November, Tuesday 22, 2011
DOW – 53 = 11493
SPX – 4= 1188
NAS – 1 = 2521
10 YR YLD -.02 = 1.94%
OIL +.83 = 97.75
GOLD +22.10 = 1700.40
SILV + 1.13 = 32.87
PLAT + 21.00 = 1571.00
The U.S. economy grew at a slightly slower pace than previously estimated in the third quarter. The Commerce Department issued its second estimate on Gross Domestic Product and they revised the growth down to 2.0% from the initial guess of 2.5% growth.
The good news is that the fourth-quarter growth pace could exceed 3 percent, which would be the fastest in 18 months.
The GDP report also showed inflation pressures subsiding. A price index for personal spending rose at a 2.3 percent rate in the third quarter, instead of 2.4 percent.
The economy was pretty flat last quarter but banks racked up big profits – posting net income of $35 billion in the third quarter, the best performance in 4 years. The FDIC’s list of “problem” banks fell for a second straight quarter, declining to 844 from 865 three months earlier, the agency said. There were 26 bank failures in the three-month period that ended Sept. 30, bringing the year’s total to 74, compared with 127 a year earlier.
It is an interesting juxtaposition; the economy slows but banks make big profits. There is no doubt the financial sector has a significant impact on the economy, what is less clear is the contribution financial services make to the real economy. There is a good chance that the value of financial intermediation services is significantly overstate in the national accounts. Is increased risk taking by banks a value added service for the economy at large? Probably not. Risk management may well be considered a value added activity. Banks use labor and capital to screen borrowers, assess their creditworthiness and monitor them; and there is value in that. But a banking system that does not accurately assess and price risk could even be thought to subtract value from the economy, especially when the risk wasn’t borne by the banks but the losses from the risk were sloughed off on society, on taxpayers. If risk-making were a value-adding activity, then bungie jumpers would the fastest growing sector of the economy.
Reuters reports: “The U.S. Federal Reserve plans to stress test six large U.S. banks against a hypothetical market shock, including a deterioration of the European debt crisis. The Fed said it will publish the results next year of the tests for six banks with large trading operations. Those banks are Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo. The Fed said its global market shock test for those banks will be generally based on price and rate movements that occurred in the second half of 2008, and also on “additional stresses related to the ongoing situation in Europe.”
Things are already stressful at BofA; regulators have informed Bank of America’s board that the company could face public enforcement action if they are not satisfied with recent steps taken to strengthen the bank.
BofA has been operating under a memorandum of understanding since May 2009. The memorandum, which is not public, identified governance, risk and liquidity management as problems that had to be fixed.
In recent months, regulators met with BofA’s board and said they wanted to see more progress on the bank’s compliance with the memorandum. In the absence of progress, the informal order could turn into a formal and public action, which would likely mean intensified scrutiny and greater restrictions.
Is it possible the Fed is getting tougher on the banks? Nahh..
The sovereign credit rating of the United States is under review by Fitch Ratings after the Congressional super committee failed to reach agreement on reducing the nation’s budget deficit.
Standard & Poor’s already downgraded U.S. debt to AA-plus from the perfect AAA back in August, and they will stand pat on their current rating and maintaining a negative outlook..
The third rating agency, Moody’s Investor Service, said that it was sticking with its AAA-rating with a negative outlook for the U.S. government, for now.
One of the most amazing things about the failure of the supercommittee is how easily the failure has been cast aside. It was just a few weeks ago, we heard the supercommittee could not fail.
Now we learn the supercommittee tossed in the towel long before the deadline. Last week the members of the supercommittee found time to attend football games, go out to bars, hold fundraisers. We now find out that even when they held meetings, they couldn’t get down to issues. And then you wonder why. The truth seems to be that failure was the only option. At least it offers culpability to both parties.
In Europe – Greece continues to teeter on the edge of a debt abyss. Italy has fallen under the control of a technocratic government. The Spaniards elected a new government over the weekend and they will try to tackle their own debt and unemployment problems. Average yields on Spanish 3- and 6-month treasury bills jumped up by around 2 percentage points in an auction seen as a test of investor sentiment after the conservative People’s Party won an absolute majority in Sunday’s general election.
France is trying to hang on to its Triple-A credit rating as bond yields jump to 3.5% on 10-year notes; that’s not anywhere close to the level of Greece or Portugal, but it’s not quite Triple-A rates, and the bond sharks smell blood. Part of the problem is that French banks have huge losses in the smaller countries, but those losses have not been marked to market – not yet.
The European Central Bank, the ECB, yesterday said it would intervene in bond purchases up to 20-billion Euros per week, or about 4 times current levels – but they indicated that was as much intervention as they could offer.
So today, the International Monetary Fund, the IMF, is stepping up to provide a backstop. The IMF will make loans to countries though a new credit facility, without forcing the countries to make as many policy changes as with traditional loans. So, proposed austerity programs don’t actually have to be in place and working, and the countries can still get funds. How much? Up to 10 times a country’s quota, or contribution to the IMF and at terms from 6 months to 24 months. So, the solution to the debt problem is more debt. Who knew?
IMF Managing Director sent out a statement saying: “The reform enhances the Fund’s ability to provide financing for crisis prevention and resolution. This is another step toward creating an effective global financial safety net to deal with increased global interconnectedness.”
The new loan program doesn’t solve the underlying issues with European sovereign debt but it might avoid a credit freeze and contagion. Make no mistake, there are plenty of people trying to avoid a credit freeze and a collapse – and they might just do it. Today, the headline is that the IMF is going to bailout Europe. But who is going to backstop the IMF. The IMF is ultimately backed by the US, Japan, and a few other nations but most of the money comes from the US and Japan – and at the last G20 meeting the US and Japan said they wouldn’t serve as a backstop. Leaders of the world’s major economies told Europe to sort out its own problems and deferred until next year any move to provide more crisis-fighting resources to the International Monetary Fund.
The Labor Department reports 36 states posted declines in their unemployment rates in October. Nine had no change and five showed increases. Nevada still far and away has the highest unemployment rate at 13.4%, followed by California at 11.7%. North Dakota has the lowest unemployment rate at 3.5%. Arizona’s rate was down slightly at 9.0%.