September, Wednesday 07, 2011
Day 2 of the Financial Review. I received a few notes on yesterday’s Review. It was suggested that there was an overload of information. Don’t worry; this will get easier as we go along. You are all very smart and I am confident that you will handle the information presented. Today, we have a tremendous amount of information to cover. A little later, we’ll be talking with Scott Paul, Executive Director of the American Manufacturing Association; we’ll cover some ideas for getting manufacturing jobs back on the growth path. Then in the second half hour we’ll be talking with Dr. John Mathis, Professor of Global Finance at the Thunderbird School. Then we’ll check in with Dr. Lee McPheters from ASU.
Another note said yesterday’s program was “scary like Halloween”. To which I say, keep listening. I am not preaching doom and gloom. There is nothing that can’t be overcome but there is plenty that could “whup you upside the head” if you’re not paying attention. Even more, there are opportunities if you are alert. I will try to keep us all alert but I’m not going to sugar coat things; in other words, I’m not going to lie. If you want a saccharine sweet economic analysis, you can just watch the main stream media, you can just read and blindly accept the pablum spewed forth by the Federal Reserve. Today, the Fed published their Beige Book, and they described the economy as subdued, slow, and sluggish. What you haven’t heard from the Fed or from the politicians is that the economy is in a depression, and we haven’t really come out of the depression. The Fed says they are growing cautious because of recent stock market volatility and falling consumer confidence.
Earlier today, Chicago Fed President Charles Evans made his case for further Fed stimulus, arguing that the central bank should be focused more on spurring job growth than controlling inflation. Evans said, “We again find ourselves with a weakened economic outlook and again trying to decide what further accommodation to provide. I’m sure everyone will agree that we seriously don’t want to be in this position again at this time next year. I believe that means we need to take strong action now.”
So, in addition to the hundreds of billions the Fed will pump into the long term bond market – trying to lower long term interest rates to stimulate domestic investment, while at the same time they are selling short-term Treasuries, which would push short-term yields higher – the idea being that move would attract foreign investment in the dollar. The Federal Reserve plan is called Operation Twist. The idea has been tried before and it has failed before, so the Fed is going to try again.
Let me break this down for you. The banks aren’t lending money, so the Fed thinks that if they can’t get interest rates on 10-year notes to drop lower, the rates will become attractive and people and businesses will start borrowing. So, let’s go back 3 or 4 years – we had a financial crisis the nearly resulted in the meltdown of global financial markets and it was precipitated by bad debt, so now the Fed wants to stimulate the economy by encouraging more debt with lower interest rates. Kind of like trying to cure alcoholism by giving beer to a drunk, but hey – it’s not handing out shots of whiskey.
Now, what this also tells us is that the deflationary part of this depression is far nastier than we have been lead to believe, and the downturn is going to last much longer than anybody is willing to admit. It also means that we haven’t seen the end of the Fed’s monetary manipulations – and that means that the inflationary pressures on commodities, and specifically precious metals, will continue – not necessarily today, but the long term trend is in place.
I got another note telling me that explanations by way of analogy or examples are the best way to educate people on the intricacies of a particular topic. And that’s good advice. Yesterday we talked about the debt problem in Europe. And it reminds me of the story of the woman who had to go out of town and she asked her husband to take care of the cat. After the first day out of town the woman calls home and the husband says “the cat died.” She says you can’t just drop that kind of information on me, you’ve got to soften the news, not be so abrupt, you know, say something like the cat got out and it got in some trouble and it ended up on the roof, and then you can tell me the cat fell, and it didn’t survive the fall. You’ve heard this story before.
Well, Greece, Italy, Portugal and Spain are on the roof. Greek 2-year notes yield around 50%. That means that there is about a 50-50 chance the Greeks will fall off the roof. Actually, it means there is about a 90% chance Greece will fall off the roof and there is a 50-50 chance that somebody will take the bet. Today, Germany’s Constitutional Court said it is legal for Germany to bail out the PIGS and save the Euro. Still, the court said future financial rescues must be approved by Parliament’s budget committee. So, the Euro did not fall off the roof today.
Meanwhile, Italy’s senate approved a $76 billion dollar austerity plan. Italy passed the measures to ensure the ECB continues to buy its bonds after contagion from the region’s debt crisis pushed borrowing costs for Europe’s second-biggest debtor to the highest in more than a decade. The Italian austerity plan will play a role in calming the markets, but it won’t be determinant, as the real focus is the credibility of Europe as a whole.
Greece and Italy are still on the roof. If or when they fall off the roof, they will grab several European banks and drag them over the gutter, and the European banks will grab American banks by the scruff of their Credit Default Swap collars and drag them over the edge as well. But not today.
Today, bank stocks were up about 4 percent on average. In a research report, analysts from Deutsche Bank noted that bank stocks have declined by 24 percent since July 21, the date to which the most recent sell-off period is often traced, while the broader market as measured by the Standard & Poor’s 500-stock index was down by 13 percent. Ironically, one of the uglier bank stocks is the Deutsche Bank, which has dropped from $59 to $35 during that time.
Bank of America was the most actively traded financial stock, and it rose nearly 7 percent. The bank shook up its top management team on Tuesday as it contended with a flagging share price and mounting legal liabilities. Bank of America is on the roof but they didn’t fall off today.
And in one of the more bizarre stories of the day, Carol Bartz was fired as CEO of Yahoo. On the surface, that is not bizarre; Yahoo has been struggling for years; Bartz had been at the helm for a couple of years. The weird part is that Bartz was fired over the phone. She got a phone call from the Chairman – telling her she was fired. This says some really bad things about corporate loyalty and decency. And it basically says that any possible candidate for the Yahoo CEO job would have to be smoking the crack pipe to accept a job offer from these jerks. Soooo, it was not surprising to hear that rapper Snoop Dogg has offered to take over the job of CEO of Yahoo. And that is the hizzle on the Yahoo Zizzle. Seriously – I can’t make this stuff up.
Comex gold was down 3 percent at $1,817. Crude traded in New York was about 3 percent higher at $88.93.
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Tomorrow and Friday we’ll have open phones – we can talk about President Obama’s Job Plan or anything else that is on your mind