Wednesday, December 22, 2010

Economy & Market Week Ended 12/11/2010

As we wrote in "Political Economics vs Political Compromise", which was our analysis of the new tax cut law which passed on the 17th of December, it was very disappointing to have the President of the United States publicly demonstrate that he does not know the history of the beginning of Social Security.  Social Security is easy to class warfare criticize if you do not need it, but the real problem is the insurance and medical provider fraud in Medicare and the increasing costs that fraud causes.  We have a President who promised change and has delivered a style of compromise which has failed to deliver opening the door to economic stagnation, a further institutionalization of inequality, and left a vacuum being filled by the political instability of discontent.

Consumer credit rebounded off its 2009 lows, but a closer inspection shows an increase of student loan debt has increased 80% vs year ago expanding $120 billion as the result of the Department of Education stepping in and buying privately originated student loans meant to be securitized but which could not be marketed starting in 2008 when the credit market dried up.  Since then, this program has been expanded and may be totally distorting consumer credit in 2010.

The Cleveland Federal Reserve, in a report, visually shows the meaning of a "Jobless Recovery" after an 18 month Recession, which average 10 months historically, in which payroll employment is still 5.4 points below the pre-Recession peak after 35 months (usually takes 23 months) and only adding a average of 86,000 jobs per month since the beginning of 2010.  In fact, the recession and continued high unemployment have had a tremendous negative impact on American families and households in which 39% of American households have been either unemployed, had negative equity in their home, or been arrears in house payments.  Of long term concern is the 10% drop in employment among young workers, particularly recent college graduates facing years of lost income and lower future earnings.

Bill Mitchell took an in-depth look at Australian employment/unemployment figures for the month of  November in which there was noticeable improvement but with significant remaining slack.  One area of Bill Mitchell's economic concentration is employment and his observations of Australian employment and governmental policies with its aging population, of increasing underemployment among 15-24 year olds, of growing part-time employment, and of higher overall underemployment than the severe 1984 recession are relevant to the United States and many other developed countries with an aging population..

The sell off of 10 year U.S. Treasuries with yield rising to 3.3% by the 8th of December has been accompanied by increasing yields of other nation's bonds globally including the German bund.  There may be market fear that future  bond losses will neutralize QE2 and lead to stagflation.  As of the 11th, three German bond auctions have failed.  Many saw the German bond, which has been treated as a safe haven, auction failure as reason to question the U.S. Treasury auction when the bonds are not comparable.  Germany does not have its own currency and is fiscally constrained and the United States fiat currency is a global reserve currency, making United States debt desirable.

As we have repeatedly reported, the comparison of U.S. states to the eurozone sovereign member nations is not legitimate.  However, it continues to be used by deficit hawks.  The portrayal of the Build America Bonds as a failed jobs program miring the states in debt is wrong; it was (it is being allowed to expire) a program which opened municipal bond market participation and targeted a decaying infrastructure.  It was investment and economic recovery is always dependent on investment.  Investment in the short term leads to deficit and debt reduction long term not the other way around.  Investment leads to an increase in aggregate demand through infrastructure, research, and defense government investment spending.  Those hoping and pushing for large deficit reductions will be disappointed by the resulting decline in tax revenues and increasing unemployment with demands for increased jobless benefits and increased taxes.  A more efficient and fair tax system would efficiently reduce a deficit, but it would not benefit the corporate and monied interests, who benefit from the current corporate welfare programs, financing the deficit hawk politicians.

The Deficit Commission proposals, which will not receive enough Commission votes to be recommended, are ill conceived and antithetical to the free market principles of Adam Smith.  The proposals would continue to promote financial bubbles and competitive inequality.  The present Tax Cut proposed law (since passed) runs the risk of not serving public needs but rather supporting the ability of private oligopolies to dominate state policy making against the interests of the people.  Investment, targeted efficient expenditures, and a return to full employment are the quickest ways to economic recovery and deficit and debt reduction.

An IMF working paper entitled "Inequality, Leverage, and Crises" has been creating quite a stir in economic circles with its analysis of a comparative growth of income and wealth inequality in the years preceding both the Great Depression and this most recent financial crisis directly contributed to causing both economic crises. Consumption inequality increased the need for financial services.  With the growth of the financial sector with wealthy saving, leverage increased without prospect of recovery of household incomes and the bargaining power of lower and middle class were limited decreasing demand and increasing household default.  Economists are amazed that a paper on income and wealth inequality showing the importance of household  bargaining power as necessary for increased demand and growth is coming from the IMF.  I was more impressed with the study of leverage and income inequality, because they seem to have a direct relationship with financial bubbles and crises which in effect concentrate more power in the financial elite and diminish the power and numbers of the middle class.  Without a strong middle class a republican democracy is not sustainable.

Along the same lines a new NBER paper, "Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons", shows credit growth (leverage) -- not current account balances -- generates the best predictive signals of impending financial instability.

A broad review of prices shows significant disinflationary trends and why the Fed is worried about deflation.  Over a sixth of consumer spending is on goods and services for which the prices are falling and three-fourths on goods and services for which prices have slowed.  A relatively high level of these disinflationary trends is located in goods and services which make up core inflation.  Deflationary and disinflationary pressures are relatively large in historical terms.

The U.S. Treasury Department solicited an legal opinion it had no legal need to request to lend credence to the position of the Treasury Department that it did not want to (and will not) use TARP funds to help borrowers facing foreclosure despite having the "extraordinary" power within TARP to do whatever is necessary to protect housing values, home ownership, and economic growth.  Evidently, it is more important to protect banks than home owners during depressed prices.  The banks foreclosure mess and frauds have revealed just how financially vulnerable the banks really are and they are using that weakness to blackmail and co-opt the government into looking the other way.  To further silence critics and advocates of due process, lawsuits are being filed against foreclosure defense attorneys to exhaust their time and money.  Reports of threats on attorneys and their families are also circulating.

An MBIA lawsuit against Morgan Stanley and its mortgage servicer over a group of second liens which were rate AAA it insured and for which MBIA has already paid $70 million in claims.  What is interesting about this lawsuit is a further claim that Morgan Stanley's servicers has failed to charge off these second liens after 180 days as required by the servicing agreement.  Banks do not want to charge off loan assets and reduce their capital ratio as is witnessed by other reports that banks are holding foreclosed homes on their books at full price rather than sell them for less and not taking any action of any kind against high income home owners (with large mortgages) who have not paid their mortgage payments (some are over $20,000 per month) for over  a year.

We have reported on numerous occasions how banks "doctor" their income and balance sheets to the point that no reasonable investor can depend on their financial representations.  The Bank of New York serves as a good example in how it uses "income from continuing operations" as its preferred public figure, because it has change the definition and construct of "income from continuing operations" for at least each of the last three years to make its operations look better.

While economic news has been playing up the increase in household net worth, if you look at debt and the deleveraging process, which has been on-going on the household level, you will see that households need to shed another $2.5 trillion in debt to return to 2002 levels.

Proper investing is about having a macroeconomic view and applying it to disciplined, rule based, fact driven investing.  Given the current national balance sheet recession and high unemployment and global economies, buy and hold investing is more difficult than short term investing where you limit your losses and lock your gains in.

The NFIB small business survey for December gained 1.5 points in November (up 2.7 in October) to 93.2 but is still in recession territory with no evidence of a surge.  Sales fell 2 points to <15>.  Reports of positive earnings fell 4 points to <30>.  It is still all about sales and sales are dependent on demand which is driven by economic growth and employment.

If China were to appreciate its currency, it would long term, after managing internal rebalancing, be the beneficiary and most other countries would be losers, including the United States.  The Australian economist, Bill Mitchell, took on the doctrinaire critics of China --- as in China is the problem --- and the focus on current account deficits which avoids the internal problems of an export driven economy, which has nothing to do with rather a nation is free or not but is directly related to the application, or the lack of application, of resources to internal imbalances.  Economic growth is not always a piece of cake.

Bill Black delineated how U.S. systemically dangerous institutions have not been regulated and in fact have blocked being fixed; how the systemically dangerous institutions of Ireland and Iceland became so large they dominated the regulators, the economy, and their governments; how the German systemically dangerous institutions have been allowed to be self-destructive, inefficient, and to fund destructive loans to Eastern Europe and EU periphery countries as if they were a drug cartel.  His conclusion is systemically dangerous institutions are too big to regulate.  This is why they need, in my opinion, to be broken up --- no matter how large or small they appear --- until the resulting units are responsive to proper risk management and regulation designed to identify systemic danger.

Bill Black has also recently written about how the deregulatory process (desupervision) of the Bank of England and its junking of the Financial Services Agency is sowing the seeds of the next UK financial crisis.  The BBC economics editor, Stephanie Flanders, has written the UK recent GDP numbers may be implying the economy is stronger than it really is, because construction has accounted for 40% of the GDP growth while only comprising 6% of the economy.  Construction output figures indicate it is growing at an annualized rate of 27% since April but the employment figures for construction have not risen.  This would appear to be inconsistent and indicate something is wrong with the data.  The UK has recently had some very notable revisions of economic data.  Is more forthcoming?  Meanwhile Parliament approved substantial educational fee hikes which have been the subject of demonstrations and riots.  These anti-austerity UK demonstrations are just a small part of the demonstrations going on across Europe

During this week ending the 11th of December, Germany continued to reject an expanded bailout mechanism.  Germany and France both declared they would not support the concept of a European bond, despite EU proposal by Tremonti and Juncker.  Wolfgang Munchau has commented in an analysis that the longer an E-bond is put off the bigger the crisis will become.  With the debt scheduled to be paid  by banks in 2011, European banks will be subject to challenges in filling big gaps beyond just winning the confidence of  bond and equity investors and beyond the borders of Spain and Italy, in both of which the banks are not as strongly capitalized as they should be. Italy has found European collateral guarantees in interbank lending to be so successful they began there own before the European version expired.

The bottom line of austerity, in a country which does not have its own currency,  is if you are left with only internal devaluation of wages and prices to spur the economy then you are setting up the necessity to reduce debt which can only be done by restructuring debt.

As the balance sheets of Ireland's banks became more apparent, they were facing further downgrades by the rating agencies and Ireland again iterated they could be for sell to sovereign wealth funds as the value of the euro deteriorated.   The reality was that the Irish banks were being sustained by loans from the Irish central Bank which were also coming from the European Central Bank to the point where the central banks exposure were at trigger points and even the most ardent proponents of European Union economic austerity were questioning  whether a bailout, which had become necessary, was being constructed in the best interests of Ireland.  Yet, with the imminent bailout, AIB (Allied Irish Bank), which is one of the two more solvent banks in Ireland, attempted to hurriedly make 40 million euro in bonuses at a bank whose value was 540 million euro.  Banks worldwide just do not get it.

The current eurozone troubles and Germany's failure to commit to common goals has had some observers, such as Marshall Auerback, theorizing what would happen if Germany left the eurozone.  It would create a strong Deutschmark which, however, would not be a reserve currency.  It would save the German banks but at the cost of its private household sector.  It would cause a trade shock within the eurozone as well as the world and lead to a drop of German exports, a dramatic slowing of economic growth, and a German budget deficit.

Bill Mitchell lambastes the European Central Bank boss, Trichet, for Trichet's ardent defense of austerity fiscal policies and his attempt to blame the current European economic problems on poor fiscal policy discipline of member nations, when the current crisis has been caused by an aggregate demand shock which exposed the flaws inherent in the lack of a fiscal mechanism within the European Monetary Union.  Mitchell questions why a blind eye has been turned to the criminal and/or incompetent behavior of individuals within the financial sector, why more austerity is demanded when it will depress growth, and why there is continued reliance on exports for growth which cannot be sustained or adequately developed.  In doing so, Mitchell asks who is going to pay for the economic hardship and lost opportunity of those who did not cause this crisis while those who did cause it get away scot-free.  These denials of the causes of the current financial crisis will only lead directly to the next financial crisis.

Pragmatic Capitalist points out that the European problems are indicative of the early stages of crisis, and not the later stages of crisis, as the result of denying there is a problem, denying there is a big problem, and denying the problem has anything to do with us, which characterize the three stages of delusion.  The ESFS emergency mechanism is flawed and invites speculative attack.  Simply raising more funds for an expanded ESFS will not be enough.  Pragmatic Capitalist draws comparisons to the current European crisis and the 1997 Russian currency crisis which expanded into the Asian Financial Crisis.  To solve the problems, Pragmatic Capitalist sees four options 1)Marshall Plan II, 2) Versailles Treaty II, 3) quantitative easing, or 4) the Icelandic option.  Of the four, Pragmatic Capitalist sees the first option as the best, because it would provide investment consistent with the development needs of each country, such as improved shipping ports in Greece to enable it to become a transportation hub between Europe and Africa and the Middle East, and such investment in the peripheral countries would also provide long-term benefits to countries like Germany.
I have long been a proponent of targeted investment as a means of promoting economic growth and correcting imbalances long-term within the eurozone.

Bill Mitchell discussed the importance of information in making informed decisions as investors and citizens.  As such, censorship of information, whether in China or the United States, is detrimental to informed participation in government, a denial of access to information, and a denial of freedom in which government is limited by necessity to be agents of the people and not our masters.  His discussion used the framing of information and public opinion in Europe as an example of how the European Monetary Union has been sold and is being defended by an elite who are not serving the best interests of citizens of the respective member nations.  His discussion then moves on to how the corrupt private financial sector in the United States is being protected and rewarded rather than being forced to confront the consequences of financial and foreclosure fraud as well as continued business conduct which poses a systemically dangerous financial risk to the world, while the current policy debate moves in the exact opposite direction away from the people.

John Hussman, in his weekly commentary on December 6th, said bonds do not warrant an extension of investment duration, the intermediate risks of gold are elevated, and the market conditions of stocks is continuing to deteriorate.  He continues to remain defensive, because stocks are overvalued, overbought, and overbullish combined with rising yield bond pressures.  He indicates one market investing rule is to not fight the market and he has revisited his different proprietary "climate" conditions to be more responsive and accept moderate, transitory exposures to market fluctuations.  If one looks at the projected 17 year annual return of the S&P 500 based on an average of three models he uses (forward operating earnings adjusted for cyclical margins, normalized earnings, and yields), the implied risk premium is only slightly over 1%.  Prior to the 1990's bubble it was closer to 5%.  Consequently, equity investors are accepting a duration which is three times that of a 30 year Treasury.

In a criticism of the Bernanke at the Fed, Geithner at the U.S. Treasury, and Trichet at the ECB, Hussman said, "We are allowing 99% of the world to accept budget cuts and austerity in order to defend bondholders from taking losses or having to accept debt restructuring. When bondholders lend money to a financial company or to a country, at a spread over the yield available safe debt, they are explicitly accepting the risk that the bet will not work out, and that they may lose money in the event of a restructuring. When government policy at every level focuses on making bondholders whole, then government policy at every level focuses equivalently on protecting the inefficient and dangerous misallocation of capital."

In discussing Social Security, Hussman said, as I have written, "My personal view is that the Social Security tax rate should be significantly lowered, but should apply to all income, wage and non-wage, while at the same time the income tax should be flattened. People at higher incomes would have a slightly higher total tax burden in the end, but lower marginal rates that would encourage work and discourage inefficient sheltering of income."

Hussman points out there are natural and useful counter cyclical argument to deficits that serves as automatic stabilizers.  Consequently, "Rather than targeting a balanced budget in the midst of a deep economic downturn (still more than 6% below potential GDP), we should be focused on policies that could reasonably be expected to achieve a deficit of between 0-1.5% of GDP at the point where GDP is again operating at potential. While I certainly think there is room to integrate unemployment compensation, earned income tax credits and Social Security in a way that strengthens the incentive for part-time work (I have friends with special needs who would lose all benefits if they worked even a few hours a week), I also believe that extending unemployment compensation is the smallest of our budget problems, and is a necessary response in an economy whose problems have been largely brought on by people at the highest income levels (particularly in the banking sector and Wall Street)."  Hussman concludes by saying, "The public is being abused for the sake of protecting bondholders that lent at a spread. This protection should end, or the resulting "austerity" will either weaken our defense or remove our automatic stabilizers."

On a personal investment level, I have been communicating current finance and economic research on the need to consider having the higher wage earning spouse waiting until full Social Security age to file for benefits and delay until age 70.  This option, among other Social Security filing options, needs to be seriously considered as the economic benefits can be substantial, particularly for the surviving spouse.  Evidently, more and more people have decided change their filing decision and delay until 70 and pay back benefits already received without interest.  This has caused the Social Security Administration to change the rules and only allow the payback of benefits when electing to change to delayed benefits.  Under the new rules, the claim for change of the beginning of benefits and delay can only be done within the first twelve months of their first Social Security check.  The withdrawal is limited to one per lifetime.  The election to suspend benefits is now only limited to future months with no payback of past benefits.  This makes it all the more important that the different Social security options be evaluated prior to the age of 62.

Market: 2 banks failed = 151 for year; the unofficial problem bank list is 919.

                 DOW/Volume                                   NASDAQ/Volume
Mon:         <19.90>/down 11.4%                        3.46/down 7.7%
Tue:            <3.03>/up 72.5%                             3.57/up 14.8%
Wed:          13.32/down 20.3%                          10.67/down 7.2%
Thu:            <2.42>/down 8.7%                           7.51/up 7.6%
Fri:              40.26/down 3.5%                            20.87/down 8.7%

Total           28.23                                                46.08

Mon: Oil up 19 cents to $89.38; Dollar stronger but weaker against the yen; Germany rejects larger European rescue fund; banks and discount retailers are down.

Tue: Oil down 69 cents to 88.69; Dollar stronger but weaker against the pound; much larger Dow volume is the result of institutional selling; Dow was up 1.1% during the day but sold off in the last 75 minutes in high volume.

Wed: Oil down 41 cents to 88.28; Dollar weaker but stronger against the yen; Treasury yields up on tax cut deficit fears; market see-sawed up/down; oil supplies were down 3.8 million barrels, gas supplies were up 3.8 million barrels, and distillate supplies were up 2.2 million barrels on the same day the price of gasoline locally jumped up 20 cents per gallon.

Thu: Oil up 9 cents to 88.37; Dollar stronger but weaker against the yen; 10 year Treasury yields fell 6 bps to 3.21%; auto parts, food companies, and financials led in mixed action; weekly jobless claims were down 17,000 to 421,000, 4 week moving average was down 4000 to 427,500, and continuing claims were down 191,000 to 4,086,000.

Fri: Oil down 58 cents to 87.79; Dollar stronger but weaker against the pound; volume fell across the board; 10 year Treasuries were up 31 bps to 3.33%.

United States: The U.S. Senate is considering stronger oversight of the Pension Benefit Guaranty Corporation as its deficit reaches $23 billion.  A recent Inspector General report raised questions about the ability of the PBGC to ability to cope with a new financial crisis.  The Employee Benefits Security Administration released a proposed rule to require all defined benefit pension plans to report annual funding to the EBSA.

Bank of America has told regulators it has raised enough capital this year to qualify for permission to make its last TARP payback.

New $100 bills with high tech security features are a printer's nightmare with 30% or more of the bills unusable as the paper folds during the printing process.  The printing has been halted as government is faced with going through $100 billion already printed by hand.  It would have been the first bill with Geithner's signature.

HSBC is being sued by the Madoff trustee for $9 billion alleging the bank had warning signs as early as 2001 and still remained a prime provider of feeder funds to Madoff.

Gasoline retail price is highest in 2 years (since mid October 2008).

The federal insider trading investigation has been ramped up.

Home Depot issued FY 2010 guidance revising net income projections to $1.97/share up from $1.94 and now expects revenue to be up 2.3% from prior estimate of 2.2%.

The Federal government is pressuring Fannie Mae and Freddie Mac to join the government program to reduce mortgage balances where borrowers owe more than the value of their home.  They have been reluctant to do so, particularly if borrowers are still making payments.  If they participate the written down mortgages could be handed off to the FHA just as private banks, who participate, can.

Bank of America agreed to pay $137 million in restitution for municipal bond bid rigging.

U.S. Treasury sold 2.4 billion shares of Citi at $4.35 each with the last share sold on Tuesday.

Citi hired former Obama Administration Budget Director, Peter Orzig, to be vice-chairman of its investment bank division.

Morgan Stanley has been sued by MBIA over claims made by the bank regarding MBS it sold; "made false representations regarding the underwriting standards".  MBIA may be considered indemnified by the Pooling and Servicing Agreement and Morgan Stanley may not have set aside reserves for this purpose.  The pool is composed of approximately 5000 securities rated AAA, which are subordinated-lien residential mortgages upon which MBIA has already paid $71million in unreimbursed claims.

The U.S. trade deficit went down to $38.7 billion in October from $44.6 billion in September (expected 43.6 billion); exports were up $4.9 billion and imports were down $900 million.

U.S. household net worth was up 2.2% Q3 as borrowing and credit card use fell.

Foreign central banks holdings of U.S. securities were down $5.68 billion for the week ending December 8th; Treasury holdings were down $2.87 billion; mortgage securities holdings were down $2.81 billion.

U.S. Treasury may be planning to sell approximately $15 billion of AIG shares in 2011 which would cut its stake 20% from 92.4%.

GE is raising its dividend 2 cents to 14 cents (17% up) for the second time this year (2 cents in July).

TJX (TJMaxx, Marshalls) will cut 4400 jobs as it shutters 71 A.J. Wright stores and converts 91 stores to either those two formats or the Homewoods format.

Bank of America refiled 16,000 foreclosures this week in both judicial approval and non-judicial states.

Mortgage rates hit a six month high of 4.61%.


According to the Fed, household real estate values declined $684 billion in Q3
U.S. wholesale inventory in October was up 1.9% --- expected up 0.8% ---(September revised to up 2.1%) and October wholesale sales were up 2.2%.

ECRI Weekly Leading Index rose to <1.5> from <2.4>.

Tobin's Q Ratio has moved into nosebleed territory with the market overvalued by 59% using the arithmetic adjusted method and 72% using the geometric adjusted method.

U.S. Treasury auctions:

3 year Treasury, $32 billion, yield .862%, bid to cover 2.91, foreign 36.7%, direct 18.0%.

10 year Treasury, $21 billion, yield 3.340%, bid to cover 2.92, foreign 44.4%, direct 11.4

30 year Treasury, $13 billion, yield 4.410%, bid to cover 2.75, foreign 49.5%, direct 8.13%.


International: Bank of Canada kept its interest rate at 1% citing weak exports and global risks such as the European Monetary Union.  Bank of Canada said the European crisis could have adverse effect on other countries including Canada and the risks to Canada's financial system are up in the last six months.

S&P raised the debt rating of Latvia one step to BB+ with a stable outlook.

Moody's cut Hungary's debt rating one notch to just above junk and warned of more cuts if Hungary's budget deficit is not reduced.  Hungary rejected austerity and intends to impose taxes on bank and other businesses as well as tap pensions.

German exports in October were down 1.1% with imports up 0.3% to a record high of 72.6 euro.

German production was up 2.9% in October (down 1% in September) -- expected up 1%; output was up 11.7% adjusted for days worked; factory orders were up 1.6% in October.

Russia and the European Union are near a bilateral trade agreement which may pave the way for Russia to join the WTO.

The Australian Central Bank held interest rates at 4.5%.

Australian employment was up 54,600 in November exceeding the estimate; unemployment was down to 5.2% (5.4% in October); the participation rate was 66.1% which is a record; employment is over 11,000,000 for the first time.   For a more in-depth analysis make sure you review the Bill Mitchell comments on Australian unemployment linked to above in this weekly commentary.

New EU bank stress tests on 91 banks have been ordered for July.

Japanese GDP Q3 was revised to up 1.1%.  Weak economic data indicates Q4 will contract to an estimated <0.1%>.  Annualized growth is at 4.5%; capital spending Q3 is up 1.3%; personal consumption is up 1.2%.

Bank of England kept interest rates at 0.5% and made no change in monetary policy, because it wants to wait and see the effect of the government's austerity program on economic growth next year.

Fitch downgraded Ireland's debt rating three notches to BBB+.


Ireland is planning a 90% tax on banker bonuses.

China raised banks required reserves for the third time in a month by 50 bps to 19% for its largest banks.

China's auto sales were up 27% in  November.

Bank of Korea kept its interest rate at 2.5%.

Britain's trade deficit increased 1.6% in October, which was unexpected; imports hit a record high.

UK producer prices were up 3.9% in November vs year ago, which was less than expected.

Canada's trade deficit was down 39% ($ 0.6 billion to $1.7 billion) in October (more than expected) as exports of copper and precious metals rose.

French industrial production was down 0.8% in October, which was more than expected; Italy's was down 0.1% (down 2.1% in September); Germany's was up 2.9%.

Spain began a 5 year $111 billion program to make its industries more competitive.





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Saturday, December 18, 2010

Political Economics vs. Political Compromise

The politically controversial tax cut compromise between the Republican Congressmen and the Obama Administration was passed by both the Senate and House of Representatives and immediately signed by President Obama this week.  The components of this bill and the rush to compromise have deeply divided the Democrat Party and made Deficit Hawks public hypocrites.  Despite the heavy political pressure brought on Democratic Senators and Representatives to vote for this compromise, there were big names voting no, particularly in the House

President Obama's willingness to compromise was seen by sincere and ardent supporters as a recognition of political reality and the need to continue extended unemployment benefits, by moderates as a President who is getting bad economic and political advice, by conservatives as a mockery of deficit reduction, by liberals as a cave in to the special privileges of the wealthy and a hidden threat to the future of Social Security, and by economists as a bill whose cost exceeds TARP with primarily one-to-two year very limited and ineffective stimulus and continuation of 2010 policies which is not targeted, timely, or temporary.  President Obama has consistently received bad economic advice throughout his Administration as I and many others have documented.  President Obama has shown a willingness to compromise which has yielded political victories but not yielded effective policies, such as the substantially flawed universal health care bill and the significantly too small and too slow economic stimulus bill, which has left us with a lingering too slow growth and too high unemployment with no visible horizon.  While President Obama has shown a lack of knowledge with respect to economcs and history, as most recently demonstrated by his misrepresentation of the beginning of Social Security, he is facing a political opposition which seems more intent on political positioning than a consistent policy with respect to deficits and eager to ignore or rewrite history, particularly assigning  the Bush economic advisers admissions that the Bush tax cuts were not economically effective to oblivion.  President Obama has been consistent in his legislative support of business and financial sector interests at the expense of families needing food stamps ($2.2 billion in future SNAP cuts) and failure to provide job programs now (ensuring high unemployment for up to the next election if not longer) or otherwise stimulate aggregate demand.  His intent, despite promises and public opinion,  to continue the Bush tax cuts for those making more than $200,000 - $250,000 were publicly known and the political opposition holding the expiration of extended unemployment benefits hostage was a convenient excuse for which he was happy to not enunciate the hypocrisy of the deficit hawks pushing a proven deficit growth vehicle pandering to the the top 2% most wealthy  of the population which the political opposition want to make permanent.

Barney Frank voted against the bill saying there were no offsets to the continued tax cuts.  The expectation is that Social Security funding will be cut in the future to pay for the Bush tax cuts to the wealthy.  In fact, the payroll cuts reducing social security taxes for both employee and employer by 2% was the Administration's idea and it will be less economically stimulative than the Making Work Pay program it is replacing as well as not increase output or demand..  While that is not a direct threat to Social Security, it is an opening for a reduction in the social security program, which social security advocates and many economists seriously consider a possibility.  With a one year expiration, the payroll tax is presenting the political opposition with another hostage situation and an opportunity to reduce social security a year from now.  The payroll tax, itself, does not threaten social security solvency; it is regressive by not taxing higher incomes as much; it is designed to dampen consumption by wage earners to leave some for retirees; it technically does not fund social security but this is not widely understood.  I have never understood why all earned income is not payroll taxed at the same percentages.  There are those who do understand how the payroll tax really works who would do away with it entirely and substitute it with a tax on all income, earned and unearned. If this were a flat tax without privileged exemptions or deductions (i.e., not income variable or available - for all practical purposes - to a few), it should yield more tax revenue than a progressive tax and significantly reduce the tax code to a few pages and the cost and size of the Internal Revenue Service.

While the political threat to Social Security is real, the House Democrats were more concerned about the estate tax exemption going to $5,000,000 per spouse and the tax rate going down to 35%.  They wanted to revert back to the 2009 level of $3,500,000 and 45%.  The higher exemption and lower tax are seen as providing for the privileged wealthy while the ordinary folk will just have to make do in this economy.  It sets up an election year issue with its two year expiration just as the Bush tax cut extensions do.  It also creates a tax choice for estates in 2010, because there will now be a choice between the 2010 no tax but a same basis as the decedent or the new but effective for 2010exemption and tax with a stepped up basis; in many cases the wealthy beneficiaries will choose to pay the tax.  If nothing had been done, the estate tax for 2011 would have reverted back to the pre-Bush tax cut amount of $1,000,000 exemption and tax of 41%-55% and a 5% surtax on $10,000,000 up to $17,184,000.  The $5,000,000 exemption and 35% tax were exceptionally large benefit increases for the wealthy and a lost opportunity for tax reform.  Much is made of family farms and the estate tax, but farm estates pay the estate tax over a fourteen year period and this has not been changed.  The problem with farm estates is that the estate plan has not been properly constructed to be viable for that family and/or the vehicle of the estate plan, such as a family limited partnership, has been defectively operated.  Small business estates usually suffer from no viable business succession plan or no funded business succession plan. 

The much ballyhooed 13 month continuation extended of the unemployment benefits does not extend benefits beyond 99 weeks, which means those unemployed longer than 99 weeks are social refuse.  Despite continued fallacious arguments that unemployment benefits discourage job seeking, unemployment benefits have been shown to improve employment and to be economically stimulative, but the stimulus here is old stimulus and not new stimulus, which means no new, only continued except for no checks going to those over 99 weeks, economic growth resulting.

Most public discussion has been based on a broad tableau.. In more detail, the gift tax is unified with the estate tax, which means there is a lifetime gift tax exemption of $5,000,000 on top of the annual $13,000 exclusion.  If the $5,000,000 estate exemption is not used, the remainder, under this new law, will be available to the surviving spouse to shelter either lifetime gifts or estate tax.  Numerous tax credits are continued which had expired, such as charitable contributions from IRAs and business donations to food banks, but it also reinstates the expensing credits for corporations and multi national corporations, which are clearly not stimulative and will probably encourage higher executive salaries and bonuses.  Here is a partial list provided in an email from National Underwriters:
"Reductions in Individual Income Tax Rates
Extends the 10% bracket. Under current law, the 10% individual income tax bracket expires at the end of 2010. The legislation extends the 10% individual income tax bracket for an additional two years, through 2012.
Extends the 25%, 28%, 33%, and 35% brackets. Under current law, the 25%, 28%, 33%, and 35% individual income tax brackets expire at the end of 2010. Upon expiration, the rates become 28%, 31%, 36%, and 39.6% respectively. The legislation extends the 25%, 28%, 33%, and 35% individual income tax brackets for an additional two years, through 2012.
Individual Tax Relief
Above-the-line deduction for certain expenses of elementary and secondary school teachers. The legislation extends through 2011 the $250 above-the-line tax deduction for teachers and other school professionals for expenses paid or incurred for books, supplies (other than non-athletic supplies for courses of instruction in health or physical education), computer equipment (including related software and service), other equipment, and supplementary materials used by the educator in the classroom.

Deduction of state and local general sales taxes. The bill extends through 2011 the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction permitted for state and local income taxes. Repeals the personal exemption phaseout for an additional two years, through 2012.
Repeals the itemized deduction limitation though 2012.
Capital Gains
Extends capital gains rates. Under the Act, through Dec. 31, 2012, long-term capital gains (with the exception of 28% rate gains and unrecaptured IRC Section 1250 gains) will continue to be taxed at a maximum rate of 15%; instead of 20% (18% for assets held more than five years).
Child Tax Credit
Extends the child tax credit. The legislation extends the current child tax credit for an additional two years, through 2012.
Marriage Penalty Relief
Extends marriage penalty relief. The legislation extends the marriage penalty relief for the standard deduction, the 15 percent bracket, and the earned income tax credit for an additional two years, through 2012.
Incentives for Families and Children
Extends the expanded dependent care credit, the increased adoption tax credit, the adoption assistance programs exclusion, and the credit for employer expenses for child care assistance.
Education Incentives
Extends the expanded Coverdell Accounts, the expanded exclusion for employer-provided educational assistance, the expanded student loan interest deduction, the exclusion from income of amounts received under certain scholarship programs, and the American Opportunity Tax Credit.
Alternative Minimum Tax (AMT)
Two-year AMT patch. Currently, a taxpayer receives an exemption of $33,750 (individuals) and $45,000 (married filing jointly) under the AMT. Current law also does not allow nonrefundable personal credits against the AMT. The legislation increases the exemption amounts for 2010 to $47,450 (individuals) and $72,450 (married filing jointly) and for 2011 to $48,450 (individuals) and $74,450 (married filing jointly). It also allows nonrefundable personal credits against the AMT. It is effective for taxable years beginning after December 31, 2009.
Estate and Gift Taxes
Estate, gift and generation skipping transfer tax relief. Prior legislation (EGTRRA) phased out the estate and generation-skipping transfer (GST) taxes so that they were repealed in 2010, lowered the gift tax rate to 35%, and increased the gift tax exemption to $1 million for 2010. Under EGTRRA, the estate tax was set to return in 2011, with the top estate and gift tax rate at 55%.

For 2010, the Act allows decedents dying in 2010 to choose between (1) the estate tax (based on a $5 million exemption and 35% top rate), or (2) no estate tax, but a carryover basis for income tax purposes, with $1.3 million and $3 million basis adjustments. Also for 2010, the gift tax exclusion remains $1 million with a 35% rate. For gifts made after Dec. 31, 2010, the Act reunifies the gift tax with the estate tax. The Act lowers estate and GST taxes for 2011 and 2012 by increasing the exemption amount to $5 million (indexed after 2011); and reducing the top rate from 55% to 35%. Further, a portability provision is added for 2011 and 2012 that permits a surviving spouse to apply any unused portion of a deceased spouse's $5 million exemption to the survivor's estate.
Payroll Taxes
Reduction in employee-paid payroll taxes. Under current law, employees pay a 6.2 percent Social Security tax on all wages earned up to $106,800 (in 2011) and self-employed individuals pay a 12.4 percent Social Security self-employment taxes of on all their self-employment income up to the same threshold. The bill provides a payroll/self-employment tax holiday during 2011 of two percentage points. This means employees will pay only 4.2 percent on wages and self-employed individuals will pay only 10.4 percent on self-employment income up to the threshold. Employer portion remains unchanged."
Needless to say, the political claims of which political party got what are diverse, but here is an independent analysis which shows President Obama got much less than he is claiming.  This tax cut compromise will not succeed in growing the economy and it is not designed to do so. There are four ways an economy can grow: personal consumption, investment, exports, and government spending.  With high unemployment there is little personal consumption growth and a little growth in demand which means investment is not forthcoming, because investment requires demand.  With troubles in Europe and inflationary and real estate bubble problems in China, which the Chinese government is trying to control with fiscal tightening, the possibility of exports is not promising.  This leaves government spending to stimulate economic growth in projects which provide jobs and in which the benefits far exceed the costs "... by taking advantage of the availability of low-cost labor and raw materials, rock bottom interest rates that make the cost of borrowing very low, and lots of infrastructure needs offering big benefits in transportation, environmental abatement, water and sewage systems, electrical grids, digital technology, and other areas."  A Federal pay freeze and continued political gridlock are not going to help and will continue to strangle growth in the economy. 

President Obama's political opposition are praising these tax cut policies, because they fully expect them to fail in such a way as to damage President Obama's chances for re-election.  This tax cut will create a slower growth rate pattern in the second year which almost always benefits the political opposition to an incumbent.  Unemployment should still remain high going into the 2012 election; this will also favor the opposition and is reason for them to hold unemployment as hostage as the extended benefits expire in 13 months and to use the two year expiration dates of the tax cuts and estate taxes to drive a wedge between the President and the real needs and interests of the American citizenry for jobs and access to economic opportunity.  That President Obama's economic and political advisers are either ignorant of or ignoring the extant literature documenting the effects of economic recovery on incumbent elections is inexcusable.

Even Moody's has recognized that the negative aspects outweigh the positive aspects of revenue in this new tax law and have warned they may lower the credit rating of the United States from Aaa as a result.

The Democrat and Republican parties have not served the best interests of the American people as a whole with this tax cut law choosing instead to jockey for political position rather than jump starting employment and sustained economic growth which benefits more than the top 2% wealthiest people.

Will "Yes, We Can" become a cry of political dissent and accusation from the economically disenfranchised and politically disenchanted rather than an affirmation of change?

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Monday, December 13, 2010

Economy & Market Week Ended 12/4/2010

Our article on the Irish bailout by the EU and the IMF and how it came about entitled "Ireland's Indentured Servitude" was republished by Credit Writedowns and then picked up by the Business Insider.  Here is the original  article with the fully embedded sources.  I am in the process of writing another piece on "Surviving the Euro" which deals directly with the structural problems of the eurozone, what needs to be done, and why it is not being done.  These two articles have eliminated a large amount of economic information from this commentary, but there is more to Europe and why we should be watching it as well as China.

We are seeing a replay of last Spring with sovereign debt problems in Europe and efforts by China to raise interest rates and tighten credit.  Both the European and Chinese stock markets have declined similarly.  To add to the similarity with last Spring, the U. S dollar is appreciating again.

The threat of crisis contagion in Europe's appears to be alive and well however costumed, but no political sweet talk and smoothing over seems to have averted eyes from Portugal and Spain.  In fact, government and corporate bond markets continued to sell off across Europe putting pressure on even core eurozone countries.  Even the German bunds became infected.  The failure of the EU and ECB to act in a timely fashion to support the eurozone countries struggling to maintain liquidity in the face of growing international uncertainty as to the willingness of the ECB and EMU to defend the euro in a credit crisis, particularly with Germany and France sandbagging a monetary union without a fiscal mechanism against an eventual tsunami rather than a flood.

While the ECB's Trichet, after the governing board met, tried to calm the market by saying the euro was credible and at first only hinting about buying bonds, which is a contentious issue in the eurozone, while in fact evidently buying Irish and Portuguese debt.  This only creates confusion and uncertainty internationally, while he is forced to play to the internal politics of eurozone member nations, which do not favor the shared costs of normal monetary crisis tools nor will they authorize the ECB to use the monetary tools normally available to a fiat currency central bank.

As Felix Salmon has argued, the problem with Ireland's banks is not artificial risk reduction or Basel capital requirements.  But the failure of Ireland to recognize the full extent of toxic assets on the books of the Irish banks and the extent of mismanagement at Anglo Irish Bank and to quickly strip them out led directly to an over investment in the Irish banks by the Irish government, when they inappropriately, but at the urging of the EU and ECB, made private bank debt public debt.  In turn, the ECB demanded a bailout when it felt the level of ECB and Central Bank of Ireland loans to the banks had reached a dangerous level without direct intervention.  This only increases the speculation that Greece, Ireland, Portugal are essentially insolvent and, as the credit and currency crisis spreads, other eurozone nations will follow.  Willem Buitler, chief economist at Citigroup, opined that not only Ireland, Greece, and Portugal insolvent but Spain will be also when the weaknesses of its banks are recognized as well as the potential threats of political instability and high debt levels in Belgium and Italy and the ESFS rescue fund needs to be much larger in the neighborhood of 2 trillion euro (about 4 times larger).  At the same time the eurozone's growth is slowing down to about 1.6%-1.5%for next year as austerity programs push deteriorating conditions.

Spain is expected to grow only .7% next year rather than the 1.3% the Spanish government is projecting and to continue to lose jobs.  Spain continues to assert its banks are healthy and they are on track in their austerity program, but they have also started to point the finger of blame for the current uncertainty at France and Germany.  Zapatero said that the eurozone needs a common economic and fiscal policy, which is true, but this is interpreted in Germany as more money Germany has to contribute to the monetary union from it has particularly benefited economically.  Some bank analysts are attributing Spanish banks seeking less ECB loans as an indication of a shrinking loan book and the use of market repo funding.  Spain's central bank has imposed more conservative regulations and pushed savings banks consolidations, but some of Spain's mid-sized banks remain vulnerable to interbank lending problems.  While the austerity program continues to damage Spain's economy, the government continues to push austerity, defend the strength of Spanish banks, and is pursuing sovereign wealth funds to invest in Spain.  The pressure on Spanish bond yields put pressure on Italian bond spreads also.  Italy, which has one of the larger economies as a G8 country, has recognized the danger and urged the ECB to buy Spanish and Portuguese bonds in order to protect its own bond spreads as Spain is the keystone in this credit and currency crisis to the core eurozone countries.  Given Italy's debt and large economy, the eurozone cannot afford the credit crisis to spread to Italy.

While Portugal is being pushed to tighten its budget and reduce debt and the report of the Central Bank of Portugal, which is pushing for more austerity, demonstrates how fiscal austerity does not work during a debt deleveraging cycle.  While Greece's austerity program and EU/IMF bailout is on track, the amount of debt to be repaid in 2014-15 (about 110 billion euro) is too large without either an extension or restructuring as I have said in the past.  S&P is weighing whether to downgrade Greece's long term debt if the bailout rules threaten private bond holders of Greek debt.

Germany continues to question and beat its head against the wall by claiming liquidity will not help the credit and currency crisis and risks putting too much money into the economy, despite German bank and insurance company exposure.  If Spain starts to wobble, Germany will have some very harsh realities to face.  Spain is a prisoner of the euro.  German banks are heavily invested in Spain and contributed to its real estate bubble.  The euro created a significant economic advantage to Germany in exporting to other eurozone countries as the result of the exchange rates established within the eurozone.  As such, the potential crisis brewing in Spain was made in Germany.  The policies of Germany today are similar to the policies which lead to the German currency crisis of 1931 and financial  failure which deepen the Great recession globally and the rise of right wing fascism.  Germany's opposition to a euro bond and a fiscal mechanism within the eurozone is based not only on its shared cost but internal politics within Germany where the word for debt also means shame.  The refusal to act in the common good to stimulate the economies of the eurozone and bring them into closer harmonization is only increasing the threat to German banks and, hence, to Germany itself and the unthinkable.  The Irish crisis is consequently a huge test for the eurozone.  When lowering fiscal deficits becomes the priority in minds it denies the stagnation of fiscal austerity excess and higher interest rates as opposed to fiscal retrenchment and economic investment stimulus with lower interest rates which inspire business and consumer confidence which includes, but is not dependent, on exports.  Fear of debt becomes suicidal.

China's leaders have decided to pursue a prudent monetary policy while maintaining a proactive fiscal policy in acknowledgment of a need to promote a quantitative tightening which will require a slow step by step process which will require assessing its positive and negative impacts on disparate sectors of the Chinese economy as hot cash inflows continue.  China has had an active monetary program to sterilize capital inflows and kept inflation down which has made approximately 25% of the money supply illiquid, which means China's money supply is actually smaller than it appears. It is controlling interest rates with the spread between lending and deposits of 3%. In order to reduce its foreign cash reserves from its trade surplus, it  buys U.S. Treasuries by selling U.S. dollars which appreciates the yuan while also helping the United States depreciate the U.S. dollar and maintain a low interest rate economy.  The relationship between the United States and China is very mutually beneficial as well as entangled.  On the first of December, China's leading indicator signaled a warning it may be ready for a stock market downturn and take commodities with it.

The financialization of commodities with derivatives and exchange traded (index) funds has created volatility in the market with more commodity price risk for index funds and increased correlation between stocks and commodities.  At the same time closet indexing by "actively" managed mutual funds brings down the average performance of those funds and of active mutual funds as a whole.

The IRS has issued guidance on in-plan Roth rollovers for qualified plans which have a Roth contribution program.

According to the Federal Reserve Beige (anecdotal) Report, the economy was showing slow improvement in most areas, although housing remains depressed and real estate and construction remains at low levels.

The ISM Manufacturing report showed new orders to inventories ratio going negative at only <.1>, but it is something which should be watched as it has a good track record of turning negative prior to economic downturns.

The employment report for the month of November was released and unemployment rose from 9.6% to 9.8% with only net increase of 39,000 jobs when 115,000 had been expected.  Discouraged workers remained unchanged at 17.0%.  If we still were using the 1980's calculation for determining discouraged workers, it would be approximately 23%. The participation rate remained flat at 64.5%, down from 64.7, indicating people are not rejoining the work force.  Unemployment remains cyclical and not structural, although there is a growing number of 24-35 year old unemployment, more male than female.  I maintain there is the possibility that unemployment for the overthe over 55 (maybe 50) may be structural because they have earned too much money in the past and age discrimination is rampant.  The NFIB small business survey will not be out until December 14th, but advance information indicates that employment picked up to .01 from .00.

In John Hussman's weekly commentary, 11/29/2010, he concentrated on financial reform, particularly referencing the work of Rudiger Dornbusch, who said when you have bad banks you clean them up or they go only one way --- worse.  Cleanings up bad banks is essential to achieving a well functioning economy.  He notes that banks reliance on short term deposits is worse than it was prior to the financial crisis with time deposits declining for seven straight months and the cost of funding assets has dropped below 1% as banks concentrate on the shortest possible liabilities in order to earn the highest interest spreads.  This indicates that, while the economy's monthly progress may be encouraging, the problem is just being kicked down the road.  While the economy is likely to expand 2.3% annually over the next four years, the output gap implies an expectation of 3.8% annually.  A 3.8% real GDP growth would imply a 1.9% growth in jobs or about 200,000 per month or 2.5 million per year when we have lost over 7.5 million jobs.  With respect to the austerity programs in Europe, he said, "Unfortunately, imposing austerity on a weak economy typically results in further economic weakness and a shortfall on the revenue side."  In the U.S., he points out that there is a difference between surface improvements and the latent problems of banks, which as a result of the suspension of the FASB mark-to-market rules and the large amount of mortgage toxic assets on their books, having balance sheets which investors cannot fairly assess the banks real financial condition.  With respect to the market, he notes that in recent weeks he has noticed "risk on" and "risk off" days in which entire classes of securities are treated as if they were a single object with "risk on" days advancing financials, cyclicals, commodities, and speculative issues while the dollar weakens and "risk off days declining with relative strength in in consumer, health, and high quality stocks while the dollar strengthens.

Tobin's Q Ratio indicates the stock market is overvalued by historical standards 49% by arithmetically adjusted methods and 62% by geometrically adjusted methods.

Market: No banks failed this week; the unofficial problem bank list is 919.
                      DOW/Volume                             NASDAQ/Volume
Mon:           <35.91>/up 115.6%                       <9.34>/up 170.5%
Tue:             <46.47>/up 64.9%                        <26.99>/up 30.7%
Wed:           249.76/down 26.7%                        51.20/down 7.9%
Thu:             106.63/up 0.3%                              29.92/down 3.1%
Fri:                19.68/down 18.9%                        12.11/down 11.2%

Total             293.69                                           56.90

Mon: Oil up $1.97 to $85.73; Dollar stronger; despite large volume, indexes were still below average volume; market is still worried about Europe's financial stability; market pared losses during the day; dollar stronger despite QE2 as the result of declining euro.

Tue: Oil down 1.62 to 84.11; Dollar weaker but stronger against the euro; volume above average; Google down on EU antitrust investigation of favoritism in its search rankings; euro at two month low; eurozone bond spreads swell.

Wed: Oil up 2.64 to 86.75; Dollar weaker but stronger against the yen; big surge on lower volume as the big money stays on the sidelines; economic news viewed as growth; oil supplies were up 1.1 million barrels, gas supplies were up 600,000 barrels, and distillate down 200,000 barrels; Europe calm on ECB & IMF bailout hopes for Ireland. 

Thu: Oil up 1.25 to 87.00; Dollar weaker but stronger against the pound; market ignores jobless claims and seizes on pending home sales being up; weekly jobless claims were up 26,000 to 436,000, 4 week moving average was down 5750 to 431,000, and continuing claims were up 53,000 to 4,270,000.

Fri: Oil up 1.19 to 89.19; Dollar weaker; market ignores horribly disappointing November jobs report; Dow ended higher after being down most of the day; Nasdaq reached a new high for year; some market analysts would consider this a confirmed market uptrend but I do not like small gains on down volume.

United States:  Bullard (St. Louis Fed President) expressed concern that the Consumer Financial Protection Bureau is funded by a fixed percentage of central bank expenses which may have no direct relationship to the functional needs of the Bureau.  What would happen if market conditions change?  The mission of the Bureau is significant and potentially broader than regulators current functions.  Interestingly enough, Congressional republicans are preparing to confront Elizabeth Warren who wants transparency and accountability in the financial sector and who has been charged with establishing and setting up the Bureau, by posing the Bureau as big government.

Hoenig (Kansas City Fed President) gave a speech in which he said the financial institutions have become bigger as the result of "too big to fail" subsidies and, as such, they have become too big to succeed and a version of Glass-Steagall needs to be enacted creating smaller and more competitive financial institutions which would not be systemically dangerous.  One economic paper has proposed a macroprudential tax on borrowing during boom times to fund a bailout mechanism as a means of capturing the external costs borrowers impose on society and reducing moral hazard by reducing the incentive to borrow when bailouts in systemic crises are assumed.

A Bank of America employee admitted under oath that it was routine for Bank of America to keep notes after they were sold.  One fact of the servicer driven foreclosure mess is that a significant number of foreclosures involve people who have made every single mortgage payment.  Is this the perfect crime?  It happens with servicer errors and fraud.

The SEC is reviewing SEC official's testimony before Congress for violations of federal law.

Economic disgust with President Obama's alliance with deficit hawks during a high unemployment slow and tenuous economic recovery which is vulnerable to economic shocks continues to grow as his statements and arguments are picked apart as he takes advice from people who have no competent understanding of economics and the type of stimulus needed in a balance sheet recession.  Tax cuts for the wealthy, which are being pushed by deficit hawks, will have little impact on unemployment and aggregate demand and will substantially increase the deficit.  The Bush tax cuts did not promote economic growth and Bush's economic advisers knew full well the cuts would yield a revenue loss.  Changes proposed for Social Security amount to the bottom line of workers will have to work longer because the rich are living longer.  An alternative to the Deficit Commission recommendations, which appear will not receive Commission enough votes to report to The President and Congress, has been published by a group in combination with the Economic Policy Institute, entitled "Investing in America's Economy" which at least is emphasizing the need for investment to stimulate the economy although it has little chance of a rational debate.

President Obama also proposed a Federal employee pay freeze for the next two years.

Yellin, Vice Chairman of the Fed, gave a speech on "Fiscal Responsibility and Global Rebalancing", in which she said the United States economy is different from emerging economies in that with low inflation and slow economic growth, the United States needs to focus on fiscal consolidation long term and concentrate on near term economic stimulus which will support recovery.  She said Fed policy is not a panacea for weak U.S. growth and would be more effective if combined with near term fiscal stimulus.

The Federal Reserve finally released information on who received $3.3 trillion in emergency lending during the financial crisis which showed that the largest U.S. and international banks received most of the money.  Despite the legal requirement under the Dodd-Frank bill, the Federal Reserve refused to release a list of collateral pledged by recipients of $885 billion.

State tax revenues increased 4.9% in Q3 and 2.6% up vs year age, although still 7% below two years ago, with only six states out of 48 not showing improvement.  Illinois sales tax revenue was only up 0.1%

Oil consumption is up 4.9% in September, which is the biggest yearly gain since June '04 and Q3 is up 4.1%, which is the highest demand since Q2 2008.

The ADP private employer survey showed an increase of 93,000 jobs in November (the November BLS report was only 39,000).

U.S. productivity was up 2.3% Q3 (expected 2.4%).

16.3% of consumers used credit cards over Black Friday weekend vs 30.9% last year.

The Case-Schiller 20 city house prices were down 2.0% September (July-September) Q3, after being up 4.7% in Q2.  The expected housing decline has begun in earnest.

Vehicle miles driven were up 1.5% September vs year ago with 3.7 billion miles driven.

Dallas fed manufacturing survey showed production index up November to 13 from 7; new orders up to 9.1 from <4.3> --- first month positive in six months; capacity utilization was up to 9.9 from <2.3>.

Bond mutual funds had $4.33 billion outflows last week for the first time since December 17, 2008.

Consumer bankruptcy filings were down 13.3% in November to a 9 month low.

Worker productivity was up to 2.3% annualized Q3.

GM is carrying $30 billion in Goodwill on its balance sheet and all GM IPO proceeds will go to pay U.S. Treasury and pension funds as well as $2 billion from cash.  Its Q3 SEC filing said disclosure controls and procedures and internal controls were not effective and could materially adversely effect financial condition.

Chicago PMI (Purchasing Manager's Index - wholesale prices) was up to 62,5 in November from 60.6, which was more than expected.

The ISM manufacturing index  was down to 56.6 in November from 56.9; new orders were down to 56.6 from 58.9.

PC sales estimate was cut to 14.3% for year from 17.9% (September) with 2011 sales estimates revised down from 18.1% to 15.9%.

GM vehicle sales were up 21% in November vs year ago; Ford was up 24% excluding Volvo sale; Chrysler was up 16.7%; Toyota was down approximately 3%.

Big Lots Q3 EPS was down 15% while sales were up 2%.  They said they were hurt by strong discount competition and rising credit and processing fees.

Pending home sales were up 10.4% to 8% (expected 0.5% down).

The ISM service index was up to 55 in November from 54.3.

Retail November same store sales were up 5.3%.

Foreclosure sales were down 25% Q3 vs Q2.


U.S. manufacturing new orders were down 0.9% in October for the first drop in 4 months (expected down 1.3%) on weak durable goods demand.

The ECRI WLI (Weekly Leading Indicators) was up to <2.4> from <3.3> the prior week.

International: France is joining Ireland and Hungary in tapping pension funds to pay debt.

European insurance companies are looking at buying 1 billion euro of distressed debts from Irish banks.

Canada's economic growth slowed to 1% in Q3 from 2.3% in Q2 despite corporate capital spending being up 19.2% vs year ago (expected 1.5%); blamed strong currency restraining exports and boosting imports, of which the import of equipment and machinery was up 6.3%.  Inventories were also up.

The United Kingdom's Chancellor of the Exchequer said the UK was vindicated in not adopting the euro.  The eurozone credit and currency crisis threatens the UK's recovery as it attempts to rebalance to a positive net trade and investment balance if the credit crisis boils over into the real economy and axes Continental demand.  When the government's austerity program flounders and if  its export projected recovery is not sufficient, it has no Plan B to stimulate the economy.  The UK recovery is the weakest since World War II according to their Office of Budget Responsibility, which is independent, due to the continued credit crunch and its austerity program.

Investor's were incensed at the UK Financial Services Authority (FSA) refusal to release the report on the Royal Bank of Scotland's (RBS) near collapse which exonerate senior RBS managers.

UK students are not only being asked to pay educational fees which are increasing approximately 300%, but to also pay a graduate tax.  This is causing demonstrations in protest.

European bank stresses have reached the highest levels since last June.

Putin is calling for more Russian and German cooperation in forming a Russian-EU free trade zone.  This is something to watch, because Germany needs new export markets and energy imports.  Russia has energy to export which it is not reluctant to use as an economic weapon and it wants into the EU market economically and to have more influence over NATO.  This would also be consistent with how Germany raised international tensions and uncertainty in 1931.  The Wikileaks cables disclosed a Spanish prosecutor was adamant he had evidence that the Russian government is thoroughly infiltrated if not controlled by Russian organized crime.

The Irish bailout will be 845 billion euro ($115 billion).

Greece will have until 2021 to repay its 110 billion euro bailout at 5.8% (up from 5.5%) as it got extension from 2015.

An Italian bond auction was weakly covered.

India's GDP was 8.9% September annualized (expected 8.3%).

Walmart is paying $2.3 billion for 51% of South Africa's Massmart.


Eurozone growth for 2011 is estimated to be 1.5% down from 1.7% (expected in 2010) with Germany's estimated to be 2.2% (2011) down from an expected 3.7% in 2010.

Eurozone Q3 GDP was up 0.4% not annualized vs Q2.

China's institutions spent 519 billion yuan ($78 billion) in October to absorb foreign exchange inflows, which were the third largest ever and almost double September.

China PMI was up to 55.2 in November from 54.7.

Japanese output was down 1.8% in October.

Eurozone unemployment was up 0.1% to 10.1%; down in France, up in Italy, and flat in Spain and Germany.

Australia Q3 GDP was up only 0.2% (1.1% Q2) below expectations of up 0.5% as the result of higher interest rates.

UK house prices were down0.3% in November.

Portugal 1 year debt sold at 5.28% vs 4.81% two weeks ago.

Thailand's central bank raised interest rates 25 bps to 2% to curb inflation.

German retail sales were up 2.3% in October, which was the best since January '08, but still down 0.7% vs year ago.

Youth unemployment in France was up 0.8% to 25% for ages 15-24 (European average is 20.1%) with overall unemployment at 9.7% (10.1% for EU).

Pepsico is trying to buying a majority stake of Wimm-Bill-Dann in Russia.

Eurozone's service sector PMI was up 2.1 November to 55.4 and October eurozone retail sales were up 0.5%.

Brazil raised bank reserves to curb inflation.

Spain moved up pension reforms, hiked tobacco taxes, and trimmed wind power subsidies to facilitate budget deficit reductions.

After Trichet (ECB) made no mention of plans to increase purchases of sovereign debt, the euro fell.

Germany, on Wednesday, struggled to sell its bonds.

The Spanish bond auction was well received.

The IMF urged China and Hong Kong to implement measures to rein in property bubbles disconnected from fundamentals by increasing real interest rates, higher carrying costs of ownership (property tax), and China should also broaden financial market development to alternative investment vehicles from housing.

China will invest $1.5 trillion over 5-7 years to transition from manufacturing cheap goods to high tech products.

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