FINANCIAL REVIEW

Bring Your Umbrellas

Sinclair Noe — September 29, 2014

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Financial Review

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DOW – 41 = 17,071
SPX – 5 = 1977
NAS – 6 = 4505
10 YR YLD – .04 = 2.49%
OIL + .59 = 92.61
GOLD – 4.40 = 1216.00
SILV – .20 = 17.56

Starting with economic data:
Consumer spending accelerated in August. Consumer spending rose 0.5% last month after being unchanged in July. Growth in personal income ticked up 0.3%, in line with forecasts. Some of the strength in spending came from a decrease in the saving rate, which eased back from a 1-1/2-year high in July.

One area where spending dipped – housing. The National Association of Realtors issued its index of pending home sales for August. Pending sales dropped 1% from an 11 month high in July. Signaling that upcoming closings of existing homes are likely to slow down, the index of pending home sales hit a seasonally adjusted 104.7 in August, compared with 105.8 in July.

The Fed’s preferred gauge of inflation was up 1.5% in August from a year earlier, down slightly from the reading in July. Excluding volatile food and energy prices, so-called core prices also advanced 1.5% year over year. Price increases measured by the PCE index slowed to a 1% annual pace late last year before accelerating during the spring and then plateauing this summer. A separate measure also shows inflation is largely in check. The Labor Department’s consumer-price index rose 1.7% in August from a year earlier. That was a marked slowdown from the better-than-2% pace recorded the previous four months.

Weak inflation gives the Fed leeway to maintain its low-interest rate policy without causing the economy to overheat. The Fed aims to set monetary policy so that prices will increase 2% a year. Now, the next logical question might be: why does the Fed target 2% inflation? And the official answer is that the Fed thinks 2% is consistent with its mandate of price stability and maximum employment. Of course, you could make the argument that 4% inflation could be just as stable as 2%, as long as everyone came to expect 4%, and there were no curve balls, we could have price stability at 4% just as easily as 2%. And the notion that the Fed might raise rates if inflation does hit 2%, well that doesn’t seem to be a good idea when it comes to maximum employment; just because inflation hits 2%, that seems a weak reason to tighten credit and slam the brakes on recovery.

So, back to the question: why 2%? Apparently they haven’t figured out a better way to turn the money spigot on and off; perhaps a combination of population growth and productivity growth; expanding the money supply to match the growth of people and things. Instead, they picked a number out of thin air, which is also how they create more money.

Each year Forbes comes out with its list of the 400 wealthiest Americans. It takes just over $1.5 billion to make the list, and it’s just Americans. Bill Gates is the richest American for the 21st year in a row, with a net worth of $81 billion. He’s the world’s second richest person, behind Mexico’s Carlos Slim. The second richest American is Warren Buffet at $67 billion; Larry Ellison is number 3 at $50 billion. All together the 400 wealthiest Americans are worth a staggering $2.29 trillion, up $270 billion from a year ago. That’s about the same as the gross domestic product of Brazil, a country of 200 million people.

Today’s geopolitical hotspot is not in Iraq, or Syria, or Israel, or Ukraine, or even Scotland; it’s Hong Kong. No we did not see this one coming. Tens of thousands of pro-democracy protesters blocked Hong Kong streets today, carrying umbrellas and chanting slogans and singing songs. Riot police had largely withdrawn and there were none of the clashes, tear gas and baton charges that had erupted over the weekend. As tensions eased, some exhausted demonstrators slept on roadsides while others sang songs or chanted slogans. The protesters are demanding full democracy and have called on the city’s leader Leung Chun-ying to step down after Beijing last month announced a plan to limit 2017 elections for Hong Kong’s leader, known as the Chief Executive, to a handful of candidates loyal to Beijing.

China rules Hong Kong under a “one country, two systems” formula that accords the former British colony a degree of autonomy and freedoms not enjoyed in mainland China, with universal suffrage set as an eventual goal. This protest could go a couple of ways: first, mainland China could send in the tanks, but they seem to be veering away from this idea, and instead, just letting the whole thing stew in its own juice, allow the dysfunction to burgeon until a local backlash is triggered or, failing that, at least stew until the local worthies have had enough and publicly petition Beijing to help them out of the mess. It’s a tightrope act. The problem is that news might get through to the mainland, and they might demand universal suffrage. Even worse, Americans might hear about it and might actually demand the right to vote.

Ohio established its early voting period in 2005, following a 2004 general election in which some voters in urban areas were forced to wait up to 12 hours to cast a ballot. Today, the US Supreme Court ruled against in-person early voting in Ohio. The first week of early voting, which the legislature cut, overlapped with voting registration and allowed residents to register and cast a ballot on the same day. The Supremes think that is a bad idea. If voters do get stuck in long lines again, maybe they can take an umbrella.

In today’s edition of “Banks Behaving Badly”, we start with the case of Commerzbank. In 2012, the Federal Reserve Bank of New York entered into an agreement with Commerzbank that required its New York branch to improve compliance with anti-money laundering laws and regulations. After finding the branch still failed to maintain adequate controls, the Fed issued a cease and desist order last year. Now, the US Attorney for Manhattan is investigating Commerzbank AG for alleged violations of money-laundering laws, potentially throwing a wrench in efforts by Germany’s second-largest bank to settle separate allegations that it violated sanctions by doing business with Iran and Sudan.

Meanwhile, the New York Department of Financial Services directed the bank to take steps to terminate a handful of employees who engaged in misconduct; that, as part of a $650 million settlement over the sanctions related violations. So, you have the US attorney going after Commerzbank; you have the state regulator going after Commerzbank, and all this after the NY Federal Reserve Bank of New York signed an agreement with Commerzbank that they must clean up their act, and when they didn’t they issued a cease and desist. I guess they just can’t help it.

Next on the docket is a familiar visitor, Bank of America. The SEC said Bank of America overstated its regulatory capital by greater and greater amounts in its regulatory filings, eventually reaching billions of dollars. The bank reported the overstatement in April and has been working with regulators to resolve the matter. The SEC has fined BofA $7.6 million. I’m sure that will be a huge deterrent.

Back in July, Lloyd’s Banking Group agreed to pay more than $380 million to British and United States authorities to resolve investigations into the manipulation of rates, including one used to determine fees paid by Lloyds related the bailout Lloyd’s received during the financial crisis. Lloyd’s admitted to criminal wrongdoing by some of its employees who manipulated the Libor, or London interbank offered rate, which is the global benchmark for interest rates on pretty much everything from mortgages to derivatives to the rate on a taxpayer bailout of a bank, apparently. Now, Lloyd’s says it has fired 8 employees and clawed back about $4.9 million in bonuses.

This is wrong on so many levels: first, the employees have continued to work for the bank; next, none of them are going to jail for admitted criminal wrongdoing; and third, the claw back comes from bonuses, which means that someone in the bank, who determines bonuses, thought that these rate rigging employees were doing such a fine job, that they deserved six figure bonuses.

Two former Wells Fargo employees have been charged by the SEC with insider trading. An analyst at the bank would tip off a trader in advance about market moving upgrades or downgrades. Nice.

Back in 2006, Congress approved the Military Lending Act on concerns that payday lenders, which offer double-digit interest loans tied to a borrower’s next paycheck, were preying on soldiers and their families, by hitting them with triple digit interest rates on short-term loans and subprime double digit rates on mortgages. It just didn’t seem right that people who were putting their life on the line for their country, should have to pay a pound of flesh to the shylocks of the world. The law set a 36% interest rate cap on a range of high-cost loan products; which still works out to about a half pound of flesh. And then, to really show how much Congress supports our troops, they left a whole bunch of loopholes in the Military Lending Act, because many payday lenders are also big campaign contributors. And so payday lenders just made minor changes to their payday loans, and kept charging rates that would make Tony Soprano blush.

The ultimate price of those loans for military members turned out to be particularly steep, costing them their homes, their cars, and, in some cases, their jobs. The military considers personal indebtedness to be a threat to national security, so high levels of debt can imperil service members’ security clearances.

Now Congress could have made some different choices; they could have decided to pay our troops a living wage; they could have set up a Military Bank to offer soldiers the same low rates they offer the bankers – essentially zero percent interest; and they could have closed the loopholes for the payday lenders. And now 7 years after the fact, that’s what they are debating – closing the loopholes. Last year, the Senate Commerce Committee convened a hearing on abusive practices aimed at military members. And the Defense Department started to solicit input about whether the protections, as they currently stood, needed to be updated. And maybe, when Congress gets back from their 2 month vacation, they will actually consider maybe doing something.