Thursday, May 15, 2014 - A Calm Port in a Stormy World

A Calm Port in a Stormy World

by Sinclair Noe

DOW – 167 = 16,446
SPX – 17 = 1870
NAS – 31 = 4069
10 YR YLD - .04 = 2.50%
OIL - .81 = 101.56
GOLD – 8.90 = 1297.80
SILV - .29 = 19.56

Today, it seems there is a lot going on. Let’s start with international hotspots.

Turks are angry following a deadly mine explosion that has killed at least 300 miners and trapped possibly 100 more; thousands of workers joined a protest strike, demonstrators clashed with security forces, and the discontent threatens the government. An aide to the prime minister was photographed assaulting a protester and there are claims that Prime Minister Erdogan himself struck a teenage girl; that after he was forced to flee an angry crowd and seek safety in a nearby grocery store. Turkish trade unions held a one-day strike over safety standards in the mining industry. Security forces deployed tear gas and water canons against protesters.

Meanwhile, reports of dozens of deaths from an explosion along the border between Syria and Turkey. Also, further allegations of ongoing chemical attacks by the Syrian government. Speaking in London today, Secretary of State John Kerry announced the US, Britain, and European and Arab states are increasing efforts to support rebels fighting to overthrow President Assad. Assad still has the backing of Russia, and that makes already tense relations with Russia even more edgy.

Fears of a civil war in Ukraine are mounting. Nobody wants to jump in with troops, and so there are clandestine forays by unidentified groups or squads of soldiers. And the major powers are only explicit with sanctions. Today, Russia announced it will halt the export of rocket engines crucial to US military defense and space programs. It must be very uncomfortable on the International Space Station these days.

Anti-Chinese sentiment has been running high in Vietnam ever since Beijing deployed an oil rig into disputed waters in the South China Sea on May 1st. There have been encounters including ramming and exchanges of water cannon between Chinese vessels operating near the rig and boats from Vietnam, which wants China out of the area. Today, Cambodia reports hundreds of Chinese nationals had poured across the border from Vietnam to escape riots.

Also, Japan’s Prime Minister, Shinzo Abe, has called for a review of how Japan interprets its pacifist constitution to allow its military to participate in conflicts beyond its borders for the first time since the end of the second world war; this in response to a growing conflict between China and Japan over islands claimed by each country; of course, it’s not just islands but the oil reserves around the islands.

Meanwhile, China issued a bunch of economic data this week, and it mostly points to a real estate slump; home sales fell 18%; housing starts were scaled back by 25%. Moody’s Analytics estimates that the building, sale and outfitting of apartments accounted for 23% of Chinese gross domestic product last year. That is higher than in the US, Spain or Ireland at the peaks of their housing bubbles. The scale of China’s building boom and the country’s reliance on infrastructure investment for growth is unprecedented. In just two years, from 2011 to 2012, China produced more cement than the US did in the entire 20th century, and it all seems to be on shaky ground these days. Each attempt to rein in China’s $25 trillion credit bubble seems to trigger wider tremors.

Brazil has sent army troops to Recife, the capital of the northeastern state of Pernambuco, after strikes lead to riots. State police walked off the job Tuesday. Schools and universities also closed down because of concerns for student safety. Today, further protests in Sao Paolo and Rio de Janeiro drew tens of thousands to the streets. The protests are centered on cities that will host the upcoming World Cup, the quadrennial global soccer championship games. Huge anti-government protests across Brazil last year overshadowed the Confederations Cup, a warm-up tournament for the World Cup. Some of the demonstrations saw clashes between activists and police, and at least six people were killed.

Many Brazilians are angry at the billions spent to host the World Cup. Protesters have said the government should focus spending instead on improving Brazil's woeful health, education, security, housing, and infrastructure systems. The World Cup starts in less than 30 days, and the whole world will be watching.

In one week, Europeans will elect a European Parliament. It’s the second biggest election in the world, after India. Voters look set to choose more assorted extremists, anti-Europeans and oddballs than ever. The Euroland economy is going nowhere, and with the razor thin exception of Germany, most countries are seeing economic contraction; that tends to lead to strange election results.

There are other hotspots around the World. The president of Yemen has declared all-out war on Al Qaeda militants and army troops are now trying to dislodge Al Qaeda from the Arabian Peninsula. Political violence returned to Bangkok Thailand, and the Thai army killed a handful of protesters and threatened more military action if the protests continue. And of course, the Nigerian crazies, Boko Haram, and the kidnapping of hundreds of schoolgirls. And of course, all the old seething conflicts that haven’t been resolved. And don’t forget, the US is still at war in Afghanistan. I know, it’s easy to forget. Apparently, it’s even easier to forget the veterans that have served our country.

Today, Secretary of Veterans Affairs, General Eric Shinseki went before the Senate Veterans Committee to explain the mess that is the VA; this following revelations that as many as 40 veterans died while waiting for medical care at the VA facility in Phoenix.

Since the allegations arose last month that veterans were forced to wait months for appointments at the Phoenix VA medical center and that VA officials were covering up the problem, Shinseki said he has asked the VA's inspector general to investigate. He said he has also launched an intense investigation of scheduling practices at the VA's other 151 medical centers. Shinseki said he was “mad as hell” and the various Senators all acted very indignant. Of course, it wasn’t very believable theatre.

One of the documents brought forth today was an internal VA memo, written in 2008 by a team of VA managers, listing 25 ways that VA scheduling clerks were cooking the books to make it appear that veterans waiting for medical care actually were being seen on time, when in fact they were being made to wait weeks or months.

And then, 2 years ago, the Government Accountability Office reported that VA schedulers were fudging wait times for veterans seeking outpatient care and avoiding using the electronic waitlist as required. The GAO report includes a response from Shinseki's chief of staff at the time, writing that the VA has "proactively taken steps in response to GAO's findings." Clearly that didn’t happen.

Meanwhile, Southern California is on fire. Actually nine fires are burning in the greater San Diego area and they have already destroyed more than 10,000 acres, forcing evacuation of about 125,000 residents. California Governor Jerry Brown has declared a state of emergency to free up resources. It’s hot, it’s dry, and it’s just the start of the fire season.

The 2014 fire season is repeating a pattern of destruction established over the past decade by a combination of high temperatures, parched vegetation and more people living in wooded areas. Fires feeding on plentiful dry grass, brush and hardwood are requiring more personnel and money to bring them under control. More than twice as many acres burned across the US through May 9 this year than during the same period in 2013.

Last week, 96% of California was considered to be under “severe” or worse drought conditions, with about 4% of the southeastern tip of the state still in “moderate” drought conditions. A year ago, only 46% of the state suffered from “severe” or worse conditions. As of today, the National Drought Mitigation Center reports severe drought conditions now engulf 100% of California.

Meanwhile, former Treasury Secretary Tim Geithner is trying to polish his tarnished image; he’s on a book tour peddling the notion that the Wall Street bailout was a huge success. And while it might be argued it prevented a Great Depression, it is delusional to consider it a success. It was at best an experiment that did not result in a worse catastrophe. It did little or nothing for the tens of millions of Americans who lost billions of dollars in home equity and savings, and the millions more who lost their jobs. The toll was greatest on the poor and the middle class. Nor have reforms been enacted that will help the middle class and the poor the next time Wall Street implodes.

Economic data today showed industrial production in the US unexpectedly declined in April, held back by a plunge in utilities as temperatures warmed and a broad-based decrease in manufacturing. That contrasted with a higher-than-forecast reading on the Fed Bank of New York’s gauge of regional manufacturing, which climbed to 19.01 this month, from 1.29 in April.

Initial claims for state unemployment benefits declined 24,000 to a seasonally adjusted 297,000 last week. It was the lowest reading since May 2007.

Consumer prices recorded their largest increase in 10 months in April. The Consumer Price Index increased 0.3% last month as food prices rose for a fourth consecutive month and the cost of gasoline surged. In the 12 months through April, consumer prices rose 2.0%. Stripping out food and energy prices, the so-called core CPI rose 0.2% after advancing by the same margin in March. In the 12 months through April, the core CPI increased 1.8%, the biggest gain since August last year.

Normally you might expect higher inflation numbers to result in lower bond prices, which means bond yields would move higher; not today. The yield on the 10-year Treasury note dipped below 2.5% intraday. Of course, Treasuries are considered a safe haven investment, and it seems a lot of people are looking for a calm port in a stormy world.

Thursday, May 08, 2014 - Monetary Policy Is Not A Panacea

Monetary Policy Is Not A Panacea

by Sinclair Noe

DOW + 32 = 16550
SPX – 2 = 1875
NAS– 16 = 4051
10 YR YLD + .01 = 2.60
OIL – 01 = 100.24
GOLD - .10 = 1290.80
SILV - .15 = 19.25

Stocks were mostly lower today. The closing numbers looked quiet but it was a roller coaster ride with the Dow Industrials up about 150 points. The Nasdaq also squandered early gains to finish in negative territory. The Nasdaq ended lower for a third straight session, its longest losing streak since early April. A late selloff in utilities and energy, among the best performing sectors recently, dragged the S&P 500 lower. Of 445 companies in the S&P 500 that have reported earnings, 68.2% beat expectations, above the 66% beat rate for the past four quarters. Profits are expected to rise 5.3% this quarter.

The number of people who applied for new unemployment benefits last week fell to the lowest level in a month. Initial jobless claims dropped by 26,000 to a seasonally adjusted 319,000.

The federal government had a budget surplus of $114 billion in April. That is $1 billion more than a year ago and would be the biggest April surplus since 2008. For the fiscal year to date, CBO estimates the deficit to be $301 billion, down $187 billion compared to the same period in 2013.

Retailers posted modestly higher sales in April. Results from March and April are generally viewed together because of the shifting nature of Easter, which fell about three weeks later this year and moved into April from March last year. For the two-month period, retailers reported 3.4% growth, down from 3.5% a year earlier.

Consumer credit balances increased by $17.5 billion in March to a total of $3.141 trillion. The gain was a bigger increase than the $15.5 billion expected by economists. This was the biggest month-over-month growth rate since February 2013. Nonrevolving debt like college and auto loans grew by $16.4 billion. Revolving debt like credit cards increased by $1.1 billion.

At 4.21%, the 30-year fixed-rate mortgage is at its lowest since the week of November 7, 2013, so says Freddie Mac in their new weekly report on national mortgage rates. Last week, it averaged 4.29%. A year ago, it was 3.42%. Since the housing market crashed, the Federal Reserve has used extraordinarily easy monetary policy to keep interest rates like mortgage rates low in its effort to bolster the housing market and stimulate the economy.  Lately, various housing-market metrics such as existing-home sales, new-home sales, and mortgage applications have all been flagging. Last week, we learned that the US homeownership rate was at a 19-year low, and some experts think it'll never come back.

Yesterday, Fed Chair Janet Yellen said, "One cautionary note, though, is that readings on housing activity—a sector that has been recovering since 2011—have remained disappointing so far this year and will bear watching. The recent flattening out in housing activity could prove more protracted than currently expected rather than resuming its earlier pace of recovery." That was the big takeaway from Yellen’s Congressional testimony yesterday.

Fed Chair Janet Yellen was back on Capitol Hill today for a second day of testimony. She appeared before the Senate Budget Committee.  Yellen’s favorite new line is, “Monetary policy is not a panacea.” That pretty much says it all.

There are a couple of trends that concern Yellen; long term unemployment; there are about 3.5 million workers who haven’t found a job for at least 6 months. Also, income inequality is pulling down spending and slowing the economy. Yellen would like to do something about these disturbing trends, but you know, “Monetary policy is not a panacea.”

Meanwhile, the European Central Bank was meeting to determine monetary policy for the Euroland; they decided to leave interest rates unchanged at 0.25%. ECB President Mario Draghi’s favorite line is “whatever it takes” and he’s been saying it for a couple of years. Euroland is slogging along with persistently low inflation and high unemployment. Draghi says something should be done, but he did not say what; and the ECB might address stimulus of some sort or another next month or so.

Perhaps Draghi is waiting to see how the situation in Ukraine plays out; right now the picture is smoky and very gray. Rebels in eastern Ukraine say they will proceed with a referendum this weekend seeking autonomy even though Russian President Putin appeared to withdraw his support for the vote. Putin yesterday presided over nationwide army drills, a day after he softened his tone by promising to withdraw troops from the border. The government in Kiev says a referendum would be illegal. Putin also indicated he would pull Russian troops from the Ukrainian border, but satellite images show that probably isn’t happening. The situation involving the tug of war between the West and Russia regarding Ukraine has steadily worsened over time and now involves outright economic warfare; sanctions on one side and the threat of energy shortages on the other.

Even former Treasury Secretary Tim Geithner is coming out of exile to hawk a new book. Geithner says there had been talk about nationalizing banks back in the crisis days. On the legacy of the bailouts, Geithner rejects criticism that the Troubled Asset Relief Program benefited the rich rather than ordinary Americans. And yet he acknowledges that the too big to fail banks are bigger and more dangerous than ever.

Have you ever seen a boxer knocked out? The devastating blow is the one you don’t see coming. Mark Carney, governor of the Bank of England and head of the Financial Stability Board, an international watchdog set up to guard against future financial crises, was recently asked to identify the greatest danger to the world economy. He answered shadow banking. It is huge and growing fast, and little understood, and even less transparent. We don’t even know exactly what counts as shadow banking; basically, it refers to lending by non-bank institutions and it involves more than $70 trillion in assets, up from about $25 trillion ten years ago.

A broader definition, however, would include any bank-like activity undertaken by a firm not regulated as a bank: it could be bond trading platforms set up by technology firms, or payment systems offered by Paypal or financing offered by a retailer such as Sears, or peer-to-peer lending, or money market funds, or who knows what. At the core is the concept of credit and lending. Shadow banking fills a void left by traditional banks, which have become miserly with lending.

Yet shadow banking is poorly or non-regulated. Think of the structured investment vehicles, a legal entity created by banks to sell loans repackaged as bonds. These were notionally independent, but when they got into trouble they pulled in the banks that had set them up. Or money market funds, which seemed like a nice safe place to park cash as a stop-gap measure; they seemed conservative, nearly risk free, until they suffered a run.

Banks must now incorporate structured investment vehicles on their balance-sheets. Money-market funds must hold more liquid assets, to guard against runs. Limits on leverage have been imposed or are being considered for many forms of shadow banks. American regulators are still allowing some money-market funds to create the impression that an investor can never lose money in them. The problem for banks is that they are involved in shadow banking, either in the form of loans to shadow banks, or because the banks buy the products created by shadow banks.

One of the biggest paces for concern is China. Banks there are banned from expanding lending to certain industries, and from luring deposits by offering high returns. So they do both of these things indirectly, through shadow banks of various sorts. Some firms are setting themselves up as pseudo-banks. It is hard to imagine that all the shadowy loans to unprofitable steel mills and overextended property developers will pay off. At which point the Chinese government will likely step in a take control, but there will be a cost.

Nouriel Roubini, the New York University professor and chairman of Roubini Global Economics is known as something of an economic pessimist, and now he thinks we’re on the verge of a bubble, but not a collapse. Roubini says the Federal Reserve will keep its key lending rate low even after it lifts off from near zero, where it has rested for the few years. That slow process of normalization will keep the spigot of borrowing flowing, helping support the economy. But it will also lead to risky lending practices. Hence, a bubble is inflating that could eventually pop.

Roubini cited the return of some of the key characters associated with the period before the last financial collapse: Lots of low quality bond sales, debt without strong protections for bondholders. Roubini says: “All the risky things that were happening back in ’06 and ‘07 are back again to the same level, if not more. So we are in the beginning of a credit bubble, but just the beginning.”

Nonetheless, Roubini doesn’t see the reversal happening immediately, citing money that continues to rush into the market. For now, credit investors appear to be stuck in an uneasy equilibrium.

He’s by no means the first person to make this claim: the question of financial stability is one of the key criticisms of the Fed’s accommodative policies. Roubini didn’t criticize the central bank, so much as say that the Fed is damned-if-you-do, damned-if-you don’t.

Yeah, well, we’ve all learned that monetary policy is not a panacea.

Tuesday, February 25, 2014 - Dumb Luck

Dumb Luck

By Sinclair Noe

DOW – 27 = 16,179
SPX – 2 = 1845
NAS – 5 = 4287
10 YR YLD  - .05 = 2.70%
OIL - .76 = 102.06
GOLD + 5.00 = 1342.60
SILV - .07 = 21.99

Just a couple of economic reports to start. The S&P/Case-Shilller home Price Indices for December were posted today. Nationally home prices closed the year of 2013 up 11.3%, while posting a fourth quarter decline of 0.3%. After 26 months of consecutive gains, Phoenix posted -0.3% for the month of December, its largest decline since March 2011. Phoenix once led the recovery from the bottom in 2012, but Las Vegas, Los Angeles and San Francisco were the top three performing cities of 2013 with gains of over 20%.

Another sign that the housing market slowed down during the fourth quarter: Fannie Mae, the nation’s largest mortgage guarantor, saw demand for foreclosed properties dip at the end of the year. Fannie reported last week an $84 billion annual profit for 2013 on the backs of large home-price gains and a series of one-time legal and accounting benefits. The report also showed that its inventory of foreclosed homes increased for the second straight quarter as it begins to take back more properties in Florida and other states where foreclosures have been tied up in courts. The report showed that the prices Fannie received on those properties, as a share of the underlying mortgage balances, declined slightly from the prior quarter for the first time in 2½ years.

The Conference Board’s Consumer Confidence Index decreased to 78.1 in February from a revised 79.4 in January.  Fewer Americans projected business conditions would improve over the next 6 months, dropping from 80.8 to 75.7 fueling anxiety over the outlook for jobs and income that risks restraining consumer spending. The most important thing that would get consumers feeling better about the outlook is if the labor market improves more substantially. Apparently people who work feel better about the economy and are more likely to spend money than people who don’t have jobs. Who knew?

Even if you have income from work, you might still be holding tight to your coin purse. The Labor Department reports that payrolls in December and January showed the smallest back to back gains in 3 years.

White House economist Jason Furman said today the economy could be in a period of slower potential growth, a development that puts greater urgency on longer-run investments. Gains in worker productivity have eased since the recession began compared with the technology-driven improvement of the prior two decades. Without new policies, the country could face slow productivity growth similar to that recorded in the 1970s and 80s.

Weaker productivity gains during that period was offset partially by a rapidly expanding workforce due to the baby boom and more women taking jobs. Over the next two decades, demographic shifts instead will present an impediment to growth. The workforce is projected to expand at less than a third of the pace it did between 1974 and 1992 because the average American is getting older.

Furman laid out six longer-run initiatives the White House will be pushing on the economic front in the forthcoming 2015 budget:

1. The so-called “Opportunity, Growth and Security” proposal would make investments in research, job training and education beyond what’s possible under the budget framework Congress agreed to late last year. Closing tax loopholes and trimming other spending would pay for the new investments.

2. Expand infrastructure investments, ranging from roads to wireless broadband networks. The spending would create jobs in the short run, with the longer-run effect of improving business productivity.

3. Overhaul the business tax system with the long-stated goal of lowering the top rate to 28% while removing loopholes. Furman says, “By developing a system that is more neutral, corporate decision makers can act for business reasons, not tax reasons, which would create an environment in which capital will flow to the most efficient purposes.”

4. Provide universal preschool education. The investment will improve students’ performance as they advance through the education system and ultimately provide employers with higher skill workers.

5. Change the immigration system to make it easier for workers to obtain green cards and clear the way for foreign students to stay in the U.S. once they earn degrees. Immigrants will not simply expand the labor force, but engage in innovative or entrepreneurial activity that further elevates the economy’s potential.

And idea number 6:  Complete free-trade agreements with countries in Asia and Europe. Those deals would make the U.S. more attractive for foreign investment and open markets for domestically produced goods abroad.

Mt. Gox has disappeared. I know, we’re all shocked, shocked I tell you. There is nothing but a blank page on the Mt. Gox website. There was a brief notation on the website saying there might be something happening, maybe an acquisition, or something, then that disappeared and the website was blank again.

Mt. Gox, once the world's biggest bitcoin exchange, abruptly stopped trading today. Several other digital currency exchanges, including Bitstamp and BTC-E, issued statements attempting to reassure investors of both bitcoin's viability and their own security protocols.

Bitcoin investors deposit their holdings in digital wallets at specific exchanges, so the Mt. Gox shutdown is similar to a bank closing its doors - people cannot retrieve their funds. Released in 2009 by an anonymous creator known as Satoshi Nakamoto, the Bitcoin program runs on the computers of anyone who joins in, and it is set to release only 21 million coins in regular increments. The coins can be moved between digital wallets using secret passwords.

While Bitcoin fans have said the technology could provide a revolutionary new way of moving money around the world, skeptics have viewed it either a Ponzi Scheme or an investment subject to potential fraud or just a bad idea. Bitcoin was supposed to be a new, subversive alternative to a financial system that had been exposed as fragile, dangerous and too big to fail in the financial crisis of 2008. If you’re confused by what that is supposed to be, don’t worry, you are still sane; the bitcoin world is the crazy one in this story.

Tokyo-based Mt. Gox began as a venue for trading cards; the name stands for Magic the Gathering Online Exchange. No, I did  not make that up. Mt. Gox had surged to the top of the bitcoin world, but critics, from rival exchanges to burned investors, said the digital marketplace operator had long been lax over its security. Mt. Gox halted withdrawals earlier this month after it said it detected "unusual activity on its bitcoin wallets and performed investigations during the past weeks." The move pushed bitcoin prices down to their lowest level in nearly two months.

This morning, Mt. Gox CEO Mark Karpeles told Reuters in an email: "We should have an official announcement ready soon-ish. We are currently at a turning point for the business. I can't tell much more for now as this also involves other parties." He did not give any other details.

A document circulating on the Internet purporting to be a crisis plan for Mt. Gox, said more than 744,000 bitcoins were "missing due to malleability-related theft", and noted Mt. Gox had $174 million in liabilities against $32.75 million in assets. It was not possible to verify the document or the exchange's financial situation. If accurate, that would mean approximately 6 percent of the 12.4 million bitcoins minted would be considered missing.

But at the same time that the news about Mt. Gox was emerging, a New York firm announced plans to create an exchange that could draw the world’s largest banks into the virtual currency market for the first time. It could still happen, or not. This might be the death knell for bitcoin, or not. Imagine the lunacy of a private entity, printing money out of thin air, thinking that people would accept it as real currency, despite having no inherent value, based on nothing more than the beneficence of the issuer; subject to meltdown and freeze up, where massive amounts of value just disappear in the blink of an eye. The whole idea is the height of lunacy; unless, you’re the Federal Reserve of course.

There is more to it of course. A sovereign government that issues its own “nonconvertible” currency cannot become insolvent in terms of its own currency. It cannot be forced into involuntary default on its obligations denominated in its own currency. It can “afford” to buy anything for sale that is priced in its own currency. It might be able to buy things for sale in foreign currency by offering up its own currency in exchange, but that is not certain. If, instead, it promises to convert its currency at a fixed price to something else (gold, foreign currency) then it might not be able to keep that promise. Insolvency and involuntary default become possible. This seems to be where bitcoin failed; the convertibility part, or at least the part where you could actually buy something with bitcoin.

Speaking of the Fed and failure. Last week we finally saw the transcripts from the Fed from back in the crisis year of 2008. Now, Tim Geithner has a book coming out, titled “Stress Test”.  Geithner has a number of attention-grabbing takeaways. Among them: “We saved the economy from a failing financial system, though we lost the country doing it,” he writes in the book, due out May 13. Geithner led the Federal Reserve Bank of New York at the onset of the meltdown. He served as the Obama administration’s top economic official from January 2009 until January 2013.

On the book’s website, Geithner says: “We made mistakes, it was messy, and the damage was devastating and long-lasting. And yet, at the moments of most extreme peril, the United States was able to design and execute a remarkably effective strategy.” Actually, what we’ve been learning from the transcripts of the Fed in 2008, is that the remarkably effective strategy was more like a drunkard managing to survive a stroll through a landmine; i.e., persistence and dumb luck.

Friday, January 11, 2013 - Meet the New Boss

Meet the New Boss

by Sinclair Noe

DOW + 17 = 13,488
SPX -.07 = 1472
NAS + 3 = 3125
10 YR YLD - .02 = 1.88%
OIL -.06 = 93.76
GOLD – 12.10 = 1663.70
SILV - .42 = 30.54

Within a few days, Tim Geithner will be gone from the Treasury. Geithner was at the center of the financial crisis, first in his role as President of the Federal Reserve Bank of New York and in 2009 as Treasury Secretary. In a recent exit interview he said: “It was a very bad crisis. No playbook. No road map. No clear precedent. If we had a different set of constraints, particularly in fiscal policy, then I think that the economic outcome could have been modestly better.”

To be fair, Geithner was handed a mess, and to his credit he did not turn it into a catastrophe, and there were constraints. Still, Geithner's tenure at Treasury has been a little less than satisfying. The Too Big to Fail banks are bigger than ever; they operate with an explicit public guarantee, and despite Geithner's dissatisfaction with constraints placed on him, he did little to challenge the banksters. Geithner quashed proposals to seize bonuses, impose new taxes or otherwise punish bankers. He claimed that it would have destabilized the banks; instead he created a moral hazard and a two-tiered system of justice; Too Big to Fail became Too Big to Jail and the result is the banksters now operate with impunity. At the same time Geithner was making sure the big banks weren't destabilized, it was far too easy to overlook the lack of stability on Main Street, as families lost their homes. Programs to modify the loans of American facing foreclosures were impotent at best. Geithner sought to incentivize banks to provide mortgage relief; what was needed was a swift kick.

Geithner will be replaced by Jack Lew. Both Geithner and Lew should be applauded for their decades of commitment to public service; they are both intelligent men, but it's disheartening that the President has once again tapped Wall Street for a key economic advisor. Back in 2006, Lew was the chief operating officer of Citigroup's Alternative Investment Unit, a proprietary trading group that oversaw a hedge fund that bet on the housing market to collapse. It's hard to imagine Lew is prepared to stand up to the banksters and fight for policies that protect working families. We need a treasury secretary who will work hard to break up too-big-to-fail financial institutions so that Wall Street cannot cause another massive financial crisis.

And so, this week we have federal regulators proudly announcing an $8.5 billion dollar settlement with 10 big banks in a deal that papers over a sham review of foreclosed loans. The original idea was to provide a review process; independent analysts would go over each mortgage loan and make sure the efforts at loan modification hadn't been bungled; make sure the paperwork wasn't deficient; make sure the fees weren't excessive; make sure the wrong family wasn't being kicked to the street; and make sure the banks weren't robo-signing reams of foreclosure documents without checking for accuracy. But the analysts and consultants didn't really work for the people; they worked for the banks. The reviews that were supposed to detect foreclosure shams were nothing more than a sham.

The comptroller’s office said that it had identified 654,000 potentially problematic foreclosures, a combination of 495,000 claims submitted by borrowers and 159,000 files that the consultants flagged for review. The regulator said it was still determining the number of reviews completed, but the consultants said that only a third of the loans were fully reviewed. Now that the review program is being shut down, we'll never really know the full extent of wrongdoing.

And because the regulators don't know how many borrowers were actually harmed, this week's settlement will be spread out among 3.8 million borrowers; some who don't deserve anything, and not enough for those who were truly aggrieved. And for the 10 banks involved, no clawbacks of fees and profits, and no admission or denial of guilt.

And just last month, HSBC was fined $1.9 billion for money laundering. There were no criminal charges against any individuals, even though the bank admits to laundering billions for Mexican drug cartels, violating the Bank Secrecy Act and also the Trading with the Enemy Act. There were no criminal prosecutions against the bank either. The money laundering was brazen. The bank gave special boxes to the drug cartels, so they could fit their cash deposits through the bank tellers' windows. Other bank employees directed terrorist groups on how to circumvent sanctions. Apparently the rationale of the government for not pursuing criminal cases against individuals at the bank was that to do so when the individuals were employees of such an important bank, might threaten the stability of the financial system.

Money laundering is taking the proceeds of crime, “illegitimate” money, and bringing it into the legitimate financial system so that the criminals can use that money without being tied to those terrible crimes – crimes like manufacturing and distributing drugs, selling people into the sex trade, trafficking in illegal weapons, and terrorist attacks against our troops, our embassies, and our country. This is not mere money we are talking about; it is the daily gang violence on the streets of our cities and towns, it is the increased likelihood that your children will be offered drugs in their schools, it is the abduction of children and selling them into the sex trade; it's the killing and maiming of troops in Afghanistan; the violence and political unrest around the world – all made possible by the banks. And not just HSBC.

HSBC Bank USA was already under a written agreement from 2003-2006 with US regulators to correct deficiencies in its anti-money laundering regime.  In a strikingly similar case, Wachovia was found to have allowed as much as $420 billion through its banks without money laundering controls.  $110 million of that was linked directly to Mexican drug cartels, just like the HSBC case.  Wachovia was fined $160 million, $110 million of which was just coughing up the ill-gotten gains and not an actual penalty.  Not one person was prosecuted.  Recently, Standard Chartered Bank was fined $667 million, and ING Bank was fined $619 million, for engaging in the same criminal activity HSBC was engaged in when it doctored wire transfer information in order to clear transactions from countries barred from accessing the U.S. financial system, like Iran. Again, not a single person is being prosecuted in those cases. If it sounds like a lot of money in fines, just consider that this morning, Wells-Fargo posted fourth quarter earnings of more than $5 billion – far more than the fines imposed on the banks I just mentioned.

And we find this acceptable because the regulators and politicians are afraid to force the banks to conduct business honestly and sensibly. Better to allow the banks to lubricate the transactions of drug cartels and terrorists than face a possible bank closure that might challenge the global banking system.

More than 4 years after the financial crisis nearly imploded the global financial system, a committee of central bankers and regulators from more than two dozen countries, including the United States, has disappointingly given in to lobbying by big banks; watering down rules meant to strengthen the global financial system. After the meltdown, it just made sense that the banks should set aside enough reserves to cover possible and potential losses. The committee unanimously rolled back the so-called Basel III rules that were adopted in 2010 to make them “more realistic”.

The banks argued that requiring them to hold most of their liquid reserves as cash and government securities would restrict their ability to lend to small businesses and consumers because they would have less money to lend. Instead of holding cash reserves or Treasury bonds in reserve, the banks want to be able to hold stocks, or mortgage-backed securities.

Large banks are second to none among institutions in arguing against regulations, no matter how reasonable and valuable in protecting both the public and the banks themselves against unwise behavior. The problem is that the new assets defined as liquid are precisely those that banks found difficult to value and trade in 2008. Relying on mortgage-backed securities to provide liquidity during a crisis is a recipe for disaster, and just stunningly stupid.

The reality is that the banks know that in a crisis they would receive emergency loans and capital from central banks and their governments, so why tie up their reserves with assets that provide only modest returns? And because the banks know they are Too Big to be allowed to fail, they dictate policy in ways that put the world at greater risk of another crisis.

Eighty years ago this month, Ferdinand Pecora, the former assistant district attorney for New York City, was appointed chief counsel for the US Senate Committee on Banking and Currency. In subsequent months, the hearings of the Pecora Commission featured many sensational revelations about the practices that led to the 1930’s financial crisis.

The Commission’s investigation led to far-reaching reform – most famously, the Glass-Steagall Act, which separated commercial and investment banking. But Glass-Steagall didn’t stop there. It created federal insurance for bank deposits. With unit banking (in which all operations are carried out in self-standing offices) viewed as unstable, banks were now permitted to branch more widely. Glass-Steagall also strengthened regulators’ ability to clamp down on lending for real-estate and stock-market speculation. Glass-Steagall separated the banks' deposit-taking and securities underwriting activities. If a bank wanted to gamble, they could, but they couldn't gamble with depositors' money; and if the bankers lost their bet, they lost their own money; they had skin in the game.

The hearings also led to passage of the Securities Act of 1933 and the Securities Exchange Act of 1934. Securities issuers and traders were required to release more information, and were subjected to higher transparency standards. The notion that capital markets could self-regulate was decisively rejected. The contrast with today is striking.

We have a watered down Dodd-Frank Act, largely written by the bankers. We have watered down Basel III rules. And we have banks acting illegally, conspiring with drug cartels and terrorists; and doing so with impunity. And there are stacks upon stacks of illegally laundered dollars bearing the signature of Timothy Geithner, and soon they will bear the loopty-loop signature of Jack Lew.

Monday, December 3, 2012 - Still in the Woods and Other Economic News

Still in the Woods and Other Economic News

by Sinclair Noe

DOW – 59 = 12,965
SPX – 6 = 1409
NAS – 8 = 3002
10 YR YLD + .02 = 1.63%
OIL +.01 = 88.92
GOLD + .80 = 1717.00
SILV + .22 = 33.76

Let's start with the economic news. Business among manufacturers contracted in November and fell to the lowest level in more than three years. The Institute for Supply Management's index of purchasing managers dropped to 49.5% from 51.7% in October. Any reading below 50 indicates contraction in the manufacturing sector. The decline in the overall ISM index largely reflected a steep drop in new orders but companies remained active fulfilling prior orders. Only six of the 18 U.S. manufacturing industries surveyed by ISM said they expanded somewhat faster in November. Nearly twice as many said their industries contracted.

In the euro zone, manufacturers contracted for the 16th straight month, according to Markit. China’s manufacturing sector expanded slightly.

In a separate report, the Commerce Department said spending on construction projects advanced 1.4% in October to the highest level since September 2009.

The big economic news will come on Friday with the monthly jobs report. The best guess is that the economy added about 75,000 jobs in November, but that is just a guess; Hurricane Sandy has distorted some of the economic numbers. The fourth quarter of 2012 has clearly gotten off to a slow start. Consumer spending, by far the biggest source of economic growth, fell in October for the first time in five months. And orders for expensive, long-lasting goods, or durable goods, were flat in October. Sandy disrupted economic life in the Northeast in late October and contributed to the decline in spending, but consumers were reluctant shoppers last month even when the effects of the storm are discounted; the reason is simple – lack of money. And that brings us back round to jobs; more jobs means more income and more spending.

Last week we saw the revision to the estimate that U.S. real GDP grew at a 2.7% annual rate in the third quarter, up from the initial estimate of 2%. Sounds good, but deeper analysis shows it's far from good.

The revised figures do show an improvement of 0.4 percentage points in the contribution of exports, which are now claimed to have added about 0.2 percentage points to the 2.7% growth figure instead of subtracting 0.2% as originally reported. But this was erased by a 0.4 percentage point reduction in the contribution of consumption spending. More than all of the reported improvement from 2% to 2.7% GDP growth could be attributed to a higher rate of inventory accumulation than previously estimated. To put it another way, real final sales for the third quarter were originally reported to have grown at a 2.1% annual rate, whereas the new numbers have the figure at only 1.9%. The bottom line is that growth in demand for U.S. goods and services overall remains weak, even weaker than originally reported.

The new report also gives us the first look at an alternative estimate of third-quarter GDP that is built up from separate data on the income people are earning rather than goods and services being produced. Conceptually, an estimate of GDP constructed using either method should produce the identical number. But in practice, one arrives at different numbers using different data sources. The bad news is that if you strip out the GDI, or Gross Domestic Income, the economy only grew at a 1.7% rate in the third quarter and actually fell 0.7% in the second quarter. Not so great but probably not enough to say we are headed for a significant downturn, unless.

Last week, Treasury Secretary Tim Geithner presented the White House plan to avert the fiscal bluff, or fiscal cliff, or whatever. In the ongoing battle of the budget, President Obama has done something very cruel. Declaring that this time he won’t negotiate with himself, he has refused to lay out a proposal reflecting what he thinks Republicans want. Instead, he has demanded that Republicans themselves say, explicitly, what they want. Republican leadership didn't like it, but they didn't offer an alternative, until today; when they kind of mumbled through a reply.. The alternative remains a little light on specifics, but it calls for $800 billion in new revenue achieved through closing loopholes and capping deductions; $900 billion in health care and other mandatory spending cuts; $300 billion in spending cuts for discretionary spending, which includes social programs such as food stamps; and $200 billion gained by changing the way the government calculates cost-of-living adjustments for Social Security and Medicare; and raising the eligibility age for Medicare benefits.

Where does that leave us?

The woods are lovely, dark, and deep,
But I have promises to keep,
And miles to go before I sleep,
And miles to go before I sleep.

The stock market was essentially flat in November but the S&P 500 has chalked up some decent gains - over 12%, year to date. That's only partially accurate. A new report from Morgan Stanley chief equity strategist says that 90% of the profit growth has come from just 10 stocks in the S&P500. Those 10 stocks are: Apple, Bank of America, AIG, Goldman Sachs, Wells Fargo, JPMorgan, Citigroup, IBM, General Electric, and Western Digital. Striking that the profit growth is concentrated among banks and insurers. It helps to have friends in the Fed. Also, make note that this report referred to profit growth, not stock price.

The banks should be making money, the yields on agency mortgage-backed securities are really low, which leaves some wiggle room for the banks to build in some profits. And the banks have been wiggling. Which is not a really good thing for a couple of reasons. First, if the primary desire of Fed policy is to get people to buy houses, be rich, etc., and if its primary mechanism for doing so is buying MBS, then the inefficiency in transforming that mechanism into that desire is rather macroeconomically important and bad. Second, if money is coming out of the Fed and not ending up in homeowners’ pockets, that leaves only so many pockets it could be ending up in, and it is easy enough to observe that big banks (1) sit between the Fed and the homeowners and (2) have lots of pockets.

So the Fed held a conference on the matter today, and they produced a research report that basically said the banks make profit from charging more for a mortgage, than they are charged with Mortgage-backed securities; the banks pocket the difference, or the spread. The spread was 30-50bps in the ’90s and early 2000s, but rose to 150bps in September and is around 120bps now. So where banks used to make $10,000 on a $500,000 mortgage, now they make $25,000. Of course most of the loans are a better quality than years back, and most are refi's, with federal guarantees, but it seems the banks are making up for lost..? Maybe making up for the lost ability to rig rates elsewhere.

Swiss Bank UBS is reportedly near a settlement with American and British regulators for its role in the Libor rate rigging scandal. UBS is expected to pay $450 million and admit that some employees reported false rates to increase profit; if so, it would match the settlement and fine Barclays agreed to pay earlier this year. When the scandal broke at Barclays, it led to the CEO’s resignation and a shakeup in the company’s highest offices. So far, there have been no shakeups at UBS. The fine amounts to a blip on the $32 billion in annual revenue at UBS. Even though there were actual individuals scamming the Libor, there have been zero prosecutions. Nine figures sounds like a big amount but it is a pittance for the bank, especially because it will be passed on to shareholders, who can't be very happy. Shares of UBS are off nearly 70% since the financial crisis, the result of several scandals that included accusations that UBS helped wealthy clients dodge taxes and a $2.3 billion loss from the actions of a rogue trader.

Meanwhile, British lawmakers have announced plans to crackdown on tax dodgers; part of a campaign against “offshore evasion and avoidance by wealthy individuals and multinationals.” The push, the Treasury said in a statement, was expected to yield £2 billion in additional annual revenue. The drive comes amid growing criticism in Britain and elsewhere in Europe of the fiscal policies of several American companies that pay little tax on the billions of pounds and euros in sales that they generate in the region. The report focused on the tax practices of Starbucks, Amazon and Google, criticizing their policy of using lower-tax jurisdictions within Europe, like Ireland, Luxembourg and Switzerland, to record much of the revenue they generate in higher-tax countries like Britain, France and Germany. Companies like Google then transfer money they earn in Europe to Bermuda or other locations, thereby deferring or avoiding U.S. taxes as well. The companies say it's all perfectly legal

Ships are backing up, a kind of traffic jam off the coast from the ports of Los Angeles and Long Beach; freighters with no place to unload their cargo are line up at anchorages. The 800-member clerical workers unit of the International Longshore and Warehouse Union walked off the job last Tuesday, with some 10,000 longshoremen and other union members refusing to cross picket lines, forcing a shutdown at 10 of the twin ports' 14 container terminals. Four other container terminals remained open, along with facilities for handling shipments of automobiles, liquid fuels and cargo such as raw steel. The overall economic impact of the strike has been estimated to run at more than $1 billion a day, including lost wages of dock workers, truckers and others idled by the walkout, and the value of cargo rerouted by shippers.

The ports of Los Angeles and Long Beach together handled more than $400 billion in goods arriving or leaving the West Coast by ship last year. The strike  marks the largest disruption of cargo traffic through the two southern California facilities since a 10-day lockout at West Coast ports in 2002. 

Wednesday, November 7, 2012 - Status Quo

Status Quo

by Sinclair Noe

DOW – 312 = 12,932
SPX – 33 = 1394
NAS – 74 = 2937
10 YR YLD -.11 = 1.63%
OIL – 4.11 = 84.60
GOLD + .40 = 1718.30
SILV - .18 = 31.94

Technically speaking, Barack Obama, Joe Biden and Senate Democrats were Election Day's big winners. But that's only if you believe something called the election results. Who were the night's real winners?

The policy wonks and demographic statisticians were big time winners. They were able to data mine and focus like a laser on key counties and precincts, and they played it to perfection. The Republican presidential primary candidates, who are no longer lonely. Chris Christie, because whatever his chances for 2016, he got to meet the Boss (Springsteen, not Obama). Tim Geithner, who now gets to land a cushy job as director of such and such bank or a big endorsement deal from TurboTax. Governor Jerry Brown because he doesn't have to go back to the drawing board. That guy from fivethirtyeight, who nailed the prognosticating. And Barack Obama had an okay night.

The losers would have to include all the lawyers who were itching for a recount. The state of Florida which showed they are incapable of a count. All those dudes in Colorado who will have to listen to all those jokes about Rocky Mountain High. Kid Rock, just because. Twitter, just because. And Barack Obama because he still has 4 more years.

The good news is that the age of big money in politics is over. Another big story from last night: Billions spent on this election, virtually no change. Karl Rove's superPac spent $100 million to defeat Obama and elect conservatives, and it got zilch for it. Romney raised a fortune, and he was never able to get any traction, except after the first debate, which was not an actual media buy. Sheldon Adelson spent a fortune and got nothing in return; he now knows what the customers in his casinos feel like. Sure, people will still spend and raise a ton of money in the future (and in the primaries, it may remain important for awhile), but the bottom line is that every dollar is getting less and less return on investment. Big money isn't gone, it just has a lousy ROI.

Now that the election is over, let's test you electoral IQ: From the NewYorker

How many unqualified voters were estimated by the chief of police of Phoenix, Arizona, to have forged ballots using invisible ink, wrapped them around rocks, and flung them through polling-station windows while illegal-alien poll-watchers stood idly by, munching nachos and swigging Coronas?

• Immediately after the 2012 Presidential election, the electoral college announced that it is merging with a) the Federal Bureau of Threads and Screws, b) Phoenix University, c) the Broadway musical “Rebecca.”

• Every election-watcher knows that 2012 Presidential election absentee ballots were counted at absentee polling stations by absentee voting-precinct officials—but did these ballots count if they went to an absentee candidate? Answer: Delayed, still waiting for absent absentee-voting expert.

• New York tycoon Donald Trump failed to cast his Presidential vote because a) his ballot got tangled up in his hair and could not be dislodged before the polls closed; b) the Board of Elections refused to allow him to cast his own exclusive personal gold ballot featuring his photo portrait; c) he demanded to vote ten times to reflect his stature.

• True or False? Former Democratic V.P. candidate Sen. Joe Lieberman watched the returns by shuttling between two different TVs, one tuned to Fox and the other to PBS.

• Political analyst/gadfly/operative James Carville’s explanation of the election outcome was comprehended by: a) one Louisianan, b) two Louisianans, c) three people, counting his wife, Mary Matalin.

• True or False? Midwestern political activist Joe the Plumber demanded a recount of his vote.

• Lie or Otherwise? According to the citizen-action group O.B.A.M.A. (Obama Believes America Means Atheism), strong-arm thugs prevented God and Jesus from voting.

• Immediately following the closing of the polls, Michiganders For An Even More Broke Michigan claimed that the government’s failed auto-bailout scheme deprived how many registered voters of their chance to cast their ballots because they had no cars to drive themselves to the polls in? Best guess_____ Second-best guess_____ Wild guess_____.

• False or True? Immediately after the polls closed, the Rick Perry Foundation think tank filed for bankruptcy.

Here’s an interesting new data point that the St Louis Fed has put together to calculate recession probabilities:

“Recession probabilities for the United States are obtained from a dynamic-factor markov-switching model applied to four monthly coincident variables: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales. “

What’s interesting about this index is the current reading.  At 20%, the index is at a level that has ALWAYS been followed by a recession. The index has never approached 20% without a subsequent recession.  All 6 recessions since 1967 have coincided with 20%+ readings in the US Recession Probabilities index.

Fitch Ratings said that there would be "no fiscal honeymoon" for Obama, warning that the U.S. probably would lose its AAA credit rating if Obama and Congress don't address looming tax increases, spending cuts and the fast-approaching debt ceiling.

Fitch said: "The economic policy challenge facing the president is to put in place a credible deficit-reduction plan necessary to underpin economic recovery and confidence in the full faith and credit of the U.S."

The expiration of Bush-era tax cuts and the start of automatic spending cuts to reduce the deficit will take place Jan. 1. In addition, the government will hit its $16.4-trillion debt limit near the end of the year. Treasury officials said they can take steps to allow continued borrowing, but the nation would face a possible default early in 2013 if the limit isn't increased.

Moody's warned in September that failure to reach a deficit-reduction deal probably would lead it to downgrade the U.S. rating. And Fitch echoed that today.

"Avoiding the fiscal cliff and a timely increase in the debt ceiling would support the economic recovery and send a positive signal that agreement can be reached on a credible plan to reduce the federal budget deficit and stabilize federal debt over the medium term, consistent with the U.S. retaining its 'AAA' status," Fitch said.

"Conversely, failure to reach even a temporary arrangement to prevent the full range of tax increases and spending cuts implied by the fiscal cliff and a repeat of the August 2011 debt ceiling episode would mean that the general election had not resolved the political gridlock in Washington and likely result in a sovereign rating downgrade by Fitch."

Greek police fired water cannon and fought running battles with protesters hurling petrol bombs outside parliament during the biggest rally in over a year against spending cuts the country must approve to avert bankruptcy.

Nearly 100,000 Greeks waving flags and chanting "Fight! They're drinking our blood" packed the square outside parliament as lawmakers neared a vote on unpopular budget cuts and labor reforms that the government is narrowly expected to win.

Violence erupted when a handful of protesters tried to break through a barricade to enter parliament, prompting riot police to respond with teargas, stun grenades and, for the first time in an anti-austerity protest, water cannon.

More chaos reigned inside the assembly, where the session was briefly interrupted when parliamentary workers went on strike to protest against a clause that would have cut their salaries. In a humiliating about-face, the government was forced to cancel the measure to allow the session to resume. The Greek Prime Minister Antonis Samaras said: "Today we vote on whether we will remain in the euro zone or return to international isolation, meet complete bankruptcy and end up in the drachma."

If the parliament sides with the Austerity Troika and its plan to put banks before people then there will be serious unrest. Not least because many Greeks no longer believe their parliament or their democracy work for them. They are increasingly seen as the mouth-piece of an occupying power.

Meanwhile, European Central Bank President Mario Draghi said the debt crisis is hurting Europe’s largest economy and the European Commission cut its growth forecasts for the euro area .The European Commission cut its growth forecast for the euro zone as the debt crisis ravages southern Europe and gnaws at the economic performance of export-driven Germany. Draghi said: “Germany has so far been largely insulated from some of the difficulties elsewhere in the euro area, but the latest data suggest that these developments are now starting to affect the German economy.”

The 17-nation euro economy will expand 0.1 percent in 2013, down from a May forecast of 1 percent, the Brussels-based commission said today. It cut the forecast for Germany to 0.8 percent from 1.7 percent. The German finance ministry said factory orders were down 3.3% in September from the month before shocking economists who had forecast a 0.4% drop. Taken with figures showing German business confidence has fallen to the lowest in two-and-a-half years, the data was described as “a catastrophe and very bad news.”

Spain is braced for the European Commission to axe its forecast growth for the country after El Pais obtained a draft of the predictions. According to the Spanish newspaper, the EC, which is due to publish figures tomorrow has changed its forecast for 2013 GDP from 0.5pc to 1.5pc.

So, after all that, we're back to the status quo.