Wednesday, June 20, 2012 – A Twisted World – by Sinclair Noe
DOW – 12 = 12,824
SPX – 2= 1355
NAS +0.69 = 2930
10 YR YLD +.02 = 1.64%
OIL – 3.25 = 81.10
GOLD – 11.10 = 1607.80
SILV – .30 = 28.22
PLAT – 23.00 = 1464.00
Quite frankly the Federal Reserve FOMC meetings have become a bit too predictable. They didn’t lower interest rates because rates are already at zero. They didn’t raise interest rates because that would be a total freak out and the financial markets would collapse. The Fed does not have an exit plan from their zero interest rate policy. They didn’t announce QE3 because that would be a blatant destruction of the currency which would send the price of gold soaring; also because they are holding back and waiting just in case Europe hits the self destruct button.
The Fed expanded Operation Twist by $267 billion, meaning it will sell short-term securities and buy long-term ones in an effort to keep borrowing costs down. The program, which was due to expire this month, will now run through the end of the year. Operation Twist is a wash; it really doesn’t cost anything; they buy, they sell, it all equals out. The next question is whether Operation Twist actually does anything. Here the results are inconclusive. Long term rates are at historic lows but we don’t know if rates would have been low even without Operation Twist.
Perhaps the most pathetic part of the FOMC statement was this: “Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate.”
Specifically, the Fed expects unemployment at around 8% or higher for the remainder of the year. This is not a decline that is consistent with their statutory mandate. This is the Fed admitting that they are impotent to fulfill their mandate. According to their calculations, inflation will run right around the target of 2%; so inflation is not an impediment to policies which might improve employment. So, what is the Fed doing about unemployment? Not much.
The Fed also released economic projections, estimating US economic growth this year to a range of 1.9 percent to 2.4 percent, down from an April projection of 2.4 percent to 2.9 percent. They also cut forecasts for 2013 and 2014. And so the question again is – what is the Fed doing to reduce unemployment? Their policies are not growing the economy, and there doesn’t appear to be any specific action to target unemployment. This is the new normal.
I told you yesterday that the reaction to the Fed meeting might be mild disappointment. It was. It should have been outrage, but it wasn’t.
Elsewhere, let’s review Jamie Dimon’s dog and pony show before the House Financial Services Committee. You may recall that last week Dimon went before the senate where he received many thanks for his many campaign contributions. The senators were such a pathetic, fawning group of quislings that the house counterparts recognized the necessity of acting like they weren’t bought and paid for.
House lawmakers demanded answers. At one point, Representative Barney Frank, the Massachusetts Democrat who helped write the Dodd-Frank financial regulatory overhaul, told Mr. Dimon to “stop filibustering” and said that he was frankly “disappointed” with some of the banker’s answers.
Dimon stuck to the script; he kept repeating that despite all the bad stuff it would be even worse if there was more regulation. I think this should be allowed as a new defense in criminal cases: “Yes your honor, I stole the money out of the store’s cash register but if you put more cops on the street, then some other thug would probably do worse than that, so you should let me go.”
One idea is to extend Dodd-Frank regulations to the foreign branches and subsidiaries of Wall Street banks. Jamie Dimon warned that would be very bad: “If JPMorgan overseas operates under different rules than our foreign competitors,” and Wall Street would lose financial business to the banks of nations with fewer regulations, allowing “Deutsche Bank to make the better deal.”
So Dimon argues for less regulation no one knows how badly JPMorgan or any other Wall Street bank will be shaken if major banks in Spain or elsewhere in Europe go down. One advantage of being a huge Wall Street bank is you get bailed out by the federal government when you make dumb bets. Another is you can choose where around the world to make the dumb bets, thereby dodging US regulations. That’s just the way it is and that’s the way Dimon wants to keep it.
One of the more important points was whether Dimon was forthcoming with investors. Dimon tried to fend off implications that he misled investors on a now-infamous April 13 conference call, when he dismissed reports of potentially risky trading in the credit markets as a “tempest in a teapot.” A little later, Dimon admitted knowing that on April 10 the bank had a $300 million loss from the position, raising questions about his disclosures at the time. And then there were questions about Dimon’s own failure to spot the troubled bet as evidence that the bank’s risk-taking had become too unwieldy.
At one point, Dimon said: “No, we’re not too big to fail.” Those words should be carved in marble. And if, at some point in the future, we happen to repeat the problems of 2008 because we failed to address the cause; if that should ever happen, then we can refer to Dimon’s testimony and be done with it.
Meanwhile, Attorney General Eric Holder has been cited for contempt by a House committee for failure to prosecute even one of the banksters responsible for the financial crisis. A spokesman for House Speaker John Boehner suggested administration officials had lied earlier or were now “bending the law,” by handing out free “Get out of jail” cards to the banksters.
Wait, no. Excuse me. Holder was cited for contempt of Congress but it has nothing to do with the prosecution of banksters. It was for possibly covering up information regarding the “Fast and Furious” gun-running gone bad ATF scheme.
So many times we say the politicians are out of touch with the common man, but today, Attorney General Eric Holder proved that he is a man of the people; just like 88% of all American, Holder has contempt for Congress.
Greece has a new government. Antonis Samaras, the leader of the New Democracy Party, was sworn in as prime minister today. Samaras is preparing to work with two other parties that agreed to form a coalition. Whether his government will last more than a few months, or succeed in renegotiating some of the tough austerity terms of Greece’s multibillion-euro bailouts with its European partners, remained an open question. Already the coalition is finding dissension among the different parties. But Europe did not implode today. And for the moment, Greece is not the biggest problem in Europe. Spain is.
The G-20 summit in Los Cabos, Mexico managed to forge a tentative deal to put the machinery in place to extinguish the conflagration in the credit markets that is Spain, and which might also burn down Italy. The market reaction to Spain’s 100 billion-euro EMU rescue for its banks has been ugly. Spanish bond yields jumped above the unsustainable 7% level.
It looks like the plan is for the eurozone’s leaders aim to deploy the ESM, the European Slush Mechanism, to cap borrowing costs for Spain and Italy by purchasing sovereign bonds on the open market. Unfortunately, the ESM fund does not yet exist. It has not been ratified by Germany and Italy. When it does come into being, it won’t have much money. It has a theoretical limit of 500 billion euro, which is a nice round number that sounds impressive but has no basis in reality. The ESM’s paid up capital will start at just 22 billion-euro.
Britain’s George Osborne cautioned against exuberance. “One thing we have learnt is: don’t expect a single summit to solve the eurozone’s problems, otherwise you are going to be disappointed. The eurozone is inching towards solutions.”
But there are still problems, even if they can put some money into the bailout fund they still would need prevent a stampede. Once the fund starts buying Spanish and Italian bonds it will subordinate other creditor. You will remember that after the Euro-union refused to take any losses in Greece, they impose the entire loss on private bondholders, who suffered a 75% haircut. One of the victims of the Greek haircut was Norway’s state pension fund, which now says it will boycott any future EMU debt issues following the act of theft. And Norway isn’t the only private investor putting on track shoes and preparing to run away from the Spanish and Italian bond market; plus, it is a safe bet that there are swarms of bond vigilantes that now smell blood in the water and are looking at the short side of Spanish bonds. In other words, it will take more than a wing and a prayer and 22 billion-euro to prevent the collapse of Spain.
We’ve had a chance to digest the Jamie Dimon testimony before the House and there were a few highlights I found at theStreet.
For example: Jamie Dimon is a patriot. “The most important thing to me,” he told Rep. Scott Garret of New Jersey, “is the United States of America.”
Rep. Jeb Hensarling of Texas spouted off a mini-speech about the “serial trillion-dollar deficits” in the U.S. that are a whole lot bigger than the puny $2 billion lost by JPMorgan. Two billion “seems to pale in comparison,” he said, sniffing that he was “somewhat curious” about his colleagues’ outrage over JPMorgan’s loss. When you’ve got a disastrous federal budget to worry about, there’s no reason to waste time worrying about too-big-to-fail banks that might or might not melt down the global financial system.
Georgia “is number one in home foreclosures,” said Rep. David Scott of Georgia, and it wasn’t easy to tell whether he was bragging or complaining. He did, though, take the opportunity to thank Dimon that JPMorgan didn’t foreclose on more homes than it did, with a shout-out for the people who worked at the Chase Home Ownership Center in his state. “Good job,” said the congressman.
Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, said that when there’s a fiancial disaster in London it “often it comes right back here crashing to our shores.” Rep. Carolyn Maloney of New York talked about a “disturbing pattern” of London being Ground Zero of trading disasters. Dimon made a case at the Senate hearing last week that stringent regulations in the U.S. would drive business away from the U.S. markets — the “best” in the world. He never addressed the possibility that they might be “best” because they are subject to more regulation than the competition.
Maloney said to Dimon, “I always thought you loved New York. Why all these jobs and all this activity taking place in London?” Apparently, Jamie Dimon’s love of the United States isn’t really the most important thing.
Spencer Bachus III, chairman of the financial services committee, was taking some flack from his colleagues because Dimon had not been sworn in. “This is not a criminal proceeding or even a civil proceeding,” he said, adding that Dimon had volunteered to testify. Oaths are for criminals, not CEOs. Spencer Baucus, in his role as Chair of the Financial Services Committee also happens to be the largest recipient on the committee of JPMorgan campaign contributions. I’m not saying there is a direct correlation, but you might call it good ROI.
America is “a business machine.” That’s how Dimon describes it, anyway, crowing that the U.S. has “the best capital markets in the world.” His idea about regulations is that we need to get regulations “right” so they work for America. Let’s hope we don’t trash our standards so much that some other country figures out that higher standards can nurture a competitive business machine.
And maybe the most important thing we learned is that Bankers have rights, too. Dimon was getting some grief that he and his firm had lobbied for exemptions from the Dodd Frank Wall Street Reform Act, but he shot back at Rep. Maxine Waters of California. “Lobbying is a Constitutional right,” he said. “We have our right to have our voice heard.” And goodness knows that whatever may go wrong for banks and taxpayers, we certainly don’t want any of our financial institutions to be giving up any privileges. This is what happens when you grant personhood to corporations, they start demanding rights, like the right to less regulations, the right to buy the best Congress money can buy.