Thursday, May 22, 2014 - A Heckuva Business Model

A Heckuva Business Model
by Sinclair Noe

DOW + 10 = 16,543
SPX + 4 = 1892
NAS + 22 = 4154
10 YR YLD + .02 = 2.55%
OIL - .31 = 103.76
GOLD + 1.80 = 1294.70
SILV + .10 = 19.59

Yesterday we told you Russia and China had signed a 30 year, $400 billion dollar deal for Russia to deliver natural gas to China. Today, both countries vetoed a United Nations Security Council Resolution seeking to refer Syria to the International Criminal Court for possible war crimes. In the short-term, the Russia-China gas deal won’t have a big impact. The deal will not be in place until 2018 and even then will only see Russia selling a fraction of its gas exports to China every year, exports to the EU could still well be two to four times the size.

The economic links between Russia and Europe will continue to be significant and they will continue to be reliant on each other when it comes to energy; the former to sell the latter to buy, but this link gives an advantage to Russia, especially when the weather turns cold. At least symbolically the deal highlights Russia’s desire to move away from links with Europe. Combine this with Europe’s desire to increase energy security and the relations between the two sides could become increasingly cold and distant. Although, some countries due to geographical proximity, such as Bulgaria or Hungary; or due to long standing economic links, such as Germany - will surely continue to have good relationships with Russia. The entire Ukraine crisis has brought the return of a Cold War, and the gas deal sets up an East and West Economic Bloc.

It also raises questions over future tie ups between Russia and China. Areas such as payments systems, broader financial markets, transportation and machinery have all been touted as sectors for potential cooperation between the two countries. Again while a long term issue, such ties up may concern the West since Russia and China are currently reliant on their exports in many of these areas. Both the EU and US will need to figure a clearer policy for how to deal with such changes.

Unrest continues in Ukraine. BBC reports at least 11 Ukrainian soldiers were killed during an attack on a government checkpoint in eastern Ukraine. The attackers were described as heavily armed terrorists. Russia has claimed that it was pulling back troops from the Ukrainian border, but that has not been confirmed by satellite photos.

Thailand’s army chief went on television today to announce a military coup, after two attempts to negotiate an end to political impasse failed. The country’s Constitution was “temporarily suspended,” and the military said it terminated the caretaker government but said it expected the nation’s Senate, courts and independent organizations to function normally. The military imposed a nationwide curfew, and ordered all street protesters to leave their rallying sites.

In economic news, the National Association of Realtors reports existing home sales increased 1.3% to an annual rate of 4.65 million units, marking only the second gain in sales in nine months. Sales remain down 15% from a peak of 5.38 million units hit in July. Compared to April last year, sales fell 6.8%.The inventory of unsold homes on the market increased 6.5% from a year-ago to 2.29 million in April. That was the highest level since August 2012. The median home price rose 5.2%, the slowest pace since March 2012.

In this cycle we’ve had enormous price increases before we had the demand, which was a function of institutional buying of homes, which pushed prices higher. One thing we should have learned about housing is that when prices start rising, there is a herd mentality that kicks in. It wasn’t just institutional buying, it was a combination of events that swirled around institutional buying. The institutional buyer bought up distressed properties, resulting in fewer distressed inventory, add in people who were locked into their homes by negative equity or low equity;  and for many would-be buyers, it’s just tough to get a decent mortgage, or any mortgage at all.

This doesn’t mean banks aren’t lending – they are; it turns out that banks are ready, willing, and able to lend to small businesses, but you might not like the deal. Typical interest rates are about 125%.  Subprime business lending, the industry prefers to be called “alternative”, has swelled to more than $3 billion a year; that’s twice the volume of small loans guaranteed by the Small Business Administration. Wall Street banks are helping the industry expand by lending originators money. They’re starting to package the loans into securities that can be sold to investors, just as they did for subprime-mortgage lenders. It’s a heckuva business model.

Manufacturing activity picked up in May; Markit's "flash" US manufacturing purchasing managers index rose to 56.2 from 55.4 in April.

New applications for unemployment benefits rose sharply in mid-May, reversing a big drop earlier in the month that put initial claims at a seven-year low. The number of people who applied for new benefits climbed by 28,000 to 326,000 in the week ended May 17. That number might grow in the coming weeks thanks to HP.

Hewlett Packard announced earnings after the close, sales fell, revenue fell, but profits were higher, and they will cut an additional 11,000 jobs, bringing the total for outstanding job cuts to 16,000.  It’s a heckuva business model.

Yesterday, William Dudley, the president of the New York Fed gave a speech to the Regional Economic Press Briefing in New York, and he said: “There have been significant and long-lasting changes to the nature of work. As a result, many middle-skilled workers displaced during the recession are likely to find that their old jobs will never come back. Furthermore, workers are increasingly facing higher skill requirements in order to land a good job. These dynamics in the labor market present a host of challenges for the region to address. However one thing is clear: workers will need more education, training and skills to take full advantage of the types of job opportunities being created in our region, as well as across the nation.”

No doubt education is important. More education and skills will not stop your fall but it might slow it down. And a point that Mr. Dudley failed to grasp, or at least communicate is that a significant percentage of corporate profits have relied upon the widespread loss of worker economic share over the past few decades.

If you have bought or sold on eBay in the past few months, change your password and monitor your financial information. The company says hackers attacked between late February and early March with login credentials obtained from "a small number" of employees. They then accessed a database containing all user records and copied "a large part" of those credentials.

The hackers stole email addresses, encrypted passwords, birth dates, mailing addresses and other information, though no financial data, nor PayPal databases were compromised. The eBay breach would be larger than the one Target Corp disclosed in December, which included some 40 million payment card numbers and another 70 million customer records. Why are we just hearing about the eBay hack now? That is a very good question and so far eBay hasn’t provided a good answer.

We’ve noted many times that bankers have a get out of jail card. This week, Credit Suisse entered a criminal guilty plea in New York for its role in an ongoing tax evasion scheme, but that was a corporate entity, and no actual human bankers went to jail; in fact, the CEO and Chairman get to keep their jobs; but today we note that the handcuffs have been slapped on a banker, the former head of investment banking for JPMorgan Chase, in China.

You may recall the recent allegations against JPMorgan in China. Jamie Dimon had a clever little business development strategy to hire the children of Chinese politicians, to win support for JPMorgan banking activities in China; it’s a heckuva business model, except apparently the SEC’s antibribery unit thinks this might be bribery and thus a violation of the Foreign Corrupt Practices Act; except the SEC was not behind today’s arrest, and we all know that US law enforcement and regulators would never actually arrest a banker. However, finding jobs for the children of China’s elite in exchange for bank underwriting is apparently illegal in China, too.  And in China they have this strange custom of arresting people who break the law, even if work for JPMorgan.

In case you missed it, this week’s criminal settlement with Credit Suisse marked a turning point for law enforcement in dealing with the big banks. The Department of Justice says it proves they will go after the big banks and slap them with felonies convictions, even though they get misdemeanor punishment. Well, the proof is in the putting.

And now we have a new case that will show whether there is really any crackdown on wrongdoing, specifically money laundering; regulators are investigating Charles Schwab Corp and Bank of America Corp's Merrill Lynch brokerage over whether the brokerages missed red flags that could indicate attempts to move money illicitly or to feed proceeds from illegal activities into the financial system. The SEC is probing Schwab and Merrill Lynch for violations of anti-money laundering rules that require the brokerages to know their customers.

Treasury Undersecretary for Terrorism and Financial Intelligence David Cohen began urging regulators two years ago to make sure financial institutions are identifying the true beneficial owners of their accounts. Cohen's exhortations came amid concerns that bad actors, such as drug cartel members and terrorists, are growing more creative in their attempts to secretly transfer tainted funds.

The SEC's investigation so far has found Charles Schwab and Merrill did not pay close enough attention to their clients' true identities, and accepted shell companies and individuals with fake addresses as clients. In both cases, some of the accounts, whose ownership the brokerages did not adequately investigate, were eventually linked to drug cartels. The investigation is not yet complete, and the only thing we know with certainty is that it’s a heckuva business model.

Tuesday, May 20, 2014 - Protected Species

Protected Species
by Sinclair Noe

DOW – 137 = 16,374
SPX -12 = 1872
NAS – 28 = 4096
10 YR YLD - .02 = 2.51%
OIL + .87 = 102.98
GOLD + 1.70 = 1295.30
SILV + .05 = 19.49

Today is Tuesday and that means that General Motors has announced another recall; this time 2.6 million more cars. Last week, GM recalled 3 million vehicles. So far this year, GM has announced 29 recalls affecting more than 15 million cars globally. The list of recalled vehicles is long. It’s easier to list the vehicles that haven’t been recalled; they have recalled 58 versions of Chevrolet and GMC pickups.

Last week the Dow hit a record high; since then it has been floundering. For the fourth straight session, the Nasdaq Composite has posted more 52-week lows than 52-week highs; 55 lows versus 38 highs. The Russell 2000 Index of small and mid-cap stocks hit a high on March 4^th and since then it has dropped almost 10%.

Meanwhile, interest rates have been moving steadily lower despite winding down of large scale asset purchases under the Fed’s quantitative easing, and the talk about raising interest rates at some point down the road. With yields on the 10-yr Treasury note dipping down around 2.5%, that means somebody is buying Treasuries, but if not the Fed, then who?

Well, it’s certainly not Russia. Putin sold off more than $100 billion in Treasuries in March; he was probably expecting Treasury prices to tumble, but that didn’t happen. The most likely buyer is Belgium; from November of last year through January 2014, Belgium bought approximately $142 billion in US Treasuries, which is quite a bit considering the Belgian GDP is about $480 billion; so their bond buys were equal to about 30% of GDP.

As a member of the Eurozone, Belgium can’t just print new money. So, something is rotten. Or maybe the Fed has opened up a branch office in Antwerp.

Anyway, Putin is in China today to talk up the virtues of Russian natural gas. Putin met with Chinese President Xi Jinping at a start of a two-day meeting on Asian security with leaders from Iran and Central Asia. Putin is hoping to extend his country's dealings with Asia and diversify markets for its gas, which now goes mostly to Europe. Russia has been negotiating for more than a decade on a proposed 30-year deal to supply gas to China. Officials said they hoped to complete work in time to sign a contract while Putin is in Shanghai, but they have not yet announced a signed agreement. Putin told Chinese reporters ahead of his visit that China-Russia cooperation had reached an all-time high.

Russia is worried about its European gas market, seeing lackluster European demand and political efforts, intensified since the Ukrainian crisis, to diversify away from Russian gas constraining future sales to the West. At the same time, the shale gas phenomenon, with possible US and Canadian liquid natural gas exports to come, has Moscow concerned about what prices it can hope to attain from the European market. Developing new, potentially lucrative markets in the east seems to be the answer to Russia’s European gas concerns.

China also feels a new impetus for a deal. Despite a slowing of the domestic economy, future demand for energy, the key to both growth and political stability, will be robust. Efforts to develop China’s domestic shale resources are promising, but are unlikely to produce consequential volumes until the next decade. Meanwhile, China has been meeting growing energy consumption with coal powered plants, and they are literally choking on that decision, as the air quality has been nearly destroyed.

Tomorrow we will get the minutes of the last Federal Reserve FOMC meeting. Today we had Fed heads giving speeches. William Dudley, the president of the New York Fed is saying the Fed will take its time raising interest rates.  Noting both market and Fed expectations that the first hike will come some time near the middle of 2015, Dudley said, “if the economy is stronger than expected, causing the excess slack in the labor market to be absorbed sooner and inflation to rise more quickly than forecasted, then lift-off is likely to be pulled forward in time. If, instead, economic growth disappoints, inflation stays unusually low and the labor market continues to exhibit evidence of considerable excess slack, then lift-off will likely be pushed back in time.”

As for the over $4 trillion worth of bonds on its balance sheet, Dudley expects them to be reduced via “automatic pilot”; in other words, as Treasury securities mature and mortgages are repaid. Dudley offered his two cents on why the housing sector’s contribution to the economy has “stalled out” over the past few quarters.  While he said some decline in activity was to be expected following the jump in mortgage rates last year, “the extent of the slowdown has surprised me given that the recent pace of housing starts, roughly 1 million per year, is far below what is consistent with the economy’s underlying demographics.”

Dudley said mortgage credit is still unavailable to borrowers with lower credit scores. Also, student debt has delayed the entry of new first-time home buyers; that could make it harder even for existing homeowners to sell their homes and trade up, slowing the traditional turnover of the housing market. Dudley said he expects the housing recovery to continue, “the pace will likely be slow, especially relative to past economic recoveries.”

The online real estate site, Zillow reports 18.8% of US homeowners with a mortgage, or 9.7 million households, were underwater on their mortgages at the end of the first quarter. That's an improvement from the end of last year when this figure was 19.4%, and it's a large improvement from a peak of 31.4% in 2012, but it shows that negative equity is still an issue in the housing market.

What's more, there is an additional 10 million households that have 20% or less equity in their homes. For those homeowners, it would be difficult to sell without coming up with some money to cover the broker fees, closing costs and the down payment for the next home.

European Union regulators have charged banks JPMorgan, HSBC and Credit Agricole with colluding to manipulate the price of financial products linked to interest rates.

The European Commission's regulator said the banks will now have a chance to respond to the preliminary findings. If the Commission ultimately concludes they have broken the law, it can impose a fine of up to 10% of their annual revenue. In December 2013, the Commission levied fines totaling $1.4 billion on Barclays, Deutsche Bank, RBS and Societe Generale as part of the same case, which covers financial derivatives linked to a benchmark interest rate called Euribor in the period 2005-2008. Barclays escaped fines for having notified the Commission of the existence of the cartel, and the others were granted a reduction in their fine for cooperating in a settlement.

Late yesterday, Credit Suisse entered a guilty plea for conspiring to help US customers evade taxes, the first such guilty plea by a major financial institution in years. Today Credit Suisse shares rose almost 1%. Apparently a felony conviction is a good thing. And why not? Top bank executives will get to keep their jobs, the bank can pin the whole thing on a handful of underlings, and it won't have to give up a list of client names to the government. Credit Suisse will have to let an independent monitor keep an eye on it, but that's a minor inconvenience at worst. The guilty plea could cost the bank some clients here and there, but investors and analysts are betting there won't be much impact. The most painful part of the deal, the $2.6 billion in fines, is manageable, less than one quarter's revenue.

For the most part, the mainstream media is dutifully accepting the spin of the Department of Justice, that this case is significant by virtue of being the first plea of this sort made by a bank in over two decades. The fact that those intervening years saw regulators generally take a very hands off approach to banks, and that we had a global financial crisis with no measures of this sort taken against the perps somehow escapes mention.

Let me return to one critical issue: why no individuals were prosecuted or even fined. This case, like so many we have discussed, seems ideally made for at least a civil action under Sarbanes Oxley against the CEO and CFO, since they must certify the adequacy of internal controls. The most charitable coloration you can put on what looks an awful lot like obstruction of justice (although Credit Suisse was not charged with that) was that it was a failure of internal controls. And Sarbanes Oxley is designed so that a civil action can easily tee up a criminal case on the same control deficiencies.

Credit Suisse was in many ways the perfect major financial institution from which to demand a guilty plea. Although its investment banking and wealth management operations are global, the commercial banking operation in the United States is largely confined to its New York branch. It does not own a subsidiary in this country providing bank services to local customers, so it really only had to negotiate with the New York authorities and the federal government to resolve the case. That meant the effort to mitigate potential collateral consequences of a guilty plea was confined to just a few agencies. So, if you think the Credit Suisse case will become the template to go after American banks, well, yeah, that’s not going to happen. The banking class remains a protected species. 

Monday, January 06, 2014 - A Cold Forecast

A Cold Forecast

by Sinclair Noe

DOW – 44 = 16,425
SPX – 4 = 1826
NAS – 18 = 4113
10 YR YLD - .03 = 2.96%
OIL - .31 = 93.65
GOLD - .20 = 1238.80
SILV + .02 = 20.27

A few big things this week. Friday we'll see the monthly jobs report. Today we had the confirmation of Janet Yellen, no surprise there; on Wednesday we'll see the minutes of the most recent FOMC meeting which will give us the justification for the taper. The minutes will likely include strong differentiation between taper and tightening, and the Fed is likely to stress the importance of accommodative monetary policy and ultra-low interest rates for the next 18 months or so.

Any bond gains have been curbed as we start the new year; a combination of the Fed slowing its bond purchases, plus corporate supply, plus there is still the safe haven aspect of bonds in the face of a few days of weakness in the equity markets. This Friday's jobs report will prove important as a barometer for yields. More than 2.2 million jobs were probably created in 2013, the most since about 2.5 million eight years earlier. The estimates call for 195,000 net new jobs in December and the unemployment rate to hold at 7.0%. If the economy added more than 200,000 jobs we might expect a more aggressive taper; fewer than 200,000 jobs and the taper might be more sanguine.

Healthcare spending in the US rose 3.7% in 2012 to $2.8 trillion, the fourth year in a row in this range as the slow economic recovery tempered private insurance use, drug prices fell and the government held back payment increases for doctors. For the first time in more than a decade, health care spending grew more slowly than the US economy from 2010 to 2012. It marks the slowest rate of increase in healthcare spending since 1960, even though that $2.8 trillion figure represents 17.2% of the national economy. Expenditures on health care, including everything from hospital procedures to prescription medicines, rose less than 4 percent a year from 2009 through 2012, after growing by an average of more than 7 percent from 2000 through 2008 and by double digits in the previous decade.

Today the Institute for Supply Management said its index on services fell in December, while the Commerce Department said new orders for factory goods rebounded in November following a drop in October. The pace of growth in the services sector slowed for a second straight month in December with business activity expanding at a lower rate and new orders contracting, according to the Institute for Supply Management. ISM’s index fell to 53 points last month from 53.9 in November, dropping to its lowest reading since June 2013 and under expectations for a read of 54.5. A separate report from the Commerce Department showed new orders for factory goods rebounded in November, rising 1.8%, as had been forecast. The department also said orders for durable goods, manufactured products expected to last three years or more, rose 3.4% instead of the 3.5% increase reported last month. Durable goods orders excluding transportation rose 1.2%.

And then, just to keep things interesting, Alcoa kicks off the earnings reporting season. And after the Fed minutes on Wednesday, the Bank of England and the European Central Bank will meet to determine monetary policy on Thursday. It should be a fun week.

Last Friday, Fed Chairman Ben Bernanke gave an upbeat outlook on the economy but he cautioned that the recovery "clearly remains incomplete." That was part of an economic conference in Philadelphia. Bernanke got most of the attention, but one of the more interesting comments came from New York Fed President William Dudley, who said  a lot is still unknown about how the bond buying works. His observation is important because he has long been a supporter of aggressive Fed actions to help the economy. The New York Fed leader has for some time expressed support for continuing the purchases, even as he also voted in favor of the Fed’s decision last month to cut back.

Referring to the Fed’s stimulus program, Mr. Dudley said, “we don’t understand fully how large-scale asset-purchase programs work to ease financial market conditions—is it the effect of the purchases on the portfolios of private investors, or alternatively is the major channel one of signaling?” Mr. Dudley also said that when it comes time to unwind the Fed’s easy-money stance, uncertainty is again a major issue facing central bankers. “There could be unintended consequences” about moving to a more normalized state of monetary policy, he said.

I tend to think that such uncertainty runs deeper than it appears at the Fed, which is why policymakers are eager to end asset purchases. The more they buy, the more they risk "unintended consequences" at exit time.

It's a cold week for most of the country. Spot wholesale electricity in Texas  topped $5,000 a megawatt-hour for the first time as cold weather boosted demand and prompted the grid operator to import generation from Mexico and ask users to conserve power until at least tomorrow. Power consumption on the Electric Reliability Council of Texas network, which covers most of the state, averaged 53,369 megawatts for the hour ended at noon, a 6.7 percent increase from the day-ahead forecast of 50,034 megawatts. One megawatt is enough to serve about 500 homes during mild weather and about 200 homes during periods of peak demand.

The forecast is extreme: 32 below zero in Fargo, N.D.; minus 21 in Madison, Wis.; and 15 below zero in Minneapolis, Indianapolis and Chicago. Wind chills, what it feels like outside when high winds are factored into the temperature, could drop into the minus 50s and 60s. That's dangerous cold weather. Frostbite and hypothermia can set in quickly at 15 to 30 below zero. A flu epidemic has now spread across half the country. It hasn't been this cold for almost two decades in many parts of the country.

There have been plenty of problems associated with the weather, not the least of which is air travel. Airlines canceled 4,400 flights on Monday, bringing the total to more than 17,000 over the last week. Today, there is a scheduled flight worth noting, Delta Flight # 2014 from Minneapolis to Atlanta; it marks the last commercial flight for the DC-9. For the past nearly 50 year, the Douglas DC-9 was an aviation workhorse, credited with bringing jet service to most small and medium sized US cities. Delta was the launch customer for the DC-9 back in 1965.

Business bankruptcy filings in the US dropped 24% last year to the lowest level since 2006. The American Bankruptcy Institute reports the total filings by businesses and individuals fell to 1.03 million, the report said, from 1.19 million in 2012.

A trial over how Detroit should end costly financial contracts with two big banks was suspended today after more than a foot of snow fell, paralyzing much of the city and closing the federal courthouse there. Creditors of the city had been scheduled to make their closing arguments against a plan for Detroit to pay $165 million to exit the contracts, known as interest-rate swaps. The creditors say that termination fee improperly favors the two swap counterparties, Bank of America and UBS.

The storm also stopped the trial just as a group of creditors accused the mediator who negotiated the swap-termination deal of misconduct. The creditors filed an objection last week, contending that the mediator had exceeded the limits of his authority when he publicly praised the $165 million deal and said he would recommend that the bankruptcy court approve it.

The creditors, including both financial institutions and labor groups, complain that the swaps were invalid from the time Detroit signed them, in 2005. They say that if Detroit took legal action against the two banks, instead of paying them to end the contracts, the city could obtain a much better deal. If Detroit cannot obtain the new loan, proposed by Barclays Capital, the city has warned that it soon will soon be out of cash and unable to pay its workers.

It was not clear when the trial might resume.

JPMorgan Chase is expected to announce this week that it has reached civil and criminal settlements to the tune of $2 billion for ignoring the signs of the Bernie Madoff Ponzi scheme. Madoff used JPMorgan as his bank, and this is basically a money laundering charge against JPMorgan. All told, after reaching the Madoff settlements with federal prosecutors in Manhattan and regulators in Washington, the bank will have paid some $20 billion to resolve government investigations over the last 12 months, and there might be more settlements in the months ahead. Authorities have opened a bribery investigation into JPMorgan’s hiring practices in China, prompting the bank to turn over internal emails and documents about its “Sons and Daughters” hiring program, which employed the children of the nation’s ruling elite.

The Madoff case, perhaps the largest threat to JPMorgan as it hung over the bank these last five years, produced its own damaging emails. The emails, some of which came to light in a private lawsuit against the bank, suggest that even as questions swirled about the legitimacy of Mr. Madoff’s operation, JPMorgan continued to do business with him. In one internal email sent before Mr. Madoff’s arrest in December 2008, a senior risk manager at JPMorgan reported that another bank executive “just told me that there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme.” No individual executives have been accused of wrongdoing.

JPMorgan’s Madoff settlements will also likely involve a so-called deferred prosecution agreement, a criminal action that would essentially suspend an indictment as long as JPMorgan acknowledged the facts of the government’s case and changed its behavior.  JPMorgan has publicly maintained that “all personnel acted in good faith” in the Madoff matter; they may have to modify that position in light of the deferred prosecution agreement.

Monday, November 11, 2013 - Fed Stuck As Other Central Banks Race to Bottom

Fed Stuck As Other Central Banks Race to Bottom

by Sinclair Noe

DOW + 21 = 15,783
SPX + 1 = 1771
NAS + 0.56 = 3919
OIL + .54 = 95.14
GOLD – 7.60 = 1282.90
SILV - .16 = 21.45

A fairly boring day on Wall Street ended with the major averages in positive territory and that was good enough for record highs on the Dow Industrial. The bond market was closed because of the Veterans Day holiday. Volume on the S&P 500 was down by about 23%. Of the 447 S&P 500 companies that have released third-quarter profits so far, 75% have beaten analysts’ forecasts. Earnings per share for the companies that have reported, increased 4.7% in the third quarter. All fairly good news.

This will be a relatively light news week. Key economic reports include Thursday’s Sep trade deficit (expected to widen to -$39.0 from -$38.8 in Aug) and Friday’s Oct industrial production report (expected -0.1%). The Treasury this week will conduct its $70 billion quarterly refunding operation. There are speaking engagements by Minneapolis Fed President Kocherlakota and Atlanta Fed President Lockhart on Tuesday and by Philadelphia Fed President Plosser on Thursday. Fed Chairman Bernanke will hold a town hall meeting with educators on Wednesday in Washington D.C.

One quick point that I didn't get to last week, last Thursday, during a speech, New York Fed president William Dudley said that some of America’s largest financial institutions appear to lack respect for the law. Dudley suggested that regulators may be stymied by "cultural" issues that have negatively affected the nation's biggest banks, saying: “Collectively, these enhancements to our current regime may not solve another important problem evident within some large financial institutions -- the apparent lack of respect for law, regulation and the public trust. There is evidence of deep-seated cultural and ethical failures at many large financial institutions,” he continued. “Whether this is due to size and complexity, bad incentives, or some other issues is difficult to judge, but it is another critical problem that needs to be addressed.”

Dudley linked accountability and enforcement to “too big to fail,” arguing that ending the perception that some banks will forever be rescued from failure will “encourage the needed cultural shift necessary to restore public trust in the industry.” and he added, “Tough enforcement and high penalties will certainly help focus management’s attention on this issue.”

Last week the European Central Bank cut interest rates; part of a global race among central banks to push their respective currencies lower. The only central bank not participating in the race to the bottom is the Fed, which is still debating taper.

It's still a good bet that the Fed won't taper asset purchases until March or so, even after Friday's stronger than expected jobs report, which wasn't quite as strong as the numbers suggest. Fed policy makers will probably need to see more data to confirm the strength of the economy because the jobs report might have some distortions in the data due to the government shutdown in October. There’s been a correlation between rising share prices and Fed's Zero Interest Rate Policy and the QE program. People legitimately are wondering if and when the Fed begins the tapering, because the markets seem to mirror the Fed's balance sheet, which has swelled with QE purchases.

With taper on hold, investors are feeling fairly bullish. The most recent reading of the Investors Intelligence gauge of adviser sentiment showed that 55.2% of respondents were bullish and just 15.6% bearish, tying the highest difference between the two this year. The last time the gap was bigger was April 8, 2011, which preceded the sharpest stock-market correction of the current bull market. Bullish sentiment is considered a contrarian indicator because if everyone is bullish, who's left to buy more shares?

The big story from the Fed this week involves the confirmation hearings for Fed vice-chair Janet Yellen to replace Ben Bernanke. She will likely face at least some opposition, and the reason for the criticism is likely to be inflation. Which is kind of strange because ZIRP and QE have not sparked inflation, despite protestations to the contrary. Low interest rates are generally a sign that money has been tight, not that it's easy. You can't tell how tight or loose monetary policy is just from how high or low interest rates are. The only way to tell is to look at how the economy is doing. Take the 1970s. Interest rates were actually pretty high, but there was still an inflationary spiral—was that "tight" money? Or take the 1930s. Interest rates were zero, but the economy was still in a deflationary death spiral—was that "loose" money? The answers are no and no. Money tends to be tight when inflation is low and money tends to be loose when inflation is high.

Of course, one reason the Fed's money printing policy hasn't produced inflationary consequences is because it has been highly concentrated on printing money because central banks can only buy financial assets, quantitative easing drove up the prices of financial assets and did not have as broad of an effect on the economy. The Fed's ability to stimulate the economy became increasingly reliant on those who experience the increased wealth trickling it down to spending and incomes, which happened in decreasing degrees.

So, the Fed is currently stuck between a rock and a hard spot; their policy has managed to inflate asset prices (the Dow hit another record high today) and if the Fed wants to target asset prices, they would tighten monetary policy to halt an emerging bubble, meanwhile, if they look at broader economic conditions they would have a bias toward monetary easing. The simple truth is that monetary policy has diminishing impact, largely because the idea of trickle down and the wealth effect is a bunch of hokum.

So, the Fed will have a difficult dilemma as asset prices move higher, we might reasonably expect lower returns for risk taking, and the spread between prospective returns for high risk assets and lower risk assets will shrink, further diminishing the impact of monetary policy. At some point the Fed will have to make a decision about whether they want to keep throwing money at Wall Street without any positives for the broader economy. This should be the line of questioning for the new Fed head nominee, instead I suspect the politicians will focus on inflation and other non-existent phantasms.

On the 11^th hour of the 11^th day of the 11^th month, 95 years ago, there was peace; Armistice Day marked the end of the Great War, the war to end all wars, or what we now call the First World War. Others followed of course, but up to that point the Great War had been the most destructive war in history, with a total death toll estimated at about 20 million, and millions more had been wounded. And for many years after the Great War, everything would stop at 11AM on the 11^th day of the 11^th month; everything would stop for 2 minutes of silence and prayer; traffic would pull over to the side of the road, factories would stop the assembly lines, shopkeepers would stop selling, customers would stop buying; widows of the fallen would weep. We don't do that anymore. There are no more veterans of World War One; they've all passed now, but we've seen plenty of other wars, and today is when we remember that without veterans there would be no America; we remember that on a day of peace. 

Tuesday, May 21, 2013 - Apple Gimmicks

Apple Gimmicks

by Sinclair Noe

DOW + 52 = 15,387
SPX + 2 = 1669
NAS + 5 = 3502
10 YR YLD - .02 = 1.94%
OIL - .98 = 95.95
GOLD – 18.10 = 1377.00
SILV - .49 = 22.53

It's Tuesday. The markets moved higher. It's almost inevitable. The Dow Industrials have closed higher every Tuesday this year, with the exception of January 8^th; 19 consecutive Tuesdays. No, I don't know why.

Well, today, part of the reason could be traced to the Federal Reserve. A couple of Fed heads were talking up easy money. New York Fed President William Dudley said he cannot be sure whether policymakers will next reduce or increase the amount of purchases, due to the "uncertain" economic outlook. The QE taper may end up being a QE expansion. Dudley worries about investor over-reaction to a "normalization" of policy and suggests the FOMC may need to update what it needs to see to move in that direction. Earlier, James Bullard, president of the Federal Reserve Bank of St. Louis, urged the European Central Bank to consider employing a US style quantitative easing program to counter slowing inflation and recession in the euro zone.

Tomorrow, Fed Chairman Ben Bernanke will speak before a congressional panel, the Joint Economic Committee. The minutes of the Fed's latest policy-setting meeting will be released on Wednesday afternoon. When the Fed showers liquidity, the money flows to the markets, but I can't give a good reason for the Tuesday winning streak.

There is a certain symmetry in life: fire and ice, winter and summer, darkness and light, yin and yang. And this brings us to the IRS scandal; last week we learned about the demand treatment afforded some groups by the IRS, this week we learn about the generous nature of the taxman. It's not so much that the taxman is benevolent; we all no better; but some entities demand preferential treatment; powerful, giant corporations are holding governments and citizens up for ransom; taking tax breaks and subsidies from countries in the name of competitiveness; sheltering profits in off-shore tax havens.

Google, Amazon, Starbucks, GE, Apple, and pretty much every other major corporation and the big Wall Street banks siphon off profits via off-shore entities that are sometimes no more than a mailbox on a tropical island, and they don't pay taxes like the rest of us, because if they did it would destroy their ability to be competitive.

And today, Tim Cook, the CEO of Apple, ran down the aisles of Congress and hurled his hammer at the totalitarian overlords, metaphorically speaking. Actually, Cook appeared before the Senate Permanent Subcommittee on Investigations. Congressional investigators found that some of Apple’s subsidiaries had no employees and were largely run by top officials from the company’s headquarters in California. By officially locating them in places like Ireland, Apple was able to, in effect, make them stateless — exempt from taxes, record-keeping laws and the need for the subsidiaries to even file tax returns anywhere in the world.

Apple Operations International, which has no employees but reported $30 billion in income over the four years, has not filed an income tax return in any country for the last five years, the subcommittee investigation found.

A second company, Apple Sales International, holds the economic rights to Apple's intellectual property in Europe, Asia and Africa. The subsidiary had $74 billion in sales income from 2009-2012 but paid less than 1% in taxes to Ireland.

The only taxes paid were on the interest earned by the cash pile and small sums in local markets. Senate investigators allege a total of $70bn has been sheltered this way in four years.

The tactic, which is legal, is possible through complex cost-sharing agreements that transfer the economic rights to the valuable intellectual property behind the iPhone, the iPad, and other products to subsidiaries outside the US.

Tim Cook told the senators: “We pay all the taxes we owe, every single dollar.” And that appears to be the case; Apple does pay a considerable amount of taxes in the US . Cook added: “We don't depend on tax gimmicks.” And that appears to be a slightly more dubious claim. Cook said he "personally doesn't understand the difference between a tax presence and a tax residence".

In a dramatic display of how threats from multinational corporations are driving down taxes across the world, Cook warned Congress that he would refuse to repatriate a total of $100 billion stashed offshore unless it acted to slash the 35% US rate. Cook said the tax rate for repatriated money should be set "in single digits" to persuade companies to bring it back. Standard tax for US profits should be, he said, in the "mid 20s". 

 Everyone "knows" that the corporate income tax is a mess. Ask any company. They pay too much in corporate income tax, face rates higher than in any other OECD country, and are just following the law when they use tax havens to keep profits eternally deferred from taxation and to perform general sleight-of-hand. There is a big difference between the headline rate of 35%, which is indeed tops in the OECD, and the effective rate of 12.1%, one of the lowest in the OECD.

Apple is not an outlier in its efforts to produce 'stateless income'; income that is taxed neither in the US nor in the countries where its foreign customers are located, but it is audacious in its tax avoidance strategies. Apple shifted tens of billions of dollars of income without even breaking a sweat. Google followed the Apple playbook by using a low-tax Irish subsidiary to avoid taxes; Google is now under investigation in the UK. Starbucks' tax dodge was so blatant British consumers began boycotting the firm until it reversed course. In the US, we aren't indignant. Today, senators talked about how they considered Apple to be a great company, even if they did have concerns about the tax thing.

We have lots of great American companies that operate in a more or less free-market system that has allowed them to thrive on publicly-funded research, infrastructure, defense, and in the case of Apple – patent and intellectual property protections. And they show their gratitude by choosing to cut their taxes in half – or actually closer to one-third despite doubling their profits, so they may hold more than $1 trillion dollars of cash off-shore, and eliminate workers rather than create jobs. Or, as one Apple executive explained: “We don't have an obligation to solve America's problems.”

Which raises an interesting question; why should America have an obligation to solve Apple's problems? Apple enjoys the protections of US laws against patent and intellectual property infringement. Apple enjoys the ability to ship its products around the world, in part because the US has the largest, most powerful military making sure the avenues of commerce aren't crowded out by pirates on the high seas or in the skies. If Apple doesn't want to pay for those protections, they shouldn't be forced to. They could just stop using those services. You don't pay; you don't get – no gimmicks in that equation.

The scandals in Washington remind us to be ever vigilant about the dangers of government overreaching its authority, whether by the long arm of the IRS or the Justice Department, but that doesn't mean that we accept anarchy. We need to remember that government does provide important services and protections, and somehow we have to pay for that. Tim Cook and Apple don't want to pay. Nobody wants to pay. I understand. And so, not much changes

By the way, the World Bank estimates the total cost for a successful attack on malnutrition would be approximately $10.3 to $11.8 billion annually. Apple alone underpaid its 2012 taxes by $11 billion, based on a 35% rate. So, we could literally put an end to hunger in this world, if Apple paid it's taxes, but you know, it's not Apple's obligation to solve the problems of the world. 

Thursday, October 18, 2012 - The Only Day Like it Ever

The Only Day Like it Ever

by Sinclair Noe

DOW – 8 = 13,548

SPX – 3 = 1457
NAS – 31 = 3072
10 YR YLD +.01 = 1.83%
OIL un = 92.09
GOLD – 8.30 = 1742.60
SILV - .38 = 32.92
PLAT – 19.00 = 1651.00

Do you remember where you were 25 years ago? It was a Sunday; 1987. The news of the day was that Nancy Reagan had been hospitalized with cancer; there was a threat of war with Iran and within 24 hours the US was shelling Iranian oil platforms; there were concerns about Germany's currency; the United States, wanting to prop up the dollar and restrict inflation, tightened policy faster than the Europeans. US pressure on Germany to change its monetary policy was one of the factors that unnerved investors.The stock market had a wave of steady selling on Friday and the Dow dropped 108 points. Most people really weren't aware; this was before we all had computers and smart phones and tablets. Maybe you read about the Friday sell-off in the Sunday newspaper. Maybe you thought about selling a little bit of your portfolio, but the truth is that it was already too late.

Halfway around the world, the dollar-backed Hong Kong markets were chopped down 10%. And then the crash spread. European bond markets collapsed, which caused interest-sensitive savings and loans and money center banks to plunge. Monday morning, October 19, 1987 the crash washed across lower Manhattan. In a flash, the Dow crumbled and by the end of Black Monday the Dow had dropped 508 points, wiping out 23% of market value.

The 1987 villain was something called portfolio insurance. It was a product that used stock index futures and options to assure institutional investors that they need not worry if market prices seemed to be unreasonably high. Portfolio insurance would let them get out with minimal damage if markets ever began to fall. They would simply sell ever-increasing numbers of futures contracts, a process known as dynamic hedging. The short position in futures contracts would offset the losses caused by falls in the stocks they owned.

Portfolio insurance did not start the widespread selling of stocks in 1987. But it made sure that the process got out of hand. As computers dictated that more and more futures be sold, the buyers of those futures not only insisted on sharply lower prices but also hedged their positions by selling the underlying stocks. That drove prices down further, and produced more sell orders from the computers. At the time, many people generally understood how portfolio insurance worked, but there was a belief that its very nature would assure that it could not cause panic. Everyone would know the selling was not coming from anyone with inside information, so others would be willing to step in and buy to take advantage of bargains. Or so it was believed.

The crash had been predicted. Congressman Edward Markey had issued repeated warnings, largely unheeded. Paul Tudor Jones predicted the crash, traded accordingly and profited greatly. But almost everybody else got burned. After the crash, the markets managed to rebound sweetly over the next couple of years, but most investors were once bitten, twice shy.

What really caused the Crash of 87? We can speculate but we can't say with certainty.

Twenty five years later, and the US is still on the verge of war with Iran, the European currency situation is still fragile, portfolio insurance has been replaced by derivatives and High Frequency Traders

What we do know is that don't know much.

Dallas Federal Reserve President Richard Fisher recently offered a stunning assessment about our policy-making central bankers down in Washington: "Nobody really knows what will work to get the economy back on course. And nobody-in fact, no central bank anywhere on the planet-has the experience of successfully navigating a return home from the place in which we now find ourselves. No central bank-not, at least, the Federal Reserve-has ever been on this cruise before."

Did you ever meet someone who has a gambling problem? Probably, I think we all know someone with strange desire to bet on almost anything: football games, horse races, slot machines, the stock market. The Federal Reserve has placed a big bet that they can buy up $40 billion or so worth of mortgage backed securities each and every month until the housing market recovers, and not just recovers but shows enough strength to lift the labor market on its shoulders.

This means the Fed will monetize nearly 50% of the entire US budget deficit in 2013. That will boost its balance sheet from the current $2.8 trillion to approximately $4 trillion , or 24% of GDP, by the end of next year. With more money available, and at lower rates, that money will then work its way through the economy. Businesses would use the cheap money to expand. The idea is that, flush with cash and with fewer opportunities for higher returns, the banks will boost their lending to businesses and consumers, which is the basic idea of traditional banking. The problem is that traditional banking is pretty much dead; replaced by a casino mentality.

So, far the Fed's QE to Infinity and Beyond hasn't pushed down mortgage rates as much as you might anticipate. QE has pushed down rates on Mortgage Backed Securities but not mortgage rates. The banks are sitting on the proceeds from the MBS purchases, rather than passing the money on to customers in the form of lower interest rates; it has really helped increase the margins for the banks; not much help for the customers. William Dudley, President of the New York Fed recently talked about the problem, that the transmission mechanism is broken. He didn't seem to offer a solution, but the Fed is certainly aware.

The banks are not content to just pick up the wider margins, just as a hard core gambler is never content to walk away from the casino, even after the pit boss tells you the roulette wheel is broken. The banks are now leveraging the MBS market. UBS has just launched a 16-times-leveraged MBS ETN. The ETN stands for Exchange Traded Note, and it's an unsecured, unsubordinated debt security; this specific one is called the ETRACS Monthly Pay 2x Leveraged Mortgage REIT, offers double the return of the Market Vectors Global Mortgage REITs Index – itself an investment vehicle with 8 times leverage to mortgage-backed securities.

The idea appears to be that with the Fed acting as a buyer-of-last-resort that prices will take a smooth upward trajectory and that 16:1 leverage makes sense for retail investors as a bet on a sure thing. Yes, you heard right, in the chase for yield 1.75% MBS pools is just too low, so the gambling junkies on Wall Street lever up 8 times; then the gambling junkies at UBS figure to double down

And it may seem like a sure thing because the Fed is backstopping the MBS market, but if you step away from the crack pipe, a closer examination of QE to Infinity and Beyond reveals some holes in the backstop. The Fed could change the transmission mechanism and buy other assets. Let's say that one year from now, the economy is no better off, the Fed could decide they need a fresh approach; no more MBS purchases instead they'll buy up student loan debt or whatever. Let's say that one year from now the economy has shown a tremendous improvement, housing has come roaring back and the jobs picture is bright and glossy and inflation is rearing its ugly head; the Fed backs out of MBS purchases and tries to clean up their books.

What the Fed hasn't figured out is that the bankers are just gamblers. That's the result of the repeal of Glass-Steagall, which demolished the wall between traditional banking and the risk-taking investment banks; now banks could gamble with FDIC insured deposits backing their bets. Toss in the Commodity Modernization Act of 2000, kind of like portfolio insurance on steroids, and the result was the Crash of 2008. Now the banks are short of cash, but they're still neck-deep in the $650 trillion-dollar derivatives casino. And their gambling addiction requires their absolute attention. And just like the addict, they take their money to the table rather than paying their rent.

Practically speaking, the world of high finance has become more dangerous than ever and traditional banking customers have become all but irrelevant. Why write 16 mortgages when you can write just one and leverage it 16 times? The nation's banks once went out of their way to find reasons to give money out. No longer.

So growth slows to a crawl. This results in balance sheet destruction once productive assets go into decline. Corporations cut costs, delay investments, fire workers. Consumers cut back, tighten belts, deleverage and shun debt, even if it's free. Ultimately, demand craters.

The Federal Reserve is probably trying to prevent a deleveraging depression. Maybe they'll be successful. It's a hard slog without fiscal stimulus, and with the dysfunctional Congress, we know not to count on that. One thing I would like to see is a reinstatement of Glass-Steagall. Either you're an investment bank or a commercial bank - but you can't be both. If you're trading derivatives, you're on your own. If you're lending to consumers and businesses, you get the FDIC insurance and the implicit backing of the federal government. If we could just get the bankers away from the casino, maybe we could get them to do their job; you know, a safe repository, a steady lender, circulating money through the economy.

Friday, May 25, 2012 – It's Better Than It Looks, Striving For Happiness Amidst the Cow Pies - by Sinclair Noe

DOW – 74 = 12,454
SPX – 2= 1317
NAS – 1 = 2837
10 YR YLD - .01 = 1.75%
OIL -.06 = 90.60
GOLD + 15.90 = 1574.70
SILV +.21 = 28.63
PLAT + 14.00 = 1436.00

For the week, the S&P 500 rose 1.7 percent.  I'm of the opinion that life is better than it appears. We look around sometimes and the world can seem scary. Sometimes we have to look a little deeper to find the good, the decent, the delightful and the potentially pluperfect.

And that brings us to today's topic on the possibility of the Federal Reserve pumping money into the banking system through asset purchases, in other words, Quantitative Easing Part 3. Inflation expectations are falling, if you consider Treasury bonds as a gauge of inflation. The lower outlook for inflation gives the Fed wiggle room to stimulate the economy. Although, right now the Dow looks like a better QE indicator, and it is not indicating QE. The banks can always make a case for QE, but what about the Fed officials who make the actual decisions?

St. Louis Federal Reserve President James Bullard says he expects the U.S. economy to perform better than many forecasters anticipate and that the Fed will therefore need to raise interest rates in late 2013, not late 2014 as its policy committee is currently indicating.

Minneapolis Federal Reserve President Narayana Kocherlakota thinks the current labor market performance is much closer to maximum employment than the data alone would suggest. A few weeks back, Kocherlakota said the Fed should start looking at tightening monetary policy in the next six to nine months. He said he saw inflation at around 2% this year and 2.3% in 2013, numbers that signal the need to start exiting the central bank’s current ultra-easy policy.

New York Federal Reserve President Wiliam Dudley says:“My view is that, if we continue to see improvement in the economy, in terms of using up the slack in available resources, then I think it’s hard to argue that we absolutely must do something more in terms of the monetary policy front.” Dudley thinks economic growth at around 2.4%, is sufficient to keep the central bank from easing monetary policy.

Overall, the chatter from the Fed-heads seems sanguine. That could change before the June FOMC meeting. The monthly jobs report always carries the potential to shake a Fed governor to the core. The next FOMC meeting is June 19. The Greeks vote on June 17. Anything that can happen in 2 days would be addressed with liquidity programs, not easing, and liquidity programs have not needed FOMC meetings to be put into effect in the past. Fed officials know the timing of the Greek vote, and typically want to see the impact of events over time before responding with monetary policy tools.

Still, the Euro-leaders seem determined to impose austerity on the peripheral countries with pure cut off your nose to spite your face sensibility. Things in Euro-land could get nasty fast. The whole Lehman Brothers collapse was nasty fast; it could happen again. The Spanish word for Lehman is Bankia; the fourth largest bank in Spain has been nationalized; trading has been halted; they will be receiving a $24 billion dollar injection of cash recapitalization. And the recent JPMorgan bungle was a vivid reminder that Too Big to Fail banks still pose a very real systemic threat. Plus, it might shut up Jamie Dimon from whining about financial reform. Maybe Dodd-Frank and Glass-Steagall wouldn't have prevented multi-billion dollar losses, and still growing but now Dimon's argument sounds like someone debating we shouldn't have seat belts because they wouldn't have prevented Hurricane Katrina.

Still, absent a big dose of nasty, the situation is fairly good for us. We head into the Memorial Day Holiday with an improving jobs picture, low inflation, plenty of softness in the economy but not enough to warrant QE3 at this precise moment. And with global turmoil, strife, and trouble, money is looking for a safe haven and that not only props up the US economy but also QE3 would spoil the illusion and send money looking for safety elsewhere; that kind of a hit would be worse than the jolt of stimulus from QE3. Of course, the Fed is still accommodative and they still have an implied put in place and they're still printing money at a prodigious clip; but we're not spending with the recklessness of the recent past.

There’s a confused and confusing debate going on over whether President Obama has presided over a “spending binge,” as Republicans claim, or whether, under Obama, “federal spending is rising at the slowest pace since Dwight Eisenhower brought the Korean War to an end in the 1950s.”

The key is fiscal year 2009 -- and who you blame for it. By any measure, spending popped that year. If you’re looking at raw dollars, it rose by $535 billion. And “the 2009 fiscal year,” writes Market Watch’s Rex Nutting, “which Republicans count as part of Obama’s legacy, began four months before Obama moved into the White House.”

That’s true: The federal fiscal year stretches, somewhat weirdly, from October to September. So fiscal year 2009 began in October 2008.

And that’s the point of Nutting’s analysis: if you attribute most of fiscal year 2009 to George W. Bush then, after adjusting for inflation, federal spending under Obama has actually dropped by 0.1 percent. Politifact checked the numbers and agreed: “Using raw dollars, Obama did oversee the lowest annual increases in spending of any president in 60 years,” they write. “Using inflation-adjusted dollars, Obama had the second-lowest increase -- in fact, he actually presided over a decrease.”

The real issue is that 2009 is an anomaly driven by crisis. The Bush Administration screwed it up and drove the spending much higher. Obama stayed the course.

The question is where should spending be now? The Obama administration wanted it to be higher. After all, unemployment rose through 2010, and remains high today. It has proposed a raft of additional stimulus bills since 2009. Republicans in Congress, however, refused to pass most of their plans, and NOT because they had an epiphany on fiscal discipline; past action refutes any non-politicized argument. The lower spending numbers are due to Republican obstructionism but they're afraid to acknowledge the lower numbers, much less take credit for them – which would be an admission of responsibility for failed policy. Instead the Democrats are touting the lower spending numbers when in fact it is numeric proof they've had their legislative agenda and economic plans hoisted on a petard. Washington is so full of cow pies, they are unavoidable. And so the Fed is sitting back waiting to whitewash the lack of fiscal policy. It isn't exactly the checks and balances envisioned by our founding fathers but so far the tapestry is only slightly raveled.

And still, we head into the weekend with the price of oil in a nifty decline, and I don't know who to thank for that but I'll take it. The price at the pump is almost bearable except my long-term memory hasn't faltered completely, and for this I find comfort. The weather looks good for a barbeque. Speaking of long-term memory, this is the first Memorial Day in 10 years that the US hasn't been at war in Iraq. There are approximately 23.4 million US veterans, 1.7 million of whom served in Iraq or Afghanistan. And because of everything they gave, we have the freedom to do whatever we want, more or less. And now our Iraq War vets can spend the holiday at home. That's good. We have the choice to get buried under the negatives or we have the choice to strive for happiness. I'm pretty sure there is empirical evidence that the standard of living is improving. I'll look it up some day but for now I'm of the opinion that life is better than it appears. That's my story and I'm sticking to it.