Thursday, May 09, 2013 - First We Start With A Military Bank

First We Start With A Military Bank

by Sinclair Noe

DOW – 22 = 15,082
SPX – 6 = 1626
NAS – 4 = 3409
10 YR YLD + .05 = 1.81%
OIL - .71 = 95.91

Initial claims for state unemployment benefits fell 4,000 to a seasonally adjusted 323,000, the lowest level since January 2008; that's January 2008, not December 2008. The weekly report from the Department of Labor shows layoffs remained contained even as other parts of the economy such as manufacturing show strain from budget cuts in Washington. The improvement in employment contrasts sharply with other data, including retail sales and manufacturing, that have suggested a cooling in the economy at the end of the first quarter. Two possible explanations come to mind; either companies think any economic slowdown is temporary, and so they are not cutting, or companies have already done so much cutting that there just aren't any more easy cuts. If it proves to be the latter, then it would be a challenge to maintain profit margins without finding additional demand.

Meanwhile, productivity gains are flagging, which could be a sign of economic weakness. Bloomberg reports employee output per hour grew at an average 0.7 percent annual rate over the past 12 quarters, which is a pace so slow it’s rarely seen outside of recessions. Gains since the recovery began in June 2009 have averaged 1.5 percent, the weakest of the nine postwar expansions that lasted as long. The two sources of growth are population growth - more people requiring more - and productivity gains – the same number of people producing more in the same amount of time. There are two ways to increase productivity; work harder or work smarter; working smarter usually means an investment in technology.

The pace at which an economy can grow without stoking inflation reflects the rate of growth of the labor force plus how much each worker can produce; it's sometimes called the speed limit for the economy. Smaller gains in productivity therefore mean advances in gross domestic product will also be restrained. Coincident with a sluggish economy, there has been a slump in business investment in equipment and software.

Companies have been slow to boost spending on more sophisticated machinery and time-saving devices such as faster computers -- a driver of the late 1990s boom in productivity. Without bigger gains in efficiency, it will be difficult for economic growth to gain momentum, and worker pay may suffer even as businesses are spurred to boost hiring in the short term.

The idea that technology has been the driver of productivity gains made sense in the 1990s, but over the past five years there is considerable evidence that productivity gains have come from squeezing workers; making workers do more for the same pay or for less pay. This means working with old or outdated equipment and also working harder. Many people who are still employed are doing the work of 2 jobs ten years ago.

There are, of course, limits to how much a company can cut without degrading their product or service to the point where they start losing sales or create a dangerous workplace. If you've noticed poor customer service, this is one possible explanation.

It's interesting that the Murdoch Street Journal just ran an article quoting a VP at McDonald's, the fast food giant, saying that “service is broken.” The number one complaint: “rude or unprofessional employees.”

For McDonald’s, a company that spends an estimated $2 billion annually on advertising to attract customers, having counter personnel who alienate them in the final moments of a transaction is a disaster. Fixing customer service will require more than admonishing hundreds of thousands of employees to smile.

That article has spawned other articles offering ideas on how McDonald's can improve the customer experience. Suggestions include: creating a shared emotion around delivering a great customer experience, invest more in training employees, simplify work processes, encourage employees to share stories of customer satisfaction, and give employees a reason to smile. I have a suggestion for McDonald's: hire more workers and pay them better.

Speaking of more jobs at McDonald's, today or sometime very soon, is graduation day at many universities. And that means that there will be thousands of graduating students hitting the pavement in search of jobs, and that means that in a few short months they will become delinquent on their student loans. It's a big problem.

The New York Fed provided analysis from 2012: ... as many as 47 percent of student loan borrowers appear to be in deferral or forbearance periods, and thus did not have to make payments as of third-quarter 2011. Specifically, 17.6 percent of borrowers had exactly the same balance in the third quarter as in the second quarter of this year, and 29.1 percent increased their overall student loan balance by taking on new originations or accruing interest to the balance. We then recalculate the proportion of borrowers with a past due balance excluding this group of borrowers. We find that 27 percent of the borrowers have past due balances, while the adjusted proportion of outstanding student loan balances that is delinquent is 21 percent.

A few years ago, I wrote a book entitled “Eat the Bankers” and one of my ideas was to create a Military Bank. Any person who is good enough to stand in harm's way and possibly shed blood for their country is good enough to be given a good deal. All active military would be entitled to the best possible terms on legitimate credit that our country has to offer. The Federal Reserve has been lending money to banks at 0.25% to zero percent, therefore the Military Bank could offer credit to active military personnel at a rate not to exceed 0.25%. If it's good enough for the bankers, it's good enough for America's greatest heroes that defend our freedom.

There would have to be some common sense limits; a Private First Class earns a little over $20,000 a year and would not be eligible to borrow a billion dollars from the Military Bank. All lending would be based on legitimate need and legitimate ability to repay. But if the Private First Class needed a loan to buy a car or housing or to pay for education or training – they should get the same rate as the bankers.

I thought that it was a good idea, and it could even be expanded to veterans, and then expanded to first responders, law enforcement, and other people who are certainly as deserving or more deserving than bankers. I thought it was a good idea, and the general concept seems to be gaining some favor.

Elizabeth Warren introduced her first standalone piece of legislation yesterday, calling for the government to give student borrowers the same deal it gives big banks when they need a loan. The measure would allow students who are eligible for federally subsidized Stafford loans to borrow at the same rate that banks get from the Federal Reserve when they need a short-term infusion of cash from the central bank’s discount window.

Speaking on the floor of the Senate, Warren said: "If the Federal Reserve can float trillions of dollars to large financial institutions at low interest rates to grow the economy, surely they can float the Department of Education the money to fund our students, keep us competitive, and grow our middle class."

The proposal drew some blowback from the banking industry. Patrick Sims, a director in policy research at Hamilton Place Strategies, argued a short-term loan from the discount window during a time of crisis is not at all comparable to a long-term student loan.

Sims said that while some people have called for higher rates or penalty rates for banks that access the discount window, the point of the funding is to prevent a liquidity crisis and is not how banks fund themselves over time.

"Using something completely unrelated and feeding into populist animosity toward large banks to increase the sympathy for the student loan body or students in general, it just kind of sounds like a weird way to legislate," Sims said. "I don’t know if it necessarily helps our student loan situation in the United States today."

Under Warren’s proposal, the Fed would make funds available to the Education Department for one year to make loans to students at the same rate offered to large banks. Warren says the bill would give students relief from high interest rates while giving Congress time to find a long-term solution to the increasing costs of Stafford loans.

Warren noted that large banks can currently borrow from the Fed’s discount window at a rate of about 0.75 percent, but if the rate for new Stafford loans increases — as it is set to do on July 1 — a student borrower seeking a loan this summer will pay almost 7 percent.

"In other words, the federal government is going to charge students interest rates that are nine times higher than the rates for the biggest banks — the same banks that destroyed millions of jobs and nearly broke this economy," she said. "That isn’t right."

Student loan debt had topped $1 trillion, and it has warned about the ripple effects on the economy if those borrowers are unable to buy a home or save for retirement. Warren also noted the "serious risk to the recovery" that student debt poses, and said students are just as important to economic growth as big banks. Warren dismissed the idea that the bill would be too expensive. The federal government earns 36 cents in profit on every dollar it lends to students, she said, which will bring in a total of $34 billion next year.

Warren said: "We shouldn’t be profiting from our students who are drowning in debt while we’re giving great deals to big banks."

I think it's a good idea. Either that or the students go get a job at McDonald's; just don't complain about the service.

Wednesday, April 25, 2012 - Bernanke Approximately Right, UK Approximately Wrong, Students Approximately Taxed

DOW + 89 = 13,090

SPX + 18 = 1390
NAS + 68 = 3029
10 YR YLD +.02 = 1.98%
OIL -.11 = 104.01
GOLD + 2.80 = 1645.30
SILV - .12 = 30.81
PLAT + 8.00 = 1559.00

If you own shares in Apple, congratulations. It gained nearly $50 to finish at $610, up nearly 9%. If you don't own Apple, don't worry about it, don't chase it. Realize that a big chunk of the move today for the broader market, was really just Apple, but it was a good day, with gainers outpacing losers by 3 to 1.

The Federal Reserve wrapped up their FOMC meeting and announced no changes. Wow, what a surprise. The Fed didn't raise rates – they can't. They didn't lower rates – they can't. They didn't announce QE3, but they didn't take it off the table.

Bernanke told reporters at a press conference, “We see monetary policy as being approximately in the right place at this point.” He said, “Our intention is to maintain highly accommodative stance of policy for the foreseeable future.” Kind of like QE in Perpetuity.

Bernanke stressed that the Fed could purchase more assets if it looked like the economy needed help, but he said some ways to boost the economy, like tolerating higher inflation, would be “reckless.” At the same time, he said it was too early to raise rates, “I think it’s a little premature to declare victory. I think that keeping interest rates low is still appropriate for our economy.”

The Fed’s unemployment forecast was lowered and the inflation forecast hiked for 2012, 2013 and 2014, though by fairly minor amounts: for 2012, the jobless rate is seen between 7.8% and 8%, compared with January’s forecast of 8.2% to 8.5%, and the PCE inflation rate is seen between 1.9% and 2%, compared with January’s forecast of 1.4% to 1.8%.

Yea, they might not want too declare victory just yet; they might not want to have Bernanke in front of a banner saying “Mission Accomplished”. Presently, the Fed is missing its employment target, and it is also below its declared inflation target of 2 percent. As the statement says, "the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate." So there is no risk of overshooting the inflation target according to the Fed, only a risk of undershooting it.

If that's true, if the Fed is likely to undershoot both of its targets -- the committee believes that in the worst case it will only hit its inflation target, not exceed it -- then why not pursue more aggressive policy?

And the Fed is afraid of inflation, in large part because the derivatives market has cut off any possible remedies. Interest rate risk is now credit risk and credit risk is enormous. Also, if the Fed faces inflation, they really have a conundrum; do they use their tools to fight inflation or do they use their tools to fight unemployment? They can't fight both with the same tools.

The British economy shrank in the first three months of 2012, falling back into recession as construction activity and industrial output fell.

The U.K. Office for National Statistics said gross domestic product contracted by 0.2% in the first three months of the year, following a 0.3% fall in the final quarter of last year. A recession is widely defined as at least two consecutive quarters of shrinking GDP.

The economy contracted 0.8% on an annualized quarterly basis, the method used to express quarterly changes in U.S. GDP.

So, the Brits have been hoping that austerity would set the stage for growth but it hasn't happened. The results aren't drastic enough to reverse policy but these latest results do highlight that the economy will not withstand any further acceleration in cuts.

The British economy is more exposed to the euro-zone economy than the U.S., but the euro-zone debt crisis was well known when austerity was rolled out; in fact, it was an argument in the last general election, that Britain wanted to avoid becoming Greece. Mission Accomplished, maybe.

Spain is also in a recession. The Dutch opposition parties refused to back austerity cuts needed to meet EU budget targets. Greece's central bank governor warned politicians and voters that they must stick to austerity targets, even after the May 6 elections, or they will surely be kicked out of the Euro-Union. Italy has imposed a limit on cash transactions – no more than 1,000-euros in cash – trying to curb under-the-counter transactions.

And don't forget, it's a global economy; a recession in the world’s third-largest economy (UK), combined with the current slowdown in the world’s second-largest (China), spells trouble for the world’s largest (US). If there’s not enough demand for US goods and services coming from the second and third-largest economies in the world, then we got trouble right here in River City.

The US housing market is showing more signs of stabilization as price declines ease and home demand improves, spurring several economists to call a bottom to the worst real estate collapse since the 1930s. “The crash is over,” says Mark Zandi, chief economist for Moody’s Analytics . “Home sales — both new and existing — and housing starts are now off the bottom.” Economists including Bank of Tokyo-Mitsubishi UFJ’s Chris Rupkey, Bank of America’s Michelle Meyer and Mark Fleming of CoreLogic are also predicting prices have bottomed, even as the threat of more foreclosures loom to boost supply. Mission Accomplished.

Student loan debt has passed the $1 trillion dollar mark. The interest rate that students pay on the basic “subsidized” loan is slated to rise from 3.4% this year to 6.8% next year, unless the lower rate is extended by Congress.

How does the government profit from student loans? Yield spread. Treasury can borrow money at 0.5% or less, and lends it to students at 3.4%. Administrative costs are well below 1%. Prepayment risk is minimal; repayment stretches over many, many years, and the interest just keeps on growing. Interest rate risk is also minimal, given that Treasury can issue debt in a range of maturities.

Loans go into default at about 10% projected for 2013 loans, so credit losses are relatively modest. There is no statute of limitations on student loans, and even bankruptcy discharge is difficult. The $37 billion Treasury profit for FY2012 is after allowing for estimated credit losses in the $5 billion range. So what are the President and Congress arguing about? They are arguing about how much of the federal deficit to plug with student loan interest money. The current “baseline” budget assumes that the rate will jump up to 6.8% for 2013 loans, yielding another $30 to $40 billion return to Treasury. The debate is how much they can scalp off the students. Once upon a time college education was subsidized to a large extent. It was nearly free in California. The Arizona constitution requires that college education should be as nearly free as possible. Charging interest on student loans is just a way of moving the cost from one segment of the economy to another. It's a tax on young students. If the Federal Reserve can lend money to the banks at near zero, I don't know why they couldn't give a comparable deal to students. Just saying.

Of course, the default numbers could change. USA Today reports half of the new graduates are either jobless or underemployed in positions that don't fully use their skills or knowledge. Mission Accomplished.