The roller coaster ride continues, with a 345 point swing in the Dow Industrials from the intraday high and low.
A couple of economic reports set the stage this morning. First, retail sales in the US sank in December largely because of cheaper gasoline prices, but most stores posted surprisingly weak results during the busiest month of the shopping season. Sales at retailers dropped a seasonally adjusted 0.9% last month to mark the biggest decline in nearly a year. Excluding gas and car sales, retail sales fell 0.3%. It was the biggest decline for retail sales in 11 months.
One month does not make a trend but this kind of puts a dent in the idea that consumers would save money at the gas station but spend elsewhere. Instead it looks like people are tightening purse strings, which is symptomatic of deleveraging and deflation; it might also be indicative of how much the economy has changed in terms of job stability, wage stagnation, and retirement prospects; all of which point to much greater pressures to save.
The Federal Reserve then offered confirmation of a weak sales. The Fed’s Beige Book said most districts reported “modest” to “moderate” growth from mid-November to late December, and the Fed’s contacts for the most part expected somewhat faster growth this year. The report said there was generally “modest” consumer spending growth, outside of the demand for automobiles and vacations.
The prices that Americans paid for imported goods fell 2.5% in December, the biggest drop in six years; and that goes to the sharp decline in oil prices. This wasn’t a surprise; the import price index started to decline in July and it fell 7.3% in the second half of 2014. The 2.5% move in December was the biggest drop in import prices since 2008. The good news is that we aren’t seeing any real signs of inflation and probably won’t for the next few months, at least.
And oil isn’t the only commodity that has been dropping. Copper has crashed. Not to sound alarmist, but I think crash is the right word here. Copper enjoyed a nice bull run from 2001 to 2011, up more than 600%. But the global economies have now slowed down. Known as Dr. Copper, the commodity is a chief building and manufacturing material and to some a harbinger of the global economy. So when copper prices collapse, the doctor is telling us that the health of the global economy is sickly. Some blamed copper’s losses yesterday on the World Bank, which cut its global-growth outlook. China had been on a building boom, and that meant copper piping and copper wires. The Chinese building boom is over. Europe is slowing down. Chile is the top producer and they are still expecting record production for 2015. This ain’t rocket science; supply is up and demand is way down.
Copper prices have been sliding since the middle of the summer over concerns that slowing global growth might curb industrial demand for the metal. When copper reached $2.72 a pound, the bottom fell out; that works out to $6,000 a ton on the London Metal Exchange, and in just the past couple of days we’ve seen the price fall to an intraday low of $2.42. But it’s not just copper; there are several indexes that track a basket of commodities. The CRB index is down 20% over the past year; an index from S&P is down 37%; the Roger’s International Commodity Index is down 28% since June.
And it isn’t just oil and Dr. Copper telling us that there is something wrong with the world’s economies. The bond market is painting a less than rosy picture. Today, the yield on the 30-year Treasury bond settled at 2.450% compared with 2.482% on Tuesday. The yield broke the previous closing low of 2.466% set in July 2012 when demand for haven bonds surged over the Eurozone’s sovereign debt crisis. Yield on the 10-year Treasury note fell to 1.833% compared with 1.89% on Tuesday. The 10-year yield has tumbled from 2.173% at the end of 2014 and 3.03% at the end of 2013. Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said rock-bottom borrowing costs in the bond market are not a positive vote on the economic outlook. Kocherlakota said: “The low long-term yields are actually a source of unease to me” because they suggest investors are marking down the economy’s long-term prospects, while indicating that it’s possible the Fed will have less room to maneuver when it comes to future monetary policy making.
Even as the Federal Reserve has moved closer to raising rates, bond yields have been falling, at a time when they would normally be rising to price in the prospect of higher short-term interest rates. Many view the drop in borrowing costs a reflection of the US’ value as a safe haven for money at a time where global economic conditions are deteriorating. The market’s movements suggest that even if the Fed meets expectations and raises rates this year, financial conditions might not reflect this change in Fed policy. The Fed has fallen short of achieving its 2% price target for over two years now, and crashing oil prices mean headline inflation will likely be negative over the start of the year, if not longer. And the Fed’s other mandate of promoting maximum employment, while headed in the right direction, still has plenty of room for further improvement.
Before the start of trade we had a couple of big banks posting earnings. Wells Fargo reported net income of $5.71 billion, compared with year-earlier income of $5.61 billion. Per-share earnings, reflecting the payment of preferred dividends, edged up to $1.02 from $1 a year earlier – matching estimates. Revenue increased 3.8% to $21.44 billion – beating estimates. Wells Fargo’s mortgage banking results are closely watched; it is the largest mortgage lender in the country and so it is viewed as a bellwether for the housing market. Wells Fargo reported its home lending originations amounted to $44 billion, compared with the $50 billion a year earlier and $48 billion in the prior quarter. Reserve releases fell to $250 million from $600 million a year earlier and $300 million in the prior quarter. Banks generally release reserves as credit conditions improve and they perceive less need to hold reserves against potential loan losses. Meanwhile, Wells Fargo’s credit-loss provisions ticked up to $485 million, compared with $363 million a year earlier and $368 million in the prior quarter.
JPMorgan Chase reported a 6.6% drop in quarterly profit. Net income fell to $4.9 billion, or $1.19 per share, from $5.2 billion, or $1.30 per share a year earlier. Revenue on a managed basis fell 2.3% to $23.5 billion. The results were well below estimates. Legal expenses rose to $1.1 billion in the fourth quarter, from $847 million in the same quarter last year, total legal costs of $2.9 billion for the year were far less than the $11.1 billion recorded in 2013.
CEO Jamie Dimon was asked about the legal expenses and he said: “Banks are under assault. We have five or six regulators coming at us on every issue. Obviously companies make mistakes. We try to resolve it, we try to fix it, we admit it.”
All right. Companies do make mistakes. The bank revealed in October that names, addresses, phone numbers and email addresses of the holders of about 83 million accounts were exposed when its systems were hacked. That was a mistake that should never have happened. JPMorgan’s transgressions go far beyond the realm of basic mistakes; companies make mistakes but not all companies break the law by rigging foreign exchange markets and interest rate markets and derivatives markets and commodity markets and municipal bond markets and energy markets. And the reason JPMorgan has regulators coming at them on every issue is because they have violated so many laws on just about every issue. Chase’s documented list of crimes included repeated fraud, perjury, forgery, bribery, and violations of laws against trading with Iran and Syria.
But wait, there’s more: Bank Secrecy Act violations; misrepresentations of CDOs and mortgage-backed securities; violations of the Servicemembers Civil Relief Act; fraudulent sale of unregistered securities; auto-finance deceptions; violations of state and federal ERISA laws; filing of unverified affidavits for credit card debt collections; energy market manipulation that triggered FERC lawsuits; “artificial market making” at Japanese affiliates; shifting trading losses on a currency trade to a customer account; fraudulent sales of derivatives; and obstruction of justice (including refusing the release of documents in the Bernie Madoff case).” JPMorgan Chase was one of five banks which agreed to pay billions in fines to settle charges stemming from massive and systematic foreclosure fraud.
Pop quiz: How many senior executives at JPMorgan Chase have faced criminal prosecution for the bank’s serial crimes? How many have been personally fined, served with cease and desist orders, or been barred from acting as officers and directors of public companies?
And with regard to Dimon’s claim that they admit their mistakes; well, most of the financial settlements that they have reached include the caveat that they are not admitting or denying wrongdoing. As far as fixing their mistakes? It might be more believable if they actually stopped breaking the law, and if they got control of their out of control bank. A high recidivism rate is not the way to amend mistakes. Jamie Dimon is right, the banks, or at least JPMorgan, are coming under assault from the regulators, but only because they are so incredibly guilty.
Wells Fargo became the most profitable US bank in 2013, overtaking JPMorgan. And today Wells Fargo delivered a solid earnings report due to “continued strength in the fundamental drivers of long-term performance: growing customers, loans, deposits and capital.” JPMorgan delivered a big miss on earnings and it’s the regulators fault. At some point, the banksters and all the politicians they buy need to learn the lesson that the best response to excessive government regulation is not deregulation, it is unrelenting, uncompromising self-regulation.