FINANCIAL REVIEW

Taking on Water

Sinclair Noe — November 6, 2014

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Financial Review
DOW + 69 = 17,554
SPX + 7 = 2031
NAS + 17 = 4638
10 YR YLD + .03 = 2.38%
OIL – .70 = 77.98
GOLD + 1.30 = 1142.30
SILV + .11 = 15.53

Record highs for the Dow Industrial Average and the S&P 500 index. Milk and cookies time.

Outplacement consultant Challenger, Gray & Christmas says layoffs increased by 51,000 last month. Layoffs are down 4% from a year ago, and the increase in October follows a 14 year low in September. Meanwhile, the Labor Department reports the number of Americans applying for new jobless benefits fell by 10,000 last week, to 278,000; the eighth straight week under 300,000. This is all part of the setup for tomorrow morning’s monthly jobs report.

The big news today comes from the European Central Bank; ECB president Mario Draghi announced the central bank will increase its balance sheet by €1 trillion, or about $1.2 trillion, over the next 2 years. Interest rates are already at record lows, and Draghi has said they can go no lower. The ECB has issued long-term loans to banks and started buying covered bonds in the hope of flooding the economy with enough liquidity to ease credit constraints. Purchases of asset-backed securities are due to start this month.

Exactly what the ECB will purchase remains uncertain, but they are likely to move into the €1.4 trillion market for investment grade non-financial corporate bonds next month. Corporate bonds still won’t be enough and the ECB will have start buying government debt early next year.

There was a minor brouhaha about Draghi’s announcement; Reuters reported that some ECB policymakers were upset that Draghi was being overly aggressive with monetary policy. Draghi squashed that when he gave the statement, he said the asset purchases had “been approved and underwritten unanimously.”

Meanwhile the Bank of England also met today, and said it would keep its benchmark interest rate at 0.5%, where it has been since March 2009. The bank also left unchanged a stimulus program of holding 375 billion pounds, or about $600 billion.

Meanwhile, an ignominious revelation as Irish newspapers printed a letter from former ECB president Jean-Claude Trichet to former Irish finance Minister Brian Lenihan back in November 2010 where the ECB explicitly threatened to cut off emergency funding from the Irish banking system, unless Ireland immediately applied for a bailout and agreed to a program of austerity and bank recapitalization.

So, it appears the ECB really did take notes from the Federal Reserve.

Let me take you back to 2008 to refresh your memory. The major financial institutions were looking into the furnace of a global financial meltdown; the Bush administration had cobbled together a 3 page plan to bail out the banksters; most politician, both Republicans and Democrats weren’t buying in. Then-senator Obama told reluctant Democrats that as president, he would pursue major foreclosure relief efforts, but it was important to keep the banks out of the furnace. With candidate Obama on board, the bailout passed with minimal Republican support. And then after the election of 2008, the new administration decided that changing bankruptcy laws would be too difficult. Obama and Geithner let the banksters run the administration’s mortgage modification program; truly putting the foxes in charge of the hen house; and as we all know now, the mortgage mod plan was an epic failure.

On Tuesday, voters voted with their middle finger. Republicans say the 2014 midterms were a referendum on Obama’s failed policies, and they are right; but these were also failed policies of the GOP. Following the financial crisis of 2008 the politicians saved Wall Street and spit on Main Street. As the voters left the polls they were surveyed; two-thirds said the US economic system “favors the wealthy”; about 80% said they were worried about the direction of the economy; about half said things will be worse for the next generation. The economy, as in every election, remained the top issue on voters’ minds.

There has been economic recovery from the near meltdown in 2008, but it has been uneven and insufficient for most people; a few drops of tepid water on a hot summer day in Phoenix; enough to keep you alive but not enough to quench your thirst; meanwhile, a cool waterfall for the lucky few who have it made in the shade. Both Republicans and Democrats share blame for the economic shortcomings, but the buck stops in the Oval Office; rightly so. Voters may or may not be aware of all the details, but they know the game is rigged.

Everything is rigged. The Libor is rigged. The foreign exchange markets are rigged. The metals markets are rigged. The stock market is rigged. The tax system is rigged. The justice system is rigged. And of course, Washington DC is rigged.

If you steal a soda from the corner grocer, you would probably go to jail, and rightly so; but a bankster can steal billions, forge signatures on documents (remember robo-signing), perjure, money launder, inside trade, cheat on taxes, lie on official documents and the worst that happens is a slap on the fine that is ultimately paid by shareholders and consumers, and the whole thing is tax deductible. And the regulator and prosecutor then shuffle through the revolving door to get paid off by corporate America.

There has been some economic recovery but the economy is still headed in the wrong direction. Consider that in 2005, for every $1 of financial wealth there was 66 cents of non-financial wealth, things like homes and family businesses. Ten years later, for every $1 of financial wealth there was just 43 cents of non-financial wealth. What happens to all this financial wealth? Over 90% of the assets owned by millionaires are held in low-risk investments (bonds and cash), the stock market, and real estate. Business startup costs made up less than 1% of the investments of high net worth individuals in North America in 2011. Small business is the backbone of America, the economic engine for new jobs, but that engine has run out of fuel.

On the corporate side, stock buybacks are employed to enrich executives and hedge fund activists rather than to invest in new technologies. In 1981, major corporations were spending less than 3 percent of their combined net income on buybacks, but in recent years they’ve been spending up to 95 percent of their profits on buybacks and dividends. Now you might say that corporations are just sitting on a hoard of cash anyway, so why not employ that cash somewhere; but what it really says is that we have run out of productive ideas and good old Yankee ingenuity is dead. I don’t believe that, I just think we need the right soil to grow small businesses again.

The Upper Middle Class of America Owns a Smaller Percentage of Wealth Than the Corresponding Groups in All Major Nations Except Russia and Indonesia. The upper middle class in the US, defined as everyone in the top half below the richest 20%, owns 11.9 percent of the wealth – that’s 11.9% for the upper middle class in the US. Indonesia at 10.5 percent and Russia at 7.5 percent are worse off, but in all other nations the corresponding upper middle classes own 12 to 27 percent of the wealth. The American Dream is dead.

America’s bottom half compares even less favorably to the world: dead last, with just 1.3 percent of national wealth. Only Russia comes close to that dismal share, at 1.9 percent. The bottom half in all other nations own 2.6 to 10.2 percent of the wealth; just 1.3% in America. A rising tide lifts all boats. And we keep hearing that the tide is coming in, but only a few yachts are rising, and the other boats are taking on water. Don’t get me wrong, I’m not talking about a handout. I’m talking about a hand up, in an economy that’s not rigged against you. It’s the idea of equality of opportunity, make of it what you will.