Wednesday, January 23, 2013 - Never Been To Davos

Never Been To Davos

by Sinclair Noe

DOW + 67 = 13,779
SPX + 2 = 1494
NAS + 10 = 3153
10 YR YLD un = 1.83%
OIL – 1.13 = 95.55
GOLD – 7.00 = 1685.80
SILV + .02 = 32.33

I want to go back to a couple of reports from the past week which I hope will bring us to today's news. First, JPMorgan’s management task force report on the bank’s $6.2 billion in losses from the “London whale” trade. JPMorgan is a huge institution with more than $2 trillion in assets. Banks typically lend their deposits, but for the tens of billions that JPMorgan cannot lend, this remainder is turned over to its chief investment office. This unit is charged with earning returns on this money and also using these billions to hedge the enormous financial institution against bad events. So, the London Whale was gambling with excess deposits. The idea was to earn returns on this money and also use these billions to hedge the enormous financial institution against bad events, but the trading position became so large, more than $50 billion, that the JPMorgan traders couldn’t liquidate it without hundreds of millions of dollars in losses. Instead of liquidation, they doubled down, adding some $30 billion more in bets on bets, hoping this would save them. That trade still didn’t work, and JPMorgan lost an estimated $169 million in the first two months of 2012. It was then that the traders added another $40 billion to the portfolio.

Like sharks smelling blood in the water, hedge funds went on the attack as they took offsetting positions in anticipation that the bank couldn’t hold the trade. The funds were right. JPMorgan lost $412 million on the first trading day after Bloomberg News and The Wall Street Journal reported about the London whale, and the losses started to snowball.

In the middle of the meltdown, JPMorgan traders fudged numbers, ignored orders, tried to bypass regulations and regulators, and in general scrambled to salvage their bets. Management raced to understand what was going on at the subsidiary while markets freaked in ways that no one ever expected or that JPMorgan’s models predicted. After the first-day loss of $412 million, Ina Drew, then the head of the chief investment office, wrote in an e-mail that it was an “eight sigma event.”

There are plenty of questions following a report like that. Where were the regulators back then? And better still, where are the regulators now? Where was management? Why did the traders do what they did?

Financial losses like the London Whale are difficult to spot, especially by regulators who work outside the company. It is somewhat understandable that they couldn't prevent the losses. What is tougher to understand is why they haven't followed-up. And what is even tougher to understand is how Jamie Dimon could not prevent the losses and why he hasn't been called to task. JPMorgan has provided its own self-analysis, and its task force prescribes more risk analysis, better risk models and management as a remedy. Nobody with a whit of understanding or integrity believes this will prevent future losses, but slathers the mess with a fine patina of good intentions.

That brings us to the next report; this one from the Federal Reserves five year old, well seasoned transcripts of their response to the global financial meltdown. The Federal Reserve has now admitted that five years ago, just days before the start of the financial meltdown, Mr. Bernanke and others at the Fed did not have a clue as to the impending financial disaster. The transcripts offer some gems of ignorance; they said things like the economy had a “reasonably good” chance of returning to its growth trend; Countrywide was described as having a “strong franchise”; the “subprime market” was described as a “really small percentage of the total credit markets.”

So, we should realize the regulators don't have the manpower, the resources, or the inclination to regulate complex derivatives trading, especially when a bank like JPMorgan doesn't make an effort at transparency, and especially when they set up their CIO trading unit in London, outside the purview of the Federal Reserve regulators and outside of the controls of listed exchanges.

And that brings us to today and Davos, Switzerland. The World Economic Forum is meeting and trumpeting its commitment to transparency and inclusiveness along with a burgeoning list of initiatives to advance the same. Their motto is: "Committed to Improving the State of the World." Not surprisingly, some of the biggest backers of the World Economic Forum are the bankers, like UBS, which last year was fined $1.5 billion for its schemes to rig global interest rates. The U.S. Commodity Futures Trading Commission cited more than 2,000 instances of illegal acts involving dozens of UBS employees. And that scandal followed a $780 million U.S. settlement in 2009 over charges that the bank had helped U.S. clients avoid taxes.

Other strategic partners include Bank of America which has just agreed to pay Fannie Mae $10 billion to settle allegations that it had improperly handled mortgages; Barclays Plc, which also paid nearly a half-billion dollars in a settlement over manipulating interest rates and faces record fines for trying to fiddle energy markets; Citigroup, which last year settled a lawsuit over sub-prime mortgages for $590 million; Credit Suisse, out more than a half-billion dollars for money laundering. The rogues' gallery is filled out with the likes of HSBC, Goldman Sachs, Standard Chartered, and of course, JPMorgan. The interests they represent are corporate; no more, no less. "Improving the state of the world," comes behind networking and dealmaking.

Just today, we learn Morgan Stanley is being sued by a Chinese bank over $500 million in subprime collateralized debt obligations which Morgan Stanley knew to be trash. The traders even sent emails calling the CDOs: S---Bag, Nuclear Holocaust, Subprime Meltdown, and other catchy names. It's becoming depressingly familiar: Bankers joke openly in emails about a toxic investment they're creating. Bankers sell said toxic investment to clients while betting against it. Everybody loses money, nobody goes to jail. Rinse, repeat, crash the economy.

So, what is the response from all the bright minds gathered in Davos? Nowhere in the forum's printed program do the words “financial crisis” appear. Two different panels will discuss systemic risk issues which may or may not be relate to financial institutions.

Jamie Dimon appeared on a panel this morning and he stressed the key role of banks in making the economy work, and insisted many of the bad practices of the recent past were being phased out. Regulators, he said, were "trying to do too much, too fast." The bankers, he said were “doing the right thing.”

Banks have spent much of the past few years in a bunker, getting on with shoring up their tarnished finances – and that's spelled difficulties for many in need to get their hands on money they need. Given its importance to the global economy, many reforms have been called for to make them work better for society as a whole. One solution being espoused around the world is to siphon off risky trading activities from traditional banking such as taking deposits and granting loans. In other words, if Jamie Dimon and the London Whale want to go to England and gamble, fine – just don't gamble with FDIC insured depositors' funds.

Part of the forum in Davos was to try and re-direct blame to regulators and the need for better regulations, but not necessarily more regulations, and not necessarily more regulators, and not necessarily requiring banks be transparent with regulators.

Axel Weber, a former central banker and current chairman of Swiss-based bank UBS, acknowledged what he called the "excesses" of the past but said it was pointless to debate breaking up banks. The excesses of UBS and other bankers are also known as felonies, and there has been no accounting as of yet. There is an elderly, 78-year old widow in Florida who followed the advise of UBS employees. She tried to evade taxes. She now faces 5 years in prison. No jail time for the UBS guys.

"Where does the financial sector start or stop?" Weber asked. "It's so intricately linked that we shouldn't throw out the baby with the bathwater .... We all provide valuable social functions."

In other words, the cancer has grown so large, it would be painful to cut it out, so don't even try.

The rise of the bankers has coincided with a decline in the middle class, and a surge in debt. A stunning 35% to 40% of everything we buy goes to interest. This interest goes to bankers, financiers, and bondholders, who take a 35% to 40% cut of our GDP. That helps explain how wealth is systematically transferred from Main Street to Wall Street. The rich get progressively richer at the expense of the poor, not just because of “Wall Street greed” but because of the inexorable mathematics of our private banking system.

This hidden tribute to the banks will come as a surprise to most people, who think that if they pay their credit card bills on time and don’t take out loans, they aren’t paying interest. Not true. Tradesmen, suppliers, wholesalers and retailers all along the chain of production rely on credit to pay their bills. They must pay for labor and materials before they have a product to sell and before the end buyer pays for the product 90 days later. Each supplier in the chain adds interest to its production costs, which are passed on to the ultimate consumer. The financial sector compose a whopping 40% of US business profits; that's five times the 7% made by the banking sector in 1980.  Bank assets, financial profits, interest, and debt have all been growing exponentially. Exponential growth in financial sector profits has occurred at the expense of the non-financial sectors, where incomes have at best grown linearly, or not at all.

 If we had a financial system that returned the interest collected from the public directly to the public, 35% could be lopped off the price of everything we buy. That means we could buy three items for the current price of two, and that our paychecks could go 50% farther than they go today. Last year, the federal government paid $454 billion in interest on the federal debt—nearly one-third the total $1.1 trillion paid in personal income taxes that year. Sure, let's talk about government deficits and the debt ceiling and let's talk about cutting spending, but let's also realize where we are spending the money before we start the cutting.

Maybe Jamie Dimon is correct when he says bankers are doing the right thing, but my question is: for whom? And at what price?

Tuesday, January 22, 2013 - Forward

Forward

by Sinclair Noe

DOW + 62 = 13,712
SPX + 6 = 1492
NAS + 8 = 3143
10 YR YLD - .01 = 1.84%
OIL + .63 =96.67
GOLD + 1.70 = 1692.80
SILV + .19 = 32.31

Yesterday was a fairly momentous day; the second inauguration of President Obama, featuring a fairly important inaugural speech laying out the major themes and vision for the next four years; it was also Martin Luther King, Jr. Day. The inauguration was fun to watch; it was also infuriating, and not just because of the hours of fawning media coverage on Michelle Obama's wardrobe. Literally, hours. Also a bit infuriating was the whole fuzzy picture of how the Inaugural was financed. The Presidential Inaugural Committee won’t say how much they have already collected or even what their goal was. Apparently these are “moving budgets,” which won’t stabilize until after the inauguration. Four years ago, promising a new openness, the president banned corporate giving to the inauguration, limited gifts from individuals to $50,000 and released a full accounting of donations. This year, the Inaugural Committee was offering packages between $10,000 and $1 million. Maybe you get a nice set of steak knives with the million dollar package. It will probably be a few months before we find out if they met their sales quota.

Still, it was a nice inauguration and the President's speech was interesting for multiple reasons. He hit on some big ideas: gay rights, climate change, immigration, and gun control. This weekend was also, by no mere coincidence, Gun Appreciation Day. A total of five people were injured in accidental shootings at gun shows in Indiana, Ohio, and North Carolina. And then today there was a shooting at a small college in Texas; three people injured.

Try to listen to the speech if you haven't, or listen to it again even if you did hear it. The speech lays out a vision, a theme for moving forward; and yesterday's speech is part of a package which includes the State of the Union Address, three weeks from today. The State of the Union will have the details. The Inaugural Speech was where Obama wants the country to be; the State of the Union speech will be the road-map to get there. Prior to today, there had been some talk that Obama would pursue deficit reduction, as part of his legacy project in his second term, but it's pretty clear that ship has sailed. During the debt ceiling fight and the fiscal cliff fight, Obama was (widely reportedly) willing to make cuts to entitlements in exchange for higher taxes from Republicans. They never found that deal.

It's still possible that something big could come out of the upcoming sequestration/budget battle, but most likely, Obama is done on the entitlement, spending front. And realistically, this may be the end of serious entitlement talk for a long while. Entitlement cutting had appeal with gigantic, trillion dollar deficits (even though entitlements were not driving said deficits). But as the deficit shrinks, the broader appetite for addressing any of these issues will fade.

Japan's central bank is borrowing a page from the Federal Reserve. The Bank of Japan set a target of 2% inflation and made an open-ended pledge to purchase government bonds until the economy revives or the inflation target is hit. Japan, the world's third-largest economy, saw negative growth in the third quarter of last year amid flagging exports and weak private spending, and is most likely to report further contraction for the fourth quarter. Deflation has long been a big part of Japan's economic problems, and the stimulus plan is aimed at long-running economic stagnation. The Bank of Japan's pledge to buy assets, known as quantitative easing, will involve total monthly purchases of 13 trillion yen, or about $147 billion, from January next year, most of it in U.S. Treasury bills. The Federal Reserve in December said it would continue to buy each month $45 billion of Treasury bonds as well as $40 billion of mortgage-backed securities. So, the bond market might turn some day; it might face trouble in the future, but for now, the old saying applies: don't fight the Fed, and the Bank of Japan.

There has been some economic recovery from the lows of 2008-2009, but the gains have been depressingly slow. Further fiscal expansion might be hampered by ongoing fiscal dysfunction and concerns about debt, and specifically debt to GDP. And the debate seems to be which targets to point at when creating new stimulus, rather than where the stimulus should be applied and if the stimulus will facilitate and foster long-term growth. The Bank of Japan targets inflation. The Fed targets unemployment and inflation. The Governor-elect of the Bank of England is on record as targeting nominal GDP, not necessarily GDP growth.

Just to refresh your memory; a nominal variable is one where the effects of inflation have not been accounted for. The Nominal Gross Domestic Product measures the value of all the goods and services produced expressed in current prices. On the other hand, Real Gross Domestic Product measures the value of all the goods and services produced expressed in the prices of some base year. So, the idea of a targeted nominal GDP suggests faster inflation might generate a faster, sustainable growth rate. Or it might just be acknowledgment that we haven't seen inflation in a while, and like the Bank of Japan, the worlds' economies aren't really concerned about inflation right now, rather the big concern is that economies grind to a standstill.

So, I hope this provides some background to the upcoming budgetary process. Considering the possibility of default or a potential government shutdown this spring, it is appropriate for policy to focus on reducing prospective deficits. Given all the uncertainties and current US debt levels, we should be planning to reduce debt ratios if the next decade goes well economically. Reducing prospective deficits should be a key priority but should not and probably will not, take over economic policy.

Even leaving aside any possible stimulus benefits, current economic conditions make this the ideal time for renewing the nation’s infrastructure. Such investments, borrowed at near-zero interest rates, need not increase debt ratios if their contribution to economic growth raises tax collections. We face deficits in other areas besides the debt ceiling.

Infrastructure represents what is and will become, an increasingly conspicuous deficit facing the United States. Nearly six years after the onset of financial crisis, we clearly are living with substantial deficits in jobs and growth. Consider that if an increase of just 0.15 percent in the economy’s growth rate were maintained over the next 10 years, the debt-to-GDP-ratio in 2023 would be reduced by about 2.5 percentage points. That’s an amount equal to the much debated year-end fiscal compromise that raised taxes. Increasing growth also creates jobs and raises incomes.

By all means, let’s address the budget deficit, but don't restrict the challenge to one blunt tool.

Earlier this month, a study by the World Economic Forum rated severe income inequality as the biggest risk facing the world, for the second year running. Also high on the list is climate change, which made its way into the inauguration speech yesterday; just in case you're looking for trends. The World Economic Forum is the official name of the Davos Rich Guys Conference held in Switzerland. They publish a study in the weeks before the annual conference. It is more than a little ironic that billionaires and millionaires meeting in the Swiss Alps, should make income inequality a top priority. I'm still not sure whether they consider it good or bad; only that it is a priority. Another irony is the concern about climate change from people jetting around the world in private jets.

In recent conferences, the economic health of the Euro-zone was a top priority, which is now seemingly under control. The current big concern about the Euro-zone is that leaders might become less vigilant now that the heat is off, ushering in a spate of new troubles that could dog the euro for years to come. In other words, they want the economic stimulus to continue. There is an enormous amount of global capital represented in Davos, but global capital does not solve big world issues: debt and financial crisis, political paralysis or gridlock, the transformative effects of the digital revolution, resource shortages, shifting demographics, climate change, and income inequality.

The Davos World Economic Forum is not known for transparency; in fact, it is known for a bunch of little side meetings where various deals may or may not get done; it is known for wheeling and dealing, especially among bankers. It is not known for accurate prognostications, but the itinerary of topics does tell us the issues of discussion among the rich and powerful. It is more than coincidental that the research report, which was released a couple of weeks ago, listed climate change as a major issue, and those words were uttered, for the very first time yesterday in an inauguration speech.

In 2009, Mohamed El-Erian, CEO of PIMCO, the world's largest bond fund manager, coined the term, “new normal” to describe the period of economic malaise the U.S. would experience in the wake of the biggest recession of a generation. The "new normal" was characterized by below trend growth, high unemployment, and ultra-low interest rates as the U.S. suffered the economic consequences of the crisis

Now, El-Erian says the "new normal" may soon be over. He wasn't quite ready to call the end of period, but he was getting close. Bigger picture, a lot of analysts are now calling The Big Turn. The consensus seems to be more “juice” from the Federal Reserve to propel the economy, at least in the first quarter.

Q1 GDP may be in the high 2% range, or perhaps even as high as 3%. That’s because the lifts from business investment, housing, inventories and trade may more than offset the expected hit to consumption from higher tax rates.

It also appears that real consumer spending ended the year on a strong note with real PCE rising up 0.3% month over month in December. This would put the December level 1.5% annualized above the Q4 average. This positive momentum will also help absorb some of the fiscal drag. All of this coincides with increasing evidence that the US is escaping the liquidity trap hat has made monetary policy so ineffective in the crisis era. It's not out of the woods yet, but even with all of the negativity surrounding the upcoming budget battles in Washington expected to unfold over the first quarter – and barring any shocks – the US economy may be closer to the end of the "new normal" than even El-Erian will admit.

Of course, that is barring shocks, and shocks can happen. Barely into 2013, Mali and Algeria are new sites of hot war and chilling fear. Where the tumult that began in the Arab Spring will end is still as unclear as when it erupted — far from Davos — two years ago. The challenge posed by the free flow of information in China went to the streets to ring in the New Year in Guangzhou.

Europe seems to have averted a collapse of the euro, but even in Germany, growth is anemic. Eleven members of the Eurozone have finally agreed to adopt a financial transaction tax often referred to as a ‘Robin Hood tax’ first discussed in September 2011. The tax will apply at the rate of 0.1% on stock and bond transactions and 0.01% on derivatives trades. It looks like Estonia is not afraid of derivatives traders.

Another example of how nations in transition are going their own way is Egypt, where President Mohamed Morsi seems to seek a geopolitical mix: a dose of Turkey, an Islamist-leaning democracy, with much-needed financial aid from China, and relations with Washington warm enough to garner more aid and collaborate on diplomacy like mediating the Israeli-Palestinian fighting over the Gaza Strip last November.

The fluid nature of this world is enhanced by digital communication. With the collapse in newspaper readership and the spread of social media, everyone gets little snippets of information, and never fully understands the implications. Very few people do deeper reading and thinking.

Washington’s feuding politicians walked up to the brink before resolving not to jump off the so-called fiscal cliff, though they might still split their head on the debt ceiling. The political gridlock in Washington really looks ugly from an outsider’s view.”

Crisis might be the new normal. Or the new norm might be the Big Turn; take your pick.

It's earnings reporting season and the stock markets are continuing with a feel good January, in part because nobody can come up with anything to be worried about. The VIX, the volatility Index is hanging out near a 52 week low of 12 and change. Complacency is rampant. Tonight is only going to exacerbate that.

Google turned in a better than expected report, up 3%. IBM beat expectations and the stock moved higher. Wells Fargo announced a dividend hike. The railroads, CSC and Norfolk Southern posted better than expected earnings. CSC was up and Norfolk was slightly lower; but it should bode well for the Dow Transports which were already hanging around record highs. And if you believe in Dow Theory, the Transports should drag the Industrials higher.

Sales of previously owned homes fell 1.0% in December from the prior month and were up 12.8% from December 2011. In total, the National Association of Realtors estimated that 4.65 million home sold last year, up from 9.2% in 2011. It was the highest level since 2007. Housing inventory dropped 8.5% in December to reach 1.82 million homes available for sale. That represents a supply of just under 4½ months. Unsold inventory is now at its lowest level since January 2001.

Friday, January 18, 2013 - Happy Inauguration Weekend

Happy Inauguration Weekend

by Sinclair Noe

DOW + 53 = 13,649
SPX + 5 = 1485
NAS – 1 = 3134
10 YR YLD -.03 = 1.84%
OIL - .15 = 95.79
GOLD – 2.40 = 1685.70
SILV + .16 = 31.99

The Dow Industrials and the S&P 500 closed at 5 year highs today. We have now seen gains over the first three weeks of the new year. While many Main Street investors remain wary of the the market that bit them in the financial crisis of 2008, they are missing out on historic gains. Since the turnaround that began March 9, 2009, the market has chalked up gains of 118%, putting it in the top nine bull markets in which the S&P 500 gained more than 100%. The current bull, which followed the worst bear market, or market plunge, since the Great Depression, is also 1,407 days old, which ranks eighth and also puts it in the "1,000 Day Club." In cash terms, the stock market has generated $10.5 trillion in paper wealth since the bear market ended.

For much of the last 44 months, most investors, many of them psychologically and financially scarred by the 2008-09 financial crisis, have sworn off the stock market. In the five years ended in 2012, individual investors have yanked an estimated $557 billion out of U.S. stock mutual funds, while $1 trillion has been funneled into bond funds. Once bitten, twice shy. Investors don't really trust the market itself, so they don't trust the rally. Of course, there are other factors. The aging baby boomers are growing increasingly averse to risk. And then there's the concern the gains have been artificially inflated by the stimulus injected into markets by bankers. These drastic and unprecedented measures used by central bankers to reignite the economy, revive risk taking and boost investor confidence are bound to end some time, and when the Fed exits QE, there could easily be another day of reckoning.

 Last week offered a hint, when minutes from the Federal Reserve showed decision makers discussing when to wean the planet from their accommodative bond buying. The sell-off in long-term Treasuries in one week wiped out their entire yield from last year, and demonstrated the peril of crowding into allegedly safe havens.

Real interest rates tick higher when economies improve, but an unruly spike is another thing altogether. The Fed has vowed to keep rates down, as will our looming debt ceiling. But if the 30-year Treasury yield, now just below 3.1%, were to nudge above 3.32%, the return over the next 12 months would be negative

Of course, there is still no shortage of things for jittery investors to worry about. The World Bank warned that the US budget battle is already restraining economic growth around the world and warned the U.S. could fall back into recession if massive budget cuts aren't avoided in coming months.

Moody's, the ratings agency that evaluates the financial health of sovereign nations, including the US, warned this week that it will downgrade the nation's triple-A credit rating if Congress doesn't raise the debt ceiling and defaults on its debts. A similar move by S&P in the summer of 2011 after a similar battle resulted in the Dow tumbling 635 points in a single day.

But, perhaps the scariest thing in the past week was a report from Lippers that stock funds, including mutual funds and exchange traded funds that invest in both U.S. and foreign shares, took in a whopping $18.3 billion in the week ended Jan. 9, the fourth-largest weekly inflow since it began tracking them in January 1992. Investors are finally coming to the realization that the conservative investments they have been in have returned little to nothing over the past several months and years. That has left them in a deep hole. Yeah, that's the ticket, jump back in at the top of a four year cyclical bull market run. Nothing scary about that.

A stock market perched at fresh five-year highs is vulnerable to many excuses for a pullback, but the fourth-quarter results companies are now reporting won't be one of them.

It isn't that corporate profits last quarter were good; they weren't. Profit projections have also been dramatically cut. Analysts now see fourth-quarter earnings for Standard & Poor's 500 companies expanding just 1.9% year-over-year—down from 9.9% hoped for three months ago and 13.7% last summer. Companies likewise desperately need revenue to keep growing, since many have squeezed all they can from profit margins. So it helps that Wall Street is now bracing for stagnant revenue growth last quarter among nonfinancial companies.

The bar isn't uniformly low, however. The two sectors analysts are counting on to deliver the biggest fourth-quarter growth—10.9% for consumer discretionary and 8.9% for financials—have already run up the most in 2012

In contrast, expectations for cyclical companies seem glummer. Three out of the four sectors where analysts expect shrinking profits are all sensitive to capital spending, with the consensus seeing profits decline 5.6% for industrial companies, 2% for energy, and 1% for technology.

Happy Inauguration Weekend. Obama has a chance to make a pointed, ideological speech Monday. Obama can define the November results as a decisive referendum on the proper role for the state. He could cement his speech in history. There have been some good inauguration speeches over the years, and plenty of not so great speeches.

Thomas Jefferson in 1801 – after the nation’s first contested election – declaring, “We are all Federalists, we are all Republicans.” Abraham Lincoln in 1861, pleading for the South to remain in the Union, and vowing to repress rebellion by force until “the better angels of our nature” returned. FDR declaring “the only thing we have to fear is fear itself,” referring to the bank panics that imperiled the nation.

John Kennedy's thrilling Cold War call to arms is remembered for sheer eloquence, rather than the crisis it addressed. Second inaugurals stand out with greater infrequency. FDR memorably proclaimed “I see one-third of a nation ill-housed, ill-clad, ill-nourished.” Lincoln called for a lenient Reconstruction policy “with charity for all.” Most inauguration speeches don't strive for cheap quotability, and this may be the one area where they find success. .

Following this weekend's speech, the President will have another opportunity to make his positions known to the world. He will take to the bully pulpit for the State of the Union Address. He will need to hit a home-run in each speech; one detailing his vision and the other detailing the specifics of how we get there from where we are now. The viability and vigor of his next four years might depend on these two speeches. If he fails to deliver? Well, as JFK said: “Ask not.”

House Republican have come up with a plan to pass a three-month extension of federal borrowing authority next week to buy time - on pain of losing their own paychecks - for the Democratic-controlled Senate to pass a budget plan that shrinks budget deficits. The plan, hatched at a House Republican retreat, marks a new strategy from the party to break a budget deadlock by forcing the Senate to act first. This is strategic can kicking.

The Treasury needs congressional authorization to raise the current $16.4 trillion limit on U.S. debt sometime between mid-February and early March. The Senate has not passed a formal budget resolution in nearly four years, while the House has passed budgets that have died in the Senate. Under the planned legislation, House Majority Leader Eric Cantor said if the Senate or the House fail to pass a budget by April 15, lawmakers' pay would be withheld.

House Speaker John Boehner said there should be no long-term increase in the federal debt limit until the Senate passes a budget, and House Republicans will try to force the Senate into action to cut spending, saying: "We are going to pursue strategies that will obligate the Senate to finally join the House in confronting the government's spending problem. The principle is simple: no budget, no pay."

So, the Republicans came up with a nice soundbite there, and they will try to place blame of a default on the Dems. A spokesman for Senate Majority Leader Harry Reid, said the Senate would consider the increase if it was "clean."

A House Republican leadership aide said it was not currently anticipated that the three-month debt limit increase legislation would include spending cuts. Although Boehner has previously sought at least $1 in long-term spending cuts for every dollar of debt limit increase, the aide said that the reforms associated with requiring budgets from both chambers would meet the speaker's requirements.

Spending cuts would be demanded of any longer term debt limit increase, the aide said, and Congress would still have to continue dealing with two other fiscal deadlines, the March 1 launch of automatic spending cuts, and government funding legislation that is needed by March 27.

For now, it appears the White House strategy of refusing to negotiate on the debt ceiling has worked, sort of. Yes, the GOP could come back on the debt ceiling, and they will almost certainly float a few trial balloons. It could try to make a big deal of the sequester, but that’s a lot more like the fiscal cliff than it is like the debt ceiling: not good, but not potentially catastrophic, and therefore poor terrain for the “we’re crazier than you are” strategy. And while Republicans could shut down the government, my guess is that Democrats would actually be gleeful at that prospect: the PR would be overwhelmingly favorable for Obama, and again, not much risk of blowing up the world.

The Federal Reserve has released transcripts from 2007; the thinking being that a five year lag would lessen the appearance of stupidity. Not so much really. The major figures were pretty much clueless. Timothy Geithner, then president of the New York Federal Reserve Bank, said during an emergency telephone call on August 10 of that year that most of Wall Street was still doing fine.

"We have no indication that the major, more diversified institutions are facing any funding pressure," Geithner said according to the transcripts, which total 1,370 pages. "In fact, some of them report what we classically see in a context like this, which is that money  is flowing to them."

Similarly, Fed Chairman Ben Bernanke underestimated the risks of a looming financial blow-up.

"I do not expect insolvency or near insolvency among major financial institutions," he said in December 2007.

By then, the Fed had already launched emergency liquidity measures and begun cutting interest rates, which by December of 2008 would be brought all the way down to effectively zero.

Eventually, the financial meltdown would come to threaten all of Wall Street's powerhouses, and you know that story.

A soldier's basic pay is figured not only according to rank, but also by how long the soldier has served. The basic yearly pay in 2010 for the rank of an E5 sergeant with less than two years of experience is $24,735. That amount increases to $28,972 with four years of experience and $31,006 upon reaching six years of service.

Goldman Sachs awarded 22 senior executives and board members more than 736,000 restricted shares worth nearly $104 million as part of their 2012 bonuses. Goldman Chief Executive Lloyd Blankfein received 94,320 restricted shares. The shares were worth $13.3 million. I'm sure Blankfein performed heroically.

Earnings, Kitchen Sinks, Whining

By Sinclair Noe

DOW + 84 = 13,596
SPX + 8 = 1480
NAS + 18 = 3136
10 YR YLD +.05 = 1.88%
OIL + .94 = 95.18
GOLD + 7.10 = 1688.10
SILV +.24 = 31.83

The Dow Jones Transportation Average logged a record high today, ending the day up 37.44, or 0.66%, at 5,681.28. The transports average logged its best opening 15 days in January in more than a quarter century. The Dow Jones Industrial Average is still well off its October, 2007 all-time high of 14,164.53. So Dow Theory purists will have to be patient for a while yet. The Nasdaq still has a way to go. But Silicon Valley is back on top. Is it 2000 all over again?

The Best Performing Cities Index from the Milken Institute may have a familiar ring to it. The country's top metro area in 2012, based on jobs, pay and technology—is San Jose, Calif. It has been over a decade since the region ranked first on the index. Coming in second place on the index is Austin, Texas, another hub for tech innovation. The Milken Institute reported that for every job added to the tech sector, five outside jobs were created.

The number of Americans filing new claims for unemployment aid hit a five-year low last week and residential construction increased in December. Initial claims for state unemployment benefits fell 37,000 to a seasonally adjusted 335,000, the lowest level since January 2008. It was the largest weekly drop since February 2010 and ended four straight weeks of increases. The jobless-claims report suggests that we’re likely to see nonfarm payrolls expand at perhaps a better rate than we’ve seen in recent months.

A separate report from the Commerce Department showed housing starts jumped 12.1 percent last month to their highest level since June 2008. Permits for future home construction were also the highest in about 4-1/2 years. Digging into the housing report, 30 percent of all housing starts in 2012 were of multi-family apartments. That is the highest share in over 20 years. In December alone, multi-family starts jumped 23 percent month to month, seasonally adjusted, and are up nearly 166 percent from December of 2011. Compare that to single family gains of 8 percent month-to-month and 18.5 percent from a year ago. The housing starts number would indicate a shift in strategy. Developers are rushing to increase supply of multi-family apartments; this even as single-family rentals continue to gain market share. Continued uncertainty in the housing market, tighter mortgage underwriting and weaker consumer wealth has pushed ever more Americans to rent; the foreclosure crisis forced others. Still, the report indicates improving health in the housing sector. The labor and housing figures were really quite compelling and exceeded expectations rather handily in both cases.

Today, the American Bankers Association's held a economic conference to complain about tax increases and continued uncertainly among government policy makers; they say it will slow economic growth and job creation significantly early this year and threaten to tip the economy back into a recession. The tax hikes already put into place following this month's fiscal cliff deal in Congress will subtract 1.25 percentage points from gross domestic product growth this year, and additional government spending cuts--or continued uncertainty--would cause the economy to grow even slower than the tepid 2.0% pace. Those lackluster projections assume a relatively orderly resolution to the debt-ceiling debate in Congress.

It's earnings reporting season; still too early to declare the fourth quarter a success or a failure. And we've been sifting through some numbers. Extending the climb in corporate profits this year is expected to grow more challenging as labor costs rise with increased hiring. CEOs say they also face uncertainty over new health-care rules and taxes. Washington’s repetitive political confrontations threaten to further lengthen their odds. The debt-limit fight comes as the economy likely is growing at an annual rate of just 1.5 percent in the first quarter, although it will probably expand 2 percent during the year.

Despite the whining from the bankers, corporate profits are outstanding. Bloomberg reports US corporations’ after-tax profits have grown by 171 percent under Obama, more than under any president since World War II, and are now at their highest level relative to the size of the economy since the government began keeping records in 1947. Profits are more than twice as high as their peak during President Ronald Reagan’s administration and more than 50 percent greater than during the late-1990s Internet boom, measured by the size of the economy. The S&P 500 index is up 80% over the past 4 years and is now at a 5 year high.

Corporations are holding more than $1.7 trillion in liquid assets; essentially, they are parked in cash reflecting uncertainty over future policies. They’re investing in capital projects only 80 percent of their available internal funds. Though that figure is up about one-third from late-2009, that ratio has been below 80 percent only once since the end of 1958. Companies have squeezed profits out of this horrible economy by making it even more horrible, laying off workers and slashing costs. 

No sector has complained more than the banks, which have been reporting profits this week, and no sector has been making more money than the biggest, most oppressed banksters. JPMorgan Chase made $21 billion last year; it would have been more except for the $6 billion in losses by the London Whale. Today, Citigroup reported it was hit by charges for layoffs and fines to the tune of $2.3 billion in the last quarter; they still managed to posted net income of $1.2 billion. More alarming, Michael Corbat, Citi’s new CEO, had the audacity to blame regulatory costs for the bank’s performance — as if it were operating under some especially onerous rules that others weren’t.

Even with these “special” and “one-time” circumstances stripped out, these banks continue to be black boxes. Investors’ only choice is whether to trust the junk they spew forth.

Bank of America really has something to whine about; the bank reported a widely expected 63 percent drop in fourth-quarter profit after making huge payments to settle legal claims over its mortgage business. The bank’s earnings, a slim $732 million, amounted to 3 cents a share. For the entire year, profit jumped to $4.2 billion. The bank’s recent legal settlements also weighed on its results. Bank of America had warned investors that it deducted $2.5 billion to settle with regulators over claims of foreclosure abuses. The bank last week also struck an $11 billion agreement to resolve claims that it sold troubled mortgages to the government-controlled housing finance giant, Fannie, which experienced deep losses from the loans. The bottom line is that, quarter after quarter, these banks turn in financial reports that are impenetrable and full of what analysts politely call “moving parts.” It’s nearly five years since the dark days of the financial crisis, yet it’s still not clear if these banks are digging out or deeper. Methinks they doth protest too much. Why, it's almost as if the banks are trying to hide something.

Consumer advocates have complained that mortgage lenders are getting off easy in a deal to settle charges that they wrongfully foreclosed on many homeowners. Now it turns out the deal is even sweeter for the banks than it appears: Taxpayers will subsidize them for the money they're ponying up. The Internal Revenue Service regards the lenders' compensation to homeowners as a cost incurred in the course of doing business. Result: It's fully tax-deductible.

Regulators reached agreement this week with Goldman Sachs and Morgan Stanley. Last week, the regulators settled with 10 other lenders: Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, MetLife Bank, PNC Financial Services, Sovereign, SunTrust, U.S. Bank and Aurora. The settlements will help eliminate huge potential liabilities for the banks. Under the deal, 12 mortgage lenders will pay more than $9 billion to compensate hundreds of thousands of people whose homes were seized improperly, a result of abuses such as "robo-signing." Companies can deduct those costs against federal taxes as long as they are compensating private individuals to remedy a wrong. By contrast, a fine or other financial penalty is not tax-deductible.

Elsewhere in the world;  International Monetary Fund chief Christine Lagarde says the threat of financial collapse in the global economy appears to have eased, but she warned that developed economies still need to follow through on financial reforms and debt reduction. LaGarde said:

"We stopped the collapse. We should avoid the relapse. And it's not time to relax." Lagarde said that big economic powers, including the United States and European countries, had taken important steps to shore up their financial systems but have a lot of work left to do. She warned that there are signs of a waning commitment to regulate the financial sector. She said that reforms have been delayed and diluted, and she worries that banks are pushing back against necessary reforms. Wonder where she got that idea?

On the United States, Lagarde said any cuts should be aimed at allowing time for an economic recovery to play out. In Europe, Lagarde said she sees a lot of progress on reform. She said the European Union has a lot of new tools to deal with financial crisis. "And yet, firewalls have not yet proven operational," she said. She added that the EU still has work to do on its banking union in order to prevent future problems. On Greece, which has seen the most acute collapse of all the EU countries and which many believed would have to leave the currency union, Lagarde said recent reforms appeared to have restored confidence.

"This time it's different," she said. I think I've heard that line before.

Wednesday, January 16, 2013 - Fuzzy Justice

Fuzzy Justice

by Sinclair Noe

DOW – 23 = 13,511
SPX +0.29 = 1472
NAS + 6 = 3117
10 YR YLD - .01 = 1.82%
OIL + .88 = 94.16
GOLD + .10 = 1681.00
SILV + .12 = 31.59

The National Association of Home Builders/Wells Fargo housing market index was flat at a seasonally adjusted level of 47 in January. This is a gauge of homebuilders' confidence. Conditions in the housing market look much better now than at the beginning of 2012 and an increasing number of housing markets are showing signs of recovery, which should bode well for future home sales later this year. The builder-confidence gauge is up 88% from the same period in the prior year, even though the number was essentially flat for the January reading.

Industrial production increased 0.3% in December and now stands at the highest level since the summer of 2008. Production is up for 2 months, indicating a recovery from Hurricane Sandy.

The House of Representatives finally passed a $51 billion aid package to provide emergency relief for Hurricane Sandy. It was a partisan vote, but 49 Republicans voted for the aid package, mainly representatives from the affected areas.

The Consumer Price index was flat in December. The core rate of inflation, excluding food and energy, rose 0.1%. Gasoline prices dropped last month. For all of 2012 consumer prices climbed 1.7%, the third lowest rate in the past 10 years. That’s also down from a 3% increase in the prior year. Core CPI was up 1.9% for the full year. You will recall the Federal Reserve has now set a target on inflation of 2.5% and a target on the unemployment rate at 6.5%; and they will buy about $85 billion in bonds until they get to their targets and spark some activity. So, there is still a lot of bond buying to go.

The Fed released its Beige Book today; that's the anecdotal survey of the economy by the 12 Fed regions. The survey says there is no real spark in the economy. Growth is lackluster. Manufacturing activity was mixed, with three of the 12 Fed regions reported a decline in factory output. The labor market was seen as mostly unchanged. Several districts reported delayed hiring, often in defense manufacturing, due to fiscal cliff uncertainties. Housing continued to be a bright spot. Existing home sales picked up in all but one of the Fed’s dozen regions with interest rates low. While consumer spending did grow during December, holiday sales were below expectations. High levels of energy production were reported across the country. In a word, the economy is beige.

The low interest rate environment fostered by the Fed tends to push savers to chase yield. The low interest rate environment also applies greater pressure on banks' loan margins, and likewise, they chase yield through their investment banking units. Today, we saw better than expected earnings from Goldman Sachs and JPMorgan Chase.

Goldman posted fourth-quarter earnings of $2.8 billion, or $5.60 per share, up from $978 million, or $1.84 per share, in the same period a year ago. Let's just say that analysts' expectations were well managed. The bank said it took in "significantly higher" revenues from credit products and mortgages in its bond-trading business. In other words, in a low interest rate environment, they took on additional risk.

JPMorgan Chase recorded fourth quarter net income of $5.7 billion, flat with the prior quarter, but up 52.7% from the prior year. Performance was supported by strong loan and deposit growth, record debt underwriting fees in the investment bank, and continued stabilization in credit, including a $700 million pre-tax benefit from lower mortgage reserves in real estate portfolios. In banking lingo, fewer reserves is considered stabilization. Chasing yield in a low interest rate environment can lead to things like the London Whale trading scandal. Today, JPMorgan announced it had reached an out of court settlement with Bruno Iksil, the whale. Details were not disclosed.

They did disclose some details of the $6.2 billion loss on trading positions taken by Bruno the Whale. Apparently there was a breakdown in management controls. The Whale got into credit derivatives and he couldn't get out. There were losses that carried into the fourth quarter. Regulators are still examining but don't hold your breath waiting for action. Jamie Dimon considers the Whale Trade to be a thing of the past; done and gone. Jamie Dimon's bonus was cut in half; the poor guy will only pull down about $10 million in bonuses. Bank insiders claim he will be able to survive, but he is accepting his punishment. In banker lingo a $10 million dollar bonus is considered punishment. Let's move on. Jamie has been punished enough.

Wait a moment. The Office of the Comptroller of the Currency issued a couple of orders to JPMorgan, one related to the London Whale, and another related to the BSA/AML, which stands for Bank Secrecy Act and Anti-Money Laundering compliance. Seems the bank wasn't up to snuff on compliance and they failed to correct previously identified weaknesses in their compliance program. The previously identified problems included 22 pages of specific things the OCC said JPMorgan must do to be in compliance, and it turns out the bank did nothing to correct the problems. Now, we don't know if the bank did any actual money laundering in direct relation to these orders, but we do know that 18 months ago, JPMorgan got caught sending a ton of gold to Iran in violation of sanctions. And then fast forward to today, and JPMorgan still refuses to comply with the Bank Secrecy and Anti-Money Laundering orders, and the punishment is exactly … nothing.

Now compare that with a guy in Los Angeles named Karen Gasparian, who runs a check cashing company (and I'm no fan of check cashing firms) and he was actually prosecuted for failure to comply with BSA/AML law – the very same failure to comply as Jamie Dimon and JPMorgan Chase. Mr. Gasparian apparently cashed checks for more than the $10,000 limit without properly reporting the transactions. There are reports of ties with Armenian and Russian gangs. I'm certainly not trying to defend this guy running the check cashing store. Today, Mr. Gasparian was sentenced to five years in prison. Today, Jamie Dimon received a $10 million dollar bonus.

This week’s bold warning on infrastructure comes weighted with the sort of price tag that seems abstract to many taxpayers in a nation where a financial bailout costs $500 billion, a war is $113 billion a year, the annual deficit runs to $1 trillion and recent spending cuts amount to $110 billion.

The cost of deficit reduction became real when people got their first paycheck this year and realized the payroll tax holiday was over. But experts said the reality of a failure to invest $1.1 trillion more in infrastructure by 2020 will creep up on them.

If the problem is not addressed, power outages will become more frequent, prices at the supermarket and department store will inch up, traffic will detour around bad bridges, household incomes will drop and millions of people will lose their jobs.

There's been plenty of documentation of the challenge of rebuilding a post-World War II infrastructure at the end of its natural life, including: roads, bridges, the electrical grid, water and sewer systems, ports. One of the most meticulous accounts has come in a series of reports by the American Society of Civil Engineers (ASCE), which delved into each failing system to calculate not just the cost of restoration but the economic and personal price of doing too little or nothing at all.

The exclamation point on the “Failure to Act” reports came Tuesday in an ASCE paper: An investment of $2.7 trillion is needed by 2020; likely funding available, $1.6 trillion. The Congressional Budget Office says combined federal, state, and local spending for roads and bridges now amounts to about $160 billion.

No, the numbers don't add up, and the result, according to the report is: “Job losses will mount annually, and by 2020 it is predicted that there will be 3.5 million fewer jobs throughout the country. The expected impact for every household in the U.S. will be an average loss of more than $3,000 per year through 2020 in disposable personal income . . . due to job cutbacks and declining business productivity.” After that, it gets worse: “Expected loss of disposable personal income is estimated to exceed $6,000 annually from 2021 to 2040.”

And finally, Germany's central bank will repatriate some $200 billion worth of gold reserves it has stored in the United States and in France. The Bundesbank plans to bring back to Germany some of its 674 tons of gold stored in the vaults of the Federal Reserve in New York, and the Bank of France in Paris.

After the end of World War II, Germany had no gold reserves, but as its economy recovered and Germany became the export powerhouse it is today, the country accepted gold as well as dollars from the central banks of its trading partners to cover the financial imbalance created by German trade surpluses.

During the Cold War, West Germany followed a policy of storing its gold as far west as possible in case of a Soviet invasion.

But the central bank came under pressure last year when Germany's independent Federal Auditors' Office last year concluded it failed to properly oversee its gold reserves. The auditor suggested the central bank should carry out regular inspections of the gold held abroad to verify its book value or change the reserves' management.

Why bring the gold back now? Don't the Germans trust the central bankers? Even after Germany completes the transfer at the end of 2020, half of its gold will remain abroad — about 37 percent in New York. The Bundesbank does not plan to move any gold out of the Bank of England, which will continue to store 13 percent of the total.

The New York Fed stores the German gold without cost on the theory that the presence of foreign gold supports the dollar’s status as the global reserve currency. I'm not sure that is a public position but it is an interesting idea. The Bank of England, by contrast, charges about €550,000 a year for storage, so storage costs are part of the reason. But there is also an emotional attachment. The Bundesbank has continually rejected periodic attempts by political leaders to convert the reserves to cash, and has not sold any gold on world markets.

Tuesday, January 15, 2013 - It's Better Than Nothing

It's Better Than Nothing

by Sinclair Noe

DOW + 27 = 13,534
SPX + 1 = 1472
NAS – 6 = 3110
10 YR YLD - .03 = 1.83%
OIL - .71 = 93.43
GOLD + 12.10 = 1680.90
SILV + .29 = 31.47

Let's start with some economic reports. Consumer spending rose 0.5% in December and sales for October and November were revised slightly higher. It was a pretty good holiday shopping season, but the pace of spending in 2012 failed to equal the gain in the previous year. Retail spending rose an unadjusted 5.2%, down from 7.9% in 2011. And the pace of spending might slow as workers adjust to lower take-home pay as a result of a 2% hike in the payroll tax.

We already know that the expiration of the payroll tax cuts was an especially damaging outcome of the fiscal cliff negotiations. It will total approximately $125bn less in wage-earners’ pockets, and is showing up immediately in reduced paychecks. Average weekly earnings of all employees on private nonfarm payrolls: $818.69 in December. The 2% payroll tax increase clips $16.37 a week from take-home pay. And if weekly earnings held steady in January, at the December level, workers would feel like they earned $802.32 instead. That’s the equivalent of losing all the 2012 gain in weekly earnings in one month.” As a percentage of income it hits the middle class hardest because it applies only to the first roughly $113,000 in wages, effectively a regressive measure that takes money from the people most likely to spend it.

Meanwhile, producer prices, or prices at the wholesale level fell 0.2% on a seasonally adjusted basis. Core producer prices, which exclude the volatile categories of food and energy, rose 0.1% last month, led by cigarettes. So, if you smoke, quit. Food prices at the wholesale level fell 0.9% in December after a 1.3% gain in the prior month that was due, in part, to a severe drought. December’s decline in producer prices for food is the first decrease since May. Meanwhile, energy prices fell 0.3% in December, led lower by gasoline. For all of 2012, wholesale prices increased 1.3%, the smallest growth in a calendar year since 2008. Tomorrow, we'll find out how that equates to prices at the consumer or retail level.

The Census Bureau reports more working families are slipping into poverty; 200,000 more working families, or the working poor, fell into poverty in 2011 compared to 2010. Although many people are returning to work, they are often taking jobs with lower wages and less job security. This means that nearly a third of all working families may not have enough money to meet basic needs. Now, you'll recall that the recession officially ended in the second half of 2009. Maybe we need a better way to measure recessions because the reality that we weren't in a recession, we have been in a small “d” depression, and we haven't really pulled out of it. For many Americans, there hasn't been a real recovery. And for people who have experienced the recovery, it has been concentrated; the top 20 percent received 48 percent of all income while those in the bottom 20 percent got less than 5 percent.

States in the South, such as Georgia and South Carolina, and those in the West, such as Arizona and Nevada, had the greatest increase in the number of working poor. The increase was slower in the Mid-Atlantic and Northeast. In 2011, roughly 23.5 million, or 37 percent, of U.S. children lived in working poor families compared with about 21 million, or 33 percent, in 2007. About 10.4 million such families - or 47.5 million Americans - now live near poverty, defined as earning less than 200 percent of the official poverty rate, which is $22,811 for a family of four. Again, these are working families; people who have jobs but for many families, working hard just isn't enough. They are cashiers and clerks, nursing assistants and lab technicians, truck drivers and waiters. Either they are unable to find good, full-time jobs, or their incomes are inadequate and their prospects for advancement are poor. In many cases, low-wage workers are involuntarily working part-time – often in multiple, temporary jobs. If it remains unaddressed, the trend is likely to continue, pushing more families into economic uncertainty, fueling greater income inequality and dampening national economic growth.

Work is better than not working, a fact that has hit home hard for many veterans. The unemployment rate for veterans of the recent wars has remained stubbornly above that for nonveterans, though it has been falling steadily, dropping to just below 10 percent for all of 2012. That was down from 12.1 percent the year before. The year-end unemployment rate for nonveterans was 7.9 percent in 2012. Today, some good news from Wal-Mart. They will hire veterans, any veteran who wants a job, provided the veterans have left the military in the previous year and did not receive a dishonorable discharge. This represents the largest hiring commitment for veterans in history.

About 100,000 of Wal-Mart’s 1.4 million employees in the United States are veterans. It's pretty simple, Wal-Mart realizes that hiring veterans is a smart move. Veterans are leaders with discipline, training, a dedication to service, a sense of hierarchy, and a willingness to make a commitment to the organization they are in.

Now, it might surprise you to learn that Wal-Mart is taking some flack for this announcement. After all, most of these jobs will not be high paying and Wal-Mart is not known for a great benefits package; some of these veterans will end up among the working poor. Still, a job at Wal-Mart is better than no job; maybe they would like to extend the job offers to veterans who didn't leave the military within the past year. What about the longer-term unemployed vets? Wal-Mart is far from perfect but today I think Wal-Mart should be commended. That doesn't mean we should skip over the concerns, especially while there's a debate raging in Washington about spending. How about making sure the GI Bill is used to educate our veterans and prepare them for better jobs and a better way of life? Since when is the motto of America "it's better than nothing?"

The debt ceiling debate rages, despite the fact that it is an artificial construct. Republicans see the debt-ceiling vote as a way to extract some spending cuts out of Obama. Yesterday, Obama said he would not play that game. Assisting Obama was Fed Chairman Ben Bernanke, who compared refusal to raise the debt ceiling to a family refusing to pay its credit card bill. Bernanke warned: “Default would increase our borrowing costs and damage economic growth and therefore add to future budget deficits, not decrease them.” Republicans probably won't listen to Obama or Bernanke or Tim Geithner, for that matter; yes, Geithner issued his own debt ceiling warning. They might listen to corporate leaders who are growing weary of the political contention following the fiscal cliff fight. The Chamber of Commerce is warning Republicans not to push their luck with the debt ceiling.

Bernanke's analogy of a family not paying its credit card bill might not be the best comparison. Americans have been defaulting at record rates. During the last five years, U.S. individuals have walked away from a staggering $585 billion in mortgages, credit card debts and other personal loans. That works out at about $6,000 per household.

And if the numbers are to be believed, there is probably a lot more to come.

Turn on any news program devoted to the economy and you will doubtless hear some Wall Street blowhard telling you that American households have been “repairing their balance sheets” and paying down their debts. They make it sound so virtuous, and they often then segue into sneering remarks about those degenerate Greeks and other Europeans who don’t behave in the same responsible way.

The truth is very different. According to the Federal Reserve, U.S. household debts peaked five years ago at a gigantic $13.8 trillion. Since then it has declined to $12.9 trillion – a decline of about 7%. To put that in context, household debts today still exceed those seen at the end of 2006, near the peak of the bubble. They are three times what they were in 1998. The total debt reduction from the peak, says the Fed, is $954 billion. Loan write-offs, at $585 billion, account for 60% of that. In other words,  in the last five years Americans have walked away from $3 in debt for every $2 they’ve paid off.In the first quarter of 2010 alone about 13% of all credit card debt was just written off. Households weren’t alone. Corporations have defaulted on $35 billion to $40 billion in debt per year in recent years. It seems individuals have learned a valuable lesson from corporations.

The number of American homeowners who are underwater fell from 12 million to just 7 million; and by underwater, we don't mean Hurricane Sandy underwater, rather they owe more than their house is worth; and when we say just 7 million – well, yes, that is still an absurd number. And that number could fall to just 4 million in a couple of years. According to an analyst with Blackstone: "The housing market is rebounding faster than anyone thought possible," then again, Blackstone would say that: It is aggressively buying single-family houses to try and profit on a housing rebound.

Meanwhile, Facebook CEO Mark Zuckerberg announce something today; the company's first major product launch since it's IPO last Spring. It's a graph search; which basically would allow Facebook users to tailor their searches, such as by specifying music and restaurants that their friends like, or their favorite dentist. The reverse is also possible, such as discovering friends who have an interest in a particular topic. As always, there are privacy concerns. The world's largest online social network, with more than one billion users, Facebook is moving to regain Wall Street's confidence in the wake of a rocky IPO and concerns about its long-term money-making prospects. Central to its efforts is devising new ways to make money from users who are migrating to mobile devices. Unfortunately, they haven't figured out how the graph search will raise revenue.