Friday, July 27, 2012 – Wall Street Finds Pleasure in GDP Pain

Wall Street Finds Pleasure in GDP Pain
-by Sinclair Noe

DOW + 187 = 13,075
SPX + 25 = 1385
NAS + 64 = 2958
10 YR YLD +.13 = 1.56%
OIL + .91 = 91.98
GOLD + 7.50 = 1624.60
SILV +.25 = 27.89
PLAT + 6.00 = 1417.00

All right class; Pop Quiz. Question: What does Wall Street love? Answer: Free money. I know, it’s the same pop quiz as yesterday. That was then and this is now. Yesterday, the free money was coming from the ECB, as Mario Draghi promised to do whatever it takes to save the euro. Today came news that was so bad that it should push Federal Reserve Chairman Ben Bernanke out of denial and into action. Economic growth was so stagnant that Bernanke will be forced to pass out free money to his bankster buddies; it’s not the solution but it is what Bernanke knows how to do. 

The nation’s gross domestic product, the broadest measure of the economy, grew at just 1.5% in the second quarter; that compares to GDP growth of 2% in the first quarter and 4.1% growth in the fourth quarter of 2011. Consumers cut back, local governments cut spending, factories received fewer orders and exports declined because of the global slowdown and a stronger dollar. 

Spending on durable goods, including things like cars and home appliances, fell 1.% in the second quarter. Cuts in government spending, especially at the local level, also held back growth. State and local spending fell 2.1% during the quarter while federal spending declined 0.4%. Non-residential fixed investment, including business spending on structures and equipment, increased 5.3% during the second quarter, down from 7.5% in the previous quarter. The US economy has grown for 12 consecutive quarters, but the gains have been small. It’s not economic contraction – you remember that – but it is weak enough to send the Federal Reserve in search of stimulus. 

Next Friday, we’ll get the monthly jobs report and if the Fed hasn’t acted by then, the report will have to be extremely strong. This is what Wall Street’s love of free money has devolved into; a perverse glee when the economy shows weakness simply because it might force the Fed to fire up the printing press. 

Earlier today, German Chancellor Angela Merkel and French President Francois Hollande pledged to do all in their power to protect the euro, backing up ECB president Draghi’s comments yesterday. Apparently, the ECB and euro-zone governments are preparing co-ordinated action to cut Spanish and Italian borrowing costs, possibly bond purchases paid for by tapping into the ESM and the EFSF, the European Fubar Slush Fund. 

From the latest issue of the Milken Institute Review, “Trends: Better Living Through Inflation” (co-authored with Jeffry Frieden):

“If the aftermath of the Great Recession doesn’t feel like the recovery from a normal cyclical downturn, that’s because it wasn’t a normal cyclical downturn. We’re living through the consequences of a massive global debt crisis, and debt-driven crises produce an especially malign form of recession. …

“The politics of debt is, if anything, more daunting than the economics. A debt crisis typically degenerates into bitter political conflict over who will bear the burden of the adjustment. Some of the conflict may be among countries, with creditor nations trying to force debtors to pay off in full and debtor nations rebelling against measures that could conceivably make that possible. Other political battles take place within countries, as taxpayers, bankers, government employees, pensioners and investors jockey to avoid being saddled with the costs of working off the accumulated debts.

“If we simply choose to wait for the world to find acceptable formulas for sharing sacrifice, we may be in for nearly a decade of snail’s pace growth — a truly global lost decade.”

The US Justice Department is preparing to file charges against traders from several banks in the global probe of interest rate-rigging. Meanwhile, British prosecutors haven’t even decided whether they have a case. The Justice Department investigation of criminal activity related to Libor is moving on a parallel course with civil probes of the banks being conducted by the Commodity Futures Trading Commission, the SEC and British regulators, including the Serious Fraud Office. Barclays, which has been at the center of the rate rigging scandal, today posted first half profit that topped expectations; they also apologized for the Libor mess and tried to move on, even as they revealed they are the target of even more Libor-linked lawsuits. Barclays also sent a 12 minute video around to all its employees. The video explains how it is bad to rig the Libor rates. The video is narrated by the chief of Barclays investment arm a guy named Rich Ricci; seriously, the guys name is Rich Ricci. The sad part is that the criminal investigations are so far just looking at traders, not executives. Apparently, criminal responsibility won’t happen until the Earth spin off its axis and we are hurtled through space – wait, that’s supposed to happen in December. 

Last week, Capital One settled accusations that vendors used deceptive, high-pressure practices to sell optional products such as credit monitoring and payment protection. Capital One was fined $210 million. It was the first public enforcement case brought by the year-old Consumer Financial Protection Bureau. Now we’re getting a few more details. The dispute concerns so-called payment protection, which pays credit-card bills in case of job loss or disability, and monitoring services that alert customers to changes in their credit profiles. Vendor call agents used “high-pressure sales tactics and made materially false, deceptive, or otherwise misleading oral statements relating to the cost, coverage terms, benefits, and other features” to sell products to Capital One customers. And Capital One billed customers for years for services they didn’t receive. Customers were wrongly led to believe they needed to buy the extra services to activate cards or that debt protection or credit monitoring was free, and others were left believing that the purchase would improve their credit scores.

The credit monitoring programs were provided by third-party vendors including a couple of companies called Intersections and also, Affion Group. And then Bank of America, Wells Fargo, and Citigroup were listed in securities filings as major customers of one or both of the providers, with Bank of America accounting for more than half of annual revenue at Intersections.  In other words, the accusations against Capital One probably were not isolated. 

Yesterday, we talked about the drought and how it is affecting crops and farmland values. It might alos affect energy prices. According to an article in the NY Time by Dr. Michael Webber at The University of Texas at Austin:

“Our energy system depends on water. About half of the nation’s water withdrawals every day are just for cooling power plants. In addition, the oil and gas industries use tens of millions of gallons a day, injecting water into aging oil fields to improve production, and to free natural gas in shale formations through hydraulic fracturing… All told, we withdraw more water for the energy sector than for agriculture. Unfortunately, this relationship means that water problems become energy problems that are serious enough to warrant high-level attention.”

Cities in Texas are already forbidding the use of municipal water for hydraulic fracturing (fracking). And in the Midwest, power plants are going head-to-head with farmers for limited water supplies.

Earlier this week, Sandy Weill, the former CEO of Citigroup called for the break up of “Too Big To Fail” banks. While I find it extremely difficult to trust Weill, let’s take him at his word; maybe we should break up the mega-banks. There are others that are calling for a break up, the list (from Washington’s Blog) including, former Citi CEO John Reed, former Citi Chairman Richard Parsons, former Merrill Lynch CEO David Komansky, Former Morgan Stanley CEO Philip Purcell, former director of Goldman Sachs Nomi Prins, Nobel prize winning economists Joseph Stiglitz, Paul Krugman, and Ed Prescott; current or former Federal Reserve officials: Thomas Hoenig, Richard Fisher, Thomas Bullard, Alan Greenspan, and Paul Volker; former FDIC head Sheila Bair, former head of the Bank of England Mervyn King, and the Bank of International Settlements (the Central Banks’ Central Bank). That’s just a partial list.

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