Morning in Arizona

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Rainbows over Canyonlands - Dave Stoker

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Monday, March 24, 2014

Friday, March 21, 2014 - Friday Wrap-up

Friday Wrap-up
by Sinclair Noe

DOW – 28 = 16,302
SPX – 5 = 1866
NAS – 42 = 4276
10 YR YLD - .02 = 2.75%
OIL + .69 = 99.59
GOLD + 6.20 = 1335.70
SILV un = 20.38

The S&P 500 briefly climbed to a record high of 1,883.97, just over its previous record of 1,883.57. We hit resistance and didn’t break through. For the week, the Dow is up 1.8%, the S&P is up 1.6% and the Nasdaq is up 0.9%.

The European Union has added a few more sanctions against Russia, adding 12 names to their list of Russians and Ukrainians facing asset freezes and travel bans. One EU commissioner said the goal is not sanctions, the goal is to get Putin to the negotiating table. The EU doesn’t want anything to rattle their already weak financial situation. In Europe they consider the Spanish “recovery” to be one of their success stories. GDP is projected at 1% growth, double last year’s 0.5% pace, and youth unemployment is still 55%; and this is considered good news. Spain, and several other EU nations are in no condition to fight a sanctions battle with Russia.

A separate order signed by President Obama yesterday expanded sanctions and authorized potential future penalties. Yesterday’s sanction expansion included Bank Rossiya, not one of the largest Russian banks, but it starts to pull the financial sector into the equation. The EU cancelled a summit in Russia planned for June. US bankers are now considering whether they participate in a scheduled May investor’s conference in Russia.

Several US banks have a presence in Russia; Citigroup has about 1 million Russian customers. Goldman Sachs has made at least $1 billion in investments in Russian companies and won a three-year contract last year to advise the Kremlin on improving the nation’s image overseas and to help the country attract more investors. Seriously, I can’t make this stuff up.

Euro leaders also vowed to wean the EU off oil and gas imports from Russia; you may recall a similar pledge made in 2008 after Russia invaded Georgia. And the EU did cut back on oil and gas imports, a little, but they still rely on Russia for nearly a third of oil and gas imports. This time, the leaders set a deadline for mid-year to come up with a comprehensive plan. A summer time plan is quite different than actual gas in the tank to heat the kitchen in winter.

Any cutbacks in Euro-zone energy imports will likely push Russia to export energy to the East, and as we mentioned a few days ago, they have a pipeline to the Pacific. Putin is scheduled to visit China in May, apparently for final negotiations on a natural gas supply deal. The next logical question is, why would the world’s largest oil exporter and the world’s most populous nation need Western banks when they have each other?

On Wednesday the Federal Reserve FOMC wrapped up a policy session and Chairwoman Janet Yellen was asked when the Fed might consider raising rates and she said it would be after asset purchases were completed and then she said a “considerable” time and then she was pressed to explain and she said a considerable time was about 6 months. And Wall Street traders did the math and computed that rates would start to go up in May of 2015, and they had a minor freak out. That was Wednesday, and the question was whether Yellen and her Fed colleagues would walk back that timeline. Today, the answer is no, they will stick with it.

St. Louis Fed President James Bullard today said Yellen was simply echoing prevailing market expectations when she said made the reference to 6 months. Dallas Federal Reserve President Richard Fisher echoed the idea that asset purchases would end around October and interest rate policy would come under consideration soon thereafter, describing the timeline as “sound”. So, Yellen didn’t have a slip of the tongue, she did make a fairly concrete policy signal.

This does not mean there is unanimity among Fed policy makers. Today, Minneapolis Fed President Narayana Kocherlakota said that raising interest rates to head off a potential financial crisis is simply not worth it, and he thinks the odds of a crisis are low, so there is little benefit to trying to reduce the probability of a crisis with tighter monetary policy.

Of course, the Fed is already in the process of tightening monetary policy, that’s what the taper is. This will cause long-term interest rates to rise -- and the worst is still to come. For instance, the yield on the 10-Year note jumped to 2.77%, from 2.68% on the same day of FOMC's decision to reduce asset purchases by another $10 billion. And short-term rates are rising to an even greater extent, despite the fact that the Fed is still posting a bid of $55 billion each month for these debt instruments. The Fed’s quantitative easing asset purchase plan was the only reason the yield on the 10-year note has been so low for so long. Well, not the only reason; the weak economy was part; but QE was the primary reason.

The Fed and the markets are generally acting like exit from QE and the Zero Interest Rate Policy will be easy. It won’t, but QE and ZIRP have mainly been a benefit for the bankers and the wealthy. Loose monetary policy is just another policy benefiting the rich… bringing undesirable consequences.

This is a moment where you might hear the phrase: “Well, don’t throw the baby out with the bath water.” Meaning we would still need loose monetary policy while we deal with other policies that directly benefit the rich. Well, loose monetary policy not only directly benefits the rich, it reinforces the other policies being criticized; and if you look closely, that isn’t a baby in the bath, it is a rich person acting like a baby.

And that brings us to today’s edition of Banks Behaving Badly, again. The banking industry was already bludgeoned by accusations that it “robo-signed” its way through mortgage default paperwork, shuttling struggling homeowners closer to foreclosure without giving them their due process. Now, fresh accusations that banks engaged in similar practices with credit card customers.

The latest development comes in the form of a lawsuit filed last week by Miami resident Ruth Moya against JPMorgan Chase.  According to her, she fell behind on her credit card payments after her husband’s business failed in late 2008. So the following year, JPMorgan filed two collection lawsuits against her.

The problem, Moya says, is that her paperwork, and that of thousands of other customers, got hurried through JPMorgan by bank employees who were less-than-concerned about getting things correct. Her lawsuit alleges that the bank’s collection lawsuits against credit card customers have contained numerous errors and are often missing relevant information, such as bankruptcies or consumer disputes. It describes an office of nine or 10 employees in San Antonio, Texas, who were FedExed paperwork for 50 to 100 collection actions per state per day. The employees, the lawsuit says, signed affidavits attributing to the papers’ accuracy without reading through them.

The lawsuit claims the “affidavits were executed by Chase employees en masse, often thousands at a time, one-after-the-other, without the affiant reviewing or verifying the information attested to in the affidavits.”

California and Mississippi have sued the bank over the way it collects credit-card debt.  The Mississippi lawsuit accused the bank of pursuing consumers for debts that had already been paid. The California lawsuit said that JPMorgan had committed “debt-collection abuses” against some 100,000 California credit-card borrowers over about three years.

Yesterday, the Consumer Financial Protection Bureau released a report on debt collection complaints. Consumers told the agency they had been hounded for debts they did not owe, or told they would be arrested or thrown in jail if they did not pay. The CFPB received more than 30,300 complaints about debt collectors in the second half of last year alone.

Fitch Ratings today upgraded its outlook for the US AAA credit rating, removing the nation from a downgrade watch after politicians put off another debt limit battle until next year. The company, one of three major credit rating firms, changed the outlook for the rating to stable from a negative watch put in place in October. Fitch said at that time political brinkmanship over raising the debt limit had increased the risk of a government default, raising the probability of a rating downgrade.

Last month's debt limit deal was a key reason for upgrading the outlook.  Fitch also cited the improved federal fiscal situation, including the shrinking budget deficit and brightening economic picture.

When you hear claims that government spending is out of control, you might want to consider that there has been a big shift, including 4 major pieces of deficit-reduction legislation enacted since the fall of 2010 were the Budget Control Act of 2011, the American Taxpayer Relief Act of 2012, the Bipartisan Budget Act of 2013, and this year’s farm bill.

Altogether, they cut projected deficits over 2015-2024 by $4.1 trillion: about $3.2 trillion from program cuts, including the associated interest savings; and $950 billion from higher revenues, including the interest savings. Program cuts outweigh revenue increases by 77% to 23%, or about 3 to 1. In fact, total federal spending has already fallen from 23.9% of gross domestic product (GDP) in 2009, at the bottom of the recession, to a projected 20.2% of GDP in 2013.  While total federal spending will remain high throughout the coming decade under current policies, that’s mostly because of a marked increase in interest payments.  In particular, as the economy recovers, interest rates will also rise, simultaneously increasing the interest we must pay on any given amount of debt.

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