Shine On You Crazy Dimons
by Sinclair Noe
DOW – 40 = 15,636
SPX – 3 = 1722
NAS + 5 = 3789
10 YR YLD +.06 = 2.75%
OIL + .04 = 106.43
GOLD – .20 = 1366.10
SILV + .13 = 23.19
No taper, despite hints and great expectations. Having announced the intention to taper, ultimately, a few weeks later, the proposal was shelved. The reasons given were concerns about the strength of the economic recovery and the impact of high rates on the ability of an over-indebted world to continue to meet its obligations. All these factors were largely unchanged between the time of the original announcement and the repudiation.
What did change was the taper tantrum, the unpleasant market reaction to the hint of taper. Bond yields rose sharply; the Fed’s tough talk has already led to a 140 basis point rise in 10-year Treasury yields, which would be roughly equivalent to six rate increases; that in turn resulted in pushing mortgage rates higher, putting a crimp in the housing recovery. Today we learned home sales were up. Sales of previously owned homes unexpectedly rose in August to the highest level in more than six years as buyers rushed to lock in interest rates before they jumped even higher.
The labor “participation rate” dropped to 63.2% in July, the lowest level since the late 1970s. The rate for men is at an all-time low. The unemployment rate has been falling, but chiefly because so many people are giving up hope and dropping off the rolls.
Fed governors tried to pass this off as a structural problem; due to evolving technology, or a “skills mismatch”, or that catch-all concept “demographics”. No doubt this is half true. But half truths also go by another name. Chronic lack of demand is the real villain is this jobs slump. The problem is not that the labor market is under performing; it is that the recovery has been very slow.
The economy has weathered the most draconian fiscal tightening (2.5% of GDP this year) since the end of the Korean War remarkably well, helped by shale gas, but it is not yet at “escape velocity”. The fiscal squeeze goes on. The International Monetary Fund has advised Washington to go easy, citing an “output gap” of 4.6% of GDP. The Dallas Fed’s measure of core inflation was 1.2% in July. Growth of the M1 money supply is the slowest in two years, while growth of broad M3 has slowed to the point where it could turn negative without QE. The inflation threat is a fiction; it could be a problem at some point, but not today.
The US dollar rose sharply and stocks sold off, and emerging markets sold off even harder. The BRICS have been hit hard already and given the dangers of another euro-zone debt hemorrhage, which happened after the end of QE1 and QE2, it would be a globally rude gesture to taper.
Ultimately, most market prices, except interest rates, headed back to where they roughly started before the taper talk. Billions of dollars were gained and lost in the zero sum marketplace casinos that constitute the modern economy. And really that seems to be the determinant factor for the Fed. The Bernanke Fed has twice misjudged the global effects of premature tightening already, each time precipitating a credit and stock market crash within weeks, and each time forcing the Fed to capitulate. The exit from QE3 will be ugly, when it eventually arrives.
A paper by former Fed governor Frederic Mishkin, “Crunch Time”, warns that the Fed will struggle to extract itself from QE if it delays until 2014. It may drown from losses on its $3.6 trillion of bond holdings as yields rise. The Fed’s own balance sheet is at risk, and the risks may indeed outweigh the rewards. Certainly some Fed policymakers would like to head for the exits, but they would like to exit without imploding the Wall Street debt machine; and that may not be realistic.
If QE as conducted is causing asset bubbles, then we should deploy central bank stimulus more creatively, should it prove necessary. We know how to do it. The methods were pioneered by Takahashi Korekiyo, who pulled Japan out of the Great Depression early in the 1930s. His feat is now the model for what Japan is doing again under Abenomics.
Takahashi turned the Bank of Japan into an arm of the treasury – “fiscal dominance” – and ordered it to finance the budget deficit. You can deploy QE in any way you want. It could be used to build houses, or to build infrastructure, or other ways of injecting the money directly into the veins of the economy, instead of the veins of hedge funds. There is no reason why it cannot be administered by an independent Fed, choosing the calibration level as they see fit.
Don’t hold your breath. At this point, Bernanke seems content to leave the fuse burning on the financial weapons of mass destruction, as he rides off into the sunset.
Of course, the whole mess could implode, if the US decides it doesn’t want to pay its bills. And that is looking more and more possible. The White House promised a veto of a Republican effort to gut President Barack Obama’s health care law as part of a temporary funding bill in the House to prevent a partial government shutdown on Oct. 1.
The official policy statement said the GOP attempt to block Obamacare “advances a narrow ideological agenda that threatens our economy and the interests of the middle class” and would deny “millions of hard-working, middle-class families the security of affordable health coverage.”
The veto threat was expected and wasn’t going to stop House Republicans from pressing their effort to defund the health care law. Republicans in the House spent Wednesday talking about how hard they would fight to derail the health care law on the eve of its implementation and weren’t conceding that their Senate rivals would undo their handiwork. A key force in the tea party drive against the law conceded the point even before the fight officially began, but urged the House to force a government shutdown rather than retreat.
The rhetoric will likely fade in the harsh light of an actual shutdown, but then again Congress is a hot mess. The Obama administration’s budget director, Sylvia Burwell, issued a memo to department heads that said, “Prudent management requires that agencies be prepared for the possibility of a lapse” in funding.
In the years since the financial crisis, we may not have solved too big to fail, sent any bankers to jail, or done much to prevent another financial crisis, and we certainly haven’t changed Wall Street’s devotion to money-making at all costs.
But we at least have finally gotten a bank to admit it broke the law.
In what amounts to a relatively stirring triumph of justice on Wall Street, the SEC has convinced JPMorgan Chase to admit that it broke federal securities laws in its handling of the $6.2 billion “London Whale” trading debacle.
The SEC press release says: “JPMorgan failed to keep watch over its traders as they overvalued a very complex portfolio to hide massive losses…, While grappling with how to fix its internal control breakdowns, JPMorgan’s senior management broke a cardinal rule of corporate governance and deprived its board of critical information it needed to fully assess the company’s problems and determine whether accurate and reliable information was being disclosed to investors and regulators.”
Jamie Dimon in a separate statementsaid: “We have accepted responsibility and acknowledged our mistakes from the start, and we have learned from them and worked to fix them.” Which is true, depending on what Dimon means by “from the start.” When the London Whale story first broke in the spring of 2012, Dimon infamously dismissed it as a “tempest in a teapot.” He has since repeatedly admitted that the bank erred, although this is the first time it has admitted breaking laws.
JPMorgan also agreed to pay $920 million to the SEC and other agencies to settle various London Whale charges. That is quite a lot of money to you and me, more than twice the size of the current Powerball jackpot. And for JPMorgan it amounts to little more than 13 days’ profits, and nothing more than the cost of doing business.
But it does mark a turning point, finally there has been an admission of wrongdoing. Finally.
But wait, there’s more. Today, bank regulators also ordered JPMorgan to correct its debt collection and other credit card procedures and to refund more than $300 million to customers harmed by the bank’s practices. In separate orders, regulators faulted the bank for errors in how it pursued credit-card debts in court, and for charging customers for credit-monitoring services they never received.
The Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency ordered the bank to refund $309 million to about 2 million customers charged for the credit-monitoring services. The orders also include $80 million in penalties. The OCC also ordered the bank to review past debt collections and compensate customers affected by errors. It did not provide details of how extensive the debt-collection problems were. That order did not include financial penalties, but left the door open to future fines.
At some point, you have to wonder how long a chronic offender can continue before we say, enough is enough.