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

Here is former Fed Chair Paul Volcker on the big question: will consumers, investors and the economy be safer?

“By now it is pretty clear that it was faith in the techniques of modern finance, stoked in part by the apparent huge financial rewards, that enabled the extremes of leverage, the economic imbalances and the pretenses of the credit rating agencies to persist so long,” Mr. Volcker said in this remarkably candid talk.”

-How Mr. Volcker Would Fix It (NYT)

Volcker’s wish list includes further basic reforms: Making capital requirements tough and enforceable; requiring derivatives to be standardized and transparent, and ensuring that auditors are truly independent by rotating them periodically. Last, he wants to shrink the Systemically Dangerous Institutions (SDIs), by reducing their size or curtailing their interconnections or limiting their activities.

In other words, bankers and the market cannot be trusted to self-regulate. Watch for the fools who claim otherwise . . .

A 10 year sequence of global fires as seen by NASA’s MODIS instruments.
Credit: NASA/Goddard Space Flight Center Scientific Visualization Studio
Source: http://svs.gsfc.nasa.gov/vis/a000000/a003800/a003868/index.html

Hat tip Flowing Data

Some quick reads to start your week:

• Bond-Fund Stars, Dimmer (WSJ)
• Hedge Funds Face Investor Pruning (WSJ)
• How Mr. Volcker Would Fix It (NYT)
• Europe is a mess:
……-Leaked Greek bailout document: Fiscal consolidation has failed (Credit Writedowns)
……-Banks must find €108bn in (FT.com)
……-In Europe, new fears of German might (Washington Post)
……-Nicolas Sarkozy: ‘We’re sick of you telling us what to do’ (Telegraph)
……-EU bank plan may include aid already pledged to bailout states-sources (Reuters)
……-Europe’s leaders threaten Greek default if banks won’t take £120bn haircut (Telegraph)
• More Jobs Predicted for Machines, Not People (NYT)
• Fisher Says Operation Twist Benefiting ‘Monied’ Interests (Businessweek) see also Government Taken in Dealings with Wall Street: Accident or Design? (Naked Capitalism)
• The Sunny Side of Doom and Gloom (NYT)
• The Mod Squad: Why Conservative Economists Back Mortgage Modification (Yahoo Finance) see also Fed Wants to Bet the House (Again) (WSJ)
• Tech Giants Sizing Up Yahoo Bid (DealBook)
• The Paradox of the New Elite (NYT)

What are you reading?
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In Wednesday’s letter we noted that virtually everyone involved in the marketplace ignored Ben Bernanke’s warning that he would hike rates to bust a bubble. We also noted that when obscure Fed officials hint or mention anything dovish, the usual suspects trumpet the comments as a sign that the Fed is about to implement QE 3.0 or some other funny money scheme – and stocks soar.

Yesterday, one of the Axis of Doves (Boston, NY, Chitown Feds), Boston Fed President Eric Rosengren followed Ben’s warning about possible Fed tightening with one of his own when he asserted that the Fed would consider removing accommodation if inflation accelerated.

Why did Ben and Rosengren broach the subject of the Fed becoming less accommodative? We believe the reason is the reacceleration of inflation as evinced by PPI and CPI, as well as Americans’ view that inflation is far worse than what CPI suggests. In other words, Ben’s Holy Grail, inflation expectations, is now a Fed concern because Fed officials realize that the public is not and will not buy its deceit that inflation is well contained due to benign ‘Core’ CPI readings.

A recent article stated that the Fed will now take food and energy prices more seriously because average Americans are irate at the real inflation in the necessities of life and don’t buy the Core bs.

John Williams: Annual inflation in the September consumer price index again hit the highest level for the CPI-U series since September 2008. The CPI-U gained 0.3% for the month and 3.9% for the year, while the narrower CPI-W gained 0.4% for the month and 4.4% for the year…The SGS-Alternate-CPI measures reflected annual inflation for September at 7.2% (1990-based) and at 11.5% (1980-based).

In other words, using BLS methodology from 1990, CPI is 7.2%; using 1980 methodology, CPI is 11.5%. Please recall that months ago we opined that the Long Island dress-down of B-Dud for trying to deceive a town hall group that inflation is low because hedonic adjustments on consumer electronic goods lowers the CPI was a seminal event for the Fed.

For years, Fed officials preached that the ‘Core’ and bogus CPI readings mean inflation is well anchored to its Halleluiah chorus on Wall Street. But once the public screamed that the Core emperor has no clothes, the scam was up on Main Street. Much of Wall Street still wants to believe in fairytales.

GDP is a bogus and deeply flawed economic indicator. As we keep ranting, real income and real living standards are the best and foremost economic indicators.

A Long, Steep Drop for Americans’ Standard of Living

The standard of living for Americans has fallen longer and more steeply over the past three years than at any time since the US government began recording it five decades ago.

Bottom line: The average individual now has $1,315 less in disposable income than he or she did three years ago at the onset of the Great Recession – even though the recession ended, technically speaking, in mid-2009…Per capita disposal personal income – a key indicator of the standard of living – peaked in the spring of 2008, at $33,794 (measured as after-tax income). As of the second quarter of 2011, it was $32,479 – almost a 4 percent drop… http://www.cnbc.com/id/44962589

With a more realistic accounting for inflation, living standards and real income would be much worst. We have maintained for years that tax data yields a far worse jobs and income picture than the BLS’s jobs report and other government agencies’ income data because tax data is actual receipts and not guesses, surveying, modeling, hedonic and seasonally adjusted garbage. Americans Grow More Negative About Their Personal Finances Nearly half say their financial situation is “getting worse,” similar to early 2008 Nearly half (48%) say their personal financial situation is “getting worse,” up from 41% in April and nearly tying the record-high 49% who said so in April 2008. www.gallup.com

Source:
The King Report
M. Ramsey King Securities, Inc.
October 20, 2011 – Issue 4121 “Independent View of the News”

In anticipation of a European agreement by Wednesday, Sarkozy yesterday summed up what they have so far, “work is going well on the banks, and on the fund and the possibilities of using the fund, the options are converging. On the question of Greece, things are moving along. We’re not there yet.” Spoken generalities notwithstanding, we assume some deal will be announced in days. That said, this is all about Italy and Spain and by assisting their refinancing needs over the next few years at the same time major pressure is put on them to get their finances in order. This is from today’s FT front page, “Germany and France have turned on Italy to demand further action to boost growth and reduce its huge debt.” Greek stocks are down 5% led by banks as bank shareholders face the reality of a sharp reduction in the mark to market value of their Greek bonds and the equity dilution that will follow. With respect to French banks and their Greek exposure, ECB member Noyer said that French banks won’t need state help, they can absorb Greek losses but still need to raise about 10b euros of equity. Euro region mfr’g and services composite index fell to 47.2 from 49.1 and was 1.6 pts below expectations. It’s the weakest report since July ’09. Asian stocks rallied after China’s HSBC preliminary Oct mfr’g figure rose to 51.1 from 49.9, the 1st reading above 50 since June and copper is following higher for a 2nd straight day

Good Monday morning.

We begin the week with a few very simple premises confronting investors:

• Will the Europeans resolve their own credit crisis?
• Have stocks entered a new trading range?
• Are fears of a US recession overblown?

Europe: The news out of Europe was surprisingly bad: Lots of bickering and infighting over resolving the Greek problem. Regardless, European markets opened higher across the board (they gave back most of the gains as of this writing). The Euro Summit failure was offset by signs of growth in Asia — both in China and Japan.

Equities: Regardless, the market reaction to no resolution is quite telling. A month ago, this news would likely have brought a 3-4% drop in European bourses, and a 250 point drop in US equities.

Broader US equities may be entering a new trading range. As we discussed Friday, the S&P500 broke out of their prior 3 month range. It is noteworthy that while the Dow, Nasdaq and SPX have managed to rise, the small cap Russell2000 is still mired in its trading range.

Recession: Funny what a strong rally does; the increasing drumbeat of recession possibilities — from ECRI to the Fed chief himself — seem to have been muted.

I am far less enamored of markets as a savvy forecaster. Its track record is spotty at best. Our recession expectations remains better than 50% over the next 18 months.

Why? Its the Jobs, stupid!

Steve Jobs was already gravely ill with cancer when he asked author Walter Isaacson to write his biography. Jobs told Isaacson to write a honest book – about his failings and his strengths. Steve Kroft reports.

See also
Revelations from a tech giant

Steve Jobs, part 1

October 23, 2011 12:14 PM

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Steve Jobs, part 2

With about 40 minutes of trading, the S&P500 has pierced its 1230-33 resistance (which includes the 100-day moving average)  though has come in a little from its morning high.   Closing above the 100-day at 1232 will be an important win for the bulls.   Lots of performance anxiety out there in the under invested crowd.

Here is a great quote from a money manager/trader we know well,

The systemic fear of going down with the ship keeps you on shore.   You wake up one morning and find the ship has left dock.  You jump in and try to swim to catch the ship and almost drown in the choppy waters.   All while thinking you’re not sure if the ship will eventually hit the iceberg that kept you on the shore in the first place!

Miss the boat and if stays afloat for six months, in the words of Donald Trump, “you’re fired.”

Couldn’t capture the frustration and fear of missing the boat here any better.   And the longs are worried that this may be a bull trap.   That’s part of the reason why markets are  so volatile.  Nobody knows for certain what the future holds and that is what makes markets.

The levels to watch on the upside for the S&P are today’s intraday high of 1239.03;  1243,  .618 fib retracement of August-October sell-off;  and 1257.64, the break-even for 2011 and level where money will be forced in.  The 1274.67, the 200-day, which will probably be slightly lower by year-end.

Stay tuned.

Yes We Can … Recover Fraudulently-Earned Money

Nicholas Taleb said recently that the bankers “hijacked the American economy,” and should not have received $2.2 trillion bonus payouts they did. Taleb lamented:

Unfortunately, we don’t have claw backs in the U.S.

I’ve previously argued that the government could use existing laws to force ill-gotten gains to be disgorged (see this and this), fraudulent transfers to be voided and – perhaps – even bonuses gained at the expense of taxpayers clawed back.

To find out whether or not Taleb is right, I spoke with the country’s top white collar crime expert – who put over 1,000 top S&L executives in jail for fraud (professor of law and economics Bill Black).

I asked Professor Black what, exactly, current fraud laws allow to be disgorged. For example, I asked Black whether or not bonuses given out based on fraudulent Ponzi schemes and manipulation of a company’s accounting books could be disgorged. And I asked hims to estimate how much could – hypothetically, if prosecutors and judges did their job – collectively be recouped for the American people?

Professor Black informed me that the proceeds of fraud can be recovered, including bonuses earned through fraudulent activity.

He said that the amount which could be recouped could amount to tens of billions of dollars per prosecution, if the evidence of wrongdoing was there.

Ten billion here and ten billion there could add up to some real money. Prosecuting fraud and recovering ill-gotten games could make the giant banks whose very size is ruining the economy (what Black calls “Systemically Dangerous Institutions” or SDIs) a little smaller, and to help pay down our national debt a little bit in the process.

And because fraud caused the Great Depression and the current economic crisis, and the economy cannot stabilize until the rule of law is restored, and criminal fraud on Wall Street is prosecuted, suing to recoup criminally-gotten gains is the best thing we can do for our economy.

And since rampant inequality leads to unstable economies and depressions, recouping some of the ill-gotten gains from the Wall Street fraudsters will help reduce inequality without raising taxes.

Here is yet another in our all-too-regular continuing series, courtesy of Ron Griess of The Chart Store:

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click for larger charts