Wednesday, June 11, 2014 - Nowhere to Hide

Nowhere to Hide

by Sinclair Noe

DOW – 102 = 16,843
SPX – 6 = 1943
NAS – 6 = 4331
10 YR YLD + .01 = 2.64%
OIL + .14 = 104.49
GOLD + .70 = 1261.60
SILV un = 19.30

The US posted a $130 billion budget deficit in May and the smallest shortfall for the first eight months of a fiscal year since 2008. The deficit last month was about $9 billion less than May of last year. For the fiscal year, which began Oct. 1, the government is running a budget deficit 30% smaller than it was a year earlier; or about $436 billion compared with $626 billion. Revenues for that period are 7% higher than a year earlier and outlays are 2% lower.

The Congressional Budget Office in April projected that the federal deficit will decline to $492 billion this fiscal year, the smallest in six years; down from $680 billion in 2013 and down from a record $1.4 trillion in January 2009. The CBO estimates that next year, the shortfall will decline further, to $469 billion. The 2014 deficit will be 2.8% of gross domestic product, compared with 4.1% of GDP in 2013.

The World Bank has cut its global growth forecast, predicting the world economy will grow 2.8% this year, below its previous forecast of 3.2% made in January. In its twice-yearly Global Economic Prospects report, the World Bank said tensions between Ukraine and Russia hit confidence worldwide.

The bank also cut its growth forecast for the United States to 2.1% from 2.8%, citing the bad weather at the start of the year that resulted in economic contraction in the first quarter. The good news is that the lower forecast is largely a result of things that have already happened, and the US economy appears to be rebounding.

The World Bank expects growth to quicken later this year as richer economies continue their recovery. It kept its global growth forecasts for the next two years unchanged at 3.4% and 3.5%, respectively. Provided the problems in Ukraine don’t get worse, or something else nasty doesn’t pop up.

In Ukraine, government forces and rebels claiming allegiance to Russia continue to clash in the east of the country. In Brussels today, the European Union served as broker for talks between Ukraine and Russia over future natural gas deliveries. Russia offered to supply gas for about 20% below the current price if Ukraine would settle its outstanding debts; Ukraine rejected that deal.

Maybe the World Bank is looking for trouble in the wrong place. Sunni rebels from an al Qaeda splinter group overran the Iraqi city of Tikrit; you remember Tikrit is Saddam’s hometown. The other day, the rebels captured Mosul, the second largest city in Iraq; now they’re closing in on the biggest oil refinery in the country.

The point is, we don’t know where the next black swan event will occur.

Maybe an app will backfire. Yesterday we told you about Uber, the ride-sharing app; now valued at $18 billion. Today, Uber brought the city of London to its knees. Actually, taxi drivers protesting Uber got fed up and parked their taxis on the streets, and London town suffered a massive case of gridlock. In Paris, taxis slowed traffic on major arteries into the city during the morning commute. Hundreds choked the main road to Berlin's historic center while commuters packed buses and trains, or just walked, to get to work in Madrid and Barcelona. Taxi drivers across Europe say Uber breaks local taxi rules, violates licensing and safety regulations and its drivers fail to comply with local insurance rules.

Mohamed El-Erian is the chief economic adviser at Allianz and the former co-chief investment officer of Pimco, and he says “investors might be surprised to learn that they have a lot riding on something that they pay very little attention to: macro-prudential regulation, or what central banks and other government agencies do to reduce the risk of systemic financial disasters.

“The aim of such regulation is to lower both the probability and potential costs of financial accidents. It does so by enhancing the resilience of the system, establishing circuit breakers to prevent problems in one area from contaminating others and, at the extreme, containing the detrimental impact on the broader economy when failures occur.

“Authorities around the world have imposed higher and more intelligent capital requirements, required financial institutions to value their assets more conservatively and to hold more easy-to-sell assets, placed constraints on allowable risk-taking, insisted on more stable funding, and demanded greater provisions against bad loans.

“The impact of the revamped regulation has gone far beyond the targeted banks and other financial companies. It has allowed central banks to be bolder in maintaining and evolving exceptional monetary and credit stimulus, which in turn has significantly bolstered the prices of stocks, bonds and other assets as a means of stimulating the economy.”

In other words, the Fed has pumped up financial assets in the hope it will trickle down to the rest of the economy and jumpstart consumer spending and jobs and wages and such. But what if the economic recovery doesn’t follow on the heels of the pumped up financial assets? This is the lasting question for investors. What to do when the prices of assets rise above what history and fundamentals warrant?

If you think that prices are too low, you can buy. But if you think prices are too high, what should you do?  One option is to sell short; borrow the security whose price you believe to be inflated, sell it and wait for the price to fall, then buy it back at a lower price and pocket the difference. That is a very dangerous move when the markets are trading at record highs. You might pick the exact top or prices may move higher for a while, and the markets can remain irrational longer than you can remain solvent.

Policymakers face a similar asymmetry.  It’s true that for a central bank, liquidity isn’t tied to solvency, so experiencing temporary losses is more a political than an economic or operational concern, but losses still matter. Central bankers can play with the value of a currency, making moves to keep a currency from falling or appreciating; happens all the time.

Sometimes policymakers are trapped in the box that they built. It is precisely investors’ belief in the commitment of policymakers that makes them willing to view some very risky investments so casually. However, when many such investments are made over an extended period without adequate compensation for risk, sharp investors expect a round of bubble trouble on the horizon.

One of the funny things that tends to happen in times like this is that investors rush into areas they think should be safe, looking for a place to hide. Largely ignored during much of last year's 30% rally in the S&P 500 Index, the stocks leading the US market this year rank among its usually sleepiest components.

The best sector in 2014 is utilities, including Consolidated Edison, about as staid a group as one can get. They're up 14.5% on a total return basis this year, compared with 6.4% for the S&P 500 as a whole.

What's happening is the opposite of what ordinarily happens in a moving market. It relates to an investing concept known as "beta," which refers to the amount of risk a particular stock adds to a portfolio. Stocks that tend to rise or fall with the market – but in a more pronounced way – are called "high beta." They generally outperform in up markets and fall the most in down markets.

Best Buy and Priceline, two discretionary stocks that were among the S&P's strongest in 2013, are good examples because their sales and profits rise along with the economy, and they led the way last year. This year, those stocks are lagging the more boring "low beta" stocks – those that tend to move less dramatically than the market. It's a signal that investors are worried about earnings growth and U.S. economic demand, and don't want to bet as heavily on the types of stocks that generally qualify as high beta – often cyclical names in the technology, discretionary and energy sectors.

To be sure, this may change if growth picks up, but after US GDP contracted in the first quarter for the first time in three years, investors are cautious. People are still scared. They're still more worried about protecting to the downside than accentuating the upside. That's helped drive equities' rotation into the more defensive, high-dividend paying names, also typically part of the low-beta camp.

So far this year, the 50 stocks in the S&P 500 with the lowest beta scores, a group that includes ConEd and McDonald's, are up on average by 12%. Meanwhile, the 50 highest beta stocks, which include Citigroup and Best Buy, are up an average of 7%. In 2013, the 50 highest-beta S&P 500 stocks rose an average of 51.4%, compared with 21.3% for the 50 lowest-beta stocks.

Investors who have pursued the high-beta contingent have suffered. Among them are hedge funds, which kept a heavy exposure to momentum-type names and the "beta" strategy. Hedge funds now have 3.8 times more net cyclical exposure to defensive stocks. In January, that measure was 4.7 times - bets that went sour as the market corrected through the first quarter. Once that trade began to break, that also accelerated a rotation back into more value-oriented names and sectors. So, what happens when these defensive plays get overvalued? I’m not saying it has happened; today was just one day after a string of record highs. I’m just posing the question.

Thursday, October 03, 2013 - Don't Underestimate the Idiocy

Don't Underestimate the Idiocy

by Sinclair Noe

DOW – 136 = 14,996
SPX – 15 = 1678
NAS – 40 = 3774
10 YR YLD - .02 = 2.61%
OIL – 1.22 = 102.88
GOLD + .40 = 1317.70
SILV - .04 = 21.80

Well, we won't be able to sift through the jobs report tomorrow, due to the government shutdown. There are lots of things that won't happen tomorrow, but next week, the International Monetary Fund and the World Bank will meet in Washington. Ahead of the meeting, Christing Lagarde, the IMF Director delivered an assessment of the global economy. It's subdued. Lagarde says “In many of the advanced economies, however, we are finally seeing signs of hope. Growth is looking up, financial stability is returning, and fiscal accounts are looking healthier.”

The impact of a slowdown on US Federal Reserve asset purchases had been expected to dominate this year’s annual meetings but the Fed’s decision to hold off on tapering has removed that focus. And attention will now turn to the spectacle of a government shutdown and impending debt ceiling default. Lagarde called the debt ceiling “mission critical”, because “the normalization of monetary policy affects so many markets and people across the globe, the US has a special responsibility: to implement it in an orderly way, linking it to the pace of recovery and employment; to communicate it clearly; and to conduct a dialogue with others.”

Late yesterday, President Obama was interviewed by CNBC and he warned that investors should be worried, saying “This time's different. I think they should be concerned.”

It was a pretty clear message to political opponents that even their Wall Street benefactors are growing weary of this mess, saying “I think Wall Street can have an influence. CEOs around the country can have an influence. This is going to have a profound impact on our economy, their bottom line, employees and shareholders unless we start seeing a different attitude around that faction of Congress.”

Today, the Treasury Department released a report warning of catastrophic damiage if Congress fails to raise the debt ceiling. The report states: "A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse."

The Treasury report mentioned that even the prospect of default can cause economic problems, including lower consumer confidence, stock market volatility and higher interest rates on business loans and mortgages. An actual default could have consequences for years to come. The US has never defaulted on its debt, but the cost of insuring one-year Treasury bonds against default has quintupled in the past 10 days.

So, the president says there is cause for concern; the Treasury warns of a catastrophe; and the IMF says the debt ceiling is mission critical, and Wall Street slips a little, but apparently they haven't yet figured out how to turn this into a full fledged panic. There is an air of complacency that might linger until the last minute. Warren Buffett says, “We will go right up to the point of extreme idiocy, but we won’t cross it.” Maybe, but I think Warren underestimates the idiots.

If the debt-limit isn’t lifted, the Treasury will face the prospect of violating one of three laws: The World War I-era statute that created the debt limit, the ban on direct lending to the Treasury from the Federal Reserve, or the 14th Amendment declaring that the legitimacy of U.S. debt must go unquestioned.

There may be some ways to circumvent default, but those options are all “iffy”, at best. The most widely discussed strategy would be for President Obama to invoke authority under the 14th Amendment and essentially order the federal government to keep borrowing, an option that was endorsed by former President Bill Clinton during an earlier debt standoff in 2011. Other potential October surprises range from the logistically forbidding, like prioritizing payments, issuing i.o.u.’s or selling off gold and other assets, to more fanciful ideas, like minting a trillion-dollar platinum coin.

President Obama will not invoke a constitutional amendment to unilaterally increase the nation’s debt limit if  an  impasse with House Republicans causes that ceiling to be breached in two weeks. White House press secretary, Jay Carney, said: “We do not believe that the 14th amendment provides that authority to the president.” The president, he added, “completely” agrees with his advisers’ legal reasoning. More specifically, this removes the idea of an impeachable offense. Of course, that doesn't mean the debt-ceiling will be lifted; again, we should not underestimate the idiots.

But it all goes back to the complacency of Wall Street, which hasn't hit panic stage but has been drifting lower. The Dow Industrials have quietly dropped 9 of the last 11 sessions, shedding 720 points along the way, to close under 15,000. Wall Street is concerned but not yet convinced of a catastrophic default, but also cognizant that the possibility of default forces the Federal Reserve to avoid the taper.

Earnings estimates have been slow in coming down. And the stock market, supposedly forward looking and focused on corporate revenues and earnings, has been completely blind to them. Fundamentals no longer matter. All that matters is the Fed. A shift that has become the Fed’s most glorious accomplishment. And the Fed continues to feed Wall Street with $85 billion a month. Step right up and gorge.

Yet in this infinite QE environment where there is no gravity for stocks and even junk bonds, the smart money is selling hand over fist, unloading whatever they can, however they can. Record junk bond issuance is just one aspect. Another aspect: IPOs. They have gone haywire.There were 23 IPOs in May, 20 in June, 17 in July, 19 in August, and 21 in September. But last week alone, there were 12 IPOs – more than two per day. And today, with all the dire warnings, Twitter announced its IPO. Generally, IPOs are scheduled apart to avoid overloading the market. But now the smart money is scrambling to issue paper while it still can and stuff it into the portfolios of retail investors at current “out of whack” valuations, stocks and bonds alike, before the Fed turns off its crazy money spigot, and before investors will finally open their eyes to the grim earnings reality.

Meanwhile, junk bond issuance hit a record high in September, at more than $47 billion. Year to date, issuance amounted to $255 billion, blowing away last year’s volume for this period of $243 billion. The year 2012, already in a bubble, set an all-time record with $346 billion. This year, if the Fed keeps the money flowing and forgets about that taper business, junk bond issuance will beat that record handily.

Junk-bond funds got clobbered in July and August as retail investors briefly opened their eyes and realized what they had on their hands and fled, and they went looking for yield elsewhere, but there was still no yield in reasonable places, and so they held their noses and picked up these reeking junk-bond funds again. Cash inflow doubled over the last week to $3.1 billion, the most in ten weeks.

These retail investors were fired up by the Fed’s refusal to taper even a little bit, giving rise to the hope that it might actually never taper, that this is truly QE to Infinity, Wall Street’s dream come true. 

The theory is that the Fed is mortally afraid that any taper would pop the asset bubble it has inflated over the last five years. Toss in the threat of a debt default and the Fed must have felt like a porcupine in a room full of balloons. Functionally, the Fed believes that the only cure for a burst bubble is a bigger bubble, so this comes as no surprise. They appear to be willfully blind that, in an era of plutocratic concentration of wealth, the old supply-side nostrums don’t work.

What else? Well, you'll remember that in 2012, a coalition of 49 states and the US reached a settlement with five of the country’s largest mortgage servicers, Wells Fargo, Bank of America, JPMorgan, Citi, and Ally in an effort to stop abuses such as “robosigning” of documents used in foreclosure proceedings and to lower barriers to modifications of loans. 

Now hold onto you hat; the banks are still behaving badly. Wells Fargo was sued by New York state over claims the bank failed to uphold terms of a $25 billion mortgage-servicing settlement aimed at helping distressed homeowners avoid foreclosure. Wells and BofA were accused by New York Attorney General Eric Schneiderman of violating the provisions of the national accord by continuing to impose unnecessary delays on borrowers seeking to modify the terms of their loans. BofA has agreed to mend its evil ways, but Wells Fargo just couldn't get their act together.

Wells Fargo is one of the most difficult banks for distressed homeowners to deal with, Schneiderman said at the press conference. The bank sends “incomprehensible communications” to borrowers; he even read a letter from the bank to a homeowner; it was pure goobledygook. After months of discussions with both banks, Wells Fargo “refused to acknowledge there’s a problem.” 

Friday, April 19, 2013 - A Bizarre New Normal

A Bizarre New Normal

by Sinclair Noe

DOW + 10 = 14,547
SPX + 13 = 1555
NAS + 39 = 3206
10 YR YLD +.02 = 1.70%
OIL =.27 = 88.00
GOLD + 14.40 = 1407.50
SILV + .01 = 23.39

You've probably heard the stories out of Boston today. Late yesterday police released a photo of two young men; it turns out to be two brothers, Tamerlan and Dzohkhar Tasarnaev; originally from Chechnya and living in Boston for the past 10 years. Last night the two brothers tried to flee; they robbed a convenience store. The two men then fatally shot an MIT campus police officer and carjacked a sport-utility vehicle at gunpoint, keeping the vehicle’s owner hostage for about a half-hour. The owner was released at a gas station in Cambridge. He wasn’t injured.

As police pursued the vehicle, explosive devices were thrown from the car. There was an exchange of gunfire between police and the suspects. A Massachusetts Bay Transportation Authority officer was wounded during the exchange. Hundreds of police officers descended on the Cambridge and Watertown areas as the violence unfolded Thursday night.

The older of the suspects was shot by police; the younger brother, still in a car, managed to drive away. At some point he abandoned the vehicle, and he is still at large, believed to be in the Boston neighborhood of Watertown. Police had locked down Boston. It is a voluntary lockdown. Millions of Bostonians are asked to stay in their homes. Streets are empty, trains are not running, and a no-fly zone is in effect over the Watertown area. Police have been going house to house in Watertown, searching for the second suspect.

As of now, they have not found the second suspect.

You've probably heard all that, because it has been all over the TV and the radio and the internet. It's “breaking news”. Wall to wall coverage; the information is a mile wide and one inch deep and heavy on emotion. Sometimes it was completely wrong. The New York Post published front page photos of two men in the crowd at the marathon; but it was the wrong guys. By the way, yesterday Reuters ran an obituary on George Soros, the billionaire hedge fund manager behind the Quantum Fund, also known as the man who broke the Bank of England back in 1992. Soros is still alive. But I digress, let's get back to breaking news.

It is all very bizarre. And at the same time it is part of day to day life. The CDC estimates there are about 120,000 unintentional injury deaths in the US each year; that includes things like car accidents, people falling, people being poisoned, drownings. And then there are about 200,000 people who will die this year due to medical errors; don't forget more than 3,000 people have died since the start of the year in firearm homicides; nearly triple that number have committed suicide.

Officials are still searching for 60 people who remain unaccounted for following an explosion at the West Fertilizer plant in Texas; 200 people were injured in that blast. It has not resulted in calls for changes to immigration policy; the president isn't going to visit West, Texas. Nobody is asking questions about the religious beliefs of the plant operator.

And nobody knows how many people have died from coding errors associated with Microsoft Excel spreadsheets; it's estimated that pain has been inflicted on millions, but an actual number is impossible. Somebody should figure out a way to calculate these things.

The world is a dangerous place, and it is usually dangerous in mundane and boring ways that don't attract wall to wall media coverage. So, we go on with the day to day.

For the week, the S&P 500 ended down 2.1 percent. The index, however, managed a finish above its 50-day moving average after ending below the level on Thursday for the first time this year. Still, the S&P 500 remains up about 9 percent for the year, and within 3% of all time highs. For the week, the Dow slid 2.1 percent, while the Nasdaq lost 2.7 percent. McDonald's and General Electric reported weak earnings. Google posted better than expected results. IBM posted disappointing numbers.

The 10-year Treasury yield is near 1.70%, down steeply from 2.05% five weeks ago. An auction Thursday of Treasury Inflation-Protected Securities, or TIPS, which compensate investors for future inflation, drew the weakest bidding interest in five years, suggesting the markets have little fear that inflation will be a major concern in coming years. It feels a bit deflationary.

The way all this filters into a market outlook is to reinforce the Fed’s message that it is in no hurry to cut back on its easing efforts to try to spark a quicker credit-creation cycle and hungrier consumer and business demand. Deflationary tendencies should put a damper on talk of near-term Fed tapering of its asset-buying program. That should place some support beneath financial markets as they digest the mixed growth signals. It also means that this present choppy earnings season is likely to usher in a prolonged period in which companies struggle to persuade investors they can grow. 

A slowdown from the economy's already slow rate of growth would not be surprising given the impact of the "sequester" and tax increases that went into effect earlier this year. These moves trimmed government spending across the board and increased taxes on most Americans. A new AP poll finds only one in four Americans expects their financial situation to improve over the next year. So, we face a few challenges.

With the world’s finance ministers, central bankers and development experts gathered in Washington for the spring meetings of the World Bank and International Monetary Fund, the mood is certainly aspirational. World Bank President Jim Yong Kim calls for universal education.  Jim Yong Kim is the new president of the World Bank, he used to be president of Dartmouth.  Treasury Secretary Jack Lew calls for universal women’s empowerment. IMF managing director Christine Lagarde says we need: “a full-speed global economy — growth that is solid, sustainable, balanced, but also inclusive and very much rooted in green developments.”

Piece of cake. 

Thursday afternoon the World Bank alone held major events on the importance of protecting women’s economic rights, meeting universal education goals, and incorporating the value of ecosystems into economic analysis. The IMF had its own agenda underway as well. And then the think tanks had their own agendas; with the Brookings Institution, the Peterson Institute for International Economics, the Bertelsmann Foundation and others battling for attention, and so many central bank governors and finance ministers lined up to speak they all sort of cancel each other out.

Communiques will be issued by the World Bank and the IMF, and other organizations like the Group of 20 major economic powers and the G24 committee of developing nations. They may even be of substance. Kim, for example, is expecting an endorsement of his broad strategic goals for the bank; the G24 endorsed a plan by Brazil, Russia, India, China and South Africa – the so-called BRICS nations – to set up their own development bank as a complement/competitor to the World Bank.

Kim also addressed the urgency of climate change and how World Bank is working to combat its effects. He says they must increase financial resources for sustainable energy, use innovative agriculture and partner with major cities to reduce their carbon footprint. The World Bank also issued a report that says it wants to end world poverty by 2030. I think we should aim for 2025. The new goal to eradicate poverty is accompanied by the concept of shared prosperity. The World Bank wants to examine how income of the country's poorest 40 percent has developed over the years to see whether this group has been profiting from economic growth at all, and they want to see the bottom 40 percent get a better deal. Sounds crazy, right?

Maybe not. Economic growth plays a major role in fighting poverty. China and its economic boom have contributed tremendously to eradicating poverty. In just the past few years, Uganda has seen  the number of people living below poverty drop tremendously from 38 percent to under 24 percent.

Climate change, universal education, eradicating poverty. It sounds impossible. But then the world is impossible, in a rather, boring, mundane and predictable way; we face huge dangers every day, and sometimes we get knocked down. If you are looking to find happiness in life, try dedicating you work to the most difficult problems. Turning around inner city schools, finding solutions to homelessness, finding ways to make drinking water safe, offering hope to people with terminal illness. Face the seemingly worst of the world with a conviction that you can do something, even if it's just a tiny little bit that serves others.

Sometimes the challenges can seem daunting and the goals impossible; sometimes the world just seems so bizarre that it's easy to get sidetracked. It's one thing to say people should find their purpose and passion; it's another matter to maintain progress. It's like we all have two jobs: our immediate tasks and the chance to make a difference.

Thursday, April 18, 2013 - Elvis and Other Ongoing Investigations

Elvis and Other Ongoing Investigations

by Sinclair Noe

DOW – 81 = 14,537
SPX – 10 = 1541
NAS – 38 = 3166

10 YR YLD - .02 = 1.69%

OIL + 1.68 = 88.36
GOLD + 14.60 = 1393.10
SILV - .03 = 23.38

Emergency teams went house to house through mounds of debris in a devastated four-block area of West, Texas; that's the name of the town – West; it's near Waco. An explosion at a fertilizer plant leveled a big part of the town and there are 15 dead and perhaps 160 injured. Officials said there was no initial indication that the blast was anything but an industrial accident, but it is an ongoing investigation. Maybe someone will look into the wisdom behind building a fertilizer plant right next to a residential area and even a nursing home.

Meanwhile, an interfaith service was held in Boston today to mourn the victims of the bombing. It was actually a very good service. Several dignitaries spoke, including President Obama, who promised that the perpetrators will face justice. But it is an ongoing investigation. The FBI has released pictures of a couple of guys carrying large backpacks; they think they might be suspects in the bombings.

Meanwhile, the FBI has arrested a man in Mississippi for mailing letters laced with the poison ricin. The suspect is an Elvis impersonator. I can't make this stuff up.

We’re seeing economic growth cool off a little bit after a strong start to the year. The index of leading economic indicators declined 0.1% in March. The LEI looks forward about 3 to 6 months; the biggest challenges seem to be weak consumer demand and slow income growth.

Meanwhile, the Philadelphia Fed’s factory index declined, reflecting a drop in orders that prompted managers to cut back on hiring and inventories.. Manufacturing activity in the region is still growing, it's just sluggish growth.

This week, the IMF released new economic forecasts lowering its estimates for global growth, while also citing diminished risks of a severe financial disruption in Europe or sharp fiscal policy adjustment in the United States. Today, at the spring meeting of the World Bank and the IMF in Washington, Christine Lagarde, the director of the IMF gave her blessing to recent actions taken by the Bank of Japan to help bolster growth. She also said the European Central Bank had more room to aid a recovery in Europe.

But it was cautious support for more easing. The IMF still believes unconventional monetary policies meant to prop up economic growth around the world are still needed now, but they also raise the risk of creating new bubbles that would jeopardize financial stability. Policy reforms are needed before any problems created by central bank stimulus start to arise.

At a separate news conference, Jim Yong Kim, the head of the World Bank, called for eradicating extreme poverty by 2030 and for fostering income growth for the bottom 40 percent in every country.

Meanwhile, the argument for austerity has suffered a devastating blow. Carmen Reinhart and Kenneth Rogoff, two economists, of the University of Maryland and Harvard respectively, wrote a paper, “Growth in the Time of Debt” that has been used by everyone from Paul Ryan to Olli Rehn of the European Commission to justify austerity policies. The authors purported to show that once a country's gross debt to GDP ratio crosses the threshold of 90 percent, economic growth slows dramatically. Debt, in other words, seemed very scary and bad. Cut budgets now or crash your economy. Problem is that their math didn't add up, and some other economists went back and checked the math, and Rogoff and Reinhart now say there was a problem with the Microsoft Excel spreadsheet; maybe some other problems they haven't taken credit for yet.

When properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2%, not -0.1% as published in Reinhart and Rogoff. It kind of changes the whole debate.

The House of Representatives has passed legislation designed to help companies and the government share information on cyber threats, though concerns linger about the amount of protection the bill offers for private information. US authorities have recently elevated the exposure to Internet hacks and theft of digital data to the list of top threats to national security and the economy. This is the second go-around for the Cyber Intelligence Sharing and Protection Act after it passed the House last year but stalled in the Senate after President Obama threatened to veto it over privacy concerns. The White House repeated its veto threat if further civil liberties protections are not added. Some lawmakers and privacy activists worry that the legislation would allow the government to monitor citizens' private information and companies to misuse it.

Too late.

Every time you mindlessly give a sales clerk your zip code at checkout, you're giving data companies and retailers the ability to track everything from your body type to your bad habits.

That five-digit zip code is one of the key items data brokers use to link a wealth of public records to what you buy. They can figure out whether you're getting married (or divorced), selling your home, smoke cigarettes, sending a kid off to college or about to have one.

Such information is the cornerstone of a multi-billion dollar industry that enables retailers to target consumers with advertising and coupons. Yet, data privacy experts are concerned about the level at which consumers are being tracked without their knowledge -- and what would happen if that data got into the wrong hands.

Acxiom, one of the biggest data brokers in the business, claims to have a database that holds information -- including one's age, marital status, education level, political leanings, hobbies and income level -- on 190 million individuals.Major competitors, like Datalogix and CoreLogic, tout similarly vast databases.

In most cases, all that is needed to match the information these data brokers compile with what you buy is your full name — obtained when you swipe a credit card — and a zip code.

Once a retailer identifies you, it can track and analyze your spending behaviors and background in order to predict what you might buy next. In the data world, this is often called predictive analysis or predictive modeling. Some retailers sell this information back to the data brokers which then sell it to other companies -- including retailers, banks, credit card issuers, airlines, hotels, auto manufacturers and many, many more -- in a seemingly never-ending cycle.

Currently, data brokers are required by federal law to maintain the privacy of a consumer's data only if it is used for credit, employment, insurance or housing. But there are some gray areas. Medical records and prescription purchases are off limits, but data brokers are allowed to track purchases of over-the-counter drugs and other related medical items, as well as web searches and medical surveys that consumers fill out online

I hope you've heard some of the talk about the foreclosure settlement fiasco. The quick rundown is that the Office of the Comptroller of the Currency and the Federal Reserve tried to take over an investigation into foreclosure abuses by the big banks and mortgage servicing companies. They looked into abuses such as foreclosing on active duty military, forged foreclosure documents, robo-signing, foreclosing on the wrong houses, foreclosing on people who were paying their mortgages on time, and other little problems. But it was too much work for the regulators, so they told the banks to hire outside consultants to review the mortgage files one by one. But it was too much work for the outside consultants, even though they were paid $2 billion to do the review. So, after two years, the regulators just decided to guess; they said there were probably 4.4 million homeowners who had been abused and they should be paid $3.6 billion. Some would be paid up to $125,000 for the big messes, but most homeowners would get a check for $300 or less.

The first round of the settlement checks was mailed last week; 1.4 million checks for abused homeowners, or maybe not abused; nobody is really certain because they never finished reviewing the files; but they sent the checks anyway. And now the checks are bouncing. Not all of them; just a few. The company hired to distribute the checks says it has corrected the problem.

Meanwhile, the journal, Science reports that NASA scientists have discovered two planets which they think could support life. The planets are very, very far away; 1,000 light years; part of a five planet solar system. The host star -- the equivalent of Earth's sun -- takes the name Kepler-62, where the individual planets are designated by letters thereafter. The planets are the right size and the right distance from the host star, and the scientists think they might have polar caps and water and all the other stuff of life; although probably no Elvis impersonators.

When former Governor Arnold Schwarzenneger signed an executive order in 2007 creating the first-in-the-nation rule ordering reduced carbon emissions for cars and trucks, the oil industry seemed to be on board. Chevron helped write the rules. Chevron's biofuels chief spoke at the signing ceremony and pledged to develop biofuel replacements to gasoline. Two years ago, California started phasing in the mandate aimed at global warming. Now Chevron is leading a lobbying campaign to undercut the mandate they helped to write.

Chevron, the second largest US oil company quietly shelved most of its biofuels work in 2010; they just didn't see enough profit potential. The oil companies can make a profit making advanced biofuels, they just can't make as much profit as they would like.

ExxonMobil, the largest US oil company, has also retreated from a biofuels effort. It cut funding for research into making fuel from algae. Now ExxonMobil and Chevron are pressing California to postpone the low-carbon standard, and they are lobbying to stop other states from following California. The Big 2 oil giants acknowledge that carbon emissions contribute to global warming but they claim the mandate would push up prices at the pump, and the technology isn't currently available and would be expensive to produce.

Back in 2007, Chevron committed to a plant to extract biofuels from forest-based biomass; pretty much using the parts of the tree that don't get cut into lumber. The researchers developed a process, known as solvent liquefaction, that could produce fuel on a commercial scale at a cost of about $2.18 per gallon, back when crude oil was around $70 a barrel. The plants were expected to generate profits around 5 to 10%, but that's not quite the profit margins for oil and gas exploration, so they shut down the venture three years ago.

So, the big oil companies have shifted from research to lobbying against low-carbon fuels, including a lobbying group called Fueling California, which has received hundreds of thousands of dollars from Chevron.

This year, 30 bills to kill or weaken renewable rules have been considered in 16 states. None have passed so far. California is the front line, and the state is outgunned. Chevron had its second most profitable year in 2012, posting net income of $26 billion on $222 billion in sales, the vast majority from petroleum. California’s revenue in fiscal year 2012 was $87 billion.

Emission controls enacted in California since 1966 have been models for federal car-pollution and miles-per-gallon rules. The state’s 32 million vehicles consume 15 billion gallons of gasoline each year, and emit 160 million metric tons of greenhouse gases annually, 36 percent of all such emissions in California. The state began to phase in the low-carbon standard in 2011. When it’s fully in effect in 2020, greenhouse gas emissions associated with transportation fuels are supposed to be 10 percent less than they were in 2010. Right now, the state is on track to achieve the goal, but the Air Resources Board, Chevron, and ExxonMobil won't disclose how the companies are complying with the rule. It could just be that Californians are driving less, or driving more fuel efficient and cleaner burning autos.

Some of the main arguments against the California low-carbon standard have been that it could raise the state's already high gasoline prices, force refiners out of business and even harm the economy by requiring the importation of more foreign oil. But it turns out that California's railroad infrastructure, including planned West Coast terminals, will increase the logistical capacity to transport oil to California from the Bakken oil field in North Dakota. That creates a sidebar play for energy by looking at the railroad companies, but it also means that the 2020 standards aren't a death knell for California refineries. The oil from the Bakken field is cheaper than the average barrel price in the US, and Bakken crude has been given a relatively low carbon intensity rating. The use of Bakken crude in California should exert downward pressure on gasoline prices in California, and Bakken crude is considered clean enough to help the state reach its 2020 low carbon emissions standard.

The USC Schwarzenegger Institute recently hosted a forum on Climate Change. California is uniquely vulnerable to rising sea levels. It's estimated that the past decade was 2 degrees warmer than it had been historically, and it was the hottest the Southwestern US has ever experienced. It's estimated the temperatures could rise 6 to 9 degrees over the next 50 years, if we do nothing.

And that looks like the current path, or at least the current path is next to nothing. This probably isn't the way things were expected to turn out in 2007; the idea of slightly less dirty fossil fuels is not nearly as good as truly clean alternatives, but until the economics change, that's what we'll be stuck with. And that leaves the question of what we've learned. We've learned that the big oil companies will break their promises in the pursuit of higher profit margins, and this should be remembered as new standards are considered or as new oil fields, such as the Monterrey Shale fields are explored.

Thursday, October 11, 2012 - The Bigger Debate

by Sinclair Noe

DOW – 18 = 13,326
SPX +0.28 = 1432
NAS – 2 = 3049
10 YR YLD - .02 = 1.67%

OIL + 1.22 = 92.47
GOLD + 4.60 = 1768.00
SILV +.06 = 34.10
PLAT + 4.00 = 1682.00

Archived audio at http://www.moneyradio.com/Audio-Archive

A fairly remarkable thing happened today. I doubt you'll hear much of it on the nightly news because after all, there is a big debate this evening, but the news out of Tokyo this morning centered around and even bigger debate.

The International Monetary Fund and the World Bank are holding their annual meeting in Japan and the Managing Director of the IMF, Christine Lagarde announced that the harsh austerity measures that European monetary officials have been pushing could produce the opposite effect on struggling nations like Greece and Spain and Portugal and Ireland. In other words, austerity has not worked and it probably isn't the solution to Europe's problems after all.

For those of you that have been alert and attentive, you know that Euro-crisis has served as the testing ground for major economic theory. The IMF announcement today marks a dramatic turning point moving forward, or at least it marks a dramatic sounding announcement and a surprising admission of policy failure. Still to be determined is how the Euro-crisis plays out from here. Large parts of the Euro-zone are now in economic depression that threaten not just the weak nations but even the strongest.

We are familiar with the situation in Greece; unemployment is running at 25%; the Greek government remains in upheaval; the old government gave up; World Bank technocrats took control for a while; elections could not produce a coalition; political parties went to wild extremes; another election produced a splintered coalition but it wasn't enough to alter the economic downward spiral. Big chunks of government owned assets went on the auction block. Greeks took to the streets in protest.

Portugal has been the poster child of fealty to the Troika of the IMF, the World Bank, and the ECB. Portugal accepted any and all austerity measures with hardly a whimper; government spending was cut, taxes were raised and still the Portuguese economy contracted and debt to GDP grew. Finally the Troika demanded cuts to pensions and the Portuguese people responded with a determined “no, you've gone too far.”

Spain is also facing economic depression. Unemployment is running at 25% and there is no hope it will improve over the next couple of years. Falling tax revenue and rising costs of unemployment benefits are confounding the government's efforts to hit a 2012 deficit reduction target of 6.3 percent of gross domestic target agreed with the European Union. The problem is that GDP is a moving target and it has been consistently moving lower. Yesterday, Standard and Poors issued a 2-notch downgrade to Spain's sovereign credit rating to BBB-minus, in line with Moody's rating. Both firms have Spain just on the cusp of junk status. If Spain is cut to junk status, it could cause Spanish bond yields to spike; there might even be a carry over effect to Italian debt.

There have already been huge bailouts for Spanish banks and they appear no healthier for it; meanwhile, there have been severe public sector wage cuts, and lower spending on education and healthcare; tensions between the central and regional governments have been rising, making policy outcomes even more challenging. The Spaniards took to the streets; the protests were overwhelming; more than 1.5 million marched on Madrid a couple of weeks ago.

Perhaps because of the enormous display of people power, Spain has resisted submitting a request for a bailout from the Troika, which would include submitting to the Troika's austerity demands. The IMF's chief economist warned Madrid was courting fate by trying to muddle through without a bailout and without the tough terms it would bring, but the Spaniards keep showing up in the streets and there was no way to accept the bailout.

More than 300-billion-euro has left Spain, a capital flight that is roughly 27% of GDP. The banks can't turn to the ECB because the banks are short on usable collateral. The likely outcome is a credit crunch that economists estimate would trim 4% off Spain's GDP. And if Greece, Portugal, and Spain fall any farther, they would surely drag Italy with them. The economic contraction is already being felt in the strongest northern countries.

There was a deal for more bank bailouts but Spain insisted the money go directly to the banks rather than have it channeled through the government and become official government debt, The northern countries figure the banks are a risky bet and Germany, Austria, Finland, and Holland reneged on the bailout deal two weeks ago.

So, once again, the EU is on the edge of a full scale meltdown, and maybe Christine Lagarde had no choice but to change philosophy and change course; maybe she is buying time; it remains to be seen if she can shift the trajectory at this late stage in the game. Lagarde said Greece should be given an extra two years to meet its budget targets

Lagarde says that governments should no longer pursue specific debt reduction targets but focus on implementing reforms. If borrowing rises as a direct result of growth-sapping measures, the IMF now thinks it should be tolerated rather than addressed with even more tax rises or spending cuts. Lagarde said: “It's sometimes better to have a bit more time” with regard to spending cuts and tax increase.

The IMF warned that governments around the world had systematically underestimated the damage done to growth by austerity. And they produced charts which show that activity over the past few years has disappointed more in economies with more aggressive fiscal consolidation plans. Still, this was not a complete rethink of austerity economics. Rather, it is just acknowledgment of the painfully obvious reality that countries are missing their targets, economies are contracting, it is useless to require further cuts, people power is actually powerful, and a shift in ideology might buy some time.

According to the IMF's World Economic Outlook report:"Risks for a serious global slowdown are alarmingly high.” The IMF expects the global economy to expand 3.3% this year and 3.6% in 2013, the slowest rate of growth since the 2009 recession. Lagarde applauded efforts to stimulate growth taken by central banks, including the Bank of England and the Fed, but warned that they were just buying time for fiscal reforms, and the monetary stimulus, “in and of themselves will not be sufficient.”

Action should be focused on four key areas; completing stalled financial sector reforms, establishing “credible medium term strategies” to deal with government debts, supporting job-rich growth “as unemployment levels are terrifying and unacceptable”, and facing up to “the fundamental issues of global imbalances”.

Unsurprisingly, she said the most urgent action is needed in Europe, saying the eurozone remained "the epicentre" of the global crisis.

However, she added that “fiscal risks are becoming more threatening” in the US, where the scheduled withdrawal of tax cuts in January threatens to squeeze the world’s largest economy and further erode global growth.

Yes, the Euro-crisis has served as the testing grounds for the big debate about austerity versus stimulus, and we are feeling the effects here in the US, where we've been testing this austerity stuff for a couple of years. It may surprise you to learn that during the past three years, the growth in government spending has been the slowest in 60 years just a 1.4% increase in government spending between 2010 and 2013.

Yes, government spending is still increasing but it is increasing at the slowest pace since Ike was in office. Under Reagan's first term, government spending grew at an 8.7% annualized pace; up 5.4% under Bush, the senior; up 3.2% in Clinton's first term; up 7.3% under Bush the junior; but up 1.4% in the past three years.

What gives? Well, you may remember that Congress passed the Statutory Pay-As-You-Go Act which mandates that new government spending be offset with spending cuts or new revenue; this was the American effort at austerity and from what we learned today from the IMF, that contractionary policy has likely been the blame for at least some contraction in the US economy. Oh, I know, the US economy is still the expanding, even if it is just sluggish growth it looks fairly strong compared to Europe; but how much better off would we be if we had just avoided the austerity hysteria and invested in America? But nooo! Congress insisted on cuts, and so they passed the Statutory Pay-As-You-Go Act of February 2010, passed by a highly partisan Democratic Congress and signed into law by a Democratic President without a single Republican vote. I can't wait for that topic to come up in tonight's debate.

And finally, tomorrow we'll see the earnings reports of several big banks, including JPMorgan Chase. This will be especially interesting to see how they portray the $6 billion “London Whale” trading loss. Expect them to paint a picture of rogue traders leading to an unfortunate mistake. What Jamie Dimon calls a mistake, others would call criminal action, as the bank failed to honor internal controls mandated under the Sarbanes-Oxley Act, instead allowing traders to provide the valuations for its financial disclosures to shareholders. The law stipulates that the top executives, including Jamie Dimon, are responsible for any fraudulent valuations delivered to shareholders. Period. Sarbanes-Oxley makes this incredibly simple.If JPMorgan Chase “submitted inaccurate financial statements to regulators,” then top management is criminally responsible under Sarbanes-Oxley. Anything less simply ignores the clear duty under the law.