 by nearly half a point, to 2.7%, because of the slowdown in emerging-market economies. The European Central Bank warned: "Any sharper or more disruptive adjustment in emerging market economies needs to be closely monitored, given the potential for stronger and more persistent euro area impacts." Their fast growth compensated for the developed world's stagnation and their currency reserves funded Western debt. The thirst of emerging market consumers for goods helped tide over Western companies, while their low production costs drove global trade.

Developing economies weren't prepared for a downturn in global trade. The prospect of costlier capital, courtesy of the Fed's taper talk, dried up the flow of hot money that never seemed to find its way to Main Street but did filter to emerging markets. A disinflationary environment also clobbered commodities, and many of the emerging markets rely on natural resources. Investors withdrew from emerging market equities, debt, currencies, and everything else. According to the Commodity Futures Trading Commission, the total value of commodity index-related instruments purchased by institutional investors rose from an estimated $15 billion in 2003 to at least $200 billion by mid-2008. And then the cycle turned; 2013 marks the third year of a downturn in commodity prices. At some point, the cycle will turn again.

And through it all, the United States has emerged as the cleanest shirt in the dirty clothes hamper. The Fed's QE might not have spread the wealth; actually it just concentrated the wealth, but that's not to say it didn't have some impact. The housing market bounced back; not all the way to the highs at the peak, but it helped. Global real estate deals are now back to late 2007 levels. The world population keeps growing, and the institutional buyers can't buy everything; even though they tried. That lead to an increase in rents. If, or when rates move even higher, it will likely dampen the enthusiasm for real estate. Look for a slightly calmer market in 2014.

The high price of oil pushed drivers to switch to more fuel efficient cars. The hybrid Prius is the top-seller in California and the Tesla outsold Audi and Jaguar. GM turned a profit, and completed the terms of its bailout. The US keeps coming up with new technologies, such as 3D printing and robotics. And we've become masters at spying on the rest of the world.

The US is now in its fifth year of economic expansion and economic growth is surpassing some of the emerging markets, which is back to that cleanest shirt theory. One of the big surprises for the US economy has been energy production. Domestic crude oil production is up 18% form one year ago; up 56% from 2007; nat gas production is up 28% from 2007. Oil imports have been dropping and exports of refined petroleum products has increased.

So everything was on track for economic recovery, until the politicians in Washington decided to shut down government. Remember the fiscal cliff deal that started the year? Turns out it was just a stopgap measure, and when it came time to work out a longer-term deal, well, what can I tell you; we've got the best politicians money can buy; which is to say that Congress is a train wreck waiting to happen, and it happened in October. The 16 day shutdown came with a price tag of $24 billion, with nothing to show for it but really bad political theater.

And then that was followed by the biggest municipal bankruptcy in US history. Detroit is on the skids. The BK process is still underway, and there are implications. We have seen an unelected emergency manager take over the governance of a major city. A coup. How will it turn out? I don't know but if this is going to be a template for other struggling cities, it could get ugly.

And finally, perhaps the most important financial development came from a source we didn't even know a year ago; a modest priest from the slums of Buenos Aires; Pope Francis, the new spiritual leader of more than 1.2 billion Catholics – it is a very large contingent. The new Pope published an apostolic exhortation in late November. Pope Francis called for renewal of the Roman Catholic Church and attacked unfettered capitalism as "a new tyranny", urging global leaders to fight poverty and growing inequality. Francis went further than previous comments criticizing the global economic system, attacking the "idolatry of money" and beseeching politicians to guarantee all citizens "dignified work, education and healthcare". He also called on rich people to share their wealth. "Just as the commandment 'Thou shalt not kill' sets a clear limit in order to safeguard the value of human life, today we also have to say 'thou shalt not' to an economy of exclusion and inequality. Such an economy kills," Francis wrote in the document issued on Tuesday. "How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses 2 points?"

I think this, more than anything else, has changed the financial dialogue as we head into the new year. 

Thursday, December 12, 2013 - Three Strikes

Three Strikes

by Sinclair Noe

DOW – 104 = 15,739
SPX – 6 = 1775
NAS – 5 = 3998
10 YR YLD + .03 = 2.88%
OIL - .06 = 97.38
GOLD – 27.10 = 1226.20
SILV - .81 = 19.60

Stocks down for a third day in a row, and except for that big gain on the news of the monthly jobs report, this has been a nasty start to December. Weekly jobless claims jumped to 368,00 from 300,000 the week before. Overall retail sales climbed a seasonally adjusted 0.7% last month, the most since June.  Auto sales jumped 1.8% in November, the most since June. Meanwhile, there were drops in retail sales of 0.2% for clothing and accessories stores, and 1.1% at gasoline stations. Online and other non-store retailers saw sales rise 2.2% in November, the most since July 2012. Over the past year, retail sales have grown 4.7%. Inventories at US businesses rose 0.7% in October. Maybe businesses are expecting a great holiday shopping season but it isn't looking good.

Neither the jobless claims nor the retail sales will move the Fed’s current position on tapering. Markets have been focused on the timing and the slope of Fed bond-buying tapering and not on anything else. Most likely, the Fed will meet next week and not taper, but they will likely communicate clearly their intent to taper.

The just agreed 2014-2015 US budget deal faces a crucial test today when the House of Representatives votes on the bill, with Speaker John Boehner urging skeptical conservatives to back it. The agreement sealed between top Democratic and Republican negotiators is seen as a chance to end the brutal cycle of fiscal crises that have plagued Washington in recent years. The legislation, which sets spending caps at $1.012 trillion for 2014 and $1.014 trillion for 2015, and repeals billions in a package of arbitrary cuts known as sequestration, appears likely to pass the Republican-led House. It would then go to the Senate for a vote, likely next week before the chamber adjourns for the year-end holiday.

Pemex is the pride of Mexico. Part of the reason may be that it is ubiquitous. Every gas station in Mexico has the green and white sign of the state owned oil company. When all else failed, Pemex was the economic lifeblood of the Mexican government. Today, the Mexican Congress passed legislation  declaring that Mexico still owns its oil, but allowing private companies to drill for oil and natural gas in partnership with Pemex, or on their own, returning international oil companies to territory they were kicked out of 75 years ago.

The stated goal is to stimulate Mexico’s sliding oil production and vault the country into the developed world by tapping vast pockets of oil and natural gas deep under the earth and sea. Foreign oil companies have long been eager to gain access to Mexico’s oil and have quietly lobbied the government to open up for years, while Pemex is known for inefficiency at best, and corruption at worst. Mexico’s oil production has declined by 25 percent from its 2004 peak, to just over 2.5 million barrels a day. Pemex is spending more to pump less: investment has more than doubled in the same period to more than $20 billion a year. It may not be the best run oil company but Mexicans tend to consider it their oil company. In a country where controlling oil is often equated with sovereignty and national pride, the plan has set off furious debate.

And it's just part of a bigger plan. President Pena Nieto is also pushing to break up telecommunication monopolies, raise taxes and weaken the teachers union grip on faltering public schools. Two decades after Mexico sold off banks and the telephone monopoly, Mexicans pay more for credit and phones service than other Latin Americans, and they suspect they will pay more for gas under the new law, too.

Five years ago, Bernie Madoff was arrested in New York for running a Ponzi scheme. Madoff's banker was JPMorgan. Federal authorities suspect JPMorgan continued to serve as Madoff’s primary bank even as questions mounted about his operation, with one bank executive acknowledging before the arrest that Madoff’s “Oz-like signals” were “too difficult to ignore.” And so now, the authorities are going after JPMorgan; apparently close to a settlement that would involve about $2 billion in penalties and criminal action, or what passes as criminal action in the world of Wall Street bankers.

The government would use a chunk of the money, probably less than half to compensate Madoff's victims. The settlement would include a deferred prosecution agreement, which would list the bank’s criminal violations in a court filing but stop short of an indictment as long as JPMorgan pays the penalties and acknowledges the facts of the government’s case. The deferred prosecution agreement is expected to fault JPMorgan for a “programmatic violation” of the Bank Secrecy Act, which requires banks to maintain internal controls against money laundering and to report suspicious transactions to the authorities. And just to be clear, this case involves money laundering by JPMorgan.

The government has been reluctant to bring criminal charges against large corporations, fearing that such an action could imperil a company and throw innocent employees out of work. Those fears trace to the indictment of Enron's accounting firm, Arthur Andersen, which went out of businesses after its 2002 conviction, taking 28,000 jobs with it. Ever since, prosecutors have increasingly relied on deferred prosecution agreements, which is a slap on the wrist and allows the bank to continue, as long as they don't continue with their illegal activities. So the basic idea is that JPMorgan can break the law, pay off the government and promise not to do it again. Prosecutors insist that no one is too big to indict or too big to jail. It will be interesting to see if JPMorgan can indeed clean up its business and manage to stop breaking the law; and if they can't keep their nose clean, it'll be interesting to see if the prosecutors actually have the fortitude to enforce the law.

Two years ago JPMorgan entered an “non-prosecution agreement” to settle antitrust charges. I'm sure there is some sort of fine distinction between a “non-prosecution agreement” and a “deferred-prosecution agreement” but they sound similar; no criminal charges as long as they kept to the straight and narrow for 2 years. Then there was that problem of manipulating electricity markets between 2010 and 2012. The head of their commodities trading division, Blythe Masters, was accused of making false and misleading statements to federal energy regulators. No criminal charges were filed.

Pope Francis is at it again. Francis, who was named Time magazine's Person of the Year on Wednesday, has urged his own Church to be more fair, frugal and less pompous and to be closer to the poor and suffering. A couple of weeks ago he published an apostolic exhortation title, The Joy of the Gospel, where he attacked unfettered capitalism, as “a new tyranny” and  condemned the "idolatry of money".

Now in a new message for the Roman Catholic Church's World Day of Peace, marked around the world on Jan. 1, he also called for sharing of wealth and for nations to shrink the gap between rich and poor, more of whom are getting only "crumbs". And he says that huge salaries and bonuses are  symptoms of an economy based on greed and inequality.

Titled "Fraternity, the Foundation and Pathway to Peace", the message also attacked injustice, human trafficking, organized crime and the weapons trade as obstacles to peace.

Francis said many places in the world were seeing a "serious rise" in inequality between people living side by side. He attacked the "widening gap between those who have more and those who must be content with the crumbs", calling on governments to implement "effective policies" to guarantee people's fundamental rights, including access to capital, services, educational resources, healthcare and technology. The Pope says: "The grave financial and economic crises of the present time ... have pushed man to seek satisfaction, happiness and security in consumption and earnings out of all proportion to the principles of a sound economy."

I'm going to take a little vacation time over the next couple of weeks. Don't worry, I'll continue to update the blog on a kind of regular basis.

Wednesday, December 11, 2013 - Let's Make A Deal

Let's Make A Deal

by Sinclair Noe

DOW – 129 = 15,843
SPX – 20 = 1782
NAS -56 = 4003
10 YR YLD + .05 = 2.84%
OIL -1.09 = 97.42
GOLD – 9.70 = 1253.30
SILV - .13 = 20.40

We have a deal. Bipartisan budget negotiators, led by senator Patty Murray for the Democrats and House Republican Paul Ryan, announced last night that they have reached a deal to settle the federal budget for two years, and avert a possible government shutdown. We have a deal; it's just not a done deal. There is pressure from both the left and right, as Democrats sought to negotiate a further deal on unemployment benefits and Republicans fended off attacks from conservative pressure groups.

House Speaker John Boehner lashed out at right wing groups such as the Heritage Foundation, claiming they were criticizing the compromise deal before they even knew what was in it. Meanwhile, some Democrats lashed out at the $1 trillion deal because it did not include an extension of long term unemployment benefits for some 2.1 million out of work workers.

Republican leaders will likely have to rely on House Minority leader Nancy Pelosi to deliver sufficient Democratic votes to counter any rebellion among their Tea Party wing, which gives the minority leader a rare moment of leverage. So far, Republicans have not ruled out allowing a separate vote to extend long-term unemployment benefits, but signal they too want more concessions from Democrats first. There is also opposition from Republicans in the Senate, who are less able to block the budget's passage, but are under pressure from a renewed wave of primary challenges by Tea Party candidates in the 2014 midterms.

The framework includes $85 billion in spending cuts and non-tax revenue from new fees to replace the mandatory budget cuts and supply a modest amount of deficit reduction. As drafted, the bill would reverse $63 billion in across-the-board spending cuts scheduled to take effect in the current budget year and the next one, easing a crunch on programs as diverse as environmental protection and the Pentagon.

It would offset the higher spending with $85 billion in savings over a decade from higher fees and relatively modest curtailments on government benefit programs.

Nearly a third of the total savings would come nearly a decade from now, in 2022 and 2023, partly from extending a current 2 percent cut in payments to Medicare providers. Also, future federal workers would pay more toward their own retirement, fees would rise on air travelers and corporations would pay more to the government agency that guarantees their pension programs.

With the increased spending to begin immediately and much of the savings delayed, Congressional Budget Office estimates showed the deal would push deficits higher than currently projected in the current year and each of the next two. The CBO said red ink would rise by about $23 billion in this 2014 fiscal year, $18 billion in the next year and about $4 billion in the one after that.

Though congressional negotiators may have reached an agreement over the federal budget, they may not have may not have figured out how they will get it passed. Still, the fallout from the government shutdown in October wasn't difficult to understand. Americans are sick and tired of the dysfunction in Washington, and another shutdown, or even the threat of another shutdown is unacceptable. There could be a vote on the deal as early as tomorrow.

On Wall Street, good news is bad news. The idea that Washington might actually be able to pass a budget raised the expectations that the Federal Reserve might be able to scale back it's quantitative easing stimulus plan. Indeed, the big question is not whether the Fed will taper, but when. The FOMC meets next week, and the Fed policymakers will likely debate how best to communicate their plan. It's still unlikely they will actually start tapering now; that would be a little shocking, but they might indicate they are going to do it in the near future, with the caveat that taper proceeds absent some exogenous catastrophe. So, expect some clarification on the thresholds for taper and interest rates.

Across the globe, central banks have resorted to forward guidance on interest rates in the wake of the financial crisis to convince markets they are serious about supporting recovery in the world's top economies for a long time to come. So, even as the Fed is likely to offer a more solid opinion on taper, they will likely offer a more precise outlook for maintaining Zero Interest Rate Policy. In a Reuters poll conducted this week, 32 economists said they expect the central bank to wait until March, while 22 looked for a move in January. Only 12 expected a move next week.

The "better than expected" figures in the latest employment data were far below the level of job creation needed to put unemployed Americans back to work on any kind of reasonable schedule. It was even below the average monthly job creation during most of the 1990s. The jobs picture is still far worse than many people would have you believe. The current unemployment rate doesn't include the workers who have become discouraged and left the workforce, and workforce participation rates remain at historic lows. The jobs numbers don't include the underemployed who are working part-time and prefer to work full-time. The ratio of job seekers to available jobs remains discouragingly high. There are no jobs for nearly two out of every three job seekers, no matter how hard they look.

The employment picture for the long-term jobless remains dismal. And many of those people were left out in the cold under the budget deal announced last night. They will fall off the roles, and basically become invisible for economic data purposes. Of course, they aren't really invisible; they're still there. But maybe there isn't anything the Fed policymakers can do to achieve maximum employment. Maybe a taper is an admission, a clear and honest communication that Fed policy is impotent in its dual mandate, and maybe the time has come to amend the Fed's tools so that all that money they've been dropping out of helicopters falls somewhere else besides Wall Street, maybe they can toss a little bit over Main Street.

Jamie Dimon, the CEO of JPMorgan was speaking at an investor conference in New York today. Dimon said he was thankful congressional leaders had reached a budget deal and was "less worried" about the impact of an eventual scaling back of the Federal Reserve's market-friendly stimulus measures. Dimon said the budget agreement was good for business confidence and that he would send thank you cards to congressional leaders. That makes me a bit more nervous about the deal.

Dimon said business demand for loans should rise to more normal levels as confidence rises, and demand for investment banking services in 2014 would be stronger than many people expect; and higher interest rates that would come with a Fed tapering would be good for the bank. He also said public attention to investigations of the bank by regulators and law enforcers was "really, really painful." Ahhh, maybe he should stop breaking the law, and then he wouldn't have all that painful attention.

Time magazine named Pope Francis its Person of the Year, crediting him with shifting the message of the Catholic Church while capturing the imagination of millions of people who had become disillusioned with the Vatican. This is the third time the magazine has chosen a pope as its Person of the Year. Time gave that honor to Pope John Paul II in 1994 and to Pope John XXIII in 1963.

Pope Francis, who, as archbishop of Buenos Aires was known as the slum cardinal for his visits to the poor and penchant for subway travel - beat former U.S. National Security Agency contractor Edward Snowden and gay rights activist Edith Windsor for the award.

The new pope's style is characterized by frugality. He shunned the spacious papal apartment in the Vatican's Apostolic Palace to live in a small suite in a Vatican guest house, and he prefers a Ford Focus to the traditional pope's Mercedes. In September, Francis gave a groundbreaking and frank interview, in which he said the Vatican must shake off an obsession with teachings on abortion, contraception and homosexuality, and become more merciful. And in July, Francis told reporters he was not in a position to judge homosexuals who are of good will and in search of God, marking a break from his predecessor, Benedict, who said homosexuality was an intrinsic disorder.

And a couple of weeks ago he published his apostolic exhortation, The Joy of the Gospel, which has gained attention for what some are calling an attack on capitalism, but is more precisely an attack on unbridled financial speculation and runaway greed. Which may actually be an attack on capitalism, but he did it without using the actual word “capitalism”.

Rather he made an impassioned plea for society and government to protect the vulnerable from the predations of the greedy, to include everyone in this prosperity, not by taking from the rich to give to the poor but by making sure they have a role to play. His call to reject the “idolatry of money and the dictatorship of an impersonal economy lacking a truly human purpose” are lessons we've heard for a couple of thousand years, and that ancient economic wisdom is as valid today as it was 2014 years ago.

Wednesday, November 27, 2013 - Evangelii Gaudium and Happy Thanksgiving

Evangelii Gaudium and Happy Thanksgiving

by Sinclair Noe

DOW + 24 = 16,097
SPX + 4 = 1807
NAS + 27 = 4044
10 YR YLD + .03 = 2.74%
OIL – 1.40 = 92.28
GOLD – 4.40 = 1238.60
SILV - .11 = 19.80

This has been a quiet week on Wall Street; the two major features have been record highs for the DOW and the S&P and 13 year highs for the Nasdaq, combined with light volume. Now normally, light volume on record highs would be an indication the market has run out of steam and is ready to roll over. But this is a holiday shortened week; the markets are closed tomorrow for Thanksgiving, and then just very, very quiet day on Friday. So, it's difficult to read much into the price and volume other than to say, there is a pause for the holiday.

Happy Thanksgiving.

Plenty to be thankful for; the S&P 500 has climbed 2.8 percent in November, poised for the third straight monthly gain. The S&P 500 is up 27% this year; the Nasdaq is up 33% year to date.

Economic data today shows fewer workers filed applications for unemployment benefits last week; that's a good report for the labor market. The Thomson Reuters/University of Michigan final index of consumer sentiment in November unexpectedly rose to 75.1 from 73.2 a month earlier, and came in higher than expected.

The Conference Board’s index of leading indicators, a gauge of the economic outlook for the next three to six months, rose for a fourth straight month in October.

A separate report showed the government shutdown hurt business confidence, with orders for durable goods dropping 2 percent in October. The MNI Chicago Report business barometer fell less than expected in November.

So, most of the economic data today is positive, but here's a scary little detail still lingering from the financial meltdown days; borrowers are increasingly missing payments on home equity lines of credit, HELOCs, they took out during the housing bubble, a trend that could deal another blow to the country's biggest banks. The loans are a problem now because an increasing number are hitting their 10-year anniversary, at which point borrowers usually must start paying down the principal on the loans as well as the interest they had been paying all along. More than $221 billion of these loans at the largest banks will hit this mark over the next four years, about 40 percent of the home equity lines of credit now outstanding.

Data from the credit agency Equifax shows that the number of borrowers missing payments around the 10-year point can double in their eleventh year. When the loans go bad, banks can lose 90 cents on the dollar, because a home equity line of credit is usually the second mortgage a borrower has. If the bank forecloses, most of the proceeds of the sale pay off the main mortgage, leaving little for the home equity lender.

What is happening with home equity lines of credit illustrates how the mortgage bubble that formed in the years before the financial crisis is still hurting banks. Even more so, it's a reminder of how everyday people are still digging out from negative equity, paying loans on properties that still are underwater and may be underwater for a long, long time. And of course, there's a ripple effect that keeps the entire economy from reaching escape velocity.

Between the end of 2003 and the end of 2007, outstanding debt on banks' home equity lines of credit jumped by 77 percent, to $611 billion from $346 billion, according to FDIC data, and while not every loan requires borrowers to start repaying principal after ten years, most do. These loans were attractive to banks during the housing boom, in part because lenders thought they could rely on the collateral value of the home to keep rising. Fitch Ratings calculates that after 10 years, a consumer with a $30,000 home equity line of credit and an initial interest rate of 3.25 percent would see their required payment jumping from $81.25 to $293.16. Yea, that's going to leave a mark.

Maybe the scariest news this week comes from former Federal Reserve chairman Alan Greenspan in an interview with Bloomberg TV claiming the stock market isn't in a bubble. Greenspan said: “This does not have the characteristics, as far as I’m concerned, of a stock market bubble.” Greenspan said that even with the rise in equities, the US economy is restrained by a “degree of uncertainty” that is reducing investment. Based upon past performance, which is not an indication of future results, Greenspan may be the ultimate contrarian indicator.

As a side note, Greenspan was asked about the major policy announcement from Pope Francis this week denouncing unfettered capitalism. Greenspan declined to comment.

The Pope's “apostolic exhortation” may be the most important news, not just of the week, but in a very long time. You don't have to be Catholic to understand the importance of this policy statement from the Pope, just look at the numbers. There are about 7.2 billion people in the world; about 2.4 billion are considered Christians, about 1.3 are Roman Catholics, and there are about 250 million more Eastern Orthodox. That makes Roman Catholics, by an overwhelming margin, the largest denomination of any religion on the planet. And Pope Francis is the leader of this massive flock.

And the Pope is now talking about the “new idolatry of money”, writing:

The worship of the ancient golden calf has returned in a new and ruthless guise in the idolatry of money and the dictatorship of an impersonal economy lacking a truly human purpose. The worldwide crisis affecting finance and the economy lays bare their imbalances and, above all, their lack of real concern for human beings.

His thoughts on income inequality are searing:

How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points? This is a case of exclusion. Can we continue to stand by when food is thrown away while people are starving? This is a case of inequality.

The pope's writing on "the economy of exclusion and inequality" might disappoint those who considers themselves free-market capitalists, but they would do well to listen to the message. And many of those free-market capitalists are Catholics. How can they reconcile their business with their faith?

Income inequality has been growing in the US since the 1970s. Nearly all of us are likely to experience it in some form or another. Income inequality is not someone else's problem. In the discussions of why the US is not recovering, economists often mention metrics like economic growth and housing. They rarely mention the metrics that directly tell us we are failing our economic goals, like poverty and starvation. Those metrics of income inequality tell an accurate story of the depth of our economic malaise that new-home sales can't. One-fifth of Americans, or 47 million people, are on food stamps; 50% of children born to single mothers live in poverty; and over 13 million people are out of work. And for the first time in our nation's history, children are now less likely to do as well as their parents.

The bottom line, which Pope Francis correctly identifies, is that inequality is the biggest economic issue of our time - for everyone, not just the poor. Nearly any major economic metric - unemployment, growth, consumer confidence - comes down to the fact that the vast majority of Americans are struggling in some way. You don't have to begrudge the rich their fortunes or ask for redistribution. It's just hard to justify ignoring the financial problems of 47 million people who don't have enough to eat. Until they have enough money to fill their pantries, we won't have a widespread economic recovery. You can't have a recovery if one-sixth of the world's economically leading country is eating on $1.50 a day.

It's only surprising that it took so long for anyone - in this case, Pope Francis - to become the first globally prominent figure to figure this out and bring attention to income inequality. And it is an issue that is not going away.

Happy Thanksgiving, and don't forget all the things you are thankful for. 

If you would like to read the apostolic exhortation, Evangelii Gaudium, here is the link.