Tuesday, August 21, 2012 - A Crash? Your Guess is as Good as the Economists, Maybe Better

A Crash? Your Guess is as Good as the Economists, Maybe Better 
-by Sinclair Noe

DOW – 68 = 13,203
SPX – 4 = 1413
NAS – 8 = 3067
10 YR YLD -.01 = 1.80%
OIL -.30 = 98.16
GOLD + 17.40 = 1639.60
SILV + .52 = 29.43
PLAT + 25.00 = 1516.00

Normally, these are the slow,  sultry, dog days of summer; that's what we've seen lately. Volume has been so light that you wondered if everyone had gone to sleep. And then this morning, people started trading, or maybe the computers started trading. Who can say which? Volume jumped to the highest in 3 weeks and prices flopped. 

David Kostin, Goldman Sachs chief US equity strategist, has sent a note to clients advising them to get out of stocks; Kostin is forecasting a 12 percent drop ahead, down to about 1250, believing that Congress will fail to address the fiscal cliff before the election, and maybe even before the end of the year. Kostin says: "Political realities and last year's precedent suggest the potential that Congress fails to reach agreement in addressing the fiscal cliff is greater than what most investors seem to believe based on our client conversations.”

According to Goldman Sachs economists, the worst case scenario this year is that a lame duck Congress does absolutely nothing after the election - not even kick the can down the road by voting in a short extension of the tax breaks and spending plans. Under that scenario, 2013 GDP would actually contract.

Now normally I would hear a report like this and dismiss it, or because it came from Goldman Sachs, I might take a contrarian stance because we know that Goldman has a history of misleading the investing public. Also, because we know Goldman Sachs is two-faced. Goldman senior investment strategist Abby Joseph Cohen just this morning said she expects equities to outperform bonds for the remainder of the year. So, it appears there is a little bi-polar disorder among Goldman economists. 

Then we see a research report from Nomura strategist Bob Janjuah and he expects the S&P to fall by 20-to-25-percent over the next three months.  Janjuah expects the dollar to be a big beneficiary if the S&P 500 does fall as sharply as he predicts.

He says the  coming major risk-off phase will be dollar bullish and bullish for core government bonds; which means 10-year bonds in the US, Germany and the UK could hit just one percent. He predicts the Federal Reserve will not provide more quantitative easing until December. Those hoping for a big bazooka from the Fed or the European Central Bank before December will be disappointed.

Janjuah says he expects “Mr Bernanke to disappoint markets at Jackson Hole next week, and also because we are confident that markets will soon discover that neither the ECB nor Eurozone politicians will actually be able to deliver on their promises. For now we are happy to risk 30 S&P points against us, in order to potentially pick up 300 S&P points in our favor.”

Sure enough, the Euro-zone seems to be in disarray. The ECB is discouraging  speculation that it might act far more aggressively to contain borrowing costs for countries like Spain. The ECB dismissed a report in Der Spiegel that they would buy up bonds in whatever quantity was necessary. Today, The Daily Telegraph, a British newspaper, supported that Der Spiegel report that the ECB planned to put a hard cap on Spanish and Italian bond yields. So, the European markets are now trading on rumors and speculation that the ECB will make a big bond buying commitment. 

Yields at a Spanish short-term debt auction fell, while Europe's  volatility index  hit a one-month low, signaling a steady rise in investors' appetite for risk. Spanish 10-year bond yields fell 10 basis points to 6.24 percent, with shorter-dated yields down as much 16 basis points. Italian bond yields also dropped.  Portuguese 10-year yields fell 30 basis points on the day to 9.40 percent, the lowest level since April 20. 

Euro financial markets have been running on hopes that the new urgency in Europe will overcome the crisis. Greek Prime Minister Antonis Samaras will meet German Chancellor Angela Merkel, French President Francois Hollande and Eurogroup chief Jean-Claude Juncker in the coming days to try to secure more help from the European Union, International Monetary Fund and ECB, even though Greece has fallen behind on its debt-cut targets. Samaras is hoping the Troika will cut some slack, it probably won't happen but if Greece can hold out hope, then there is hope for the rest of the continent.

The euro climbed 1 percent to $1.24, and the dollar index slipped to 81.92; for now the chart of the US Dollar looks to be rolling over to the downside.  This sparked a bit of a commodity wide rally today as speculators ran to hard assets. Precious metals moved higher. Corn and soybeans posted new record high closes. 

The ECB still refuses to confirm the newspaper reports but it is clear that the ECB damn well better step up big, or there will be massive problems, and the time-line is about  3 weeks. 

Central banks around the world have maintained near-zero short-term interest rates for many years now, trying to save the world. The Federal Reserve has bought up billions of dollars worth of government and mortgage bonds and they hold them on its on balance sheet, in order to hold down long term interest rates.  You can argue the Fed has helped but these actions are not without negative side effects. Central bank intervention can give investors headaches and it also  causes markets to behave in strange ways.

And lately, there has been some strange behavior in the junk bond market. Junk bonds are issued by companies that either have relatively risky business plans, or that already carry a large amount of debt, or they are just generally considered a credit risk. And because of the relative riskiness of loaning money to them, these companies typically have to pay 3% or 4% more in interest than the US government does to borrow for the same amount of time.

With interest rates so low for so long, investors have been increasingly willing to risk their money on junk bonds in order to get that extra yield. And as new money starts pouring into high-yield bonds, some are starting to worry that the junk bond market has reached bubble-like levels. Maybe investors piling into junk bonds for the attractive yields should worry about the fact that the default rate has been creeping up lately. 
High yields are tempting, especially compared to what government bonds are paying, but the yields are supposed to compensate for risk. Investors who are only paying attention to the spread aren’t accounting for the fact that the junk bonds are paying 0.5% less interest than they were five years ago. And, of course, the world hasn’t gotten any less risky over the past 5 years. 

So is this possible junk-bond bubble a threat to the broader economy? Probably not. The bubble might not pop, but it is another indication of the unintended consequences of having the Fed run monetary policy, inducing investors to take bigger than normal risks; maybe the Fed can control any fall-out or maybe when any bubble pops it makes a mess; a mess for junk bond investors, a mess for companies looking for capital. 

Wikileaks and Free Speech NY Times
I don't know where Julian Assange came from; I know he's an Australian citizen, but he seemed to appear on the international scene out of nowhere. His name generates more hits on search engines than the British Prime Minister. The news media in the Untied States does a poor job of informing Americans. Wikileaks, the website created by Assange, has created a unique approach to journalism. The site disseminates raw data, without interpretation or editorial opinion, just raw data in the form of cables, memos, dispatches, videos, and such. Sometimes some information has been redacted to protect people in dangerous situations; the idea was not to expose a US spy or undercover agent; still the data released has proven quite embarrassing for some people in positions of power. 

Julian Assange has been granted asylum by Ecuador and he is now living in the Ecuadorean Embassy in London. Ecuador has acted in accordance with important principles of international human rights. Indeed, nothing could demonstrate the appropriateness of Ecuador's action more than the British government's threat to violate a sacrosanct principle of diplomatic relations and invade the embassy to arrest Mr. Assange.

Since WikiLeaks' founding, it has revealed the "Collateral Murder" video footage that shows the seemingly indiscriminate killing of Baghdad civilians by a US Apache attack helicopter; United States collusion with Yemen's dictatorship to conceal our responsibility for bombing strikes there; the Obama administration's pressure on other nations not to prosecute Bush-era officials for torture; and much more.

Predictably, the response from those who would prefer that Americans remain in the dark has been ferocious. Top elected leaders from both parties have called Mr. Assange a "high-tech terrorist." And thre are demands that he be prosecuted under the Espionage Act. Most Americans, Britons and Swedes are unaware that Sweden has not formally charged Mr. Assange with any crime. Rather, it has issued a warrant for his arrest to question him about allegations of sexual assault in 2010.

All such allegations must be thoroughly investigated before Assange moves to a country that might put him beyond the reach of the Swedish justice system. And if Assange is guilty he deserves no quarter.  But it is the British and Swedish governments that stand in the way of an investigation, not Assange.

Swedish authorities have traveled to other countries to conduct interrogations when needed, and the WikiLeaks founder has made clear his willingness to be questioned in London. The Ecuadorean government made a direct offer to Sweden to allow Assange to be interviewed within Ecuador's embassy. In both instances, Sweden refused.

Mr. Assange has also committed to traveling to Sweden immediately if the Swedish government pledges that it will not extradite him to the United States. Swedish officials have rejected this proposal; so did the Brits.  So, it is obvious that the real agenda is to get Assange to Sweden, where certain treaties would make it easy to extradite him to the US. Mr. Assange has every reason to fear such an outcome. WikiLeaks itself has published e-mails from Stratfor, a private intelligence corporation, which state that a grand jury has already returned a sealed indictment of Mr. Assange. The charge would likely be espionage, a capital offense.

If Mr. Assange is extradited to the United States, the consequences will reverberate for years around the world. Mr. Assange is not an American citizen, and none of his actions have taken place on American soil. If the United States can prosecute a journalist in these circumstances, the governments of Russia or China could, by the same logic, demand that foreign reporters anywhere on earth be extradited for violating their laws. The setting of such a precedent should deeply concern everyone, admirers of WikiLeaks or not. On Sunday, Assange took to a microphone from a balcony of the Ecuadoran embassy and proclaimed the US risks  “dragging us all into a dark, repressive world in which journalists live under fear of prosecution,” 



There is an interesting aside, Wikileaks published more than 250,000 US Embassy cables that highlighted embarrassing back room dealings. Some of this information might have resulted in the Arab Spring, but Wikileaks really ran into trouble when Assange threatened to release hundreds of thousands of documents that he said would expose major banks wrongdoing, and would almost certainly result in the ruin of more than one major US bank. Shortly thereafter, all sources of funding for Wikileaks were shut down, and Assange was arrested. We still haven't seen the bank document dump from Wikileaks. 

Monday, August 20, 2012 - Diminished Expectations

Diminished Expectations
-by Sinclair Noe


DOW – 3 = 13,271
SPX -0.03 = 1418
NAS -0.38 = 3076
10 YR YLD un = 1.81%
OIL - .05 = 97.70
GOLD + 5.40 = 1622.20
SILV +.72 = 28.91
PLAT + 12.00 = 1496.00

Apple already boasts the largest market value of any public company. Today it became the most highly valued public company ever. With an increase in its share price, Apple broke the record for the biggest market capitalization, $616.34 billion, set by Microsoft on Dec. 27, 1999. Of course, shortly thereafter, Y2K hit and destroyed modern civilization as we know it; or maybe it was because Apple invented the iPod and the iPhone and the iPad, and Microsoft gave us Zune. Who knows?  Apple’s stock closed at $665.15, giving it a market value of $623.52 billion. Microsoft’s 1999 market value is still far higher than Apple’s when adjusted for inflation. The Microsoft of late 1999 would be worth $850 billion in today’s dollars. To beat Microsoft’s inflation-adjusted market value, Apple needs to close at $910. The Microsoft of August 2012 is worth $257 billion.

I'm not sure what it says about our economy, that Apple is the most valuable company ever, but I suspect it is problematic. 

ECB President Mario Draghi is scheduled to speak at this year's Jackson Hole symposium. A fellow named Ben Bernanke is already scheduled to speak at the symposium, and so there has been a little speculation that there might be some coordinated action that will be announced. I'm not sure the ECB has learned the meaning of coordination. 

German magazine Der Spiegel said over der weekend that der ECB was considering buying debt issued by member countries if their interest rates became too elevated; the idea is unlimited bond buying to cap interest rates, but a bank spokesman said it was misleading to report on yet-to-be decided matters.

Germany's central bank, the Bundesbank, also on Monday reiterated its opposition to bond purchases, and a spokesman for the German Finance Ministry said it was not aware of any plans for the ECB to target bond spreads. It is a little tricky to figure out exactly what position Germany is taking, but they seem to benefit for the ongoing crisis; Germany is considered a safe haven of sorts. Spain is still a basket case. Technically, Spain can't receive aid until they make a formal request for aid; they haven't requested the aid, but there has been a bailout of the Spanish banks, but nobody knows details. The latest plan calls for banks to transfer their non-performing assets into a newly formed “bad bank” (which seems like a redundant term). At some point,the ECB may throw a bone to Greece, maybe not. In other words; the Euro-crisis seems very uncoordinated. 

The European Central Bank will hold their next policy meeting on September 6. The German constitutional court will rule on the legality of the euro zone's new bailout fund on September 12. You may recall, Draghi promised to do whatever it takes to support the Euro-union, yet what can he do before he finds out whether the Germans decide that whatever he is doing is legal or not? Expectations for a successful resolution are greatly diminished. 

 The next Federal Open Market Committee meeting is scheduled for September 13. We are seeing a situation where the US economy is looking a little better, while the economy of the euro zone continues to deteriorate. This is bullish for the dollar and bearish for the euro currency.  There is a slim chance we could see some coordinated action between the Fed and the ECB coming out of Jackson Hole; I doubt it. There is a slim chance that the Fed will take an accommodative move, possibly QE3 during their  September  FOMC meeting; but I doubt it; more likely, they wait till next year – unless.., Unless the ECB and the Germans are so uncoordinated that they can't come up with some program. Inaction, or a lack of action might be very dangerous for the for the Euro-zone. There is a chance the ECB could screw things up over the next three weeks, forcing the Federal Reserve to take action on the 13th. Just something to keep in mind. The way this is likely to play out is deflationary pressures in various parts of the world, especially Europe, along with a flight to quality buying due to the ongoing economic and political problems in the Euro-zone. 

Right now, it looks like the Federal Reserve is fairly satisfied with the idea of 8.3% unemployment and they think that any risk of sustained inflation above 2% per year is unacceptable. The Fed seems to be sanguine in the face of steady job growth in the neighborhood of 150,000 new jobs per month. It is real easy to forget that the economy has been adding jobs, steadily, consistently, for 29 consecutive months. I don't think we've added enough jobs. If you are unemployed, you are certainly not satisfied, but the Fed seems sanguine.

The biggest fear is that the Fed has not set a higher standard for unemployment; it is possible the Fed has set the bar for unemployment and that this will be a self-fulfilling prophecy. Any cyclical decline in the labor force participation rate becomes structural over time as skill loss increasingly excludes those displaced by the depression from reentering the labor force.

There is concern that the bar has been set too low for the economy as a whole.  Once the policymakers believe the economy is operating at full-potential rather than recognizing it is operating at far less than potential, then they start behaving like we can't realistically expect more; they set policy and manage the economy for suboptimal results, and that is exactly what we get. The anticipated becomes the expected and it is the self-fulfilling prophecy. We get what we expect; and our expectations are diminished.The cyclical becomes structural. 

 The Fed has done this, turned the cyclical into the structural in the area of their mandate on price stability; they set a 2% rate of inflation as their target; they did not set a specific, enumerated target for unemployment. The result? We have lingering and high unemployment and we have inflation firmly ensconced below 2%. We have met expectations; the cyclical has become the structural. 

Right now, the Fed acts like it is scared of inflation. They might have good reason; we will likely see higher food prices as a result of the drought; we will likely see higher gasoline prices, despite more domestic oil production and despite conservation efforts. There are some outside forces the Fed can't control but those forces will likely revert to the  mean over time. 

The Fed does control monetary policy and monetary policy still has a huge influence on the economy, on the growth of the economy, on prices we pay in the economy, and on money we earn in the economy. There is an old saying: “don't fight the Fed.” But I wonder if the Fed is still willing to fight, or have they given up? Are they willing to accept the new, suboptimal normal? Are they willing to push the boundaries of 2% inflation? Would Bernanke's head explode if we had 3% inflation?  Is it time for the Fed to step on the throttle and see if they can get all cylinders firing? We usually end up with the economy the Fed wants us to get. 


I mentioned the inflationary pressures on food prices from the drought. For California, the drought is a problem but a bigger problem is not enough farm workers.  Some crops won't get picked this season due to a lack of workers.
Farmers will just leave some crops in the field.  The Western Growers Association reports a 20 percent drop in laborers this year. Stronger border controls are keeping workers from crossing into the US  illegally, and the current guest worker program is not providing enough bodies. The lack of workers is forcing farmers to pay more. Still, it's not enough to attract local labor. 


A UK parliamentary report criticized Barclays ex-Chief Executive Officer Robert Diamond for giving “unforthcoming and highly selective” evidence; the report  faulted the bank for letting traders rig interest rates.

The “candor and frankness” of Diamond’s testimony to lawmakers on July 4 “fell well short of the standard that Parliament expects,” the House of Commons Treasury Committee said in a 122-page report today following its inquiry into the bank’s attempts to manipulate the London interbank offered rate.

“The Barclays board has presided over a deeply flawed culture,” the panel of British lawmakers said. “Senior management should have known earlier and acted earlier.”

Barclays was fined $450 million for manipulating Libor. Barclays’ compliance department was told three times about concerns over Libor, yet these warnings weren’t passed on to senior management, the committee said. Compliance at the bank was “persistently ineffective”, and the actions of Barclays and other traders were “disgraceful” and harmed the reputation of the bank and the industry.  

You see how this sets up for the senior management to get a slap on the wrist and for some “rogue traders to be severely punished?


Foreign banks dominated a key Federal Reserve bank lending program that ran from 2007 to 2010. According to a paper written by Northwestern University’s Efraim Benmelech, the Fed’s lending tool called the Term Auction Facility, TAF, lent directly to deposit taking banks and was created to circumvent many financial institutions’ reluctance to borrow from the central bank’s traditional source of emergency lending, the Discount Window. The research was published by the National Bureau of Economic Research.

Lending via the TAF was substantial and at its peak represented the largest category on the Fed’s expanding balance sheet,  around $500 billion in early 2009 and steadily trailed off as the worst days of the financial crisis passed.

So, what did those foreign banks do with all the money they borrowed from the Fed's TAF, to help keep them afloat? 

Federal and state prosecutors are investigating Deutsche Bank and several other global banks over accusations that they funneled billions of dollars through their American branches for Iran, Sudan and other sanctioned nations

The Deutsche Bank investigation is the latest in a series of cases against global  firms since 2009 that suggests the practice of transferring money on behalf of Iranian banks and corporations flourished under a loophole in United States policy that ended in 2008.

A spokesman for Deutsche Bank declined to comment, but noted that the German bank decided in 2007 that it would “not engage in new business with counterparties in countries such as Iran, Syria, Sudan and North Korea and to exit existing business to the extent legally possible.”

Since 2009, the Justice Department, the Treasury Department and the Manhattan district attorney’s office, working largely in concert, have brought charges against five foreign banks, contending they moved billions of dollars through their American subsidiaries on behalf of Iran, Cuba and North Korea, sponsors of terrorism and drug cartels.

The five banks all included deferred prosecution agreements and required the banks to forfeit some assets. The banks are: ABN Amro, Barclays, Credit Suisse, Lloyds  and ING.

The cases typically have not involved United States banks. Unlike foreign institutions, American banks were prohibited from originating or receiving such transactions from Iran. That enabled them to largely sidestep the conduct that has helped ensnare foreign banks.

Friday, August 17, 2012 - We All Want Justice but You've Got to Have Money to Buy It

We All Want Justice but You've Got to Have Money to Buy It
-by Sinclair Noe 

DOW + 25 = 13,275
SPX + 2 = 1418
NAS + 14 = 3076
10 YR YLD -.02 = 1.82%
OIL + .61 = 96.21
GOLD + 1.10 = 1616.80
SILV - .13 = 28.19 
PLAT + 34.00 = 1479.00

We had a bunch of economic reports this week. Here's a quick review:
The Consumer Price Index, or CPI, measures inflation at the retail level; in July the overall consumer prices were unchanged, while the core gauge rose 0.2%. The CPI rose 1.4% over the year through July, the smallest 12-month change since late 2010. 

The Producer Price Index, or PPI, measures inflation at the wholesale level; it rose 0.3% in July. Higher  food prices were only slightly offset by lower energy prices. In the 12 months ending in July, producer prices rose 0.5%, the smallest gain since October 2009.  However, food prices jumped, with corn prices leading the way, up 34.5% for the month. That will filter through the economy. Energy prices were down in July, but they've been moving higher. Inflation is not a problem right now, but wait. 

Initial filings for unemployment benefits climb by 2,000 to 366,000 in the latest week, but the four-week moving average dropped to its lowest level since March. While the July unemployment figure rose a tenth of a point from June to 8.3 percent, the government says 44 states saw their jobless rates increase. Nevada has the highest unemployment rate at 12%. California added 25,000 new jobs but the unemployment rate is still the third highest at 10.7%. Arizona matched the national rate at 8.3%.

Housing starts dipped in July after builders broke ground on the most new homes and apartments in nearly four years in June. Building permits stood at the highest in four years. If you want to identify a bottom in the housing market,  the first thing is to see some construction activity, like housing starts, new home sales and residential investment, which goes to inventory; then you look for a move in home prices; it's an old story of supply and demand.

The University of Michigan consumer sentiment index increased to 73.6,  the highest level since May, from a final July reading of 72.3. The economists who prepare the report say they don't expect a big change because Americans still face strong headwinds such as poor job prospects, a bad housing market, rising student loan debt, and a lack of faith in political institutions. 

The Conference Board said the index of leading economic indicators fell 0.4% in June; indicating sluggish growth through the end of the year. 

A growing list of economists are all pretty much  putting 50/50 odds on new action from the Federal Reserve at the central bank’s September 12-13 policy meeting.  Plenty of analysts think the Fed will still launch a third round of quantitative easing in the coming months, but the timing is the question.

Markets are calm, while equities approach their highs of the year.  Fed policymakers generally concede that asset purchases are most effective in times of financial instability. The ability of QE to boost growth and generate jobs has been more challenging to prove. To the extent financial markets are functioning normally, balance sheet expansion becomes a tougher sell.

Increasingly, it appears the majority of FOMC participants don't seem to think that the unemployment rate will improve that quickly, but it is not at all obvious that the pace of the recovery is inconsistent with the FOMC's view of achieving its dual mandate. It sounds as though the Fed has given up; they done what they can; they can't think of more to do; they're not going to try; they're not going to risk even a bit of inflation, not with a drought hanging over the food supply and who knows what hanging over the oil supply; and the closer they get to the election the more likely they are to do nothing, afraid of seeming political, even though doing nothing is super-charged with political implications; and they seem to be willing to accept the new normal; and this is despite assurances from Bernanke and others that the Fed is not out of bullets. I've heard the expression “don't fight the Fed” but what happens when the Fed won't fight? I guess we just drift through the Dog Days of Summer. We'll see.  

It could be worse I suppose. The S&P 500 held near a four year high. Volume was very light, again but it closed up for a sixth straight week, and the volatility index, the VIX, hit a five-year low of 13.43. 

It finally looks like regulators are going to crack down on MFGlobal. The New York Times reports the criminal investigation is heading into the final stages: “authorities are seeking to interview the former chief of the firm, Jon S. Corzine, next month, according to the people involved in the case. Authorities hope that Mr. Corzine, who is expected to accept the invitation, will shed light on the actions of other employees at MF Global.” Corzine is the former CEO of MF Global and the former CEO of Goldman Sachs. This is apparently the new “get tough on crime by inviting suspects to tea and scones at the DOJ cafeteria” plan. 

The Times article says: “after 10 months of stitching together evidence on the firm's demise, criminal investigators are concluding that chaos and porous risk controls at the firm, rather than fraud, allowed the money to disappear, according to people.”

I don't know if Corzine is responsible for stealing $1.6 billion in client funds, and apparently the regulators don't know where the money went, but somebody stole the money. Chaos and porous risk controls are not a legitimate defense for theft. Sorry. 

Then, we had the recent example of Standard Chartered. Some people think the New York state regulators in this case over-reached their authority and penalized a bank in a manner disproportionate to the crime it committed. Or maybe the crime was a decade long pattern of willful and blatant disregard for the law and then covering up their crimes; and maybe their crimes resulted in denying collection on a $2.6 billion dollar judgment against Iran, for the families and estates of  241 Marines killed in Beirut in 1983. One thing you can be sure of: the banks are treated to more privileges than Marines. Standard Chartered denied wrongdoing while they paid their $340 million dollar fine. I don't think the families of Marines are willing to accept that denial.  

There's a good chance the public will never know the truth. A settlement allows the banks to avoid airing their dirty laundry; the settlement is not as distracting as litigation; and a possible courtroom loss could destroy the entire operation. Regulators settle because they are over-worked; it's cheaper and easier; they are frequently outgunned and out-manned by the well financed attorneys representing the banks; and they don't risk an embarrassing not-guilty verdict. Ultimately, the process is corrosive to public trust. 

So, if you steal $1.6 billion you get an invitation to afternoon tea with investigators; if you finance terrorists who blow up Marines while they sleep at night in their barracks, you get to deny wrongdoing. The United States has 5% of the world's population and 25% of the world's incarcerated population. We put more people in jail than any other country. Communist China has a population four times greater than the US, but they lock up 700,0000 fewer people.  The Chinese, we've been told, are a cruel, authoritarian regime; what does that make us? Americans are locked up for fairly small crimes, from writing bad checks to using drugs, that would rarely produce prison sentences in other countries. And they are kept incarcerated far longer than prisoners in other nations. But the banksters get special privileges. 

The banking industry has  become so omnipotent, so all-consuming in our lives, so all-consuming of our money, so filthy rich that it buys and sells government officials, legislators, administrations, regulators, and presidents. So powerful that it has effectively captured the nation. How did an industry that accounted for between 5% to at most 7% of GDP in this country in the 1980s go to being responsible for more than 20% of GDP by 2007? That’s a lot of paper shuffling for some very lofty fees and fringe benefits. You've got to ask yourself if we're better off for the bankers increasing power.

The past couple of weeks have been some of the worst in recent memory for Bankster scandals. In addition to Standard Chartered Iranian money laundering settlement, and the MF Global dodge; we saw Goldman Sachs avoid prosecution on bundling subprime, selling it to clients and then betting against it – apparently this is a good business model. And don't forget UBS, which had to pay a $780 million dollar fine in 2009 for helping clients dodge taxes, well UBS was back in the news this week for the same thing. And don't forget the Morgan Stanley electricity rigging in New York, where they jacked up electricity prices by about $300 million and then paid a $4 million dollar fine. And don't forget the credit card robo-signing scandal, where debt collectors sign off on affidavits just betting that you won't respond. And don't forget the Libor rigging scandal. Everything you ever knew about interest rates was manipulated, and which resulted in seven more banks being subpoenaed this week. 

And still there has not been a single criminal charge filed by the federal government against any top executive of the elite financial institutions. 

Now, don't for one minute think law enforcement isn't cracking down on financial criminals. The Department of Justice created the Financial Fraud Enforcement Task Force, and wow, have they been busy. Here is just a partial list from Daily Beast of some of their “get tough” enforcement: 


The DOJ sent a property appraiser in Washington, D.C., to the slammer for 65 months for fraudulently inflated prices in a scheme to “flip” properties. The scheme was a small-time $1 million operation, a sharp contrast with the billions on Wall Street.

Federal officials went after 10 people in Las Vegas because they tried to “fraudulently gain control of condominium homeowners’ associations in the Las Vegas area so that the HOAs would direct business to a certain law firm and construction company.”

Five people in California were charged with bid-rigging foreclosure auctions. The individuals have been charged with violating the Sherman Act and could face up to 10 years in jail.

And there are about 6 or 7 more stories about the DoJ's crackdown on financial criminals.  Occasionally a rogue trader gets prosecuted; a Bernie Madoff or a Raj Rajaratnam for example. The cases they prosecute are slam dunks, super-simplified, and super-stupid cases of blatant insider trading or blatant pyramid schemes. 

The banks pay big money to have lawyers and accounting firms produced hundred of pages that say that something illegal is legal, to say loans are actually sales, to determine that toxic assets are solid cash reserves. Stealing, tax evasion, accounting fraud – it's all legal if you pay enough accountants and lawyers to say it's legal. We all say we want justice but you've got to have money to buy it. 

Thursday, August 16, 2012 - The Solar Power Update

The Solar Power Update
- by Sinclair Noe

DOW + 85 = 13,250
SPX + 9 = 1415
NAS + 31 = 3062
10 YR YLD +.03 = 1.84
OIL +.92 = 95.25
GOLD + 11.60 = 1615.70
SILV +.39 = 28.32
PLAT + 42.00 = 1445.00


Last Sunday morning a caller to the radio show asked about solar projects in the desert. Let me tell you a little of what I've found out.

Solar power in California has been growing rapidly, because of a Renewable Portfolio Standard which requires that 20% of California's electricity come from renewable resources by 2010, and 33% by 2020. Much of this is expected to come from solar power.

At the end of 2010, California had 1,386 MW of solar and 3,177 MW of wind farms. According to a recent report by the California Public Utilities Commission, California failed to meet the 20% renewables by 2010 target. Pacific Gas & Electric and Southern California Edison were the closest to meeting the goal. PG&E generated 17.7% of the electricity it sold in 2010 from renewable sources while SCE was the closest to hitting the goal by producing 19.4% of its electricity from renewable sources in 2010. San Diego Gas & Electric, on the other hand, generated only 11.9% of its electricity from renewable sources in 2010

The California Solar Initiative is a 2006 initiative to install 3,000 MW of additional solar power by 2016. Included in it is the million solar roof initiative. In 2011, this goal was expanded to 12,000 MW by 2020. We're nowhere near the target.  
The last numbers I've seen and they are probably a little out of date show California has a cumulative total of 441 MW of distributed solar PV systems, the highest in the country, but still far short. In other words, solar is a growth industry. 

In 2012, the Bureau of Land Management is giving priority status to 5 solar project proposals in California. The 750 MW McCoy Solar Project has been proposed by NextEra. The 100 MW Desert Harvest project has been proposed by enXco. The 664 MW Calico Solar Energy Project has been redesigned by K Power. The 600 MW Mount Signal Solar Farm #1 has also been proposed.

The Ivanpah Solar Electric Generating System, is a solar thermal power project currently under construction in the California Mojave Desert, 40 miles southwest of Las Vegas. The project will occupy about 4,000 acres (16 km2) near Interstate 15 near the California–Nevada border. With a planned capacity of 392 megawatts; it will deploy 170,000 heliostat mirrors focusing solar energy on boilers located on centralized solar power towers. It is believed to be the largest solar thermal project in the world.

The project will cost $2.2 billion and the largest investor in the project is NRG Energy, out of New Jersey, that has put in $300 million. Google has invested approximately $168 million. The project has received a $1.375 billion loan guarantee from the United States Department of Energy.

 NRG Energy, Google, BrightSource Energy and construction partner Bechtel announced that the Ivanpah Solar Electric Generating System  has reached the halfway mark. Ivanpah has also reached its peak construction workforce, with more than 2,100 construction workers and project support staff on-site. The project is on-track to be completed in 2013.


The Desert Sunlight Solar Farm is a 550 MW solar power plant under construction in Riverside County, California, that will use thin-film solar photovoltaic modules made by First Solar. The Topaz Solar Farm is a 550 MW photovoltaic power plant, being built in San Luis Obispo County. The Blythe Solar Power Project is a 500 MW photovoltaic power station under construction in Riverside County.  The California Valley Solar Ranch (CVSR) is a 250 megawatt solar photovoltaic power plant, which is being built by SunPower, northeast of California Valley in San Luis Obispo.

So, let's do some back of the envelope calculations. We're looking at a few projects that should produce about 3,300 megawatts; based upon the Ivanpah project, which is 392 megawatts at a cost of $2.2 billion, you are probably looking at about $18 billion in solar related projects. 

While there has been extensive coverage regarding the failure of the solar company, Solyndra, there has been almost no coverage of the projects that are moving forward or that have been steadily producing. If you only heard the Solyndra story, you might think solar is a failure. It is not; it is a phenomenal success story.  The Obama administration has just this summer put the finishing touches on a plan to fast track solar deals on public lands;specifically, 17 sites in six southwestern states.

It all falls under a plan to give greater access to energy developers who want to explore federal lands. Green energy projects are now the highest priority, all in keeping with President Obama’s campaign pledges. This doesn't mean the Big Oil lobby is dead; the administration has also awarded leases to oil and gas producers both offshore and on land, and domestic oil production has jumped in the past 4 years. 

Specifically, the Departments of Interior and Energy have issued their final environmental impact statement for solar development in the states of Arizona, California, Colorado, Nevada, New Mexico and Utah. The Interior Department says that it has subsequently approved 17 utility-scale solar energy projects that when built will produce nearly 5,900 megawatts of energy. For context: 285,000 acres of public lands will be open to such construction, which has the potential to produce nearly 24,000 megawatts of electricity. California, which has the renewable energy mandate, is at the center of the policy. Altogether, 70,000 megawatts of new generation have been proposed there. 

For now, solar is a nascent industry. By the end of 2011, Arizona had installed 383 MW of photovoltaics, in third place, behind New Jersey, and California. The Solana Generating Station, located near Gila Bend is a proposed 280 MW parabolic trough solar plant, and is expected to be operating in 2012.  When finished the plant will provide 5% of the power from Arizona Public Service, the state's largest utility.

What's the future of solar?

Fossil fuels are running out, or at the very least becoming increasingly more expensive to extract. Carbon dioxide is building up. What to do? German engineers are building the biggest solar energy project ever in the Sahara Desert, where there’s lots of sunshine. And lots of room. More than three-and-a-half-million square miles. That’s as big as the continental United States. A solar array big enough to supply the whole world with electric power could fit into 35,000 square miles. One percent of the Sahara. About the size of the state of Maine.

Maybe the coolest thing about the planned project is that most of the technology has been around for years and we know it works.  If we think about the idea of Moore's Law, the number of transistors on an IC board doubles every two years, or computing power doubles every 2 years. Don't expect that kind of technological advancement in solar, but even if the efficiency doubled every 4 or 5 years, it would be spectacular. Right now, these big projects in the desert are expensive, but the technology has already improved to the point where the payback is fairly quick and cost-efficient. The more we invest in solar, the more efficient and cost effective it will become.

I'm sick and tired of the apologists that say solar isn't ready to meet our national energy needs. Guess what, nothing is ready for that. It will be a mix of technologies for many years to come. Coal may seem cheap but it isn't; the environmental costs are enormous. Nuclear has problems, just look at Chernobyl, Fukushima, Three Mile Island, and more recently the problems at San Onofre. Natural gas, is just another fossil fuel, slightly cleaner, but fracking might destroy the aquifers. Ethanol has been another innovation, but it is difficult to justify putting food in your gas tank when people are going hungry. Even if you don't believe in climate change, clean energy production makes sense. If you believe in climate change, then clean energy production is crucial.

One certainty is that energy technology of 100 years ago is not going to be the answer for our energy needs over the next 100 years. Another certainty is that the energy industry will be one of the most important parts of business in the years ahead. And I bet you, that there is some shade tree mechanic, some modern day Edison, who will change the world.  Some day, I'll tell you that story.

Wednesday, August 15, 2012 - I've Never Been to Spain and I've Never Seen a Flash Flamenco

I've Never Been to Spain and I've Never Seen a Flash Flamenco
- by Sinclair Noe

DOW – 7 = 13,164
SPX  + 1 = 1405
NAS + 13 = 3030
10 YR YLD +.08 = 1.80%
OIL -.07 = 94.26
GOLD + 4.10 = 1604.10
SILV un = 27.93
PLAT un = 1400.00

JPMorgan Chase, Barclays, UBS,  Deutsche Bank, Royal Bank of Scotland, HSBC Holdings, and Lloyd's are the seven banks subpoenaed in the past week in New York and Connecticut’s investigation into alleged manipulation of Libor. Citigroup and UBS received subpoenas earlier this year as part of the investigation. New York Attorney General Eric Schneiderman and Connecticut Attorney General George Jepsen are jointly investigating alleged manipulation of the London interbank offered rate, or Libor. 

Meanwhile, HSBC has handed over details of current and former employees to the US authorities as part of a tax probe that almost sank rival bank UBS in 2009. As a result, the bank may be sued by the former employees claiming banks infringed the criminal code and Swiss privacy laws. HSBC claims it has avoided breaching strict Swiss banking secrecy laws by redacting from the documents any information that could lead to the identification of clients.

Yesterday, I told you that Standard Chartered had reached a settlement with New York State regulators. There will be no criminal prosecutions as a result of the settlement, mainly because the New York state regulator doesn't have prosecutorial powers. You may also recall that when this story broke last week, one of the first things Standard Chartered did was to hire PR firms that tried to say most of the Iranian transactions were before the sanctions, and it wasn't really $250 billion in money laundering, it was at the most maybe a paltry $14 million. 

Part of the settlement with the New York State Department of Financial Services is that both parties agree the conduct involved transactions of at least $250 billion. Not that it matters. SCB still gets off with a slap on the wrist, just a $340 million dollar fine, not even one percent of the business done. And you will note the language did not say, “the conduct at issue involved FRAUDULENT transactions of at least $250 billion.” Still, they face investigations from the federal regulators, the Treasury, the Federal Reserve, and the Department of Justice; all are notorious for cutting sweetheart deals with the banksters. Whatever deal they reach will now be based on $250 billion not $14 million. 

Meanwhile, Reuters reports the estates of the victims of the 1983 bombing of the US Marine barracks in Beirut sued Standard Chartered seeking compensation over the bank's concealment of Iran-linked transactions. The civil lawsuit, filed in US district court in Manhattan, said the bombing victims obtained a $2.6 billion judgment in compensatory damages against Iran in 2007. The court document said the plaintiffs include representatives of the estates of the 241 US servicemen killed in the attack in the Lebanese capital, relatives and heirs and bombing survivors. The  lawsuit on behalf of the bombing victims claims "those unlawful actions are part and parcel of Iran's longstanding, determined efforts to evade collection of the judgment, and other judgments."

Treasury prices fell, sending 10-year yields toward the highest in almost three months. Ten-year yields have climbed from the record low of 1.38 percent on July 25. We've been getting some fairly positive economic reports and that weighs on bonds. We've seen a slightly better than expected July jobs report; it wasn't great but it was better than expected. The July retail sales report was pretty solid. Today, a report showed that industrial production in the US increased more than forecast in July; manufacturers are turning out more cars and computers. 

On the flip side, we've seen inflation is flat. The BLS reported that the seasonally adjusted Consumer Price Index, a measure of inflation at the retail level, was virtually flat at 0.0%  in July, or just 0.6% annualized rate. The CPI less food and energy increased 0.1% (1.1% annualized rate) on a seasonally adjusted basis. There is a different calculation, the CPI-W, used for figuring the cost of living adjustment for Social Security and other programs – not a big jump but positive. 

The Fed is focused on the future, because monetary policy influences the economy only gradually, so what officials really care about is what the data will show in the coming months. Their most recent guesses, published in June, pegged core inflation between 1.2 and 1.7 percent this year, which is well below their target. All in all, inflation is below target for the Federal Reserve calculations, which means they have some room to be a little looser with monetary policy, but the slightly positive economic reports mean that another round of QE is not in the immediate future. You may recall that in 2010, Fed Head Bernanke gave a speech at the Jackson Hole Economic Symposium and signaled a second round of quantitative easing or QE2. There is another Jackson hole Symposium on August 31st, but don't expect QE3. This  doesn't mean the Fed is not loose with money – they are; just that they likely won't be announcing QE3. 

Last week, for a brief time, the machines took over the stock markets; tens of thousands of trades took place of some of the major stocks; trades done by what they are now calling rogue algorithms. This created instability in prices; trading was halted, but not before Knight Capital lost about $400 million on rogue trades. This instability is troubling for anyone trading or investing in stocks.

Knight Capital's business is these quick in and out trades. They've established computer rooms in close proximity to the exchanges, and they get a split second advantage, just enough for the computers to jump in front of a trade, and manipulate the bids and offers in such a way as to scalp a tiny amount from thousands or even millions of trades. The federal commodities trading commission reports that something like 500 to 600 people at Goldman Sachs are employed doing nothing but working on these kinds of quick in-and-out algorithm tradings, although I don't think Goldman's algorithm is to blame for this particular incident. But it's a very widespread thing that's happening, and last week it went out of control.  So, now there is talk about the need for regulation; there has been talk about regulating these kinds of flash trades for a few years. There was supposed to be something in Dodd-Frank. Nothing has been regulated. 

One possible solution is a financial transaction tax, just a small tax on each share traded, the tax might even increase as volume increases. That would probably eliminate the flash traders, who are really nothing but middle men, skimming from each trade while adding nothing of value. Rightfully, isn't that the role of government? New York state actually has stock transaction tax and it's been on the books for more than 100 years, and it rebates the tax to the Wall Street traders for some inexplicable reason. The tax doesn't cover flash trades. 

Don't confuse flash trades with flash mobs; that is apparently the latest thing in Spain. The Spanish government gave in to demands to bailout the Spanish banks and imposed harsh austerity measures on the Spanish people. So the people are having flash mobs in grocery stores and then they steal food and give it to the poor. Other flash mobs dance the flamenco in bank lobbies and they sing songs about how they dislike the bankers. I've never been to Spain but I would like to go. 

According to regulatory filings late yesterday, some well-known money managers reported significantly reduced stakes in big banks, including JP Morgan Chase and Goldman Sachs, as well as food companies such as Kraft Foods Inc. in the second quarter. Billionaire investor George Soros’s Soros Fund eliminated positions in JPMorgan Chase, Goldman, and Citigroup. The investment company also reported a new stake in Wal-Mart and a big stake in Facebook. 

Warren Buffet's Berkshire Hathaway reduced positions in Procter&Gamble, Johnson and Johnson, Intel, and Visa.  Berkshire increased its existing positions in Wells Fargo and IBM. Buffet bought National Oilwell Varco, an oilfield equipment company, and Phillips 66. 

And John Paulson, the guy who made a fortune bundling subprime junk through Goldman Sachs and then betting against it; Paulson was selling stock in the second quarter and buying GLD, the exchange-traded fund that tracks the price of gold.  Paulson's $21 billion hedge fund now has more than 44 percent of its US traded equities tied to bullion.

Tuesday, August 14, 2012 - Go Figure

Go Figure
- by Sinclair Noe

DOW + 2 = 13,172
SPX – 0.18 = 1403
NAS – 5 = 3016
10 YR YLD +.07 = 1.73%
OIL +.60 = 95.30
GOLD – 10.90 = 1600.00
SILV un = 27.93
PLAT + 12.00 = 1403.00

I have always been fascinated with Pi; not the apple or blueberry pie (although that's good), rather Pi, the ratio of a circle's circumference to its diameter. Pi is considered a transcendental number; you can't square the circle. It is an irrational number which cannot be expressed as a ratio of two integers. The number is 3.141, but that's just the beginning. It is a number that cannot be fully expressed. People have tried. Mathematicians have used computers to extend the decimal out to 10 trillion digits, and then they give up; the decimal representation never ends and it never repeats; the number appears random but there has never been proof of the randomness. As best we know, Pi is infinite, and yet the definition of Pi relates to the circle, which is a closed loop. There are links to Pi in music and in the pyramids and in scripture and most likely in all sorts of things we haven't yet begun to understand.

Go figure.

The US Census Bureau population clock hit 314,159,265; which is 100 million times Pi. Beyond the obvious conclusion that there are more births than deaths, I don't know what it means. Maybe the world is more inscrutable; maybe it has always been so.  The next time you're feeling really smart, try to figure out Pi. 

The British bank Standard Chartered has agreed to pay a $340 million in fines to the New York state regulator which had accused it of scheming with Iran to hide about $250 billion dollars worth of transactions from the US authorities, at a time of sanctions against Iran. 

A week ago, the Department of Financial Services said that Standard Chartered had left the US financial system "vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes, and deprived law enforcement investigators of crucial information used to track all manner of criminal activity". The regulator threatened to revoke Standard Chartered's banking charter in New York. A hearing was scheduled for tomorrow. The deal was reached earlier today. The New York regulator effectively stepped in front of federal regulators and insured that New York state got some money. The federal regulators will probably get more down the road.

Standard Charted said it strongly rejects and contests the New York regulators' portrayal of its transactions with Iranian banks. So, I guess I was wrong. There was no crime. That whole money laundering thing, just forget it. It was nothing, really. SCB has a get out of jail card; it was there in their hip pocket the whole time, right next to their wallet. Go figure. 

Europe’s economy is in a depression and that is making it harder for other economies around the world to recover and policymakers from all round the world are urging more decisive action, particularly from the European Central Bank. Eurostat, the European Union‘s statistics agency, reports the economies of both the eurozone and the wider 27-country EU shrank by a quarterly rate of 0.2 percent in the second quarter of the year. In the first quarter, output for both regions was flat. A recession is officially defined as two straight quarters of falling output. It is worse than just a recession, this is contraction. The downward spiral has begun. 

The euro-zone is struggling with sky-high debt levels and record unemployment of 11.2 percent. Compared with the year before, the euro-zone’s economy is 0.4 percent smaller.


Europe’s largest economy, Germany,  grew by a quarterly rate of 0.3 percent in the second quarter. Though down on the 0.5 percent recorded in the first quarter, the advance was a little more than expected; estimates called for 0.2 percent growth.

Germany currently benefits from strong demand for its products, but German exporters are finding it increasingly difficult to tap international markets.  The other 16 countries that use the euro are Germany’s biggest export market and six of them are toast. The US is the prettiest horse in the glue factory but our growth in the second quarter down compared to the previous three months at 0.4 percent.

Slower economic growth is also making it harder for governments and central banks to control the debt crisis in Europe. Shrinking economies make it more difficult to get the public finances into shape. Lower output cuts tax revenues while forcing up the cost of social benefits. The big picture is that the economic growth required to bring the region’s debt crisis to an end is still nowhere in sight. Turns out the austerity programs imposed on the periphery countries made things worse instead of better. Go figure. 

Wrangling over the right way to resolve the crisis has accomplished primarily one thing: it has fueled fears of a collapse of the euro. Banks, investors and companies are bracing themselves for the possibility that the euro will break up -- and are thus increasing the likelihood that precisely this will happen. There is increasing anxiety, particularly because politicians and the technocrats have not managed to solve the problems. Despite all their efforts, the situation in Greece appears hopeless. Spain is in trouble and, to make matters worse, Germany's Constitutional Court will decide in September whether the European Stability Mechanism (ESM) is even compatible with the German constitution.

According to the ECB, cross-border lending among euro-zone banks is steadily declining, especially since the summer of 2011. In June, these interbank transactions reached their lowest level since the outbreak of the financial crisis in 2007.  In addition to scaling back their loans to companies and financial institutions in other European countries, banks are even severing connections to their own subsidiaries abroad. Germany's Commerzbank and Deutsche Bank apparently prefer to see their branches in Spain and Italy tap into ECB funds, rather than finance them themselves. At the same time, these banks are parking excess capital reserves at the central bank. They are preparing themselves for the eventuality that southern European countries will reintroduce their national currencies and drastically devalue them. Even the watchdogs don't like to see banks take cross-border risks, although in an absurd way this runs contrary to the concept of the monetary union. You know things are bad when banks won't do business with themselves. Go figure. 


Meanwhile, US retail sales rose in July by the largest amount in five months, with more spending on autos, furniture and clothing.  The Commerce Department says retail sales rose 0.8 percent in July from June. The increased followed three months of declines, including a 0.7 percent drop in sales in June.
Retail sales totaled a seasonally adjusted $403 billion in July, up 21 percent from the low hit in March 2009.

All major categories showed increases.  Auto purchases rose 0.8 percent. Excluding autos, retail sales also increased 0.8 percent. Consumers paid more for gas in July than June, although that had little impact on the data. Retail sales excluding gasoline station sales were up 0.8 percent, the same as the overall increase. The retail sales report is the government’s first look each month at consumer spending, which accounts for 70% of economic activity. Overall, consumer spending on goods and services grew only 1.5 percent in the April-June quarter, the slowest pace in a year. Americans are also saving more. The savings rate — the percentage of after-tax income that consumers don’t spend — rose to 4.4 percent in June, the highest in a year. The more we spend the more we save; apparently that TV commercial was telling the truth; go figure.

Monday, August 13, 2012 - The World Slows Down but Refuses to Admit or Deny Slowing

The World Slows Down but Refuses to Admit or Deny Slowing
- by Sinclair Noe

DOW – 38 = 13,169
SPX – 1 = 1404
NAS + 1 = 3022
10 YR YLD +.01 = 1.65%
OIL +.01 = 92.74
GOLD – 10.60 = 1610.90
SILV - .30 = 27.93
PLAT – 13.00 = 1391.00


The S&P 500 closed slightly negative, but the interesting part was the volume, or the lack thereof on the New York Stock Exchange. It was the lowest non-holiday-trading day volume in over a decade; only 380 million shares changed hands. You've got to wonder if the problems with Knight Capital last week have exposed a problem. Clearly something broke with Knight's algorithm software glitch. Could it be that the volume on the exchange has been artificially inflated? Yep. And what did we get for having a company like Knight Capital scalping with High Frequency trades? We all lost a little. 

The S&P 500 and Dow have risen every week for the past five weeks. The S&P 500 last wrapped up a five-week climb in mid-March. The Dow hasn't done so since last October. The Dow has fallen for 10 out of the past 11 Mondays, and the S&P 500 has finished down five of the last six.

Japan’s economy grew in the second quarter at a 1.4 percent annual rate, slower than expected. Last week, China released dismal figures on retail sales and exports in July. There was some speculation Beijing would roll out stimulus measures over the weekend. That did not happen.

Slower growth in Asia is problematic because Asia’s economic endurance has helped offset weakness in the US and Europe. Exports from China and Japan are declining as Europe’s economic problems hurt consumer confidence there. The whole world is slowing down.

Japan’s exporters are under duress as the debt crisis in Europe has cut into sales. There were some expectations about the possibility of action from Japan’s central bank; although I don't know what the Bank of Japan can do, except continuing to push on a string. And right now it looks like central banks globally have been hesitant to do anything. The general opinion is to wait a few weeks and see if the whole mess can just wait until September. 

A senior member of Chancellor Angela Merkel’s party issued a stark warning to Greece today, saying Germany would not hesitate to veto further aid to the country if there were any signs it was not meeting the conditions of its bailout…”Even if the glass is half full, that won’t be sufficient for a new aid package. Germany cannot and will not agree to that.” It is easy to be tough minded when things are going well, and the core of the euro-zone has been tough minded on the periphery, but now it appears the core may be feeling economic restrictions; not as bad as Greece.  Gross domestic product slid 6.2 percent in the second quarter from a year earlier. That follows a 6.5 percent year-over-year contraction in the first quarter.  The second quarter was difficult, with two parliamentary elections, tough austerity measures and a flight of deposits from Greek banks..  The Greek economy has shrunk almost 18 percent since the April-to-June quarter of 2008, a decline that suggests economic depression. So far, there appears to be little reason for optimism, with the unemployment rate in May reaching a record 23.1 percent, up from 22.6 percent in April. The jobless rate among youth has reached almost 55 percent.

Now the strain is starting to tell on the core countries, too. On Tuesday, estimates of second-quarter growth for the Euro-zone are expected to show a fall of 0.2 percent for the euro zone as whole, a 0.1 percent dip for France and just 0.2 percent growth for Germany. Germany's factory orders fell by an alarming 1.7 percent between May and June, much worse than the 0.8 percent forecast. If the euro-zone's biggest and healthiest economy is faltering, then who is left to do the bailing?

The recent emergence of an axis between Spain, Italy and France at the last euro zone leaders' summit shows that the political fault lines between core and periphery are shifting too. The relationship between German Chancellor Angela Merkel and her French opposite number, Francois Hollande, does not appear to be as close as her relationship with his predecessor Sarkozy.


There has been a lot of focus on the  LIBOR rigging scandal, but no one seems to be asking the question: why would banks want to contribute their LIBOR numbers at all? And what happens if they stop? If you run a bank you have to pay your treasurer to make up a bunch of numbers every day and send them out to be scrutinized. The media, the regulators, and clients will all read your contributions and compare them to other banks. Your numbers will inevitably be considerably higher or lower than the average and you will be accused of wrongdoing. 

Of course your treasurer can't be bothered with making up numbers daily, so the job gets sloughed off on junior accountants. And you can only hope those junior employees don't have too many persuasive friends on the trading floor trading basis swaps.  And the banks do this for free; a few of the more clever bankers figured out they could make a few proprietary trades on the side, but mainly it was not much upside opportunity. It is therefore likely that many banks will simply pull out of this exciting venture going forward. So will Libor die? What will take its place? Just asking. 

The Federal Reserve bank of St. Louis says the shadow  banking sector was close to $20 trillion at its peak and shrank to about $15 trillion last year, making it at least as big as, if not bigger than, the traditional banking system. The still scary part is that the shadow banks serve as  financial intermediaries that conduct functions of banking "without access to central bank liquidity or public sector credit guarantees." No guarantees means there could be problems; if so, the problems would be big. Remember what happened in 2007? Problems with money markets...

Peregrine Financial Group CEO Russell Wasendorf Sr., who attempted suicide outside his Cedar Rapids, Iowa office in July, has been indicted on charges of making false statements to regulators.

The Federal Trade Commission finished a settlement with Facebook on Friday over allegations that the company had violated its privacy policy, and in the process said it would re-examine its own practice of allowing companies to settle charges of wrongdoing while denying that they had done anything wrong.

The FTC’s turnabout came in response to dissent from the Facebook settlement by one commissioner, J. Thomas Rosch, who said that allowing the company to deny charges it was agreeing to settle undermined the commission’s authority.

In November, the FTC said that Facebook had deceived consumers by telling them that their personal information would be kept private, while “repeatedly allowing it to be shared and made public.”

The commission voted 3-1, with one abstention, to impose a 20-year consent order requiring Facebook to protect its users’ privacy. The company agreed to give consumers clear and prominent notice and to obtain their express consent before revealing information beyond their previously stated privacy settings, to maintain a comprehensive program to safeguard private information, and to obtain an independent privacy audit every two years. Facebook said in a statement on Friday, “We are pleased that the settlement, which was announced last November, has received final approval.” The company did not repeat its assertion, made in November, that it “expressly denies the allegations set forth in the complaint.”

The FTC is not the only federal agency that allows a company to deny facts that it seems to be conceding. In July, the Justice Department settled a case with the pharmaceutical maker GlaxoSmithKline in which the company agreed to pay $2 billion to settle civil charges that it defrauded the government with drug sales. Despite the payment, Glaxo expressly denied that it had engaged in any wrongful conduct. That seems to invite denials of liability in every case in the future.

Securities and Exchange Commission’s rules ban a company that settles a case from denying that it committed the acts in question. The SEC  also states that “a refusal to admit the allegations is equivalent to a denial, unless the defendant or respondent states that he neither admits nor denies the allegations.” That rule would disallow the FTC’s language that a settlement “does not constitute an admission” of guilt.

The SEC’s policy, however, has itself been a subject of dispute. A federal judge in Manhattan refused to approve an SEC settlement with Citigroup last year, saying that the agency’s policy of allowing a company to neither admit nor deny allegations gave him no basis on which to judge whether the settlement was in the public interest.

The case, heard by Judge Jed Rakoff of Federal District Court in Manhattan, is now being considered by a federal appeals court. So, we've reached a point where major corporations can't just pay a fine and deny wrongdoing; we've advanced to the point where they may have to pay a fine and not admit wrongdoing. These may seem like subtle distinctions but they are not. 



Credit card debt collection may achieve the dubious distinction of making mortgage servicers look good. The New York Times reports that credit card debt collection was a heavy user of robosigned affidavits, and credit card companies frequently file erroneous lawsuits, sometimes saying a customer owes money when they’ve paid off the balance, and then if they can establish there is a balance, there are problems with the accuracy of the balance. Unlike foreclosures, where even after the revelation of widespread and varied mortgage abuses, most judges are pro-bank, in the credit card realm, the conduct of lenders is so bad that experienced judges are skeptical of them. From the article:

As they work through a glut of bad loans, companies like American Express, Citigroup and Discover Financial are going to court to recoup their money. But many of the lawsuits rely on erroneous documents, incomplete records and generic testimony from witnesses, according to judges who oversee the cases.

Lenders, the judges said, are churning out lawsuits without regard for accuracy, and improperly collecting debts from consumers. The concerns echo a recent abuse in the foreclosure system, a practice known as robo-signing in which banks produced similar documents for different homeowners and did not review them.

“I would say that roughly 90 percent of the credit card lawsuits are flawed and can’t prove the person owes the debt,” said Noach Dear, a state civil court judge in Brooklyn, who said he presides over as many as 100 such cases a day….

The problem, according to judges, is that credit card companies are not always following the proper legal procedures, even when they have the right to collect money. Certain cases hinge on mass-produced documents because the lenders do not provide proof of the outstanding debts, like the original contract or payment history.

At times, lawsuits include falsified credit card statements, produced years after borrowers supposedly fell behind on their bills.

But the big reason that the credit card companies can ride roughshod over the law is that so few consumers contest these cases. The article reports that 95% go uncontested, meaning the lender will win a default judgment and can then garnish wages or bank account balances.

And if you think it’s bad with the credit card companies, it’s even worse with the bottom feeders. There ares statutes of limitations on unpaid debts; for most states, its about 4 or 5 years. Apparently a hedge fund is backing a company that buys bad debts from credit card companies, debt they’ve already written off, shortly before the statue of limitations is about to expire, for pennies on the dollar. They then file suit. They don’t even plan to spend any money fighting, they're just intent to win default judgments. So if you hire a lawyer and merely file an answer, you win. But a remarkably high percentage of people fail to do that. And this is the business model that the hedge fund has determined is a good business model.