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Tuesday, June 19, 2012 – There is No Escape for the Fed – by Sinclair Noe

06192012 Script


DOW + 95 = 12,837
SPX + 13 = 1357
NAS + 34 = 2929
10 YR YLD +.04 = 1.62%
OIL – .12 = 84.23
GOLD – 10.80 = 1618.90
SILV – .32 = 28.52
PLAT – 2.00 = 1487.00


The Federal Reserve FOMC is meeting today and tomorrow to determine monetary policy for the next few weeks. Here is what they will probably say tomorrow. They won’t lower interest rates; interest rates are at zero; interest rates are actually already negative when you consider the effects of inflation. Operation Twist is scheduled to expire in about two weeks. The idea behind Operation Twist is that the Fed sells shorter-term securities and buys longer-term securities with the goal of reducing long-term interest rates to encourage borrowing and spending. The yield on the 10-year note is 1.62%, so rates are pretty low even though the Twist hasn’t been able to encourage a big round of borrowing and spending. Low interest rates alone have not been enough to create demand. Operation Twist is the Fed pushing on a string – which is to say, supply side economics is a crock.


Here’s the conundrum for the Fed – how do they exit Operation Twist without creating a problem, possibly unwinding those nice, ultra-low interest rates? The Fed might announce a limited extension of the Twist, maybe to September or they might just offer a soft extension – saying something like: “we will monitor long-term rates and stand ready to maintain stability”. 


As far as QE3 – not likely. Europe hasn’t collapsed, not today; but due to the possibility the Euro economy might implode in the not too distant future, the Fed will keep its powder dry. That’s not totally accurate. Just like Operation Twist, QE 1&2 never really included an exit plan. The truth is that the Fed has continued to be the biggest buyer of Treasuries, they are propping up the market, they are pushing on a string and again confirming the fallacy of supply side economics. QE never went away, it just hasn’t been effective and the Fed let it expire (in name only) while continuing to maintain an accommodative policy and this way they didn’t have to answer questions about why QE was so ineffective. 


Another option for the Fed tomorrow is to announce they will maintain the ZIRP even longer than previously announced. It is already scheduled to last until 2014, they might say it should remain in place until 2015 or until such time as an asteroid destroys life on earth as we know it. Here is the bottom line – the Fed can’t exit their easy money policy; if they try to exit, it would get ugly; so, tomorrow they will say something which will indicate they are not trying to exit, and the markets will be somewhere between mild disappointment and moderate pleasure. 


The payrolls report shows job growth has averaged 96,000 in the past three months, well below the 252,000 rate in the three months before that.


The payrolls number is the net change between job additions and separations; the difference between hirings and firings. The Job Openings and Labor Turnover Survey (Jolts) provides some details on the labor markets. The April report  shows the spring payroll weakness reflects a very steep drop in hiring, not a rise in job losses.  According to the Jolts report, new hires fell to 4.18 million in April, down from 4.34 million in March and from 4.44 million in February which had been the highest hire number since October 2008.


Companies also cut back on looking for workers. April job openings fell to 3.42 million, the lowest number in five months.  Job separations actually fell in April, to 4.09 million from 4.17 million in March. Separations including layoffs, firings, quits and retirements have stabilized around 4.1 million over the past year.


Any way you look at it, the Federal Reserve has failed miserably in its mandate to achieve maximum employment.


Meanwhile, Greece is trying to form a coalition government and it looks like the 3 major parties are getting closer. The conservative New Democracy party won the election, narrowly, but the reality is that all the political parties want to renegotiate the bailout because a monkey with a calculator could figure out that the Greeks are getting screwed on the deal. And there seems to be some wiggle room. An IMF spokesperson said: “These economic programs are not static. They do get adjusted.” Germany has been inflexible on allowing any compromise. Then, late this afternoon we heard reports from the G-20 meeting in Mexico that Germany was going to end its opposition to the euro zone’s bailout funds buying the sovereign debt of troubled European nations. The stories have not been confirmed, but who knows? Maybe Merkel discovered the great Mexican invention, the margarita, and maybe she’s getting a little loose in Los Cabos.


While this was going on, British Prime Minister David Cameron sparked a war of words with French officials by saying he would roll out the red carpet for French firms if new French President Francois Hollande raised taxes as planned on the wealthy. So it isn’t total unanimity.


The G-20 is expected to issue a communique stating that the euro-zone will issue a jobs and growth plan and they will take concrete steps toward a more integrated approach to bank supervision, resolution, recapitalization and deposit insurance. The communique appears aimed, in part, at easing market worries about Spain.


If yesterday was all about Greece, today belongs to Spain. The euro strengthened 0.6 percent to $1.2647 while the yield on Spain’s ten-year note dropped 11 basis points to 7.05 percent, after topping 7 percent yesterday for the first time in the history of the euro. The 7% threshold is the level that knocked other smaller countries like Greece and Ireland over the edge. Spain will need a lot more than 100 billion-euro to recapitalize its banks. And even though the bailout is too small to be effective it is still a big number, big enough to add to Spain’s sovereign debt, pushing real debt to GDP to more than 146%. This means Spain now has a banking problem and a sovereign debt problem. They are not going to grow their way out of this problem. There doesn’t appear to be a bailout plan that could pull Spain out of its downward spiral. It is probably just a matter of time. Of course we could be looking at another year of Spanish misery, and a lot can happen in 12 months, if they can last that long, but the situation doesn’t look good. Spain is big enough to wipe out the EU.


There is a great photo of the doors of the Bank of Spain; someone has put up multiple stickers and post-it notes that read: “this is not a crisis, it is a scam.”


Let’s look at some quotes that tell the Euro story:
“Spain is not Greece.” Elena Salgado, Spanish Finance minister, February, 2010.


“Portugal is not Greece.” The Economist, April 2010.


“Greece is not Ireland.” George Papaconstantinou, Greek Finance minister, November, 2010.


“Spain is neither Ireland nor Portugal.” Elena Salgado, Spanish Finance minister, November 2010.


“Ireland is not in ‘Greek Territory.’” Irish Finance Minister Brian Lenihan. November 2010.


“Neither Spain nor Portugal is Ireland.” Angel Gurria, Secretary-general OECD, November, 2010.


“Italy is not Spain” – Ed Parker, Fitch MD, 12 June 2012


“Spain is not Uganda” Spanish PM Rajoy. June, 2012


“Uganda does not want to be Spain” (Ugandan foreign minister) June 13th 2012






Google has put out its latest “transparency report.” It includes details of all the “takedown requests” the company received from governments around the world; these are basically government requests to pull something off the internet.  Leading the pack: The government of India, but that’s a little misleading because China simply blocked Google. Sometimes Google complies with the takedown request, sometimes they don’t.


Wikileaks founder Julian Assange is seeking political asylum at Ecuador’s London embassy. Last week the UK’s Supreme Court dismissed Mr Assange’s bid to reopen an appeal against extradition to Sweden over alleged sex crimes he denies. The Supreme Court gave him until 28 June before extradition proceedings can start.


He says the allegations are politically-motivated. Swedish prosecutors want to question him over allegations of rape and sexual assault made by two female former Wikileaks volunteers in mid-2010 but have not filed any charges. Mr Assange, whose Wikileaks website has published a mass of leaked diplomatic cables that embarrassed several governments and international businesses, claims the sex was consensual.


According to a State Department report, more than 42,000 adults and children were found in forced prostitution, labor, slavery or armed conflict in 2011, a US government report has found. Some 9,000 more victims were identified around the world than in 2010.  But the number is just a fraction of the estimated 800,000 people trafficked across borders every year.


Describing the report as a “clear and honest assessment”, US Secretary of State Hillary Clinton said: “The end of legal slavery in the United States and around the world has not meant the end of slavery.”


Where the trade in persons was once labelled as human trafficking, Mrs Clinton said: “I think labelling this for what it is – slavery – has brought it to another dimension.”


The stories of those enslaved “remind us of what kind of inhumane treatment we are still capable of as human beings. They are living, breathing reminders that the war against slavery remains unfinished.”


Now, let’s put that in perspective; JC Penney shares fell 8.5% to close at $22.25 one day after Michael Francis, the company’s CEO announced a very abrupt resignation. The stock is down nearly 37% year to date. Store traffic fell as Penney shifted toward everyday low pricing and away from marked sales days. Francis walks with about $10 million for nine months work. 

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