Thursday, October 10, 2013 - Goodbye Jamaica

Goodbye Jamaica

by Sinclair Noe

DOW + 323 = 15,126
SPX + 36 = 1692
NAS + 82 = 3760
10 YR YLD + .03 = 2.68%
OIL + 1.35 = 102.96
GOLD – 20.60 = 1287.40
SILV - .21 = 21.78

Over the past few days we've been hearing that a government default wouldn't be a big deal; that a default wouldn't actually mean default. But it turns out that avoiding a default is a very good thing indeed. Hope over a deal in Washington put the bid back in stocks; and for right now it is just hope for a deal on the debt ceiling, not an actual deal yet; and quite possibly no deal on the government shutdown. We may not get the government running again but the politicians finally realized that they can't strap a suicide bomb vest on US Treasuries.

We may have a bunch of idiot politicians in Washington...,

Yeah, we do have a bunch of idiot politicians in Washington. And they still have a lot of work to do. Republicans in the House of Representatives offered a plan to postpone the default for 6 weeks; President Obama has indicated that if a clean debt limit bill is passed, he would sign it, even if the government remains shut down. That might be a stumbling point. In another potential wrinkle, the GOP plan might permanently ban the Treasury Department from using extraordinary measures to avoid default; so in some ways it isn't a truly clean bill; plus it is very short-term, meaning we get to go through this again around Thanksgiving.

The possible extension means there is the possibility of broader budget talks, including possible deficit reduction. The prospect of broad budget talks is reviving worries among some liberals that Mr. Obama would agree to steps to trim Social Security or Medicare benefits to win Republican concessions, and one area in particular seems ripe – the chained CPI. That remains to be seen.

Bloomberg is reporting on a conversation between Obama and John Podesta, an informal adviser and former chief of staff to President Clinton; just before Obama was re-elected, he vowed to Podesta that he would never again bargain with Republicans to extend the debt limit. The precedent, set in the agreement that ended a 2011 budget standoff, “sent a signal that this was fair game to blackmail over whether the country would default.” According to Podesta, “He feels like he has to end it and end it forever.”

The stand Obama has taken on the latest fight over the government shutdown and borrowing limit -- refusing to tie policy conditions to raising the debt ceiling -- is an attempt to repair some of the damage that he and his aides believe he sustained by making concessions to Republicans to avert a default two years ago.

The Republicans will renew their attack on Obamacare. Heritage Action, the Koch brothers funded, conservative group leading the charge against the health care law has agreed to raising the debt limit but maintains that any measure re-opening the government would be met by demands for killing Obamacare. Just in case you were wondering why something is happening now, it's because the big money players from Wall Street and Big Oil were getting worried, and they started pulling the strings. We may have a bunch of idiot politicians in Washington, but they're the best idiot politicians money can buy. And this is why it is too early to say the deal is in the bag. Conservative Republicans might not throw their support behind Boehner's plan. Boehner made no mention of Obamacare this morning during his remarks.

So, we get a possible, temporary impasse on the debt ceiling, and no movement on the government shutdown, and the Dow industrials jump 300 points. Just imagine the temper tantrum Wall Street would have thrown if we had defaulted.

And then the cherry on top is that all of the fiscal dysfunction means the Federal Reserve FOMC is less likely to take action when they meet October 29-30, especially in light of the damage done by the shutdown. Then you also can consider the nomination of Janet Yellen, a dove, likely to prefer monetary stimulus to backsliding. Yesterday, the Fed released minutes of the September FOMC meeting and one of the concerns dealt with the “considerable risks surrounding fiscal policy.”

There are risks to fiscal policy. Today, a report that initial claims for unemployment benefits jumped 66,000 last week to 374,000. Exactly how much economic damage results from the shutdown will be hard to determine. Pollster Nate Silver, the guy who actually got the numbers right on the election, says the media is probably overstating the magnitude of the shutdown's political impact. Remember Syria? The fiscal cliff? Benghazi? The IRS scandal? The collapse of immigration reform? All of these were hyped as game-changing political moments by the news media. Yeah, not so much. Of course, if the not-yet-done deal doesn't get done and we go into default or if the shutdown lasts a long time, then the magnitude of the impact is being understated.

And all those polls you're seeing suggesting that the GOP is cratering with regards to public approval, and pulling the Democrats down with them, well all those polls probably won't translate in changes in the re-election efforts of incumbents, or the makeup of the House or Senate. And according to Silver's analysis the degree of polarization in Congress is higher than at any point since the Great Depression by a variety of measures, and is possibly at its highest point ever. It is very partisan, and that means there is a great amount of uncertainty. And so the Fed FOMC minutes were correct, there are risks to fiscal policy.

So, the markets bounced today, but it's not a done deal.

Something else I wanted to cover today. With all the political insanity, you might have missed an important story in the journal Nature. Try to think back to the hot days of summer. Now try to remember the hottest summer of the past 20 years. It's tough to put the exact date on it but we can all remember some brutal heat in the desert southwest; a hot spell where temperatures topped 110 or 115 for several days in a row. Well, there will come a time when we'll look back on those days as the good old days. Within a generation, whatever climate we were used to will be a thing of the past. The hottest, most extreme weather will be the average.

According to the new study, the mean annual climate of the average location on Earth will slip past the most extreme conditions experienced during the past 150 years and into new territory by between 2047 and 2069, depending on the amount of climate-warming greenhouse gases that are emitted during the next few decades. Once a location reaches the transition point, the average temperature of its coolest year will be greater than the average temperature of its hottest year for the past 150 years. Even more strikingly, the study found that the oceans, which have absorbed about half of the man-made carbon dioxide (CO2) emissions since the dawn of the industrial revolution 250 years ago, exceeded their historical bounds of pH measurements back in 2008. In other words, the oceans are becoming highly acidic.

Even with aggressive cuts in greenhouse gas emissions, the study found, the projected near-surface air temperature of the average location on Earth will move beyond historical variability in about 56 years from now. A business-as-usual scenario in which emissions continue on their current upward trajectory would see an unprecedented climate occurring 20 years sooner than that, in 2047. And they even break it down by city. New York will reach a tipping point by 2048; Los Angeles will get to the point of no return in 2048; Mexico City in 2031; Phoenix is 2043; and Kingston Jamaica will be there in 10 short years.

The boundary of passing from the climate of the past to the climate of the future really happens surprisingly soon. The study shows that tropical areas, which contain the richest diversity of species on the planet as well as some of the poorest countries, will be among the first to see the climate exceed historical limits — in as little as a decade from now — which spells trouble for rainforest ecosystems and nations that have a limited capacity to adapt to rapid climate change.

According to the study, conducted by a team from the University of Hawaii, about 1 billion people currently live in areas where the climate will exceed historical bounds of variability by 2050. This number would rise to 5 billion people under a business-as-usual emissions scenario, which is the emissions path the world is currently on. We could slow down, by cutting emissions we might buy more time until we hit the tipping point, but according to the new study, we will hit it.

The study is hardly the first to document the steady march toward hotter temperatures around the globe. Less than two weeks ago,the Intergovernmental Panel on Climate Change (IPCC) released its fifth report, describing a planet that is warming at an accelerated pace because of human activity. The past three decades have been the hottest since 1850, according to the panel established by the United Nations, which added that warming and sea-level rise will continue through the 21st century.

But by predicting the tipping point when traditional climates will be replaced by hotter futures, the new study provides a fresh way to look at the problem. There are several things we can start to look for, including changes in food production, especially from the tropics; water scarcity due to drought; and the prices will be affected as big agriculture responds, and much more, right down to specific locations.

Sorry Jamaica.

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.” 

February, Tuesday 14, 2012

02142012

DOW + 4 = 12,878
SPX – 1 = 1350
NAS +0.44 = 2931
10 YR YLD -.07 = 1.92%
OIL +.29 = 101.20
GOLD - .80 = 1722.10
SILV - .14 = 33.68
PLAT – 26.00 = 1635.00

Over the weekend, the unelected technocrat Greek Prime Minister warned that if the terms of the second Greek bailout were not approved, there would be a "disorderly bankruptcy that would create conditions of economic chaos and social explosion. The savings of the citizens would be at risk. The state would be unable to pay salaries, pensions, and cover basic functions, such as hospitals and schools, and … the country - public and private sector alike - would lose all access to borrowing and liquidity would shrink. The living standards of Greeks would collapse. The country would drift into a long spiral of recession, instability, unemployment and prolonged misery. These developments would lead, sooner or later, to exit from the euro."

And so the Greek parliament voted to accept a plan to impose austerity on the already austere Greek economy in exchange for a 130-billion euro bailout needed to pay 14-billion in bonds that are set to be redeemed in March.  If there is a default on the bonds, it would likely start a process of national bankruptcy which in the first order would mean state pensions, wages, contracts and medical bills not being paid. From there, the insolvency would multiply outwards into the already deeply impaired private sector, where many businesses would find it impossible to stay afloat.

To exit the euro would further wipe out the private savings market through a combination of devaluation and waves of bankruptcy. Then there would be an  economic contraction, followed in short order by heavy duty inflation, really nasty inflation, because Greece imports most of what it needs to get by. Devaluing the currency would lead to inflation, then people who are still working would demand better wage compensation and that would result in another wave of inflation and then central bankers would emerge from under their bridge to monetize the deficits.

And so, faced with these prospects, the Greek government decided to submit to the austerity program in exchange for bailout money. But the money doesn't go to the Greeks, it goes into a fund to pay the bankers. And so the Greek people have been protesting. There have been riots. They burned buildings. The police fired back with tear gas. The ordinary Greeks are being punished for the mismanagement and corruption of the politicians and the banksters and the business elite.

And the European paymasters, mainly Germany, keep making the deal tougher and tougher on the ordinary Greek citizen. Late today, the Greek parliament defied violent street protests and voted for even more austerity, but fully implementing the measures is likely to prove an impossible task given the political divisions and deep-seated social unrest. The package includes public sector layoffs, sharply cutting the minimum wage and already dwindling pensions, as well as widespread tax increases.

But late today, there was word the Greek government signed off on the austerity measure, and then later the euro ministers said the paperwork had not yet been received and there was more technical details to be worked out and more assurances were required from the Greek politicians.

The question we still have to ask is if the markets have already priced in a Greek default, and the possible contagion, or if the market is still living in a land of make believe. Today, Moody’s Investors Service cut the debt ratings of six European countries including Italy, Spain and Portugal and revised its outlook on the U.K.’s and France’s top Aaa ratings to “negative”.There had been no indication the U.K.’s outlook was necessarily in danger based on how other ratings firms view U.K.’s debt. Both S&P and Fitch have a stable outlook on their U.K. rating.

Spain was downgraded to A3 from A1 with a negative outlook, Italy was downgraded to A3 from A2 with a negative outlook and Portugal was downgraded to Ba3 from Ba2 with a negative outlook. Moody’s also reduced the ratings of Slovakia, Slovenia and Malta.

What Greece has in essence committed itself to is an internal devaluation lasting years, if not decades into the future. There is no discernible end to the austerity; year after year, it grinds remorselessly on. Even if everything goes according to plan, which seems unlikely, it takes until 2020 to reduce the national debt to 120% of GDP, a level still far too high to be remotely sustainable.

Greece also faces a massive hit to wages and living standards as it seeks to impose competitiveness on an economy. There is not a hope of Greece growing its way back to debt sustainability while still in the euro. Even if that were the right thing to be doing from an economic perspective, it seems intolerable from a political and social one, as we are already seeing from the mini-revolution on the streets of Athens. Public support for the political establishment is going up in flames. The euro is destroying Greek democracy.

There is a long history of countries that have defaulted on their debt; most recently Iceland and Argentina and other countries that have both devalued and defaulted; the result is an economic shock that is relatively short lived. Once competitiveness has been restored by devaluation and default, growth prospects improve dramatically. This is probably a better path for Greece than to become the whipping boy of Europe.

As Greece struggles to meet Europe’s strict terms for receiving its next round of bailout money, the lesson of Portugal might bear watching. Unlike Greece, Portugal is a debtor nation that has done everything that the European Union and the International Monetary Fund have asked it to, in exchange for the 78 billion euro (about $103 billion) bailout Lisbon received last May.

And yet, by the broadest measure of a country’s ability to repay its debts, Portugal is going deeper into the hole.

The ratio of Portugal’s debt to its overall economy, or gross domestic product, was 107 percent when it received the bailout. But the ratio has grown since then, and by next year is expected to reach 118 percent.

That’s not necessarily because Portugal’s overall debt is growing, but because its economy is shrinking. And economists say the same vicious circle could be taking hold elsewhere in Europe.

Two other closely watched countries on the debt list, Spain and Italy, now also have rising debt-to-G.D.P. ratios — even though they, like Portugal, have adopted the budget-slashing and tax-raising measures that the European officials and the I.M.F. continue to prescribe.

And on Tuesday, new figures showed that the Greek economy shrank even more than expected last year, as Greece struggles under ever heavier austerity demands by its European lenders.

Without growth, reducing debt levels becomes nearly impossible. It is akin to trying to pay down a large credit card balance after taking a pay cut. You can cut expenses, but with lower earnings it is hard to set aside money to pay off debt.

Mario Monti, the Italian prime minister, has warned of the dangers of pushing governments too far, and fearing contagion to his own country, has asked for Europe to go easy on Greece. The Euro-powers-that-be argue that there is no alternative, they must impose harsh discipline on Greece. And if contagion does spread through Europe, it will be well deserved because there is always an alternative. Right now the Euro-zone economy is being run by and for the bankers. There was a time when Europe was torn apart by war, and after the war, the victors rebuilt the vanquished. Economics without compassion is a losing game.

Yesterday was the last day to submit comments on the Volker Rule No less than Paul Volcker himself was roused from 25 years of slumber to submit his own comment, and while he was up he laid a gleeful smackdown on European governments. You may recall that some clients had some concerns about the Volcker Rule reducing liquidity, with some of those concerns being less sympathetic than others, and foreign sovereigns were among the noisiest complainers. Volcker is having exactly none of it:

“There is a certain irony in what I read. In Europe, there are plans to introduce a financial transaction tax, justified in part by officials because it puts “sand in the wheels” of overly liquid, speculation-prone securities markets. … How often have we heard complaints by European governments about speculative trading in their securities, particularly when markets are under pressure?”

The financial services industry wants to revise the “Volcker Rule.” I know, it's shocking. The Securities Industry and Financial Markets Association, or SIFMA, teamed up with the American Bankers Association, the Financial Services Roundtable and the Clearing House Association to deliver a 173 page letter detailing their objections to the Volker Rule and how it goes about setting up the ban on proprietary trading. The groups, the major trade associations for the financial world, also filed separate letters on other aspects of the rule.

The trade groups write:“The potential costs to the financial markets, investors and corporate issuers from incorrectly implementing the Volcker Rule are enormous.”  I doubt it, but just to refresh my memory, what was the cost to allowing the banksters to take crazy risks and nearly drive the entire global financial system over the edge and into a dark abyss? How many trillions were paid out in the form of bailouts, and free money? And how much of that money has been spent to lobby for even less regulation for a broken system?

Just curious.

The California Public Employees' Retirement System, or CALPERS has about $234 billion under management. The pension fund estimates that it has about 75 percent of the money it needs to cover promised benefits. That differs from a Stanford University report that said Calpers was only 58 percent funded. That's a pretty significant difference. And to come up with those conclusions they have to make certain assumptions. CALPERS assumes they can earn 7.75% on the funds. Stanford assumes that CALPERS can only earn 6.2%.

About 2 weeks ago, The California State Teachers’ Retirement System,  with $133 billion of assets, agreed to lower its assumed returns to 7.5 percent from 7.75 percent. The teacher’s fund had 71 percent of what it needs to pay future benefits as of June 30, 2010. The lower rate added $5.9 billion to a $56 billion shortfall projected at the time  So, now you're thinking Calpers is crazy for making such aggressive assumptions, or maybe they are pretty good at investing. Which is it?

In the fiscal year ended June 30, Calpers earned 20.7 percent, its best result in 14 years, led by stocks and private equity. Since then, the fund has dropped 4.5 percent. It lost almost a quarter of its value in 2009 as the global recession dragged down stock prices and real-estate values. Through Dec. 31, Calpers earned almost 5.1 percent over a decade and 7.5 percent the past 20 years. hat 20-year return will rise to 8.36 percent when results through June 30, 2011, are included. The fund uses such fiscal year results in its calculation of employer contributions.