Monday, June 18, 2012 - G-20 Declares Ceviche Tasty and Democracy Messy - by Sinclair Noe

DOW – 25 = 12,741
SPX +1 = 1344
NAS + 22 = 2895
10 YR YLD un=1.58%
OIL -.26 = 83.01
GOLD + 2.00 = 1629.70
SILV un= 28.84
PLAT – 1.00 = 1489.00


The results of the Greek election shows conservative New Democracy taking 29 percent, with the radical leftist Syriza bloc just behind on 27. The Pasok Socialists were set to take 12 percent of the vote. The scenario is similar to the results of an earlier round of voting. ND also came in first in May 6 elections, again with Syriza running a close second, but failed to form a government then. And 38% of eligible voters did not vote yesterday; that's more votes than any one party received. 


The headlines say that a pro-bailout, pro-remain in the Euro-union party won the Greek elections; it's not that simple. There was no majority. The next step is for New Democracy leader Antonis Samaras to form a coalition government; not an easy or certain task, and it must be done within the next 10 days. Look for a combo of the New Democracy conservatives and  the Pasok socialists; the same group that governed Greece into this mess in the first place. 


Pasok, the Socialist party, called for a government that would include Syriza, the far left party, but  Syriza ruled out joining a coalition that would stick to the punishing bailout terms that have helped condemn Greece to five years of record recession. Alexix Tsipras, the leader of Syriza, had vowed to tear up the terms, betting that European leaders cannot afford the financial market turmoil that could be unleashed by cutting a member of the euro zone loose. Even though Tsipras has consistently said he supports the euro zone and wants Greece to remain in it, Samaras framed this election as a referendum on the euro; ND ran TV spots showing a sad little schoolgirl asking why Greece wasn’t a member of the euro zone.


Greece’s lenders say a new government must accept the conditions of the bailout - on top of a 110 billion euro package in 2010 - or funds will be cut off, driving Athens into bankruptcy. If the Greeks can form a government, the first visitors will be the Troika – the ECB, the IMF, and the EU. Today, Angela Merkel, the German Chancellor gave the Troika its marching orders, saying she would not accept revisions to the bailout deal.


A Greek euro exit has the potential to unleash shocks that could even break up Europe’s single currency and plunge the global economy into chaos. The result will dominate today's meeting of the Group of 20 world economic powers in Mexico. The central bankers have been standing next to their fleet of helicopters, ready, willing, and able to take flight and toss out cash on bankers in the event the markets freaked out today. The markets did not freak, but we've got a few days to see if a deal will actually happen. 


Meanwhile, Spain Economy Minister said Spain is solvent and has the capacity to grow and the reforms already undertaken to cut its budget deficit will make the country more competitive. Spanish bond yields hit a new Euro-era high above 7%. And from Reuters, Italy's European Affairs Minister said: "Italy will push this week at a meeting of euro zone finance ministers for a semi-automatic mechanism involving the European Central Bank or the permanent bailout fund ESM to reduce spreads of euro zone bonds over Germany."


While the Greeks were not enthusiastic about the election they have been actively pulling money out of Greek banks. The government is helping itself to people’s savings and forcing businesses to prove the tax purity of their funds. In Italy, the government has colluded with several banks (like BNI) to freeze customers out of their accounts with no warning or explanation. ATM limits are being imposed at many banks across the continent. More severe controls may be required to prevent capital flight.


The conclusion to draw from all of this is clear: finance the government, save the banks, screw the people. This reality, coming soon to a western civilization near you.


It wasn't too long ago that a vaguely positive statement from an EU "source" or a salacious rumor from almost anywhere could spark a robust rally in credit spreads. Now we get a favorable result in one of the most important elections for many years and the rally has dissipated by mid-morning. This is not a done deal, not by a long stretch.


Meanwhile, the big wigs from the G-20 are holding a meeting in Los Cabos, Mexico. They claim their top priority remains strong, sustainable, and balanced growth that reduces unemployment. The G-20 issued a preliminary communique that states: the shrimp ceviche is very good and there is reason to hope the talapia will not be overcooked.


Another area of agreement in Los Cabos is a call for peace in Syria. President Obama and Russian President Vladimir Putin are urging an immediate end to violence in Syria. Details of how peace might happen remain vague but  they said they shared a belief that Syrians should determine their own future. Today, Syrian security forces pounded opposition areas across the country, and at least 79 people were killed in violence that has escalated since international observers suspended their mission. Welcome to the future. 


Meanwhile, Egypt's ruling military council has vowed to hand over power to an elected president by the end of June. The promise comes as votes are counted after Sunday's presidential run-off election, with both candidates claiming they are ahead in early results. The results of the vote count won't be announced until Thursday, to allow the military time to count the way they want. The presumptive winner is a candidate of the Muslim Brotherhood. The vote stuff doesn't really matter, the military council had earlier issued a declaration granting itself sweeping powers over legislation and the introduction of a new constitution, control of the budget, and they also stripped the president of any authority over the military. 


Clearly this democracy stuff can be messy and when it gets too messy, it will not be tolerated. 


Meanwhile, the Federal Reserve Federal Open Market Committee meets in D.C. Tuesday and Wednesday. Hiring has slowed, economic growth has eased, inflation is tame and millions of Americans remain unemployed. Hints of recovery have stalled. The Federal Reserve has made a terrible mess of their dual mandates of price stability and maximum employment. What will they do this week? 


The Fed might extend Operation Twist, which is the policy that swaps $400 billion in short-term bonds for ones with a longer duration. The idea is to push down long-term interest rates,  making it cheaper for businesses to get loans and consumers to get mortgages and other forms of credit. Except there is still not much lending, punching a hole in the supply side thinking. 


While it's unclear just how effective Operation Twist has been so far, it is true that long-term rates have come down since October, when the program started. Mortgage rates have hit record lows, but there hasn't been a surge in lending activity. Operation Twist is scheduled to expire June 30; if they want to extend it, this would be the time to say so. 


The Fed might try a third round of QE. Buying more Treasuries is a possibility for the Fed, but it comes along with greater risks. The central bank has already tried this policy -- known as quantitative easing or QE -- twice now, and while it has pushed interest rates lower, it has yet to solve the unemployment problem. Adding a third round of QE is unlikely to change that, plus it's risky. It would increase the Fed's balance sheet. It's still a possibility later this summer, but only if the economic outlook gets worse; most likely the Fed will keep their powder dry, regarding QE3, at least for now. 


Another option is to modify the ZIRP, Zero Interest Rate Policy.  The Fed has kept interest rates near zero since December 2008 in an attempt to boost the economy. But the central bank can also have an impact merely by signaling to investors where it thinks interest rates should be in the future. The Fed's most recent most recent proclamations say rates should stay "exceptionally low" until late 2014. Extending that language to say 2015 or later could shake things up.


And the other option for the Fed is to do nothing at all. The Fed will release its official statement at 9:30 p.m. PT on Wednesday, 


In case you haven’t had enough of Congress lobbing softballs at Jamie Dimon, the JP Morgan CEO is appearing before the House Financial Services Committee tomorrow. Last week was incredibly embarrassing, and showed just how unlikely it is that you’ll ever get anything like real questioning in a Senate hearing when the level of general expertise among the members is so shamefully low, and the witness is a man who controls millions of dollars of campaign contributions. JPM is supporte by the US Treasury, they receive loans from the Fed and bailouts and less obvious subsidies like GSE purchases of mortgages and implicit guarantees of bank debt. This was a chance to show Americans how a too-big-to-fail commercial bank like Chase uses the crutch of government support to gamble recklessly in search of huge profits, with the public on the hook for any potential downside.


 But most important, they had an opportunity to demand explanations, such as what that trade actually is, who was involved in approving it, when did it start to go bad and when did management realize there was a problem, and how did they not control it better. For the overwhelming majority of the legislators, that was no accident.


Dimon took what is actually an indefensible position: that any bank risk taking should be permitted, so long as it will make money when there is a crisis. This logic would justify engaging in systemically destructive high-risk trading activities, with government backstops for good measure. That is a very risky proposition.


Dimon’s defense seems to be: “we got on top of this pretty quickly, we’re a big bank and this isn’t much of a loss, it happens and we’ve learned from this mistake.” In addition, Dimon claimed the underlying portfolio of about $370 billion of securities in the CIO weren’t all that risky, because, among other things, it had an average rating of AA; pay no attention to the incredibly risky derivatives – largely unregulated, no idea how big and nasty they were, no idea if those derivatives positions might be the bets that destroy the global financial system. Nope, just a few highly rated securities.


That sounds pretty tame, right? Well actually, JP Morgan was taking more risk in its CIO that any of its peers were. So the concern about the failed CIO trade is well warranted. It provides a window into undue risk-taking at JP Morgan, and a generalized industry policy of pushing the envelope, which is the right thing to do if you have managed to set up “heads I win, tails you lose” wagers with deep-pocketed suckers.

Tuesday, May 08, 2012 - The Situation in Europe Isn't What You Think

DOW – 76 = 12,932
SPX – 5 = 1363
NAS – 11 = 2946
10 YR YLD - .04 = 1.84%
OIL - .46 = 97.30
GOLD – 33.70 = 1605.80
SILV - .62 = 29.57
PLAT – 18.00 = 1517.00

The markets did a double take. We knew what was happening in Europe. Yesterday, the markets acted as if nothing had happened. This morning, the sky was falling. And then as the day progressed, the markets realized the sky wasn't falling, or  perhaps the markets remembered that the Federal Reserve will backstop the markets. And the Fed meets again in June 19^th, and that's not too far away. Of course, before the Fed can make an announcement on yet another round of Quantitative Easing, the sky has to fall, at least a little; stock markets have to wobble, oil prices need to slip, gold prices need to be slapped around. And just when you imagine there is a deep dark deflationary abyss, the Fed can ride to the rescue with another round of cheap money for undeserving bankers.

The euro fell for a seventh straight session against the dollar, dropping below $1.30, which was considered a fairly significant level of support. Today's euro weakness is overwhelmingly tied to Greece's difficulty putting together a government. Greece's two main pro-bailout parties failed to win a majority in weekend elections, leaving questions over the country's ability to avert bankruptcy and stay in the euro. Greece's Left Coalition party has a chance to form a government opposed to the country's EU/IMF  bailout after the mainstream conservatives failed to cobble together a coalition. The chances are looking like slim and none. The Left Coalition is trying to back away from pledges made in exchange for a EU/ IMF bailout; this basically means they want to tell the bankers to go to hell and they don't care if they get kicked out of the Euro as a result. The right wing is saying Greece must accept the bailout deal and remain in the EU; the left wing is saying the popular verdict renders the bailout deal invalid. If a government can't be formed, then they will call for another round of elections.

So, the next question is: what happens if Greece exits the Euro? Not much. If you haven't seen this coming, you haven't been paying attention. International banks have sharply reduced their exposure to Greek and other peripheral government debt. If Greece leaves, it is already baked into the cake and it may be the best thing for the Greek people. Except... if Greece leaves, then Spain and Portugal and Italy might consider leaving the Euro or renegotiating their deals. That does not mean there would be no market impact. The premium investors demand to hold peripheral debt rather than German benchmarks would rise and the euro might fall even more. Overall, the situation in Greece is important politically but not financially. France is another story.

François Hollande, the newly elected Socialist French president, demands a change to the EU's economic policies, with a shift from austerity to growth. European Union leaders are to hold an emergency summit; not today; the summit will be held May 25^th. Germany and France are battling over the euro-zone’s "fiskalpakt", signed by 25 EU countries, that enshrines austerity measures into European treaty law and requires countries to change their constitutions to outlaw high levels of state spending. Mr Hollande is refusing to back such a change or to allow the EU courts new powers to strike down national budgets that breach the fiscal pact's "golden rule", and wants to renegotiate it to dilute the focus on austerity in favor of growth.

So, the elections in Europe showed voters were fed up with austerity, and they prefer a growth policy. Well, yes, sort of. There is more to it. The voters were also expressing their disgust with German imposed austerity. Germany is the instigator for austerity imposed on the periphery countries, and even on France. Germany wants more cutbacks in social spending, it wants higher taxes on the average citizen, and it wants friendlier policies for corporations; the Germans don't want these policies for Germany but they would like to impose this on the southern Euro-countries. And what we have heard is that the southern Euro-countries are lazy, and living off government handouts, while the Germans are hard working, productive, efficient, and thrifty.  What you are not hearing is that this is a Euro version of the 99 Percent movement.

The German version of austerity calls for austerity for the 99%, but not for the wealthiest One-Percent. We've seen this playbook before. It is the Federal Reserve playbook and it calls for an enormous amount of liquidity to be fed into the economy by the central banks. The liquidity is injected directly into the banking system and provides the banks with reserves as the central banks buy up toxic assets in exchange. A zero interest rate policy also provides banks with essentially free loans which can then be used to speculate in various markets. Theoretically, you might think the money injected into the banking system would be circulated throughout the economy to juice growth, but that's not how it works. The banks hoard the money and they gamble with the money. Instead of jobs, growth and stability, the opposite happens; growth is stifled, jobs destroyed, and wealth is redistributed to the small minority known as the one-percent.

Nobody likes to have austerity imposed on them, yet most people realize that emerging from tremendous debt will be difficult and require some sacrifice; the voters were saying the burden should be shared by the people who most benefited in the past from this corporatist plutocracy, who are manipulating the system currently to avoid any harm to themselves, and who show not the slightest concern about the burdens imposed on 99% of the population.  The elections were not necessarily a mandate for a new round of massive expansion of government debt, rather it was telling governments to redirect the current government spending away from propping up the corrupt corporate oligarchy. The Greek people are suffering economically. Goldman Sachs played a significant part in making the Greek debt situation worse. Goldman Sachs received hundreds of millions. Goldman Sachs made out like thieves in the night.

So, why not take away the bailouts? Why not stop the equity extraction businesses, the vulture capitalism, the excessive leverage, the stock option programs that reward short term corporate profits at the expense of long term viability and jobs? Why not reinstate discipline that punishes unsound judgment with the loss of jobs and wealth, not with golden parachutes? Why shouldn't badly run companies be allowed to fail? Why shouldn't success in business be predicated on more than the ability to bribe government officials with campaign contributions to grease the way for unfair advantages and special privileges.

Cases in point: a kid steals a 12 pack of beer from the 7-11 and ends up in prison; John Corzine steals $1.2 billion from client funds and we're still waiting for the police to show up. Or what do you think would happen to you if you forged a check and got caught? Prison, followed by probation. Forge tens of thousands of names and create bogus notaries for mortgage notes – no problem for the banksters. A student hacks into Sarah Palin's phone and gets indicted and convicted in a flash. Rupert Murdoch hacks into a dead student's phone and he gets a pie in the face and a slap on the wrist. You give a cop 20 bucks to fix a ticket and you'll be busted for bribery. JP Morgan gives the New York Police Department $1 million dollars and they have their own private security force; better yet, Goldman Sachs coughs up a few million in campaign bribes, or donations, and they get one of their guys appointed as Treasury Secretary. The list goes on, and on, and on.

We hear malarkey about how the voters went for communists and socialists and neo-nazis. The Europeans have dealt with a corrupt corporate oligarchy in the past; maybe they really wanted to vote for capitalism but there isn't anybody representing that ideal. Maybe they just wanted a level playing field. Maybe we shouldn't fear the socialists in France; maybe we should fear what they're replacing. Maybe we should hope they're going to effectuate change, because if they don't get change with their votes, they may move on to more drastic solutions.

Bank of America has started sending letters to thousands of homeowners, offering to forgive a portion of the principal balance on their mortgages by an average of $150,000 each. The principal reduction offers from Bank of America Home Loans are the result the $25 billion dollar multi-state settlement that came about in the wake of the robo-signing scandal. BofA  started making prinicpal reduction offers in March to a narrow group of homeowners who were already in the process of seeking mortgage modification. The bank estimated that the earlier wave of trial reduction offers to about 5,000 people could amount to more than $700 million in forgiven principal. But homeowners have to make at least three timely payments for the reductions to become permanent. This is BofA's punishment for robosigning; of course many of these mortgages being modified might have ended up in default, so it works out pretty good for the bank.., as always.

BofA holds its annual shareholder meeting tomorrow in Charlotte, NC. Expect protesters, maybe quite a few. In response, the city of Charlotte is beefing up police presence in a two-block radius surrounding the bank's headquarters, where the meeting will be held. Earlier in the year, the city deemed it an "extraordinary event," which allows the Charlotte police force to reallocate officers as it sees fit.  The bank also  hired off-duty Charlotte police officers to sit inside the meeting, as well as a private security firm to work outside.

Senate Republicans on Tuesday blocked consideration of a Democratic bill to prevent the doubling of interest rates on some student loans. Along party lines, the Senate voted 52 to 45 on a key procedural motion, failing to reach the 60 votes needed to beat back a filibuster and begin debating the measure.  Republicans say they want to extend Democratic legislation passed in 2007 that temporarily reduced interest rates for low- and middle-income undergraduates who receive subsidized Stafford loans to 3.4 percent from 6.8 percent. But the Republicans would not accept the Senate Democrats’ proposal to pay for a one-year extension by changing a law that allows some wealthy taxpayers to avoid paying Social Security and Medicare taxes by classifying their pay as dividends, not cash income.

Doubts about Europe’s political and economic future drove prices down for a wide range of commodities. Metals prices were hit hard. Gold, silver, platinum and palladium all fell. Energy and agricultural products were mixed. You might think there would have been a flight to safety, but that flight was for Treasuries, not metals. That might change soon.

Monday, May 7, 2012 - The Revolution in Greece and France

DOW – 29 = 13,008
SPX +.48 = 1369
NAS + 1 = 2957
10 YR YLD unch = 1.88%

OIL +.07 = 98.01
GOLD – 3.60 = 1639.50
SILV -.25 = 30.19
PLAT + 2.00 = 1535.00


The results pretty much followed expectations: An anti-austerity backlash by voters in Greece an France. First attempt at forming Greek coalition fails. Hollande seeks to augment fiscal pact with growth plan. Merkel tells French president-elect "no renegotiation".

Greece, where Europe's sovereign debt crisis began in 2009, was slightly discombobulated after the election boosted left and right-wing fringe parties, stripping the two mainstream parties that backed a the EU/IMF bailout of their parliamentary majority. Uncertainty over whether the country could avert bankruptcy and stay in the euro deepened on Monday when the leader of the conservative New Democracy party which won the biggest share of the vote, failed within hours to cobble together a government. The leaders of the New Democracy party had been given 3 days to form a government but this morning they said it was impossible.

Next in line to try to form a government will be Left Coalition leaders, whose party came second on a platform of rejecting the austerity conditions of Greece's latest bailout program. So, that might be interesting. The Left Coalition is considered a splinter group of the communist party, and now they are in the spotlight because the socialists were too centrist. The far right Golden Dawn party, essentially neo-nazis, achieved a parliamentary breakthrough. In hard times, voters are receptive to extreme ideas. It is easier for a politician to blame immigrants rather than address the real problems. That is a troubling trend.

Greece had appeared to have averted a disorderly default and euro exit in December when a technocratic government led by former central banker Lucas Papademos, and supported by the two main parties, agreed on a second international bailout under which private bondholders accepted sharp write-downs on their holdings. Supporting the technocrats backfired. After four straight years of recession, wage and pension cuts and still rising mass unemployment drove angry Greeks further to the left and right.

Greece consistently missed targets under its first program, which led to the restructuring of its private-sector debt under the second package. Officials say any further backsliding now will not be tolerated, especially with the International Monetary Fund a reluctant partner in the second program. Harsh words. Voters had a louder voice this weekend. Greek finance ministry officials say the country might run out of cash by the end of June if it does not have a government in place to negotiate the next installment of EU/IMF aid and projected state revenues fall short.

Euro zone leaders have tried to avoid a Greek default and departure from the euro, which Merkel has said would be a catastrophe, mainly because it could set a precedent for other troubled south European countries. There is no public support for further bailouts among the lenders, and clearly the Greek voters find the terms onerous. Some European diplomats and economists have been predicting the possibility of Greece leaving the euro area for months.

In France, it was a clear victory for Socialist Francois Hollande, who wants to change Europe's policy focus from austerity to restoring growth, Hollande clobbered conservative incumbent Nicolas Sarkozy. German Chancellor Angela Merkel, who had openly supported Sarkozy, her partner in euro zone crisis management, promised to welcome Hollande "with open arms" and work with him to maintain strong Franco-German cooperation at the heart of Europe but she also made clear there could be no renegotiation of a fiscal discipline treaty. Hollande has said France will not ratify it unless measures are added to promote economic growth.

Merkel sent her message through journalists, saying: "We in Germany are of the opinion, and so am I personally, that the fiscal pact is not negotiable. It has been negotiated and has been signed by 25 countries. We are in the middle of a debate to which France, of course, under its new president will bring its own emphasis. But we are talking about two sides of the same coin - progress is only achievable via solid finances plus growth. "

Jean-Claude Juncker, head of the Eurogroup of euro zone finance ministers, said he had told Hollande on that the European Union's fiscal pact could not be renegotiated. Juncker said: "It will not be possible to change the substance of the fiscal pact, there will not be a formal new negotiation in that respect." However, he added: "It is possible to add growth elements, not necessarily in the form of a treaty.”

Of course, the reality is that everything is negotiable. The next question is whether it is workable and whether there will be any cooperation, any real attempt to help growth or whether it will become an ideological battleground, where right and wrong lose ground to left and right. Hollande's election gave leaders of southern European countries a new ally in their effort to temper the German drive for austerity that has exacerbated their problems. Italian Prime Minister Mario Monti promised to cooperate with Hollande on refocusing European policy towards growth.

However, International Monetary Fund Managing Director Christine Lagarde said that the world's advanced economies still had to cut their debts or face even more pain. In a speech in Zurich she said: "The most important element is to lay out a credible medium-term plan to lower debt. Without such a plan, countries will be forced to make an even bigger adjustment soon."

Lagarde also said "austerity versus growth" was a false debate as it was possible for countries to make policies that were both good for stability and growth. The rhetoric is already shifting.

European stocks slipped early in the day on the Greek news but most recovered later, except the Athens stock exchange, down 6.67 percent. French debt was spared from the selloff, in a sign that markets are more relaxed about the moderate Hollande. The yield on French 10-year bonds fell to its lowest in seven months.

The elections in Europe will be analyzed for some time. Maybe the results had more to do with deep seated resentment for Germany than anything else. It is fairly clear that the French and the Greeks revolted. The elections were in effect referendums on the current European economic strategy, and in both countries voters turned two thumbs down. It’s far from clear how soon the votes will lead to changes in actual policy, but time is clearly running out for the strategy of recovery through austerity. So what are the alternatives? Break up the euro. Greece and Spain would have a quick way to restore cost-competitiveness and boost exports, by way of devaluation. German leaders claim their economy should be a model. What they don’t like to acknowledge is that the German recovery was driven by a huge trade surplus with other European countries, specifically the nations now in crisis; which were booming, and experiencing above-normal inflation, thanks to low interest rates. Europe’s crisis countries might be able to emulate Germany’s success if they faced a comparably favorable environment; that is, if the rest of Europe, especially Germany, experienced a bit of an inflationary boom, it would drive demand to the periphery.

British Prime Minister David Cameron wrote today in an article in the conservative Daily Telegraph: “When people think about the economy they don’t see it through the dry numbers of the deficit figures, trade balances or inflation forecasts — but instead the things that make the difference between a life that’s worth living and a daily grind that drags them down.” This is the old question: What's the economy for anyway? The daily grind seems to be dragging down most Brits, and even Cameron's government. Britain’s conservatives have been taking a beating.

The choice isn’t simply between budget-cutting austerity, on the one hand, and growth and jobs on the other. It’s a question of timing. If government cuts spending too early, when unemployment is high and growth is slowing, it makes the debt situation far worse. GDP slows faster than debt, and the ratio is skewed. The proper sequence is for government to keep spending until jobs and growth are restored, and only then to take out the budget axe. The problem is that the budget axe is never a welcome sight because it might just be your neck on the block. If Hollande’s new government pushes Merkel in this direction, he might end up saving the euro and, ironically, the jobs of many conservative leaders throughout Europe.And we'll be watching in the United States. If it plays in Brussels, it'll play in Washington. America has a long-term budget deficit that’s scary. So does Europe. There is a chance the voters in Athens will influence the voters in Athens Georgia, and the voters in Paris might have something to say to voters in Paris Texas.

Ron Paul is still a candidate for the Republican nomination for President. He won't win, but he is a candidate. He is also still a congressman, and as such he will preside over hearings that take aim at the institution Paul has criticized throughout his political career: the Federal Reserve. On Tuesday, the House subcommittee on domestic monetary policy and technology, which Paul chairs, will consider various proposals to overhaul the Fed. Paul argues that the Federal Reserve is the root of many economic evils and should be eliminated. His ideas, which for most of his career have been considered to be on the fringe, have moved into the mainstream.

One proposal is being introduced by Indiana Republican Mike Pence, would limit the Fed’s responsibilities to controlling inflation. Another Republican proposal, the Sound Dollar Act, would shift control of some aspects of monetary policy to the regional Federal Reserve banks and out of Washington.

And to confirm the old saying that politics makes strange bedfellows, Democrats and liberal groups have also attacked Federal Reserve Chairman Ben Bernanke’s policies. They’ll have their day at Paul’s hearing, too. The Occupy movement claims that the Fed is held captive by the interests of major banks. Massachusetts Representative Barney Frank has a bill that would centralize even more control in Washington, moving it away from the regional banks. Representative Marcy Kaptur (D-Ohio) would curtail the influence of industry by cutting the 14-year terms of Fed governors in half and doubling the amount of time a retiring member of the Fed must wait before taking a job at a bank. Dennis Kucinich (D-Ohio) would take even more power from the Fed: He’d make it part of the Treasury Department.

Now if only we could get Kucinich and Paul to run together on the same ticket. I'd vote for that, if only for the entertainment value.

Monday, April 23, 2012 European Debate Austerity v. Growth, Walmart in Mexico, Apple in Seattle

DOW – 102 = 12,927
SPX – 11 = 1366
NAS – 30 = 2970
10 YR YLD - .04 = 1.93%
OIL +.03 = 103.14
GOLD – 4.10 = 1639.30
SILV - .84 = 30.86
PLAT – 22.00 = 1565.00

There is some uncertainty in Europe. Sarkozy is losing the election in France; the Dutch government has collapsed, and the debt continues to mount and the austerity plans aren't working and the natives are getting restless.

In France, Sarkozy came in second behind Francois Hollande, the Socialist candidate and a harsh critic of the spending cuts prescribed as a way to end the region's debt crisis. This was the first round of voting and there will be a runoff election on May 6^th. Hollande won 28.6 percent to Sarkozy’s 27.1 percent; Hollande has the momentum. Voter frustration with the status quo and with the E.U. fed a rise of support for extremes at both ends of the political scale, making potential kingmakers out of 11 million voters who supported candidates of the far right and left.

Sarkozy and Germany's Chancellor Angela Merkel have been the main architects of Europe's efforts to avoid a collapse of the region's shared currency. If Sarkozy loses, it means Merkel might not last. If both Sarkozy and Merkel lose power, we've got a whole new situation.

Figures reported by the European Union's statistics office confirmed the effects of budget-cutting programs on countries that use the euro currency. Even with widespread spending cuts, overall debt rose to 87.2 percent, the highest level since the euro was created. Separately, a survey of the euro zone's manufacturing and services sectors fell in April. Official data confirmed that Spain is in recession, after economic output fell 0.4 percent in the first three months of the year; that qualifies as a recession although I would categgorize it as a depression. Spain joins other European countries now officially in recession, including Italy, Belgium, the Netherlands and, outside the euro zone, the Czech Republic. Even Germany may have fallen into recession in the first quarter, though official data is not out yet.

The Dutch government resigned Monday after it couldn't reach agreement with an opposition party to bring its budget deficit within European Union rules. The budget dispute raised the prospect that the Netherlands could lose its top AAA credit rating. Euro zone unity is under strain as other Europeans resent what they perceive as Germany’s holier-than-thou attitude in insisting that all the other Euro-zone countries keep their promises to reduce government budget deficits to 3 percent or less of gross domestic product. The Dutch debate basically boils down to austerity versus growth.

Christine Lagarde, the president of the International Monetary Fund, speaking in Washington over the weekend, said: “A global, undifferentiated rush to austerity will ultimately prove self-defeating.” But Ms. Lagarde also acknowledged the quandary facing European leaders. Most of them simply do not have the resources to pay for public works projects or social programs that would ease the pain of rising unemployment and declining wages.

Last week, the International Monetary Fund called for Europe to begin issuing bonds backed by all members, so-called euro bonds, a measure that would take pressure off the most debt-burdened countries whose high borrowing costs are contributing to their economic woes. In Germany, there is little support for such measures. At weekend meetings the IMF announced an additional $430 billion in lending capacity by developed economies. The contributions came after IMF economists determined that countries around the world might require up to $1 trillion in new loans because of the combined effects of the sovereign debt crisis in Europe and sluggish global economic growth. 

There are also calls for the European Central Bank to issue another round of cheap three-year loans to banks, as it has already done twice since December. The bank should also cut the benchmark interest rate from 1 percent, or resume purchases of euro zone government bonds to hold down borrowing costs. Now, the ECB can't seem to enforce deficit reduction plans in exchange for bailing out the banks. The population is catching on to the idea that the banks are part of the problem and not the solution.

The IMF has three recommendations, as outlined in last week’s World Economic Outlook, which are somewhat at variance with current euro zone policy. First, it wants the region not to overdo short-term fiscal austerity while placing more emphasis on longer-term structural measures to improve budgets. Second, it wants the European Central Bank to continue very accommodative monetary policies. Finally, it wants the euro zone authorities to be prepared to inject capital directly into troubled banks and to accompany that with stronger European-wide supervision of lenders.

When the ECB give the banks cheap money, the banks take the money and gamble – why not? It is cheap money. The banks buy the sovereign bonds and then they bet against the same with Credit Default Swaps. For the banks, the best bet is that the economy will shudder and shake and quake and maybe default. And to aid in the bet, the banks are not lending out the cheap money they received from the ECB.

Just a reminder that the Greeks hold an election on May 6, the same day as the runoff in France. Surely the Greeks are looking at the Dutch indignation regarding austerity. The same Dutch that demanded Greek leaders submit to EU demands for punitive austerity measures or forget about getting any help to avoid bankruptcy.

From Reuters: A former chief executive of Calpers, the biggest U.S. public pension fund, and a former board member were charged by federal regulators on Monday with scheming to defraud Apollo Global Management, a private equity firm, of more than $20 million in placement fees.

The U.S. Securities and Exchange Commission said that Federico Buenrostro, a former chief executive of the California Public Employees' Retirement system, and Alfred Villalobos, a friend and former board member who became a placement agent, fabricated documents as part of the fraud. Villalobos is also a former deputy mayor of Los Angeles.

Investment firms hire placement agents to help them land business at pension funds. According to the SEC, Buenrostro and Villalobos, gave Apollo Global the impression that Calpers, which has $235 billion in assets, had reviewed and signed placement-agent fee disclosure letters in accordance with its procedures.

"In fact, Buenrostro and Villalobos intentionally bypassed those procedures to induce Apollo to pay placement agent fees to Villalobos's firms," the SEC said in a statement. "The false letters bearing a fake Calpers logo and Buenrostro's signature were provided to Apollo, which then went ahead with the payments."

Villalobos generated more than $70 million in placement agent fees over approximately a 10-year period, at least $58 million of which was related to Calpers' investments, according to the SEC.

Buenrostro served as Calpers' CEO from 2002 to 2008.

From the Murdoch Street Journal: In a letter set to be sent to regulators and lawmakers on Monday, an MF Global customer group calls for J.P. Morgan to “return hundreds of millions of dollars in MF Global customer funds transferred” to J.P. Morgan in late October. The group, called the Commodity Customer Coalition, urged U.S. officials to “demand” that the New York bank “disgorge all MF Global customer property immediately.” J.P. Morgan is cooperating with the ongoing investigation, has said it did nothing wrong and lost some of its own money in the Oct. 31 bankruptcy because it was a creditor of MF Global.

Next up, we have two tales of corporations performing badly. We start with Walmart. Walmart, has just been caught in a massive bribery scandal that extends to the highest levels of the organization. Just as bad, Walmart's senior management appears to have long known about the scandal and has deliberately tried to cover it up. About 20% of all Walmart stores worldwide are in Mexico.

Walmart de Mexico apparently bribed Mexican officials for years; the bribes may have totaled more than $24 million and they were paid to win permission to open new stores without having to go through regular legal channels. The bribes were initially hidden from Walmart's global headquarters in Bentonville, Arkansas, by disguising them as normal legal bills, which would be accounting fraud. One of the key executives in charge of the bribery payments quit the company in 2005 after being passed over for promotion. He then detailed his behavior to some of Walmart's lawyers, implicating many senior Walmart executives in the process. The CEO of Walmart de Mexico is said to have personally approved the bribes. Walmart's global headquarters launched an investigation of the bribes but despite finding evidence of suspicious behavior and possbly clear violations of law, they shut down the investiagtion. Walmart's then-CEO, H. Lee Scott, Jr., was briefed on the investigation. He reportedly rebuked the company's investigators for being too aggressive.Walmart's current CEO, Michael Duke, was chairman of Walmart International at the time of the scandal. He received frequent briefings about the bribery allegations and progress of the investigation.

The Foreign Corrupt Practices Act makes it illegal to bribe officials in countries in which American companies do business, which is what Wal-Mart is accused of doing here. And don't forget the accounting fraud.

Our next example of a corporation behaving badly is Apple. A guy from Seattle named Rex sued Apple and won. He kept a blog of his battle. Here is the quick version. In 2008, Rex bought an Apple laptop was part of a batch that contained a defective chip. Apple acknowledged the defect and said it would replace it when it burned out. When the chip burned out three years later, Apple flaked out; they claimed his computer was a slightly different version than the model for which it had agreed to replace the chip. So, this guy, Rex, goes to the Apple store, he mails letters, he makes phone calls and he keeps meticulous records of everything, and he writes a blog about his experience. And finally, in March he ends up in small claims court and he wins. David beats Goliath.

If it sounds like a heck of a lot of work and hassle for a computer repair – it is. And that is what Apple was counting on. They thought they could just wear the guy down and eventually he would quit. Most people would give up. Who could blame them? In the past, wronged customers could band together and file a class-action lawsuit. The whole reason why class actions were set up is because most Americans don’t have time or money to go to court over a small item. But today, most companies have added clauses to their customer contracts that prohibit class-action suits. Instead of class action, the corporations now have contracts that mandate arbitration. The problem with arbitration is that customers lose 95% of the time. Coincidentally, the arbitrators are selected by the companies.

So, Rex sued Apple and took them to small claims and Apple fought back. They sent two attorneys to fight the battle, even though it was pretty clear they were liable for the defective chip. They probably thought they could wear the guy down, that he might not show up, or that he might slip up and not be prepared. Maybe Apple was just trying to be a bully. Now the guy is entitled to a new computer and Apple has to pay their attorneys. Once upon a time, Apple was the scrappy underdog, throwing a hammer through the window of conformity. Those days are gone. Apple is now a monolith that thinks the legal system is there to serve them; and customers are meant to be beaten into submission. And they do it for the worst possible reason: because they can. It is only a matter of degrees between screwing one guy in Seattle, screwing the Mexicans who live near a Walmart, screwing the clients of MF Global, screwing the pensioners in California, screwing Europe. And everybody is doing it.

Sinclair Noe

Eat the Bankers