Monday, August 04, 2014 - Giving Up the Ghost

Giving Up the Ghost
by Sinclair Noe

DOW + 75 = 16,569
SPX + 13 = 1938
NAS + 31 = 4383
10 YR YLD - .01 = 2.49%
OIL + .09 = 98.38
GOLD – 6.00 = 1289.20
SILV - .17 = 20.23

Let’s start with economic data; on Friday we had the monthly jobs report: 209,000 jobs and the unemployment rate ticked up to 6.2%. It was a decent jobs report but came in a little under expectations. Still the economy has been adding jobs at a strong clip this year. Early in 2014, the Conference Board’s employment trends index pointed to stronger job creation even though the economy temporarily contracted, and that’s exactly what happened. Hiring accelerated, the economy snapped back in the second quarter, and over the past six months the economy has added jobs at the fastest clip since 2006.

The Employment Trends Index increased in July to a reading of 120.31, up from 119.91; this represents a 6.6% increase from a year ago. The 6 month growth rate in the index is the strongest in over 2 years, and suggests solid job growth is likely to continue in the coming months. Job openings keep hitting post-recession highs. There were 4.64 million job openings in May, near an all-time high; and layoffs are extremely low, even compared to the prerecession period.

While there are some signs of strength in the jobs market, wages have been stagnant. Worker pay was a smaller piece of the US income pie than earlier estimated as some Americans collected significantly more in interest and dividend payments over the past two years.  According to revised data from the Commerce Department, employee compensation, including wages and benefits, was lower for each year from 2011 to 2013 than previously calculated. With the revisions, employee compensation was reduced by $9.5 billion in 2011, $5.1 billion in 2012 and $14.6 billion last year. It accounted for 52% of gross domestic income in the last quarter of 2013, down from a prior estimate of 52.2%.

More rank-and-file workers are participating in the recovery as companies report record profits and boost hiring. Compensation has accelerated this year, rising $134 billion after a $153 billion surge in the first quarter. It marked the biggest back-to-back gains since the six months ended in the first quarter of 2007. That’s because companies are hiring again and more people are returning to the workforce, not necessarily because paychecks are getting fatter. We’ve added millions of people to the payroll since the low point of the economy, but we haven’t added at all to the payouts that workers are receiving. Little has flowed to workers except as an increase in their employment rate.

The latest data on consumer credit is due out Thursday. It’s likely to show non-revolving debt like auto and student debt is continuing to grow rapidly. But credit-card debt has barely budged. Auto loans made up a big part of the growth in second quarter GDP. In the second quarter, motor vehicle and parts spending grew an annual 17.5% rate. Put another way, cars made up 3.7% of all consumer spending, the highest rate since the first quarter of 2008. Growth in subprime auto loans has climbed more than 130% in the past five years.

The New York Times recently reported that many subprime auto lenders are loosening credit standards and focusing on the riskiest borrowers, and then many of the subprime auto loans are bundled into complex bonds and sold as securities by banks to insurance companies, mutual funds and public pension funds, a process that creates ever-greater demand for loans. Subprime loans make up about a third of new car-sales and two-thirds of used cars; with many subprime loans carrying interest rates of 23% or more; the loans were typically at least twice the size of the value of the used cars purchased.

Now maybe you are thinking that there were financial reforms put in place following the downturn; reforms that would prevent subprime lending practices. The Dodd-Frank Act did create the CFPB, the Consumer Financial Protection Board, and you might imagine this would protect consumers from less- than scrupulous lenders. Auto loans were stripped out of the CFPB's jurisdiction by an amendment proposed by Representative John Campbell (R-CA), a former used car dealer. Ripping off poor people has become an art form, and one of the requirements is that the companies engaging in this performance art keep themselves outside regulation as much as possible.

General Motors Financial said today it was served with a subpoena from the Department of Justice directing it to turn over documents related to underwriting criteria on subprime auto loans. The Financial Institutions Reform, Recovery and Enforcement Act, allows the Justice Department to sue over fraud affecting a federally insured financial institution.

A Federal Reserve survey of 75 domestic and 23 foreign banks shows that banks are seeing solid demand for loans, but the banks aren’t making it easy for borrowers. Banks reported stronger demand for prime residential mortgages for the first time since last summer and for home equity lines for the first time since October 2013. Credit standards on prime mortgage loans have eased somewhat, but mortgage standards still remain tighter than in 2005. The July survey also shows that new qualified mortgage rules has reduced approval rates on applications for prime jumbo home-purchase loans and nontraditional mortgages but have not impacted prime mortgages. Banks were somewhat more willing to make consumer-installment loans than they were in the April survey.

New research from the Federal Reserve and Northwestern University finds that expanding unemployment insurance benefits reduces the likelihood of mortgage delinquency. About 5 million foreclosures were completed between 2008 and 2012, but it could have been much worse. The survey says unemployment benefits prevented about 1.4 million foreclosures between 2008 and 2012.  

The researchers discovered there were other side benefits from jobless benefits. Banks who saw a lower default risk expanded credit access. Mortgage investors lost less than they otherwise would have. Local governments took a smaller hit. Also, more owners hanging onto their properties meant that homes stood a better chance of not falling into disrepair, which in turn would have sunk property values in their neighborhoods. And here’s one key finding for housing-policy wonks: Fewer troubled properties cut the government’s costs for expanding jobless benefits by narrowing the number of bad loans that would have been covered by federally controlled mortgage-finance giants Fannie Mae and Freddie Mac. Savings related to Fannie and Freddie decreased net costs for the federal government’s jobless-benefits expansion by about one-fifth.

Today’s bank failure comes from Portugal, and it was a big one. Banco Espirito Santo gave up the ghost; the bank will be shut down, and its healthy businesses transferred to a new bank. Portuguese officials were unable to find private investors to prop up the bank, and so the government will use 4.9 billion euro, or about $6.6 billion of its own funds to bail out the bank, or at least part of it. The bank will be spit in two, with the healthy part going to Novo Bank; the healthy part will include deposits and viable assets; so for now, the depositors and senior bondholders are safe.

Regulators are investigating possible accounting fraud and abuse of privileged information by the Espírito Santo family. Toxic loans, mainly to the Espirito Santo corporate parent and various subsidiaries, will be quarantined in a separate bad bank, which will be owned by shareholders and junior bondholders. Eventually, the new bank, or Novo Bank, will be sold in an attempt to recover the taxpayer loan. It is not clear whether even a sanitized version of Banco Espírito Santo will be worth enough to repay the loan.

Banco Espírito Santo provides something of a preview of what may happen in October when the European Central Bank discloses the results of an exhaustive review of bank holdings in the eurozone. The review is intended to uncover precisely the kind of hidden problems that have undone Banco Espírito Santo.

The central bank review is expected to expose an unknown number of other banks with problem loans or other woes that they have failed to disclose to regulators or shareholders. There has been concern that the central bank’s findings could destabilize the eurozone financial system. The European Union still lacks a comprehensive system for dealing with troubled banks, meaning countries must finance their own bailouts.

There is a new study taking a look at the state of banks in the US, the limits of Dodd-Frank reform, and what should be done with banks that are too big to manage. The study was requested by Democratic Senator Sherrod Brown and Republican Senator David Vitter, and the study finds that some institutions remain too complex and interconnected to be unwound quickly and efficiently if they get into trouble. That means that banks still would be able to force a taxpayer bailout in some form, and the banks are essentially receiving value in that implied guarantee. And the new study had the Government Accounting Office look at the value of that implied bailout. Turns out it was a tough calculation as the value of the implied guarantee varies, skyrocketing with economic stress (such as in 2008) and settling back down in periods of calm. If we were to return to panic mode, the value of the implied taxpayer backing would rocket. In other words, the threat of high-cost taxpayer bailouts remains very much with us.

Friday, August 01, 2014 - Jobs, Mainly

Jobs, Mainly

by Sinclair Noe

DOW – 69 = 16,493
SPX – 5 = 1925
NAS – 17 = 4352
10 YR YLD - .05 = 2.50%
OIL - .32 = 97.88
GOLD + 13.70 = 1295.20
SILV - .09 = 20.40

The first Friday of each month brings us what I consider one of the most important economic reports we can cover, the jobs report; and so we provide comprehensive (wonkish) coverage.

The economy added 209,000 net new jobs in July. The unemployment rate moved up to 6.2% from 6.1%. Even though the economy added jobs, more people joined the labor force, and that is why the unemployment rate moved higher. The 209,000 new jobs was below estimates of about 230,000. The report from June was revised from 288,000 to 298,000; the May report was revised from 224,000 to 229,000 for a net 15,000 in upward revisions.

Employment is up 2.57 million year over year. We have regained the jobs lost in the downturn, and total employment is 639,000 above the pre-recession peak. Total employment is up 9.35 million from the lows of the recession, and private employment is up almost 9.9 million from the lows; the difference reflects the job losses in government related jobs.

So far this year an average of 229,000 new jobs a month have been created. That’s a significantly higher pace than in 2010 when a mere 88,000 jobs a month on average were added. Since the start of the year the economy has added 1.6 million jobs.  At the current pace, the economy could add 2.75 million jobs this year, which would be the best year for total and private job growth since 1999.

This was the sixth month in a row with more than 200,000 jobs added, and that hasn’t happened since 1997. It was probably a bigger achievement 17 years ago, because the economy and the labor force was smaller back then, but the employment recovery has been chugging along through a first quarter that was frozen by the polar vortex and rebound in the second quarter. And the private sector has been adding jobs consistently since the first quarter of 2010.

The unemployment rate was up to 6.2%. The jobless rate can rise for both good reasons (more people looking for work) and bad reasons (fewer people having a job). This month, more people were looking for work. The Labor Force Participation Rate increased to 62.9% in July; this is a measure of how many people who are of working age are actually in the labor force and working or looking for work. The idea that the pool of labor is increasing is a positive; the idea is that some people who have been unemployed for a long time are now finding jobs. The trend in employment growth remains more than strong enough for the unemployment rate to keep trending down, even though the rate rose a tenth this month

Part of the decline in the participation rate was due to demographics; many older workers retired, whether they wanted to or not, while many younger workers stayed in school or returned to school. So, it’s helpful to look at people aged 25-54, in their prime working age; among this group, the participation rate declined slightly; this confirms that younger and older workers were jumping back into the labor pool.  Still, the employment to population rate, which measures the country’s population that reported having a job in July was unchanged at 59%, a number that was up only barely from its 58.7% level of a year ago.

There are still more than 3.1 million workers who have been unemployed more than half a year. And there are just over 7.5 million people working part-time for economic reasons. These workers are included in an alternate measure of unemployment known as the U-6, which includes unemployed and underutilized workers; U-6 increased from 12.1% to 12.2%.

Many people think the U-6 is a more accurate measure of the jobs market, but let’s dig a little deeper. There are 9.6 million people unemployed and actively looking for a job. There are more than 2 million people who have stopped looking for a job within the past year. When you start adding all the unemployed workers who want a job, plus involuntary part-time, plus discouraged workers, you come up with about 23 million people that could possibly move into the labor pool. There is still massive slack in the labor market, and it will take a long time to take up the slack. For now, it is a slow, steady slog.

Where is the job growth coming from? Professional and business services added 47,000 jobs. Retail employment gained 27,000 jobs. Manufacturing added 28,000 jobs last month but the sector has recovered only 30% of the jobs lost during the recession. Construction added 22,000 jobs. Leisure and hospitality gained 21,000. Education and health services added 17,000. Government added 11,000. State and local government employment is now up 151,000 from the bottom, but still nearly 600,000 below the peak. Federal government jobs have dropped by 22,000 since the start of the year. The loss of government jobs is one of the major factors in the slow jobs recovery. In previous downturns, government did not have layoffs, and sometimes increased hiring. In this downturn government jobs were cut in a wave of austerity measures.

Even though the economy has been adding jobs, it has not been enough to push a recovery in wages. In July, average hourly wages rose a penny to $24.45, a disappointing result after strong gains in June and May. In 23 of the past 24 months, the yearly increase in hourly pay has ranged from 1.9% to 2.2%, or about one-third less than usual during an economic recovery. The 12-month increase in wages as of July was just 2%; and inflation wiped out about three-fourths of that gain. There’s been no change since the start of 2014. While it might seem counterintuitive that wages are flat while jobs are being added, the likely reason is that there are a lot of poor paying jobs plus a few very good paying jobs. The average length of the workweek for private sector workers was unchanged at 34.5 hours.

Stronger than expected US growth figures on Wednesday showed second quarter GDP up 4% on an annualized basis, along with hawkish comments from US Federal Reserve board member Charles Plosser, it prompted fears that the central bank may increase the cost of borrowing sooner than expected. Today’s non-farm payroll numbers were just weak enough to ease concerns about possible tightening from the Fed, yet not so awful as to indicate a downturn. It still points to a job market and an economy that is improving, but there is no real wage pressure and nothing to indicate inflation is a concern.

We had a couple more economic reports today. The Institute for Supply Management said its index of national factory activity rose to 57.1 in July, the highest since April 2011, from 55.3 in June. A reading above 50 indicates expansion in the manufacturing sector.

The Thomson Reuters/University of Michigan's final July reading on the overall index on consumer sentiment came in at 81.8, down from the final June reading of 82.5. The surveyors report that consumers’ attention has been dominated by jobs and income growth.

For the week, the S&P 500 fell 2.7%, its biggest weekly percentage loss since the week ending June 1, 2012, while the Nasdaq fell 2.2%. The Dow ended down 2.8% for the week. The Dow's losses dragged it further into negative territory for the year. For the year-to-date, it is down 0.5%.

Markets have suffered a turbulent few days, hit by a combination of interest rate concerns and growing geopolitical worries. The violence in Gaza also added to the sense of events escalating out of control; a proposed 72 hour cease fire didn’t last one day. An Israeli soldier was captured, and it looks like violence will escalate over the weekend. The week saw Argentina defaulting for the second time in 12 years, while continuing tensions with Russia over the Ukraine led to the imposition of further sanctions which could hit businesses and put the brakes on global growth.

It was a big week for US economic activity, with jobs and GDP statistics and a Fed meeting, but it was European equity markets that took a real tumble. Portugal was a big loser, as Banco Espírito Santo reported the largest-ever loss for a Portuguese company, sending its shares spiraling and prompting probes into possible accounting fraud at the bank.

Portugal’s major stock index dropped 10% for the week. German stocks were hit following stepped up sanctions against Russia, a major supplier of natural gas to Germany; the DAX index slipped 4.5%. Greece, Austria, Spain, UK, and France all saw declines of 3% or more. The major Russian index dropped about 1%.

Europe posted its own jobs report. Eurozone unemployment dropped to 11.5%, which is absolutely horrible, but getting better. Meanwhile, the region continues to flirt with the prospect of deflation, with euro zone wide prices rising a scant 0.4% in July from the prior year. So, there is still plenty the ECB can do to stimulate the economy over there.

Meanwhile, Congress is calling a 5 week recess, an extended summer vacation, which even Europeans think is excessive. They managed to get a few things done before running away. They passed a $16 billion VA bill to help deal with extensive treatment delays and a recent record-keeping scandal. They cobbled together a patch for highway funding, just a temporary patch. This Congress has only managed to pass 142 bills into law, which puts the legislative branch on pace for its least productive session in modern history. And now they’re heading out for a 5 week vacation. Maybe we’ll get lucky and they won’t come back.

Monday, July 14, 2014 - Clearing Up Outstanding Issues

Clearing Up Outstanding Issues

by Sinclair Noe

DOW + 111 = 17,055
SPX + 9 = 1977
NAS + 24 = 4440
10 YR YLD + .03 = 2.55%
OIL + .22 = 101.05
GOLD – 32 = 1307.80
SILV - .54 = 21.00

The Dow Industrial Average hit an intraday high of 17,088, but couldn’t close above the old closing high of 17,074 from July 2.

I woke up this morning and checked the Euro markets; the headline read: Global Stocks mostly higher as Portuguese debt concerns ease. Banco Espirito Santo’s parent company sold part of its stake in the bank to pay off short-term debt, so everything is cool. Portuguese bond prices popped. Nothing to see here. Move along, move along.

Just to refresh your memory, Banco Espirito Santo is 25% owned by Espirito Financial Group, which is in turn 49% owned by Espirito Santos Irmaoes, which in turn is wholly owned by Rioforte investments, which in turn is wholly owned by Espirito Santo international. What’s the point of owning a bank if you can’t make loans to yourself; and that’s what happened, until last week, when Espirito Santo International, the parent company failed to make a payment on short-term debt. The collective companies under the Espirito Santo umbrella have borrowed several billion from the bank, and then the bank made about 8 billion euros in loans to Angola, and that has a non-performance rate approaching 90%. And I know you’re wondering why you should be concerned about loans to Angola, and it’s because everything in finance is leveraged. No loan lives in isolation.

Panic ensued. The fear was that creditors and/or depositors might be on the hook in the event of a shortfall; no one could be certain because of a lack of transparency. But the bank says they have a cushion; the parent company sold a few assets to come current on the loan. Hopefully, I’ve cleared up the transparency issue. Regulators say there’s nothing to worry about and they should know because they didn’t see this coming in the first place, and so there’s nothing to worry about; the situation in Portugal is contained, and global stocks moved higher.

Here in the US, we know a thing or two about banks behaving badly. Today, as expected, Citgroup agreed to pay $7 billion to settle civil claims the bank misled investors about toxic mortgage backed securities leading up to the 2008 crash. Citigroup admitted it was aware that "significant percentages" of sample loans did not comply with underwriting guidelines but the bank pooled them into securities anyway. In one 2007 deal, a Citigroup trader told colleagues in an email he had reviewed a due diligence report on the poorest quality loans, and that they "should start praying." Many of the loans listed unreasonable borrower incomes or home values below the original appraisals, the trader wrote, saying he "would not be surprised if half of these loans went down." Citigroup still securitized loans from the pool. Quite simply, they knew the mortgage backed securities were full of bad loans, they lied about it to make the sale.

Under the agreement, Citi will pay $4.5 billion in cash and provide $2.5 billion in aid to low-income tenants and struggling homeowners; details of terms of the help and how many will benefit are not yet known, but there’s no indication people they will go back to help make people whole. Some homeowners with Citi mortgages could see the amount of their loans reduced, or could have their interest rates reduced. There will also be down payment and closing cost assistance to future homebuyers. But none of that starts until 2018. I don’t know why.

Last year Citi settled with the FHFA for $250 million. The regulator of Fannie Mae and Freddie Mac had sued the bank over soured mortgage securities sold to the taxpayer-owned entities. The cash portion consists of a record $4 billion civil payment to the Justice Department, double JPMorgan’s penalty in November, and $500 million to resolve claims from five state attorneys general and the Federal Deposit Insurance Corp.

And there is a little gift for Citi; the state AG and FDIC payments would be deductible, along with any costs Citigroup actually incurs in relation to consumer relief, which could be less than the $2.5 billion amount of relief in the settlement.

As part of the settlement, Citigroup “will take a charge of approximately $3.8 billion pre-tax in the second quarter of 2014." Second-quarter earnings results were also posted this morning, and if you exclude the multi-billion dollar settlement, Citi beat expectations. The settlement wipes out the quarter’s earnings, but if you look the other way, it was a kick ass quarter for earnings. Citigroup exceeded Wall Street expectations in the second quarter with adjusted earnings of $1.24 a share. On that basis, analysts had been expecting Citigroup would earn $1.05 a share. Citi posted a 15% drop in trading revenue. Investment banking revenue rose 16% from a year ago. Mortgage originations were down.

This is a civil settlement, not a criminal settlement. Attorney General Eric Holder at a press conference said: “Citi settlement doesn’t absolve bank, employees from criminal charges.” Of course nobody expects the Department of Justice to pursue criminal charges. Citi is also under investigation for possible fraud and money laundering in its Mexican unit. And if you look at all the wrongdoing, you might come to the conclusion that this is just a corrupt organization.

If you’re wondering where the next subprime meltdown will occur, well you can pick from a wide selection of possibilities. Markets seem to be considering only a very narrow spectrum of potential outcomes. They have become convinced that monetary conditions will remain easy for a very long time, and may be taking more assurance than central banks wish to give. Debt ratios in the developed economies have risen by 20 percentage points to 275% of GDP, since the Lehman crisis. Credit spreads have fallen to wafer-thin levels. Companies are borrowing heavily to buy back their own shares, and 40% of syndicated loans are to sub-investment grade borrowers, a higher ratio than in 2007, with fewer protections from loss.

The Bank of International Settlements, the central bank for the central bankers of the world, warned it is annual report two weeks ago that equity markets had become "euphoric". Volatility has dropped to an historic low. European equities have risen 15% in a year despite near zero growth and a 3% fall in expected earnings. The cyclically-adjusted price earnings ratio of the S&P 500 index in the US reached 25 in May, six points above its half-century average. Overall, it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally.

Some of you might pick the student loan market, with over $1 trillion in outstanding loans and growing. The deeply indebted college graduate has become a stock character in the national conversation: the art history major with $50,000 in debt, the underemployed barista with $75,000, the struggling poet with $100,000. That’s not really typical of student loan debt. Only 7 percent of young-adult households with education debt have $50,000 or more of it. By contrast, 58 percent of such households have less than $10,000 in debt, and an additional 18 percent have between $10,000 and $20,000.

That’s not to say student loan debt is not a concern, it is, and it is growing. In 2010, 36 percent of households with people between the ages of 20 and 40 had education debt, up from 14 percent in 1989. The median amount of debt, among those with debt, more than doubled, to $8,500 from $3,517, after adjusting for inflation. Student loan debt is a problem, but it isn’t a new problem, it’s just a trillion dollar problem now, but it hasn’t imploded in the past 2 decades and there doesn’t seem to be an immediate catalyst.

How about a bubble in energy? Ambrose Evans- Pritchard writes: Data from Bank of America show that oil and gas investment in the US has soared to $200 billion a year. It has reached 20% of total US private fixed investment, the same share as home building. This has never happened before in US history, even during the Second World War when oil production was a strategic imperative.

The International Energy Agency (IEA) says global investment in fossil fuel supply doubled in real terms to $900 billion from 2000 to 2008 as the boom gathered pace. It has since stabilized at a very high plateau, near $950 billion last year. Output from conventional fields peaked in 2005. Not a single large project has come on stream at a break-even cost below $80 a barrel for almost three years….

There are, of course, other candidates for the bubble prize of the current economic cycle, now into its 22nd quarter and facing the headwinds of US monetary tightening. China’s housing boom has echoes of the Tokyo blow-off in 1989, and is four times more stretched than US subprime in 2006, based on price-to-income…Emerging markets have racked up $2 trillion in foreign currency debt since 2008. They are a much larger animal than they were during the East Asia crisis of the late 1990s, so any crisis would do more damage.

Yet the sheer scale of “stranded assets” and potential write-offs in the fossil industry raises eyebrows. IHS Global Insight said the average return on oil and gas exploration in North America has fallen to 8.6%, lower than in 2001 when oil was trading at $27 a barrel. What happens if oil falls back towards $80 as Libya ends force majeure at its oil hubs and Iran rejoins the world economy?

And that’s before we get to another threat to fossil fuel investments that Evans-Pritchard mentions: that governments might get serious about climate change and impose meaningful restrictions, like hefty carbon taxes. Right now, that seems like a tail risk, but the crisis just past was a tail event as well. And much higher energy prices resulting from restriction on fossil fuel production would slow down economic activity markedly, which again could blow back to leveraged investors in unexpected ways.

Friday, July 11, 2014 - TGI Friday

TGI Friday

by Sinclair Noe

DOW + 28 = 16,943
SPX + 2 = 1967
NAS + 19 = 4415
10 YR YLD - .01 = 2.52%
OIL – 2.44 = 100.49
GOLD + 3.70 = 1340.00
SILV + .03 = 21.55

We start with a quick review of the global hot-spots.

Israel and Gaza are throwing missiles at each other. Israel has better offense and defense. Approximately 100 Palestinians have died in the bombing; one Israeli has died in the missile attacks. President Obama has offered to negotiate a ceasefire but there isn’t much interest. Palestinian militants say they will fire missiles at Tel Aviv’s main airport. Israelis won’t rule out a ground war and vow the aerial assault will continue until quiet is restored.

Ukrainian President Poroshenko vowed to "find and destroy" pro-Russian rebels who killed 23 servicemen and wounded nearly 100 in a missile attack today. Kiev blames Moscow for fanning the violence and allowing fighters and high-powered weaponry to cross the frontier from Russia to Ukraine.

Kurdish forces seized two oilfields in northern Iraq and took over operations from a state-run oil company. Kurdish politicians formally suspended their participation in Iraqi government in Baghdad. An oil ministry spokesman in Baghdad described the takeover as dangerous and irresponsible. The Shi’ite run government of Prime Minister Maliki has been trying to cobble together a coalition government with very little success and it now appears the country has literally been divided into three states. Meanwhile, when the extremist Sunni faction known as ISIS took over the city of Mosul, they reportedly captured some radioactive materials, 40 kilos of uranium. The International Atomic Energy Agency says it is low grade and doesn’t pose a risk. I’m just guessing that story isn’t the last we’ll hear about the radioactive materials.

Portugal’s government and central bank tried to reassure investors that the country’s banking system is safe and sound. Banco Espirito Santo said any losses at the holding company Espirito Santo International would not pose a danger to the bank. European markets moved a little higher today.

Recent financial history in the Eurozone paints a less than compelling picture of bank soundness. You will remember when the Greek banks floundered. About four years ago, there was that little problem with Bankia in Spain. Bankia bought up smaller bankrupt regional banks and then went bankrupt itself. Bankia shareholders and Spanish taxpayers took the brunt of that failure. You will also remember the Bank of Cyprus, where the depositors took a big haircut.

The common theme in Eurozone bank failures is that things go wrong, governments claim everything is under control, banks fail, banks get bailed out or bailed in, depositors and taxpayers get the shaft. Rinse, lather, repeat. And then you think, these are just the banks in the peripheral countries. Don’t forget the money laundering by HSBC and BNP Paribas, and the tax evasion schemes from Credit Suisse.

Back in the USA, the speaker of the House of Representatives is suing the President. Politics makes strange bedfellows. Casino magnate and conservative donor Sheldon Adelson joined Berkshire Hathaway CEO Warren Buffett and former Microsoft CEO Bill Gates to write a New York Times op-ed criticizing House Republicans for failing to address an overhaul of the nation’s immigration system, which they said “borders on insanity.”

And the top story in America today…, Lebron James will take his basketball talents to Cleveland.

The World Cup championship will be played Sunday; Germany versus Argentina. More than one billion people are expected to watch at least a bit of the final game; more than 3.2 billion will have watched at least some of the games of the tournament, which would make World Cup 2014 the most watched televised event ever.

The markets moved higher today, which is more than we can say for CYNK Technology, the obscure OTC stock that surged 36,000% from a couple of pennies to more than $25 dollars in a few weeks, with nothing in the way of an actual business. The SEC closed down trading. I told you it was a bad idea.

Potato salad, however, is apparently a good idea. A guy from Ohio posted a simple request on the crowd-funding website, Kickstarter: Help him raise $10 to buy the ingredients to make potato salad. Within about a week’s time, 5,300 people donated between $1 and $10 to the potato salad endeavor for a grand total of $44,000.

Meanwhile, Wells Fargo was the first of the big banks to report second quarter earnings. The bank’s earnings per share of $1.01 in the second quarter matched analyst’s estimates; profit rose 4% from the same period a year ago, to $5.7 billion. The bank’s second-quarter revenue fell to $21.1 billion from $21.4 billion a year ago.

The FTC has sued Amazon for billing parents millions of dollars for unauthorized app purchases made by children. The FTC suit seeks an order that Amazon pay back parents for such purchases and also force the company to require parental consent for such purchases in the future.

Meanwhile, Amazon is seeking permission from the FAA to test its delivery drones near Seattle. Amazon wants to use drones to deliver packages in 30 minutes or less as part of a program called “Prime Air”. In 2012, Congress required the FAA to establish a road map for the broader use of drones. The FAA has allowed limited use of drones in the US for surveillance, law enforcement, atmospheric research and other applications. The Federal Aviation Administration estimates about 7,500 drones will be flying across the sky for commercial use by 2018. The agency plans to issue rules by the end of this year governing the flight of drones weighing less than 55 pounds. Last year, the US government created six sites for companies, universities and others to test drones for broader commercial use.

About a month ago, I told you that Apple was working on a new type of glass made of synthetic sapphires. This week, Apple won a patent for “fused glass device housings”, a new method of fusing glass to make casings for devices like the iPhone.  There is speculation that the next version of the iPhone will use the nearly indestructible glass for a cover or for an entire casing. According to the new patent, Apple has figured out a way to build an all-glass device that would still be durable and lightweight, essentially by fusing multiple pieces of glass together rather than designing casings out of a single slab. The new casing could be a sales killer; if the case doesn’t break, why would you be forced to buy a new one.

America’s largest reservoir and Las Vegas’ main water source and an important indicator for water supplies in the Southwest, will fall this week to its lowest level since 1937 when the manmade lake was first being filled. Lake Mead is expected to drop to 1,081 feet above sea level; by 2016 the lake is projected to drop below 1,075 feet above sea level and trigger water rationing.

The California State Water Resources Control Board will hold a public hearing next week to impose rules that would ban wasteful outdoor watering; things like hosing down sidewalks and driveways, or washing a car without a shut-off nozzle. The rules would give local agencies the authority to impose fines of up to $500 a day on scofflaws, although enforcement would probably start with warnings and escalating fines.

At the beginning of the year, Governor Brown declared a drought emergency and asked residents to voluntarily cut use by 20%, but water use has only declined by 5%, and in Southern California’s 3 largest cities, water use has increased in the last year.

Over a three-week span starting next Monday, 72% of the S&P 500's members will report earnings, and we’re off to an uneven start. Alcoa kicked off the season with strong results. Wells Fargo posted decent numbers but mortgage originations were down; that had been a cash cow for Wells Fargo. Container Store reported earnings that were a big disappointment. Why would you buy boxes, if you weren’t moving? The results seem to indicate that the housing market is weak, or possibly consumer spending is weak.

Yesterday, the discount chain, Family Dollar reported same store sales fell 1.8% during the quarter, and the CEO offered a downbeat assessment: "Our results continue to reflect the economic challenges facing our core customer and an intense competitive environment."

And then Gap topped off the week of discouraging retail commentary by reporting June same-store sales that fell 2% year-over-year. Sales were expected increase 0.8%. Gap's management, however, was light on additional commentary. This rash of discouraging retail data, however, makes the broader US economic picture seem murky, and consumer demand seems to have been weak in a number of sectors of the economy, but earnings season is just starting.

Many of the biggest banks on Wall Street will turn in quarterly results that will provide some insight into how the slowly improving economy is translating to companies’ bottom lines. Among the big names on the earnings calendar this week: Citigroup, Goldman Sachs, Morgan Stanley, JPMorgan, Bank of America.

Next week’s economic calendar includes a report from the Commerce Department on retail sales in June. Wednesday brings the PPI, or producer price index, or prices at the wholesale level. Another, though indirect, part of the inflation outlook is the level of slack in industrial capacity. When goods producers have little capacity to spare, chances increase for bottlenecks and shortages that could introduce price increases at the wholesale level. The Fed will report on industrial production and capacity utilization on Wednesday. On Wednesday, the National Association of Home Builders and Wells Fargo will release its July housing market index, a gauge of builder confidence. The Commerce Department will report on June housing starts and building permits Thursday. And Tuesday and Wednesday, Federal Reserve Chairwoman Janet Yellen takes the Hill to deliver semi-annual testimony before the House and the Senate, where she will regale lawmakers with tales of noisy inflation and an economy that is inches from liftoff.

Thursday, July 10, 2014 - If It’s Not One Thing…

If It’s Not One Thing…
by Sinclair Noe

DOW – 70 – 16,915
SPX – 8 = 1964
NAS – 22 = 4396
10 YR YLD - .01 = 2.53%
OIL + .59 = 102.88
GOLD + 8.70 = 1336.30
SILV + .32 = 21.52

We start today with the hottest stock in the world: CYNK Technology, ticker CYNK.  It is a one person company, which has something to do with a website, with headquarters in Belize, maybe. There is no indication of revenue, possibly about a million in losses. It had been trading for a couple of pennies, and then for no apparent reason it started trading higher. After closing at 6 cents on May 15 it began its surge with a 3,650% jump to $2.25 on June 17. The stock climbed as much as 49% to $21.95 earlier today in over-the-counter trading on volume of more than 380,000 shares before erasing its gain to close down 5.5% to $13.90, and a market cap of a little more than $4 billion. How and why did this happen? Nobody seems to have an answer, but I think it would be a very, very bad idea to do anything with this stock, just to be clear.

Se nao e uma coisa e outra coisa.

Which is Portuguese for “if it’s not one thing, it’s another thing.”

I’m sure somebody in Lisbon was fully aware of what was going on, and they were waving their arms and screaming about the bank that was ready to implode; and nobody paid any attention because there was so much else happening around the world. Iraq is fractured, bombs are flying in Israel, Germany is expelling a US spy, the Italian economy looks wobbly, Libya, Ukraine, Nigeria, Thailand, China. Pick a global hot spot, pick ten global hotspots, and I bet Portugal is not on the list.

Here’s the story: Espirito Santo International is a big conglomerate in Portugal; they missed a payment on some short-term debt this week. So, a couple of subsidiaries got clobbered, Espirito Santo Financial Group shares down 9%, and Banco Espirito Santo shares down 17%. Trading was halted.  The credit rating agency, Moody’s, cut the corporate credit rating to junk status, which is basically closing the barn gate after the cow gets out.

While I make no claim to any particular knowledge of the Portuguese banking system, the consensus is that this problem should not create a meltdown scenario; however, there has been a singe factor. Borrowing costs for Greece, Spain, and Italy bounced a bit higher. Again, this is not earth shaking, but it did cause a brief flash of realization that the banking problems of the past few years have not been corrected.

A couple of years ago the European Central Bank developed a plan for dealing with sovereign debt crises, the OMT or Outright Monetary Transactions program, but it has never been used and it probably wouldn’t apply even if the situation in Portugal started to create a meltdown scenario. So the fear out of Portugal is something called the “doom loop”; that’s the cycle in which weak banks lean on governments for support, draining public finances, which in turn drags down the banks with them.

A couple of years ago,ECB President Mario Draghi bought some time when he declared the central bank would do “whatever it takes”, and then they did nothing. So it was like a whiff of smoke that reminds you that never bought fire extinguishers, even after that little explosion in 2008, and the Greece fire in 2011.

And so, European stocks took a hit today, and that spread over to Wall Street, where the Dow Industrials started the day with a 180 point dip, until traders remembered – it’s Portugal. And then they decided that a little pullback following a 6 week rally was to be expected and Banco Espirito Santo is nothing to fear, even if you don’t have a fire extinguisher.

So, with the long-term memory of a dog chasing a squirrel, we move on to our next topic. After all, we live in a mobile-first and cloud-first world. So says Satya Nadella, the CEO of Microsoft; no he’s not the guy trying to buy the LA Clippers, he’s the guy who replaced Steve Ballmer. Nadella has sent out a really long email to all Microsoft employees outlining his vision for Microsoft. Over the years, Microsoft made a very large amount of money serving the PC world. Its Windows operating system and Office software generated the vast majority of its sales and profits, but now the personal computer is going the way of the typewriter. Microsoft used to talk about “a computer on every desk and in every home,” a vision it clearly succeeded in delivering. But what do you do when you’ve delivered that vision?

So Nadella writes: “Computing is ubiquitous and experiences span devices and exhibit ambient intelligence. Billions of sensors, screens and devices – in conference rooms, living rooms, cities, cars, phones, PCs – are forming a vast network and streams of data that simply disappear into the background of our lives. This computing power will digitize nearly everything around us and will derive insights from all of the data being generated by interactions among people and between people and machines. We are moving from a world where computing power was scarce to a place where it now is almost limitless, and where the true scarce commodity is increasingly human attention.”

There are a couple of interesting phrases in the mission statement from Nadella; he writes, “computing is ubiquitous” and also “ambient intelligence”. The idea that computers are ubiquitous is fairly easy to understand; just look around you; you probably have a smart phone close at hand; if you are in an office, you still have PCs, and don’t forget the computers in the printers and telephones, and thermostat, and electric meter. If you are driving right now, your car is a computing marvel. And if you are at home, check out the computer in your refrigerator, and dishwasher, and a dozen other gadgets and appliances. Another name for ubiquitous computing is the “internet of things”.

And the idea here is to connect machine to machine, and machine to human, and then human to human. We’ve been talking about that for a long time. The computers would be embedded in almost everything and everything would communicate seamlessly with everything else. We’re not there yet, but if you have questions about the internet of things, just ask Siri or Cortana.

All that computing power means we are surrounded by an ocean of data. The exploration of that data constitutes what Microsoft researchers call the “fourth paradigm”, exploration of data to discover new and interesting results to power a new generation of artificial intelligences. Microsoft Research head Peter Lee recently talked about some of the AI breakthroughs that were powering the new tools. Discussing the concept of “transfer learning,” he revealed that by training a speech recognition neural net on multiple languages, its performance improved with each new language, even on previously trained languages.

There are already apps that can infer context from our emails and documents and then deliver information we need, or might need, when we need it. We’ve already seen this in marketing and advertising; based upon your searches, the data programs can figure out whether you are getting married, pregnant, planning a vacation, or looking for a job; and then they deliver advertising that should grab your fancy and even calculate the probability of a purchase, putting the supply chain in motion, ready to send out drones to deliver your package with same day delivery, or even within the hour. It’s a little like the waiter anticipating when you want a coffee refill; that sounds like a simple task but it is incredibly complex and requires understanding the differences between correlation and causation. Computers are not good at that, but they’re getting better, or maybe they’re getting smarter.

As computing becomes more and more ubiquitous all those little computers, embedded in almost everything, are gathering data; and the neural networks are analyzing the data – watching and learning, and the data eventually becomes information, and the information becomes knowledge. And we end up with collective wisdom. At least that’s the idea.

We’re closer than you think. We already know that computing power grows exponentially. Moore’s Law basically says that technology performance indicators double every 18 months, which leads to incredible innovative applications only slightly bogged down by social acceptance. Not every innovation makes it into common usage because of concerns about privacy, lack of trust, reliability, or just information overload. Somewhere there is a huge scrapyard of abandoned apps.

There is an even larger ocean of smaller and more powerful embedded computers monitoring our actions and data and trying to figure out where we want to go, and then trying to figure out how to help us get stuff done. That’s the benign version. The version will a little less sugar coating involves a complete loss of privacy and subjugation before the robot overlords. Then again, in a world of CYNK Technology and Portuguese doom loops, maybe we deserve robot overlords.

Microsoft will have an earnings call next week, and we’ll likely learn more then. Today’s six page memo was big on building productivity, but that might also mean pink slips for many Microsoft employees; after all there are bound to be some redundancies following the Nokia acquisition. Nadella writes that "We will reinvent productivity to empower every person and every organization on the planet to do more and achieve more." But for all the talk of a brave new mobile first, cloud first world, don’t expect Microsoft to abandon the Xbox game console; it’s a money maker. Still, it is a fairly bold new direction for Microsoft, maybe the biggest vision change since Bill Gates ran the place.

Tuesday, April 09, 2013 - Poultice Does Not Cover the Wound

Poultice Does Not Cover the Wound

by Sinclair Noe

DOW + 59 = 14,673
SPX + 5 = 1568
NAS + 15 = 3237
10 YR YLD +.01 = 1.75%
OIL +.60 = 93.96
GOLD + 12.30 = 1586.00
SILV + .68 = 28.08

The Dow Industrials hit a record high close. The S&P 500 was close to a record; not quite.

Yesterday, there was a Statement Issued by the Europe Commission on Portugal. The Statement reads: “The European Commission welcomes that, following the decision of the Portuguese Constitutional Court on the 2013 state budget, the Portuguese Government has confirmed its commitment to the adjustment programme, including its fiscal targets and timeline. Any departure from the programme's objectives, or their re-negotiation, would in fact neutralise the efforts already made and achieved by the Portuguese citizens.”

Let me clear this up for you; the Portuguese courts ruled that austerity was a bad thing and suggested that the Portuguese governmetn stop with the austerity. By ruling that four government austerity measures, including planned cuts in public-sector pay and state pensions, were in breach of the constitution, the court has blown a 1.3-billion-euro hole in the 2013 budget. It has raised the possibility of another bail-out crisis in southern Europe while the dust is still settling on the rescue of Cyprus’s banks.

Let's look at Portugal:  Portugal is in a recessionary cycle. The economy will shrink by 2.3 per cent this year, more than twice as much as the previous government forecast (and the slowdown of exports to the rest of the eurozone is not helping). The deficit-to-GDP ratio widened from 4.4 per cent in 2011 to 6.4 per cent last year, and is forecast to be 5.5 per cent in 2013. Far above the target of 3 per cent that the government had agreed with the Troika. The budgetary cuts did not boost private spending, and expectations remain gloomy. Portugal has entered a recessionary cycle. People have no reason to believe the future will be any better. So long for the confidence fairy.

For now, the Portuguese government is disregarding the court; and this makes the European Commission very happy. Austerity may be illegal in Portugal, but the government is sticking with it. I'm not quite sure how this is supposed to work in a supposed democracy. And there is no indication that austerity programs are doing anything but destroying the Portuguese economy.

And since this austerity thin has been working so well for parts of Europe, we're giving it a try in the US. Last Friday's jobs report was a big disappointment, but at least it was still showing some gains. The March jobs report was the first since the start of sequestration. It's hard to see any direct connection between those poor job numbers and the sequester. The government has been shedding jobs for years. We are just starting to see the results of sequester, but we are seeing it in bits and pieces; thousands of bits and pieces.

The public schools of Syracuse, New York, will lose over $1 million. The housing authority of Joliet, Illinois, will take a hit of nearly $900,000. Northrop Grumman Information Systems just issued layoff notices to 26 employees at its plant in Lawton, Oklahoma. Unemployment benefits are being cut in Pennsylvania and Utah. Some 1,700 poor families in and around Sacramento, California are likely to lose housing vouchers that pay part of their rents. More than 180 students are likely to be dropped from a Head Start program run by the Cincinnati-Hamilton County (Ohio) Community Action Agency. Two thousand civilian employees at the Army Research Lab in Maryland will be subject to one-day-per-week furloughs starting on April 22, for example, resulting in a 20 percent drop in pay. The Hancock Field Air National Guard Base is furloughing 280 workers.

Over one million federal workers are set to begin unpaid furloughs this month, amounting to pay cuts of anywhere from 20 to 30 percent. Sequestration has also prompted the extension of a pay freeze already in force for federal workers. The cuts will result in the equivalent of 750,000 full-time job losses throughout the economy.

Due to a cut to Medicare reimbursement for expensive chemotherapy drugs, cancer clinics across the country have already begun to turn away thousands of Medicare patients, forcing them to seek treatment at hospitals, which may not be able to accommodate them

The U.S. District Court in Los Angeles announced that it will close its clerk's office for seven Fridays over the next few months. Utah officials said they would limit Friday federal court openings beginning in April. In Nevada and several other districts, federal courts are "going dark" on criminal cases on Fridays, the day that many federal public defenders will be furloughed. No justice on Fridays.

The Federal Aviation Administration has delayed until mid-June the closing of 149 airport control towers, but still plans to go forward with the plan, As the travel industry nears its summer upswing, airlines and hotels are joining other companies in warning about lost revenue due to federal budget cuts that started in March -- and fear they'll lose much more. This week, Delta Air Lines and US Airways Group said reduced last-minute bookings by government workers cut their unit revenue in March, sparking a selloff in airline stocks.

Shares of F5 Networks Inc plunged 18 percent on Friday, after the network equipment maker partly blamed lower government sales for its profit warning - news that also pressured shares of rivals Juniper Networks Inc and Cisco Systems Inc..

It's earnings reporting season. Over the next few days, we'll get reports from a couple of the big banks, including JPMorgan Chase and Wells Fargo. We already know the big banks are likely looking at the best results since 2006. So what are they going to do? They are firing 21,000 workers. Revenue is weak. The business model is changing. Headcounts are being re-aligned. The departures come on top of 320,000 jobs cut by financial companies over the past 5 years. US banks had $141 billion in net income last year, the second-best on record behind the $145 billion total reported for 2006.

It was easy to miss a little story from a few days ago. The Consumer Financial Protection Bureau hit the nation’s four largest mortgage insurers with a total of $15.4 million in fines for “allegedly” paying kickbacks to lenders to steer business their way. There was no admission of wrongdoing.

Back in the summer of 2009, the Inspector General of the Department of Housing and Urban Development handed the Justice Department evidence that laid bare a scheme by lenders, including: Citigroup, Wells Fargo, Countrywide, and so on, to get kickbacks from mortgage insurers for making borrowers who had to buy mortgage insurance, purchase coverage from those companies kicking back profits to lenders.

One estimate of the amount of kickbacks is $6 billion. But the Big Four insurers were only fined a total of $15.4 million. Genworth Financial and AIG’s United Guaranty unit each paid $4.5 million. MGIC Investment Corp. paid $2.65 million, and Radian Group paid $3.75 million. Of course, nobody is actually guilty; nobody will ever go to jail; nobody has to stop doing what they do.

The Federal Reserve and the Office of the Comptroller of the Currency are starting to mail out checks as part of a multi-billion dollar settlement with banks over mortgage foreclosure abuses. The banks were forced to conduct their own review of abuses. The banks hired consultants who worked for the banks and according to the consultants, the banks did abuse homeowners, but they claim they didn't do too much. Of course, the consultants were supposed to review millions of foreclosed loans but that would have taken a long time and been a whole lot of work, so they just reviewed some of the files. Good enough for the regulators.

This round of self-revealed abusive behavior will cost the banks $3.6 billion. The first checks will go to members of the military, about 1,082 service members who were foreclosed on illegally by the banks. Under the settlement, each borrower will receive about $125,000, the largest amount of relief. Most homeowners who will see checks, will see checks for $300 dollars or less. I'm sure that makes everything better. If you seek forgiveness, the poultice must cover the wound.

Monday, April 08, 2013 - Cat Food Futures Soar on Chained CPI

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Cat Food Futures Soar on Chained CPI

by Sinclair Noe

DOW + 48 = 14,613
SPX + 9 = 1563
NAS + 18 = 3222
10 YR YLD + .04 = 1.79%
OIL +.82 = 93.52
GOLD – 9.60 = 1573.70
SILV - .05 = 27.40

The S&P 500 fell 1 percent last week as US payrolls had the smallest gain in nine months in March. The economy added 88,000 jobs in March, even though prior month job gains were revised higher; the unemployment rate dipped to 7.6%, mainly because more people left the labor market and are no longer counted for one reason or another. The idea is that some people just retire, or other people just can't find a job, so they drop out of the workforce.

One reason that so many people are just dropping out of the workforce now is the shortening of the period of extended unemployment benefits. As long as people are receiving unemployment insurance they have to be looking for work. When their period of eligibility ends, most people just drop out of the labor force. The period of extended benefits was shortened in most states at the end of 2012. As a result, many people went from being classified as unemployed (no job, but looking for work) to being out of the labor force (no job and not looking for work). They are still unemployed; they still need a job; most of them would still like to get a job; some of them have moved into an underground economy; but you know, we just stop counting some people.

There are a large number of people who do not respond to the Bureau of Labor Statistics' Current Population Survey (CPS), the standard survey used to measure labor force participation. In recent years the non-response rate overall has been close to 12 percent, as opposed to just 5 percent three decades ago. The non-response rate varies hugely by demographic group. For older white men and women it is 1-2 percent. By contrast, for young African American men it is close to one-third.

The Bureau of Labor Statistics effectively assumes that the people who don't get picked up in the CPS are just like the people who do. This assumption may not be plausible. The people who don't respond may be more transient or may have legal issues that make them less willing to speak to a government survey taker. For these reasons they may be less likely to be employed than the people who do respond to the survey.

The earnings reporting season kicks off today; it needs to be strong to support the recent run-up in the equities market. Alcoa kicks off the earnings reporting season, alphabetically it leads the pack among the Dow Industrial stocks. After the close, Alcoa reported an increase in quarterly profit , but revenue fell short, and share prices dipped in after hours trade.

JPMorgan, Wells Fargo, and Bed Bath & Beyond are among nine companies in the S&P 500 scheduled to report earnings this week. Analysts project profits at S&P 500 companies fell 1.8 percent in the latest quarter, which would the first year-over-year drop since 2009. Analysts had predicted a 1.2 percent increase when surveyed in January. They'll revised estimates even more, and probably downward.

Meanwhile, President Obama is sending his budget to Congress on Wednesday. We know that the controversial part of the budget includes a reformulation of the way Social Security payments are calculated. In general, the chained CPI would lower the cost of living adjustment increases for Social Security recipients. The way chained CPI works, is when inflation increases, the government figures that the American people are mighty clever, and we'll just roll with the flow and we'll adjust our spending.

For example: if you used to spend $3 for a hamburger and french fries, but the price goes up to $5, you might not be able to afford that, so you'll switch to a hot dog and chips; if the price of gasoline goes up, you'll start riding a bicycle; of the price of your medications goes up, you'll either get healthy or maybe you'll die – in which case you Social Security payment is completely eliminated. The chained CPI would result in about 3% less benefits for Social Security beneficiaries, and that is each year going forward. A little quick math and we see that in 24 years, there won't be any payouts, and Social Security will be saved. Brilliant! Cat food futures are soaring on this news.

Obama's budget also calls for cuts in Medicare by reducing payments to health-care providers and drug companies and imposing more costs on high-income beneficiaries. While the White House hasn’t yet released specific dollar figures for the budget, administration officials said the plan puts the country on a path toward lower deficits, cutting the gap by $1.8 trillion over the next 10 years.

In exchange for cutting Social Security and Medicare, Obama is calling for tax increases; the quid pro quo is being called the Grand Bargain. Among the tax proposals: a limit of $3 million in an IRA or 401k or other qualified retirement account, a new tax on cigarettes and other tobacco products, a cap value of itemized deductions. Normally a taxpayer multiplies their top tax rate by the amount of a deduction to calculate the taxes saved. But Obama would cap that rate at 28%, which is below the top two income tax rates. Also, Obama is calling for an increased tax rate on investment fund manager income: Managers of private equity, venture capital and hedge funds are taxed 20% on the portion of their compensation known as carried interest, essentially paying the long-term capital gain rate. Obama would like carried interest to be treated as ordinary income, which means those managers would pay a rate as high as 39.6%, or more than 2.5 times the rate they pay now. And the other idea is to close loopholes, which sounds good but we don't have details on that yet.

How this all plays out will be fun to watch. South Carolina Senator Lindsey Graham on Sunday became the first prominent Republican to publicly praise the budget proposal. Actually, Graham said the plan is overall bad for the economy, but "there are nuggets of his budget that... are optimistic."

On Friday, House Speaker Boehner said: “If the President believes these modest entitlement savings are needed to help shore up these programs, there's no reason they should be held hostage for more tax hikes.”

Meanwhile, the Democrats hate the entitlement cuts offered up. There is a chance nobody will vote for the budget. So, when Obama's budget hits Congress on Wednesday, the fun part will be to see which side shreds it first.

Meanwhile, last week we told you about the Japanese monetary stimulus plan. You recall that Japan has been dealing with a banking crisis since the 1990's, its economy stuck in a generation of economic stagnation and low-level but persistent deflation.

A new government took office the day after Christmas, led by prime minister Shinzo Abe, pledging to, in effect, go whole-hog on the Keynesian remedies for Japan’s long recession, particularly by pushing for a combination of fiscal stimulus on a mass scale, and, through appointment of Haruhiko Kuroda as governor of the Bank of Japan; he has pledged to do “whatever it takes” to get annual inflation to 2 percent in a country where inflation has averaged -0.3 percent since 2000. The Japanese stock market is on a tear and the yen has been falling steeply on currency markets, exactly the kind of reaction the BOJ hopes to see.

If everything works as planned, Japan’s industries will rebound on the back of a weaker yen, an improving economy will improve its deficit picture, and the nation will soon have a seamlessly balanced economy of prices rising about 2 percent a year and debt to GDP levels coming down. If things go bad, we could soon be staring at the mother of all sovereign debt crises. Whatever path the Japanese economy takes, it is one that will have lessons and implications for all of us.

Meanwhile, on the continent of Europe, austerity impoverished countries aren't waiting for the results from Japan. Spanish prime minister Mariano Rajoy has called for the European Central Bank to follow other central banks with extra stimulus measures. Portugal's constitutional court rejected part's of the country's austerity budget and issued a ruling that recent deficit cuts to payments for pensioners, civil servants and unemployment benefits were unlawful and should be reversed. US treasury secretary Jack Lew used a visit to Brussels to urge top officials to relax austerity programs and drive growth. Two of Greece's biggest banks risk being nationalized after admitting they were unlikely to raise enough cash from private investors and seeing their merger blocked by the country's international lenders. Greek government officials have said deposits in the banks will not be touched; this is a big concern in light of the recent Cyprus Bank Heist; where the banks robbed the depositors.

Plenty to watch and it's just Monday.