DJ30 – 11,494   down 120
US Treasury 10 Year Bond – 2.15%    down 0.07%
USDEUR  -  1.4270
Gold – $1825     down $1
Oil – $88.81    up  $0.11

Jobless Claims and Productivity……..

Jobless claims came in at 409,000 for last week, and this continues to be bad news for the US economy – as anything over 400,000 just makes things worse.  The previous week was revised upwards to 412,000 from 417,000.

Productivity came in at MINUS 0.7% for the 2Q 2011.  This is the third quarter in a row with DECLINING productivity.  Okay, I hear you ask, what is productivity?  Well, from the layman’s point of view, productivity is a measure of how much better (more valued product) production is with the same employees.  In other words, if the same number of employees produce twice as much (in value) as last year, the productivity of that group of employees rose by 100%.

Generally productivity increases come about by capital investments in computerized production gadgets (like robots and computers, etc).  So, the way that industry has raised productivity in their company before was to buy sophisticated machines to replace employees.  This resulted in less employees producing MORE goods – ergo an rise in productivity.

So, why is productivity declining, and is this good for America?  Well, I think that industry is at the end of its good ideas for automation of production lines right now – and has stopped investing – as well as stopped hiring new employees.  They are waiting for a time in history when an investment will pay off with greater profits for the company – and that isn’t now with unknowns coming each day from Washington DC.  In other words, I believe that the decline(s) in productivity that we are seeing in America today are coming from (lack of) decisions coming out of our federal government.  And, to make it clear to you all, a decline in productivity is just another sign that the US economy is going into (or is already in) a double-dip recession – aka a stagflation right now.

Today’s Re-Financing for Housing…….

I would like to bring to your attention a speculation that the big banks in the US together with Fannie/Freddie have conspired to maintain a high income of past mortgages – at the expense of the average middle class family.

Here is how it worked:

1. The world blew up in 2008 with the Mortgage Securities junk bonds – but not all bonds were equal.
2. These bonds were sliced and diced into various pieces – and some were AAA, some AA, some B+, some C, some just junk – you get the idea.
3. The big banks bought up the good stuff – the AAA – these are the ones where people actually paid their mortgage payment.  Fannie/Freddie are major holders of these good mortgages too.  (Perhaps you might see some self interest in this story.)
4. These mortgages were written in the 2002 through 2007 timeframe when interest rates were higher than today.
5. The 2008 came along, and all the rules changed – Fannie/Freddie put out rules to make “refinance’ much harder to qualify.  Rich people could qualify, but middle America hard a very hard time qualifying.  Basically, refinancing dried up.
6. This mean that all those “new low interest loans” out there over the past couple of years were unattainable for the average person.
7. The net result = more profits for the banks who held the right AAA bundles of mortgages.
8. As an aside, you might ask who got the junk?  Well, the FED is holding quite a bit of mortgage securities – and I wonder about its quality.  But, most of it probably went overseas to the EU banks – and you wonder why they might be introuble today?
   

That gets us to today.  We have a broken housing market today.  We have 25% or so of mortgage holders “under water”.  We have a declining value in the housing stock.  The future is not bright for the housing market.

So, what could the government do?  Well, with the previous story, you can see that the government could order the GSEs (Fannie/Freddie) to rewrite the rules on refinancing so the Average American can get a lower priced mortgage, and that savings would go directly into the consumer’s pocket.  It would come out of the big banks and GSE pocket.  (Remember the WE own the GSE, so any less money going to a GSE is less money going to US).  More money in the consumer’s pocket would be good for the economy – as consumers tend to spend.

As we move back into the Congressional sessions next week, and the President gives his ideas for kick-starting the job market, we should look for discussions coming out of Congress on the subject of “refinancing” regulations.  Barbara Boxer has proposed legislation along this line, and you might hear something about this.  The President has proposed forcing mortgage holders to be “forced” to take principle write-downs as part a solution to the mortgage problem.  This would put a big burden on the big banks (like Bank of America) and that would create a new problem to be solved.  The solution could easily be the breakup of the big banks to spin off the mortgage portion of the banks.  Chaos would rein, of course.  Politics would run wild too, and the public opinion of Congress would fall lower than scum.

So, there is my thoughts on one of the biggest rip-offs in American history.  What bothers me most is that the federal government (which we think is there to protect us) is actually working with the big banks to prop them up and fill their coffers with our money.  I know – I shouldn’t be surprised – and I am not surprised – just very sad for the country.

This is news that shows that a “healthy” economy like the one in the UK can have a double dip recession.  If the 1Q 2011 is negative also, that would confirm the new recession there.  It is interesting to note that the 4Q decline in GDP was a “surprise” to the economists.

SWAPS have gone bad in Italy, and Merrill Lynch, Deutsche Bank and UBS are suing in London

These are fancy financial instruments that the “big banks” sold cities across Europe.  Rome, Florence and many other are included in this lawsuit.  The swaps are losing money for the cities, and for the big banks who sold them in the first place.  The cities have stopped paying their premiums on the swaps – so that’s why the banks are suing.  The cities are angry that some fees were hidden from them, and they are seeking damages from the big banks.

Italian municipalities, emboldened by Milan’s criminal trial of Deutsche Bank AG, Depfa Bank Plc, JPMorgan and UBS over allegedly fraudulent selling practices on swaps, are increasingly filing complaints at home to avoid losses on derivatives contracts. The banks are turning to U.K. courts, where they expect to get swifter and fairer judgments.

The total loss by the Italian municipalities are about $1.6B – so we are talking about real money here.  It is not clear who will win the suits – even though they will be fought in the UK.  UK courts have ruled against swap derivative contracts in the past.  That would mean the big banks would have to eat the loss.

What does all this mean?  It means that the mess that was started in 2008 with the financial meltdown hasn’t been resolved yet – and it will take years to work out all those contracts and get someone to step up to the responsibility.

Is the FED cheating by writing their own accounting rules?

Concerns that the Federal Reserve could suffer losses on its massive bond holdings may have driven the central bank to adopt a little-noticed accounting change with huge implications: it makes insolvency much less likely.  The significant shift was tucked quietly into the Fed’s weekly report on its balance sheet and phrased in such technical terms that it was not even reported by financial media when originally announced on Jan. 6.

But the new rules have slowly begun to catch the attention of market analysts. Many are at once surprised that the Fed can set its own guidelines, and also relieved that the remote but dangerous possibility that the world’s most powerful central bank might need to ask the U.S. Treasury or its member banks for money is now more likely to be averted.

“Could the Fed go broke? The answer to this question was ‘Yes,’ but is now ‘No,’” said Raymond Stone, managing director at Stone & McCarthy in Princeton, New Jersey. “An accounting methodology change at the central bank will allow the Fed to incur losses, even substantial losses, without eroding its capital.”

The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability.

The timing of this FED accounting rules change is set to coincide with the Quantitative Easing 2 which could yield additional losses to the FED.  Please remember that accounting tricks are only tricks.  They don’t change the facts about the assets that the FED is holding – they are still losses if they are sold on the market today.  And, YOU as the taxpayer of last resort are responsible for those losses.  I bet you didn’t think you would be responsible for FED losses – did you?

Belgian citizens want a government

Tens of thousands of Belgians took to the streets on Sunday to shame political leaders who have failed to form a government more than seven months after an election and left the country at the mercy of financial markets.

Since the inconclusive June 2010 parliamentary vote, a caretaker administration has run the country while Dutch- and French-speaking party leaders have argued over the degree to which powers and tax-raising rights should be transferred to regions of the linguistically divided country.  French-speakers particularly view further devolution as a step towards the break-up of Belgium, something they oppose.

In the past two months, financial markets have also woken up to the impasse, increasing the country’s borrowing costs.  Economists say the lack of a fully-fledged government means Belgium cannot take reforms required to rein in its heavy debt and left investors wondering whether the country could eventually need a bailout.  Belgium’s public sector debt has approached the size of its annual economic output and was the third highest in the euro zone in 2009, behind only Italy and bailed out Greece. Only rescue fund recipient Ireland appears to have caught up last year.

My wife and I lived in Brussels for 9 years, and know the people of that magnificent city well.  It takes a lot to get people to protest, so there is real dissatisfaction there.  Belgium is another weak link in the financial structure of Europe.

Bonds gained in value (decreased in interest rates) as profit taking and squaring of shorts moved bonds.  Higher interest rates appear to be with us for some time.

The Dollar lost over 1 cent against the Euro today, and is testing a recent high for the Euro.

Oil and gasoline hit recent highs.  Speculators are rife in this market as oil doesn’t move up $20/barrel in one month without speculators.

Gold was up a little today, and appears to have tested its bottom and has set a new resistance point just above $950/ounce.  Providing this resistance point holds, gold is poised to test a new high within the next month.

In the news today….

Bank of America CEO Lewis – was forced to complete the purchase of Merrill Lynch by the FED and the Treasury according to his testimony to Congress today.  Apparently an email trail shows that Lewis was threatened with his job if he didn’t cooperate.  He was also told to keep the details of the Merrill Lynch deal confidential.  Apparently Lewis tried to back out of the deal, and try his luck in the courts by breaking the deal, rather than complete the purchase.  That’s when the real pressure from government hit him.

Bernanke denies having told Lewis that he shouldn’t withhold information on the Merrill Lynch purchase, and Bernanke and Paulson will both testify to Congress on this subject sometime in the future.

I must apologize to Mr. Lewis as I previously accused him of being a scumbag when I thought he purchased Merrill Lynch and Countrywide and drove Bank of America into the sewer.  It appears the government had its hand in his being a scumbag.

Retail Sales – rose 0.5% in May.  Good news???  Perhaps a little good news, but the main driver in this number was the higher gasoline prices.  So, it’s difficult for me to see how paying more for gasoline is good for the US economy – which is what the headlines want you to believe.  If people are spending more on gasoline, a necessity, they have less money left in their pockets for other goods.

Jobless Claims – also fell last week, and were 601,000.  While this trend is actually good news, it is still above the magic 400,000 number, so the unemployment number is still climbing.  While it would be nice to call the bottom of the jobless claims graph before it happens, that is just impossible – so, it’s much better to let the jobless claims level out with NO increase in the unemployment number, and that’s when it’s time to break out the champagne.  No sooner.

Foreclosures – fell 6% in May over April.  However, the rate of foreclosures is way too high, and foreclosures lead to distressed sales by banks and this leads to lower property prices.  This problem is far from being resolved.

More on the Pay Czar…..

President Obama has appointed a “Pay Czar”.  Isn’t that nice?  He wants to regulate the pay of the top 100 people’s pay in companies that receive taxpayer bailout money, TARP money.  I agree.  When we bail out a scumbag company that helped cause the economic mess we’re in, they should be “controlled” by the government on our behalf.

However, the President’s desires go far beyond companies with bailout money.  He wants to regulate the pay of all companies.  He has backed down from his statement that a CEO can’t make more than $500,000 per year.  He did this under a barrage of criticism, but his real reason was that Congress was passing legislation that would restrict bonuses to 1/3 of total compensation.  In other words, a CEO could get $750,000 in compensation including bonuses, and this is acceptable to the President.

Today, the Treasury announce “guidelines” for ALL companies to follow regarding executive pay.  Isn’t it interesting that while the rhetoric says Obama doesn’t want to control executive pay, he puts out guidelines anyway!!!!  Actions speak louder than words.

Having Big Government setting salaries – no matter how egregious those salaries have been, and are right now – is a fundamental intrusion in our capitalist system.  

Calmer heads are prevailing, and people are actually talking about strengthening the rights of shareholders in companies to have a major say in the salary of the company officers.  The boardrooms of America need a major shakeup to accomplish this type of shareholder control.  We’ll see how far this actually goes.  My cynical side says that all this smoke and mirrors is meant to show that the government is doing something, when in reality, it is doing nothing.

Oh, and by the way, doesn’t the word ‘czar’ imply “dictator?”  If I remember right Obama has now appointed over 20 Czars.

Here are the last numbers for today:
Dow Jones 30 Industrial – 8771 (up 32 points)
10 Year Treasury Bond – 3.86% (down 0.07%)
Euro – $1.4102
Gold – $962 (up $7)
Oil – $72.68 (up $1.35) – another near term high
Gasoline $2.06 (up $0.05)

Bonds got clobbered (interest rates way up) as the amount of bonds coming on the market next week spooked the traders.

The Dollar, oil and gasoline all went sideways.

Gold went down again today below $900/ounce.  This might be another buy opportunity, but wait for the fallout next week.

In the news today…..

The Unemployment Rate jumped to 8.5% in March from 8.1% in Feb.  During the month of March we lost 663,000 jobs.  Also, given the current weekly unemployment claims being made in April, this trend of a massive unemployment gain is expected to continue.

Fannie and Freddie are going to give their employees $210M in bonuses this year.  And, I might add, they are paying for it with your tax dollars.  So, where is the outrage in DC this time?  It doesn’t exist because everyone knew about it, as they did about AIG.  What a bunch of scumbags.

10% of the population of the US are getting Food Stamps.  That is 32.2 million people.  The average payment in January was $113 to each person.  A typical family of 4 will get an $80 boost to their Food Stamp money starting soon, and that added money is coming from the Stimulus Bill.

Food for Thought – Tonight’s Dinner Conversation…..

Remember Geithner’s plan to solve the “toxic asset” problem that our big banks have???  It’s called the Public-Private Investment Program, and also please remember that YOU will be paying big incentives to the “investors” who are putting in their own money!!!!!!!!

Well, here is the rub.  The exact same banks who are holding those assets are putting together plans to purchase the other banks’ “toxic assets.”  

Does this sound insane to you?  Or, am I just smoking something?????

So, the TAXPAYER is giving money to those greedy, incompetent banks, and they are going to use that money to buy more toxic assets.  Only this time, they will be on the receiving end of the “incentives” promised by Geithner and make a bundle of money out of the deal.

Are you hearing anything about this scam on the news yet???  I haven’t seen it yet, but this is so explosive that it must hit the news sometime.  Enjoy the blast when it happens.

Here are the last numbers for today:
Dow Jones 30 Industrial – 8018 (up 40 points)
10 Year Treasury Bond – 2.91% (up 0.16%)
Euro – $1.3487
Gold – $897 (down $12)
Oil – $52.51 (up $0.13)
Gasoline – $1.49 (down $0.02)    

Oil and gasoline gained on this latest news as speculators are gambling that this major Treasury step will lead to a recovery in the economy.

Gold held steady, only losing $4 on the news.  The steady gold price shows the battle between the “economic recovery proponents” which would bet on lower gold prices, and “inflation hawks” who would bet on higher gold prices.  I believe in the latter.
 
In the news today…..

Treasury Secretary Geithner today announced his not too hidden plans on solving the toxic mortgage securities problem that our big banks have.  Here it is in a nutshell:

1. He plans that $1TRILLION of this “toxic waste” will be purchased
2. It will be purchased by 3 groups
   1. 7% by Private individuals  
   2. 7% by the Government  
   3. The remainder (86%) by the government – probably the FDIC – as a “loan”.
3. The “toxic waste” will be valued by the private sector.
4. Not much detail in this plan, but a lot more than the “hope and a prayer” stated before.  The devil is in the detail!!!

Here is my observation and opinions on this plan:

1. Geithner thinks that the problem with the economy is that banks aren’t lending,
2. and they aren’t lending because they have these “toxic securities” on their books, and they are worried the future value of these securities will be going down making them insolvent.
3. So, let’s question this basic assumption.
4. Is that banks aren’t lending, or people aren’t borrowing?  I think it’s the latter, and my opinion is backed by the decreased public spending and increased public savings.  Remember that at least 2/3 of the economy is driven by the general public consumption.
5. Banks are lending because they don’t want to lend to deadbeats anymore. Remember that the government forced them to lend to people who couldn’t possibly pay back their mortgages.  They fully understand the ramifications of that line of action in spite of the fact that they make a ton of money doing it, and loved it.
6. Banks believe that house prices will continue to decline, and therefore, the value of their toxic securities will continue to decline.  A future decrease in their value if taken onto their balance sheet would force the FDIC to take them over – probably today.
7. The value of these assets are worth less than the banks state they are worth.
8. Geithner’s belief that our economic recovery will be lead by the banks if false.  It will be lead by consumers.
9. Geithner must believe there is no alternative.  Naturally, this is false.  The tried and true FDIC takeover of banks has a proven track record.
10. Only 7% of this “deal” will be offered to the private enterprises, like pensions and insurance companies and rich individuals??  WHY ONLY 7%?????  If this is such a great plan, don’t you think that private investment would want more than 7% of it?  Or, is this the maximum amount of money that the government thought they could get out of private investment?  Just the 7% figure raises a big RED FLAG for me.
11. If the value of this great investment actually goes down in the future, who bears the loss?  Do the 3 classes of investors share in the loss proportionately, or will one class (and I’m thinking the taxpayer) bear the entire loss?   Another way of addressing this question is “Are there any guarantees for the private investors?”  Details, details, details.

What is wrong with this plan???

1. The debt remains. It isn’t going to be written off.  
2. The taxpayer is holding the bag, and the banks get off scot free – well, that hasn’t been truly determined yet because the banks should have to sell this junk at less than they think it’s worth.  We’ll have to wait and see.  I wonder how “transparent” the valuing process will be???   For sure, the banks won’t have to worry about their future as they do every minute of every day today.
3. A major portion of this toxic waste will never be paid back – and no one – neither the banks, nor the government – has addressed this issue head on.  You and I will be stuck with the loss.
4. Oh, by the way, when this additional cash comes home to roost, there will be more inflation created.

My conclusion:

This should help the big banks take a deep breath, and allow them to go back to business as usual.  I don’t like business as usual, as the banks were one of the major factors in getting us into this mess.  Where’s all the needed regulation by the government that was missing the last time around????

Without knowing the details, it is impossible to determine exactly how badly the taxpayers will get screwed, but you can count on it.

Without a complete destruction of this toxic waste, it will linger and be an albatross around the President’s neck.  The press will try to hide the truth of the demise of the money going down this rat hole.  

I think this is just another nail in the inflationary coffin that will hit the US in the future.  The only way this won’t be a major inflationary force is IF the housing prices of the US stabilize immediately and start back up.  I don’t see that happening soon.

 
Here are the last numbers for today:
Dow Jones 30 Industrial – 7775 (up 497 points)
10 Year Treasury Bond – 2.66% (up 0.04%)
Euro – $1.3655
Gold – $953 (down $4)
Oil – $53.80 (up $1.73)
Gasoline – $1.49 (up $0.03)