The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Nice reversal today on Greece and Strategic Oil Reserve release:

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DJIA 2 Minute Chart, this week

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Nasdaq 2 Minute Chart, this week

James Grant, editor of Grant’s Interest Rate Observer, talks about the outlook for Federal Reserve monetary policy and the consquences of the central bank’s policy of quantitative easing. Fed officials said today they will maintain record monetary stimulus to support a flagging economic recovery after completing a $600 billion bond-purchase program as scheduled this month. Grant speaks on Bloomberg Television’s “InBusiness with Margaret Brennan.”

Hat tip Scott F

Running time 13:15

Source: Bloomberg, June 22 2011

So yes the market is rallying on only a headline and not a full story. Headline being “Greece agrees with IMF, EU on 5 yr austerity plan.” There is already an austerity plan that the Greek parliament is voting on next week so the only thing that could be different is if the terms have been changed to make it easier for the Greek government to pass. Again, its just a headline that doesn’t fully make sense since a plan is already being voted on next week.

UPDATE:

Well, it turns out the market rallied on a story that came out this morning. The supposed deal that reuters reported at around 3pm and caused the market spurt higher was actually out before lunch with the gist being the Greek government will lower the income threshold of those being taxed, amongst other spending cuts. For those who have Bloomberg, it hit the tape at around 10:50am.

As long as we are nation building around the world, I know this little out of the way place in North America that could use some fixing up . . .

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via Sherffius

Aasif Mandvi explains how Goldman Sachs helped Greek people to continue retiring a few years before puberty.

I hope to have more on Bernanke’s press conference when the transcript is posted, but this partial comment in response to a question goes a long way toward understanding the moribund housing market:

Unfortunately, there are problems, including the fact that credit standards for mortgages have tightened considerably so that roughly about the bottom third of people who might have qualified for a prime mortgage in terms of FICO scores a few years ago cannot qualify today.  That’s an important problem.

We all well know the subprime market is dead.  I had not realized that fully 1/3 of potential prime borrowers are now no longer considered qualified by virtue of higher FICO scores being required by banks.  Simply put, we’ve apparently got big issues on both sides of the equation (way too much supply, and a demand problem that is being exacerbated by banks’ newfound religion on credit standards).  Exactly how is the tremendous slack supposed to be picked up?

I’ll also opine for a moment on the Fed’s statement, and leave the follow-up for when a transcript of the Q&A is posted.  Two words (highlighted) in this line caught my attention, and also that of today’s second questioner, whomever that was:

The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. 

The statement begs the question as to how much the Fed believes is temporary and how much it believes will linger for a while or is perhaps permanent.  As mentioned, a questioner pressed on this a bit, and I’ll review the transcript when available.  But this, to me, is worrisome (along with the fact that, at least for now, the Fed is washing its hands of further proactivity).

Frederick Sheehan is the co-author of Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.

His new book, Panderer for Power: The True Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, was published by McGraw-Hill in November 2009. He was Director of Asset Allocation Services at John Hancock Financial Services in Boston. In this capacity, he set investment policy and asset allocation for institutional pension plans.

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DOW JONES NEWSWIRES – June 22, 2011 –

“Lawmakers are considering changing how the Consumer Price Index is calculated, a move that could save perhaps $220 billion and represent significant progress in the ongoing federal debt ceiling and deficit reduction talks.

“According to congressional aides familiar with the discussions, the proposal would shift how the Consumer Price Index is calculated to reflect how people tend to change spending patterns when prices increase. For example, consumers tend to drive less when gas prices increase dramatically.

“Such a move is widely seen by economists as resulting in a slower rise in inflation. That would impact an array of federal programs that are linked to CPI including the Social Security program and income tax brackets set by the federal government.”

Social Security payments must be reduced. Promises were made – by lawmakers – that are beyond the government’s (the taxpayer’s) ability to pay. The latest scheme is a ploy by cowardly elected representatives who surreptitiously cut benefits for those most in need: the old and the frail.

First, the logic is indefensible: Gasoline prices rise; higher prices are unaffordable; people drive less; less gasoline is consumed; the Bureau of Labor Statistics (BLS) reduces the weighting of gasoline in the Consumer Price Index (CPI) calculation; this cuts gasoline’s (and, other products that are rising in price) influence on the CPI; the Consumer Price Index falls. Ergo, Chairman Ben S. Bernanke, in a future and “dreary” press conference (the adjective used by the Wall Street Journal to describe his session with reporters on June 22, 2011), states that inflation is falling.

Second, as mentioned above, this is hidden from public view. The official, government CPI which is used to increase Social Security benefits (e.g., if the CPI rises by 2.0%, next year’s Social Security checks go up 2.0%), will understate costs, reduce the ability to buy gas further, which will reduce gasoline’s proportion in the CPI even more.

By the way, this also reduces the inflation credited to owners of TIPS, or TIIS (Treasury Inflation-Protected Securities). The change reduces the value of TIPS.

It would be interesting to know if the amount spent on gasoline actually falls. The amount of gas (in gallons) might be less, but the increase in price could mean the dollars spent are proportionately greater to total costs. You can be sure the BLS has devised a method that has eliminated the possibility, which leads to:

Third, this latest scam is part of a long-running ploy to reduce Social Security benefits without inconveniencing politicians. Chapter 12 of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession is the history of Social Security and inflation manipulations between 1983 and the mid-1990s. From Alan Greenspan’s 1983 Social Security Commission through Michael Boskin’s contorted changes to the CPI measurement (1995), Social Security payments have already been reduced well below what they should be. One estimate, by Richard Karn, author of Emerging Trends Report, calculates that Social Security checks would have been 43% higher by 2006 if not for the chicanery of the scandalous Boskin Commission, a decade before.

Fourth, this latest effort shows the talk about reducing the deficit, cutting spending, and reaching an agreement on the debt ceiling is exactly that – talk. (As if you needed to be told.) Lawmakers may pat themselves on the back for this gift from the BLS, but a $220 billion spending cut is a drop in the ocean (and, probably a projection over the next 20 or 50 years). Social Security needs to be addressed by increasing, and by a substantial amount, the age at which retirement benefits can first be collected. Starving the old and the frail is not only a sick policy, it is also camouflage to win the next election.

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Previously:
Sheehan on Michael Boskin (January 2010)

Why Michael Boskin Deserves Our Contempt (January 2010)

Click for ginormous graphic

Via Life Hacker

Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., talks about Greece’s debt crisis. El-Erian, speaking with Betty Liu, Michael McKee and Jon Erlichman on Bloomberg Television’s “In the Loop,” also discusses the release of emergency oil stockpiles and the U.S. economy.

Source: Bloomberg, June 23

Here is the other half of today’s Look Out Below – the US release of Crude from the Strategic Petroleum Reserve.

The DoE announced a release of 30 million barrels of oil, ostensibly due to Libyan supply disruptions over the next 30 days.

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