Morning in Arizona

Morning in Arizona

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Thursday, September 15, 2016

Eight Year Anniversary

Financial Review

Eight Year Anniversary


DOW + 177 =18,212
SPX + 21 = 2147
NAS + 75 = 5349
10 Y + .02 = 1.71%
OIL + .12 = 43.70
GOLD – 8.50 = 1315.10

Wholesale prices were flat in August, mostly because of sharp declines in the cost of food and gasoline; the Producer Price Index was unchanged for the month. In the past 12 months, the producer price index is unchanged. In August, the wholesale cost of food tumbled 1.6%, the biggest drop in almost three-and-a-half years. Gasoline prices slid 2.5%.

If the volatile food, energy and trade margin categories are stripped out, so-called core prices rose a faster 0.3%. Looked at that way, costs have risen 1.2% in the past year, the highest 12-month rate since the end of 2014.

Sales at U.S. retailers fell in August for the first time in five months as traffic dropped off for most stores, a sign that third-quarter growth might not be as strong as previously estimated. Retail sales declined a seasonally adjusted 0.3%. In August, hardly any retail segments did well. Receipts at auto dealers slipped 0.9%. Sales at gas stations fell 0.8% last month, reflecting a decline in prices.

Sales also declined 1.4% at home-improvement centers and 0.6% at department stores. Sales even fell for internet sellers and mail-order companies for the first time since the start of 2015. Only restaurants and apparel stores, helped by back-to-school demand, showed much strength. Restaurant sales increased 0.9% and clothing-store receipts climbed 0.7%.

The U.S. current-account deficit, a measure of the nation’s debt to other countries, sank 9.1% in the second quarter to $119.9 billion. The decline mostly stemmed from an increase in investment in U.S. assets such as stocks and bonds. The current account reveals if a country is a net lender or debtor. The current account deficit was 2.6% of GDP in the second quarter. That’s down from 2.9% in the first quarter and well below a record of 6.3% in 2005.

Industrial production fell 0.4% in August after a revised 0.6% rise in the prior month and a revised 0.5% gain in June. Industrial production fell 1.1% in the 12 months through August. Manufacturing output fell 0.4% over the year, and mining output declined 9.3%. In August, manufacturing, which analysts said accounts for 80% of total industrial output, fell 0.4%.

Reflecting the up and down nature of recent data, the New York Fed and its neighboring Philadelphia Fed reported contrasting conditions in September. The Empire State index, which covers the New York region, showed factory activity contracted in September while the Philadelphia Fed manufacturing index jumped to 12.8 in September from 2 in August, the first back-to-back positive readings in the index in a year.

Rates for home loans jumped. Freddie Mac reports the 30-year fixed-rate mortgage averaged 3.50% in the September 15 week, up from 3.44% in the prior week. The 15-year fixed-rate mortgage averaged 2.77%, up one basis point during the week. Despite the big weekly jumps, rates are much lower than they were a year ago.

The Bank of England opted to hold base interest rates at record lows this morning and to maintain the size of its newly enlarged asset-purchasing program. The bank’s Monetary Policy Committee (MPC) voted unanimously in September to hold the base rate at 0.25 percent, which was cut in August. It also voted unanimously to maintain the size of its corporate bonds purchases at up to £10 billion ($13.2 billion) and government bond purchases at £435 billion.

Switzerland’s central bank has kept its expansive monetary policy intact, holding its deposit rate at -0.75%, stating the Brexit vote has clouded its view of the global economy. “The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market are intended to make Swiss franc investments less attractive, thereby easing upward pressure on the currency.”

Brazilian prosecutors charged ex-President Lula da Silva with being the “boss” of a vast corruption scheme at state oil company Petrobras, in a major blow to the leftist hero’s hopes of a political comeback. It was the first time that Lula, still Brazil’s most popular politician despite corruption accusations against him and his Workers Party, was charged by federal prosecutors for involvement in the political kickbacks scheme. Lula’s lawyers say the accusations are part of an effort to stop him running in the 2018 election.

On September 15, 2008, eight years ago today, investment banking giant Lehman Brothers filed for Chapter 11 bankruptcy, becoming the largest bankruptcy by asset value. The collapse of Lehman Brothers set off shock waves throughout global markets and economies.

The Dow dropped over 500 points, a 4.4% fall, in one day. The Dow Jones Industrial Average shed 25% over the next 30 days — a quarter of its value in just four weeks. Financial markets froze; not just stock trading, but derivatives tied to every kind of financial transaction from home loans to interest rates on bonds, to foreign currency exchange, to commodities – Lehman was a big player, an out-sized player in derivatives – and everything froze.

Some leading money market funds were unable to maintain their net asset value and began selling for less than $1 per share, a phenomenon known as “breaking the buck.” Liquidity dried up overnight. People were even questioning the future of capitalism.

Three days later, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke went to Congress with the Troubled Asset Relief Program, or TARP, a bailout for the banks. The Fed slashed rates to zero. Within days the contagion had spread around the world with governments having to use taxpayers’ money to bail out over-extended banks.

Despite all the damage, nobody went to jail. The Department of Justice refused to file criminal charges against individuals despite serious indications of violations of federal securities and other laws, uncovered by the Financial Crisis Inquiry Commission (FCIC) probe into the causes of the economic crash. The prosecutors’ cases were laid out for them, yet they refused to prosecute.

The FCIC findings found criminal liability at most of America’s largest banks — Citigroup, Goldman Sachs, JPMorgan Chase, Lehman Brothers, Washington Mutual (now part of JPMorgan) and Merrill Lynch (now part of Bank of America) — along with foreign banking giants UBS, Credit Suisse and Société Generale, auditor PricewaterhouseCoopers, credit rating agency Moody’s, insurance company AIG, and mortgage giants Fannie Mae and Freddie Mac.

The FCIC presented DOJ with evidence that these institutions gave false representations about the loan quality inside mortgage-backed securities; misled credit ratings agencies; overstated assets and earnings in financial disclosures; failed to disclose credit downgrades, subprime exposure and the financial health of their operations to shareholders; and suffered breakdowns in internal company controls. All of these were tied to specific violations of federal law.

And the FCIC named names, specifying nine top-level executives who should be investigated on criminal charges: CEO Daniel Mudd and CFO Stephen Swad of Fannie Mae, CEO Martin Sullivan and CFO Stephen Bensinger of AIG, CEO Stan O’Neal and CFO Jeffrey Edwards of Merrill Lynch and CEO Chuck Prince, CFO Gary Crittenden and Board Chairman Robert Rubin of Citigroup.

And if you think things have changed, just consider the latest scandal: the thousands of Wells Fargo employees who opened millions of fake accounts in the names of real customers, just to meet unrealistic sales goals. It is more evidence that bad incentives are rampant in the financial industry and top executives either look the other way or that they don’t know what’s going on in the companies they run – a sign, if nothing else, that big banks are too big to manage. And that’s just an example from this week.

In the past 8 years we have seen a long, long rap sheet of illegal activity from the banksters; everything from money laundering to market rigging, to tax evasion, to sanctions violations, to robo-signing (that’s the word we invented for blatant, out of control forgery and perjury).

And while it is undoubtedly true that a working financial sector is crucial to the health and growth of an economy, economists increasingly argue that we now have a sector which impairs growth. The Bank of International Settlements published a white paper arguing that periods of rapid growth in finance bring with them slowing growth in productivity in other areas of the economy. In other words, growth is good but uncontrolled growth is a cancer.

The cost of the crisis has been severe. A paper from the Federal Reserve Bank of Dallas estimated that the financial crisis and the recession cost the U.S. economy as much as $14 trillion, or about $120,000 for every household. Since 2008, the global economy has been struggling to recover from the shock. Gross domestic product, or economic growth, is still below the levels seen before the crisis.

While there is growth, it’s been painfully lackluster in recent years. In the US, GDP is forecast to rise 2.4% in 2016, the same as in 2014 and 2015, according to the International Monetary Fund. Unemployment levels have fallen since the crash but there remains a particularly weak area of the labor market: wage growth. Earlier this week we reported that personal incomes picked up last year and millions were lifted out of poverty, but incomes are still at 1998 levels.

Reforms were effectuated, but that doesn’t mean banks are safer. Yes, they have more of a capital cushion but they are bigger and involved in even more risky behavior. In fact, the risks of a big bank failing may actually be greater than they were leading up to the financial crisis. Any attempts at reform were little more than a drop of water in the ocean. Disasters like Lehman Brothers’ collapse can occur at any time, without warning. Those who don’t learn from history are doomed to repeat it.

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