Monday, April 14, 2014 - Blood Moon and More

Blood Moon and More

by Sinclair Noe

DOW + 146 = 16,173
SPX + 14 = 1830
NAS + 22 = 4022
10 YR YLD + .02 = 2.64%
OIL - .11 = 103.63
GOLD + 8.20 = 1327.60
SILV un = 20.07

Here’s what you can expect; the Earth will eclipse the moon tonight about 10:58PM pacific time, adjust according to your time zone. The eclipse will take some time, a few hours. The moon will shift color from orange to blood red to brown, again depending on you locale and the weather. It should be interesting.

The stock markets started the day in positive territory and as trading dragged on, the major indices moved lower on the very cusp of turning red, almost as if they were being eclipsed, and then positive again, right at 3:15 PM eastern time, everything just picked up. Now, you might think the markets are rigged. You might.

A group of traders has sued CME Group Inc, accusing the operator of the world's largest derivatives exchange of selling market data to high frequency traders, cheating other investors who lacked such access. The suit says the CME and its Chicago Board of Trade unit have been giving high-frequency traders early access to buy and sell orders.  They said this deprived other investors of the transparent, real-time data on futures and interest rate contracts that they thought they were getting, and were paying for.

Volume was down from Friday; that’s a nasty trend, lighter volume on up days, heavier volume on down days.

The economic calendar includes the March Consumer Price Index tomorrow; Wednesday brings an update on housing starts and building permits, plus the Federal Reserve will release its Beige Book; Friday, the markets are closed for Good Friday.

This morning the Commerce Department reported retail sales increased 1.1% last month; February’s sales numbers were revised higher to 0.7% from a previously reported 0.3%. An important subset of the report showed retail inventories, excluding automobiles, rose 0.2% in February. You will recall that businesses accumulated too much inventory in the fourth quarter of last year, and we have seen fewer orders as the businesses work through unsold goods and try to clear their shelves. That has left the inventory to sales ratio at its highest level since September 2009. Now, it looks like the buyers are back.

A separate report from the New York Fed showed people grew more confident in the labor market last month, with younger workers in particular seeing a greater chance of finding work should they lose their current job.

Earnings reporting season continues with Citigroup posting better than expected net income under of $3.9 billion, or $1.23 per share, from $3.8 billion, or $1.23 per share. Citi Holdings, which holds the bank's portfolio of troubled assets left over from the financial crisis, posted a loss of $292 million, down from $798 million a year earlier. For all of Citigroup, adjusted revenue dropped 2% to $20.1 billion. Citi still has problems with its Mexican unit, which is accused of making fraudulent loans. Also, Citi flunked the recent Fed stress tests for capital reserves. So, here we are nearly 6 years after the financial meltdown and Citi is still cleaning up its books, still exhibiting signs of structural damage, and unable to put money to productive purpose.

The Congressional Budget office says the deficit isn’t as bad as they thought. For the fiscal year 2014 ending September 30, CBO said, the deficit would fall to $492 billion from a $514 billion February estimate - and nearly a third lower than last year's $680 billion deficit. And CBO lowered its cumulative deficit forecast for fiscal years 2015 through 2024 by $286 billion, to a mere $7.6 trillion; the reason for the lower deficits, is that subsidies for health care costs will be less than previously guesstimated.

Deficits will reach a low point of $469 billion, or 2.6% of US gross domestic product, in fiscal 2015, then gradually start to rise, topping $1 trillion again in 2023 and 2024, a level that would be near 4% of GDP.

Last week the IMF and the World Bank held their Spring Meeting in Washington DC. Here’s a snippet from a panel discussion featuring Federal Reserve Bank of Chicago President Charles Evans and Citigroup chief economist Willem Buiter.

Charles Evans said: “In the U.S. monetary policy is using the standard transmission mechanism. We’re trying to reduce financing costs. Auto rates are down and the auto sector is way back compared to where it was. Housing is better. Mortgage rates are down. And if you have the ability to refinance, or get a mortgage – it’s tougher these days because of the standards - then you can do that. So it’s the standard transmission mechanism. And we are indeed trying to get inflation up because we’re below target. What comes with that is wage increases, also up to where they ought to be. Wages are a symptom of inflation – using a lagging indicator – and they’re down around 2 to 2.25% right now. When they’re at a steady growth part of the cycle they ought to be about 3.5% - 1.5% productivity and 2% inflation target. So getting everything up – and getting inflation up to where it is supposed to be is an important part of all of this. So that benefits everybody.”

Citigroup chief economist Willem Buiter responded: “Monetary policy works with asset prices. By boosting equities, raising bond prices, weakening the currency and that’s exactly how it has happened. Not very effectively, because we have poor man’s monetary policy. Which is what unconventional monetary policy is. But it’s all we have. I would have preferred to see some additional measures on the fiscal side, which could have mitigated some of the income distributional consequences…”

Over the weekend we saw the investment game plan detailed on Sunday morning talk shows. Did you catch it? The climate is changing; we can still fix it; it will require massive investment. According to the most recent Intergovernmental Panel on Climate Change report, keeping global warming down to a level people can live with means cutting carbon emissions to "near zero" by the end of the century, even in an increasingly industrialized world. That may be doable, but it will take "substantial investments" in everything from planting more trees to replacing fossil fuels with low-carbon power sources like solar, wind and nuclear energy. The report clearly shows that the challenges to resolve the global common problem are huge, but also this report shows that there are some steps to resolve this issue.

And the longer we wait, the more expensive it becomes, and if we wait too long, the Earth and all of us who are too miserly to invest now, will cook.

Any hope will require more than tripling the share of electricity produced by renewable sources or nuclear power, along with refining the still-evolving technology of capturing carbon emissions and storing them underground. And it will take a coordinated global effort, likely including taxes on emissions. No direct price tag was attached to that scenario, but the IPCC authors indicate it would require "substantial investments," and more delays just drive up the expected cost. The impact could amount to shaving the projected average growth of the global economy by six-hundredths of a percentage point, from about 2% per year to 1.94%, over the coming century. The total global economy was about $72 trillion in 2012, according to World Bank figures.

Secretary of State John Kerry, who in February called the issue "the greatest challenge of our generation," said Sunday's report is an economic opportunity.

Kerry said in a written statement: "So many of the technologies that will help us fight climate change are far cheaper, more readily available, and better performing than they were when the last IPCC assessment was released less than a decade ago. These technologies can cut carbon pollution while growing economic opportunity at the same time. The global energy market represents a $6 trillion opportunity, with 6 billion users around the world."

Despite more than two decades of efforts to restrain carbon emissions, not only are emissions still going up, they're going up faster than ever. Though there's been an increased emphasis on generating power from renewable sources, the use of coal has gone up in the past 10 years.

The Washington Post and the Guardian captured coveted Pulitzer Prizes for public service for their revelations about the US government's massive surveillance programs. The newspapers' stories were based on thousands of secret documents obtained from Edward Snowden, the former National Security Agency contractor who is living in Russia after fleeing the United States. The Post also won a Pulitzer this year for explanatory reporting. The New York Times won two Pulitzers, both for photography. No award was handed out for feature writing. The Boston Globe won for breaking news for its coverage of the Boston Marathon bombing. Reuters won an award for its coverage on the persecution of a Muslim minority in Myanmar who in efforts to flee often fall into the hands of brutal human-trafficking networks. The prize for investigative reporting went to The Center for Public Integrity for reports on how some lawyers and doctors rigged a system to deny benefits to coal miners stricken with black lung disease. The prize for explanatory reporting went to the Washington Post for work on the prevalence of food stamps in post-recession America. The prize for local reporting went to the Tampa Bay Times for an investigation into squalid housing conditions for the city's homeless population. The prize for national reporting went to The Gazette in Colorado Springs, Colorado, for his examination of how wounded combat veterans are mistreated.

I know what you’re thinking; this is a shocking development. Who knew there were still newspapers?

Wednesday, February 27, 2013 - It's Ben's World

I will be speaking at the 2013 Wealth Protection Conference in Tempe, AZ, April 5 & 6. For information please click here. This is an excellent conference. Hope to see you there.

It's Ben's World

by Sinclair Noe

DOW + 175 = 14,075
SPX + 19 = 1515
NAS + 32 = 3162
10 YR YLD +.02 = 1.90%
OIL + .22 = 92.85
GOLD – 18.40 = 1597.30
SILV - .45 = 29.08

Yesterday, Federal Reserve Chairman Ben Bernanke deliver his semi-annual testimony before the Senate; today he talked to the House of Representatives, repeating testimony in which he defended the Fed's policy of buying bonds to keep interest rates low in order to promote growth and bring down the unemployment rate. Woohoo! Ben is going to continue with QE to infinity and beyond. Wall Street loves free money. The markets moved higher. That pretty much covers it.

The stock market tumbled a few days ago. Bernanke promised more free money and the market moved higher yesterday. And then today, Bernanke reiterated that the free money spigot is wide open, and the market moved higher again. That pretty much covers it.

So, maybe we can play some music. Start happy hour a little early today if that's your thing. I'm just saying that you need to keep it all in perspective. If you have friends, call them up and thank them for being friends. If you don't have friends, go make some. If you are doing something productive, keep doing it. If your not doing something productive, then enjoy the sunset. Go placidly amidst the noise and confusion.

So, Bernanke was on the Hill. The lawmakers questioning Bernanke today were by and large, stupid; they talked a lot and didn't allow much time for answers. So, here's a rundown of what Bernanke actually said, because after all, you can forget the fundamentals, forget the technicals; the Fed is running the game. It's Ben's world, and we're just trying to make a living in it.

BERNANKE ON POSSIBLE EXIT STRATEGIES:

"First, we can simply allow securities on our balance sheet to run off and not replace them as we currently are doing. Secondly, we have a number of tools that can be used to drain reserves from the system such as reverse repos. Thirdly, we can raise interest rates even without reducing our balance sheet, by raising the interest rate we pay on excess reserves, which will in turn translate into higher interest rates in money markets. And fourth and finally ... eventually we can sell the securities back into the market in a slow, predictable way."

"Each of the elements is something that we have tested, that we have seen other countries use, so we think we understand it pretty well."

BERNANKE ON IMPORTANCE OF EQUAL OPPORTUNITY TO ECONOMY:

"In the longer term, what matters is our productive capacity and there, human talent and skills is really the most important thing. In this country we had a period where we brought women into the labor force and that brought a whole new set of skills and talents into our economy.

BERNANKE ON EFFECTS OF QUANTITATIVE EASTING:

"We have seen recovery that is not as fast as we would like but it is nevertheless meaningful and is stronger than many other industrial countries."

BERNANKE ON INTEREST RATES AND CREATING BUBBLES:

"It's the cost of these policies and one that we take very seriously. We look at these possible mis-pricings and we ask ourselves are they in fact mis-pricings, how large are they, and if they are mis-pricings, what is the vulnerability."

"I ask you what the alternative is - interest rates are low for a good reason."

BERNANKE ON EXIT STRATEGY:

"We haven't done a new review of the exit strategy yet. I think we will have to do that sometime soon. Even if we don't sell any securities, it doesn't mean that our balance sheet is going to be large for many years, it just would be maybe an extra year, that's all it would take to get down to a more normal size."

So, here we learn the Fed might just hold onto the Treasuries and mortgage backed securities. Just hold them to maturity.

BERNANKE ON UNUSED ECONOMIC RESOURCES:

"I don't think the economy is overheating. There still seems to be quite a bit of unused resources, people that could be working, capital that could be used and is not being used. We believe the monetary policies that we've conducted have helped get stronger recovery and more jobs than we otherwise would have had."

BERNANKE ON STATE AND LOCAL BUDGETS:

"...state and local governments seem now to have stabilized their budgets, and as a result we don't expect to see those ongoing layoffs to the extent we have in the past."

BERNANKE ON JOBLESS RATE:

"It's hard to predict but a reasonable guess for 6 percent (unemployment) would be around 2016, about three more years."

Just in case you were wondering when QE might end.

BERNANKE ON TOO BIG TO FAIL ISSUE:

"We are not asking for any additional tools at this juncture. We continue to work on the orderly liquidation authority with the FDIC and at some point it would be good idea for Congress to review that process and see if you are comfortable with the approach that the FDIC in particular has suggested for dealing with a failing firm."

BERNANKE ON BANK RESERVES:

"So we have generally been supportive actually of banks doing more reserving so they would have some more reserves available against losses not yet seen."

In other words, the banks balance sheets are not in good shape; they need to be shored up. This was pretty scary, but remember – no more bailouts.

BERNANKE ON HIGHER RETURNS:

"The best way to get sustainable high returns to savers is to get the economy back to running on all cylinders. It's somewhat paradoxical, but in some ways the best way to get interest rates up is to not raise them too quickly, because by keeping rates low, now, we can help the economies get stronger, we can create more jobs, we can create more momentum in the economy, that's the way to get a sustainable higher set of interest rates. Until we can get greater forward momentum, we are not going to get sustainable higher returns."

So, why is everyone concerned about breaking the speed limit when we can't get this jalopy out of first gear?

BERNANKE ON SUCCESS OF CURRENT POLICY:

"If we see no progress for an extended period, which I don't expect because we've already seen some progress, then I think we want to discuss the efficacy side of the equation."

"This is very much focused on the average American citizen. Our estimates are that we've helped create many private sector jobs, government jobs to support the economy quite significantly."

And then Bernanke bowed, threw a kiss to the audience and bowed again.

BERNANKE ON FINANCIAL MARKETS:

"The Treasury and the MBS market functioning is something that we do … every hour because we are heavily engaged in those markets obviously. To this point we don't see any significant problems with those markets. But if we do see any problems obviously we will react to that."

I guess that's Bernanke's way of saying the Fed has completely taken over the bond markets.

BERNANKE ON HOUSING MARKET RECOVERY:

"The evidence thus far is that the housing market has hit the bottom and is recovering. ... So we're still far from where we'd like to be but the evidence is that the housing market is strengthening."

This would be reassuring, except I remember it's the same thing Bernanke was saying about the housing market in 2007.

BERNANKE ON SEQUESTRATION:

"What I am advising is a more gradual approach. I'm not saying we should ignore the deficit, I am not saying we shouldn't deal with long-term fiscal issues, but I think that from the perspective of our recovery, a more gradual approach would be constructive. ...

"The more gradual this is, as long as there is offsetting changes in the further horizon, the less the immediate impact will be on jobs and growth in this recovery in 2013. ... I think there is some cost to the economy of these repeated, I won't say 'crises,' but these repeated episodes where Congress is unable to come to some agreement and therefore some automatic thing kicks in, I think that's on the whole not a good thing for confidence."

BERNANKE ON FISCAL POLICY:

"I cited in my testimony just the numbers from the Congressional Budget Office which suggest that fiscal measures will reduce growth this year by 1.5 percentage points which is very significant. … "My suggestion for your consideration is to align the timing of your fiscal consolidation better with the problem, that is to do somewhat less in the very near term when it will have the greatest impact on growth and jobs and where the Federal Reserve doesn't have any scope to offset it and instead to focus on the longer term where the real problems I think still remain.

"I am very much in favor of getting our fiscal house in order but I think it's a long run issue and I would be supportive of a less front-loaded set of measures."

Bernanke should get some kind of an award for constraint when talking to the politicians about sequestration and fiscal policy. And I'm not one to hand out kudos to Bernanke; he does that himself. The simple fact is that we don't have a real emergency, we have a manufactured crisis. The deficit is already falling at the fastest rate since the end of World War II. The deficit is down 50% as a percentage of GDP in the past four year. It's not growing, it's shrinking. Austerity – budget cuts – hurt the economy; they cut economic growth. Europe is engaged in a grand experiment with austerity, and we can see the results. The differences between the US and the Euro-zone are not that great. They cut their budgets, their economies decline, less tax revenue comes in the door, and their deficits as a percent of GDP actually go up making the problem worse. And the next thing you know, Italy elects a clown. I'm just saying.

The sequester is coming; it will hit Friday. The world will not end. The sky will not fall. Do not distress yourself with imaginings. And most important. Strive to be happy.

Tuesday, February 05, 2013 - Cutting to Spite Ourselves

Cutting to Spite Ourselves

by Sinclair Noe

DOW + 99 = 13,979
SPX + 15 = 1511
NAS + 40 = 3171
10 YR YLD +.04 = 2.02%
OIL + .47 = 96.64
GOLD – 1.40 = 1674.00
SILV +.06 = 31.92

The Congressional Budget Office released revised budget projections that show the federal deficit will drop to $845 billion this year, the first time during Obama's presidency that the red ink would fall below $1 trillion. The budget office also said the economy will grow slowly in 2013. The reason for the slowdown is a tax increase in January and spending cuts coming in the next couple of months.

A few minutes after the CBO report, President Obama spoke to the press and said those spending cuts would damage the economy and must be avoided. He asked Congress for a short-term deficit reduction package that will delay deeper cuts past the automatic start date of March 1, also known as the sequester.

The automatic cuts are part of a 10-year, $1 trillion deficit reduction plan that was supposed to spur Congress and the administration to act on long-term fiscal policies that would stabilize the nation's debt. Though Congress and the White House have agreed on about $2.6 trillion in cuts and higher taxes since the beginning of 2011, they have been unable to close the deal on their ultimate goal of reducing deficits by about $4 trillion over a decade.

If the automatic cuts are allowed to kick in, they would reduce Pentagon spending by 7.9 percent and domestic programs by 5.3 percent. Food stamps and Medicaid would be exempt, but Medicare could take up to a 2 percent reduction, under the plan.

White House aides say the president's plan for long-term deficit reduction would increase tax revenue by about $600 billion to $700 billion over 10 years as well as reduce mandatory health care spending, primarily in Medicare, by about $400 billion over the next decade. It would also change an inflation formula that would reduce cost-of-living adjustments for beneficiaries of government programs, including Social Security. Republicans have called for a more comprehensive overhaul of government entitlement programs.

For now, the President is asking for a short-term deficit reduction package of spending cuts and tax revenue that will delay the sequester, and give Congress time to chip away at the problem.

Part of what we should have learned is that austerity is not the answer. Europe has shown that. When economists talk about the role of government in economic recovery, they often focus on the question of whether or not we need more economic stimulus. Government participation in the economy does not just stimulate private sector activity.  Government is itself a large, diverse and important sphere of economic enterprise.  Our federal, state and local governments produce and deliver important goods and service, things that people want and need, and that they have asked their representatives to create and maintain.   And governments employ millions of people in income-earning positions to carry out all of this production.  Ordinarily, we would expect that as a society grows, government will grow commensurately along with everything else.  As our population grows and private enterprises proliferate, we need more schools and teachers, more courthouses and police stations, more public parks, more inspectors and regulators, more paved roads and street lights, and more government clerical workers.  So while it is true that government spending also stimulates additional economic activity in the private sector – just as any economic enterprise stimulates economic activity in the other enterprises it touches and affects – it is also true that the public enterprises governments oversee and the tasks governments perform are all by themselves an important component of overall economic activity.

The part of government spending that is devoted to purchases made in the production of goods and services is called “consumption and gross investment” , or CGI, and it amounts to about 15% to 20% of GDP.  Government consumption and gross investment (CGI) can be contrasted with other forms of government spending that do not contribute to GDP, such as transfer payments to the public under social insurance programs like Social Security and unemployment insurance programs.

CGI started to dry up after the stimulus package started to wear off in 2011, and public enterprise also started to decline. Paul Krugman asked: “How big a deal is this? Government consumption and investment is about $3 trillion; if it had grown as fast this time as it did in the Bush years, it would be 12 percent, or $360 billion, higher. Given a multiplier of more than one, which is what the IMF among others now thinks reasonable under current conditions, that ends up meaning GDP something like $450 billion higher, which is 3 percent — and an unemployment rate 1.5 points lower. So fiscal austerity is the difference between where we are now and an unemployment rate not much above 6 percent.”

For the past couple of years we've heard bipartisan talk about grand bargains, fiscal cliffs, sequestration, and debt ceilings, with different strategies granted, but with a common theme to shrink government.

 Obama actually told us government must shrink because we are “out of money”.  But notice how absurd it would be if the leaders of private sector industry were to say that the private sector economy has to shrink because it is out of money.  Everybody recognizes that if our economy is to grow and progress, private enterprise needs to spend and invest, and that the means of financing are created along with the initiatives that are financed.   In the case of government, the financial constraint is even less relevant, I mean they print the currency, so there are no real constraints due to a lack of money.

Yesterday I told you to look for a lawsuit against S&P. As expected, the government is seeking more than $5 billion in a civil lawsuit against Standard & Poor's and parent company McGraw-Hill over mortgage-bond ratings, marking the first federal enforcement action against a credit rating agency over alleged illegal behavior tied to the recent financial crisis. S&P reportedly had a chance to settle for about $1 billion, but they felt the price was too high. Attorney General Eric Holder said at a news conference that S&P misled investors, causing them to lose billions, and that its ratings were affected by "significant conflicts of interests." He said that while analysts raised red flags as early as 2003, S&P executives ignored questions about ratings.

In the filing Monday, the government said: "Considerations regarding fees, market share, profits, and relationships with issuers improperly influenced S&P's rating criteria and models." In other words, they sold their ratings to the highest bidder and didn't give a damn about honesty. So, the question is why did it take so long to bring civil charges against the ratings agency?

Well, the lawyer defending S&P says the government intensified its investigation after S&P downgraded the government's credit rating in 2011, following the debt ceiling dysfunction. I'll give the lawyer credit for misdirection, if nothing else. S&P will likely use the same defense the industry has been using for years to explain the seemingly misguided ratings -- their right to free speech. S&P and other credit rating agencies have claimed that their ratings were merely free speech and are therefore protected under the First Amendment. 

There is a paper trail of damaging emails. You've heard about this before. And when those emails are read aloud in court, the best hope will be to make jurors think that maybe it's just a government vendetta. But listen to some of the emails:

In an April 2007 email, an analyst quoted in the lawsuit told an investment banking client that the priorities inside S&P were not centered on providing accurate ratings, but rather were focused on not “p*ssing off too many clients and jumping the gun ahead of [competitors] Fitch and Moody’s.”

The banker emailed back: “I mean come on we pay you to rate our deals, and the better the rating the more money we make?!?! What’s up with that? How are you possibly supposed to be impartial????”

Another S&P analyst wrote: "We rate every deal … it could be structured by cows and we would rate it.”

The email complaints about the integrity of the ratings were so numerous that S&P management directed analysts to stop sending complaints via email. But the emails continued. They wrote about allowing bankers to have greater input into the ratings process; let the bankers help make the grades for the products they were selling; and all designed to increase revenue for S&P. One email that seems particularly damaging came from a director in charge of rating CDOs in late 2006. He wrote: “this market is a wildly spinning top which is going to end badly.”

The paper trail is long and extremely damaging. So, what does it take to come up with criminal charges against a large financial institution? Seriously, what does it take to get a criminal charge started?

Today, Barclays, the British bank, announced it is provisioning another $1.3 billion in its Q4 results to settle claims it mis-sold financial products, bringing total provisions to about $3.5 billion. And UBS, the Swiss banking giant, announced a a $2.1 billion dollar fourth quarter loss, with $1.5 billion of that coming from fines for manipulating Libor interest rates. The Libor rate affects the prices of hundreds of trillions of dollars of financial products; everything from credit cards to mortgages to municipal bonds. Basically, the price of everything in the world the price is somehow connected to Libor. And these guys were monkeying around with this for individual profit. But nothing illegal happened.

And finally, Dell Computer will be taken private by founder Michael Dell and Silver Lake Partners in a $24.4 billion dollar deal. It works out to about $13.60 per share, roughly one-quarter Dell's all-time high 12 years ago. Still, it's the biggest buy out in years.