Does this adage hold water? The market direction for the year is correlated approximately 70% of the time with January’s move. I certainly would not make investment decisions based purely upon that rule of thumb. The rule did not hold in 2009 as major equity averages were down 8% last January. That said, 2009 was anything but a normal year given the massive economic and market supports implemented by Uncle Sam.

What rule of thumb would I recommend? Read and review Sense on Cents regularly to most effectively navigate the economic landscape. On that note, let’s review the market moves for January. The figures provided are month end statistics for the respective markets, then month-to-date and year-to-date returns.

CURRENCIES

The U.S. dollar had a very solid month with the overall index gaining 2.1% on the month. The dollar did weaken versus the Japanese Yen while strengthening versus the Euro. Please be aware the Euro/dollar quote above looks at the currency swap from the perspective of the Euro. Why? Most market participants quote it in that format so it becomes the standard. Red ink there means our greenback strengthened versus the Euro.

Are we witnessing the unwind of dollar carry trades (that is, sell dollars because they can be borrowed so cheaply given the 0-.25% Fed Funds rate and use the proceeds to buy risk-based assets, including commodities, equities, and bonds) that were so prevalent in 2009? I believe we are. Why might these trades be unwound? The expectation that global governments and central banks, including our own, are withdrawing supports for their economies and markets. Why? Fears of asset bubbles and incipient inflation. This dynamic is playing out most prominently now in China where banks are curtailing lending. What impact has this had? Let’s move on to our review of . . .

COMMODITIES

This sea of red ink is not indicative of expectations of strong future economic growth. The losses here are widely due to the unwind of trades as highlighted above. Within the commodity space, copper specifically got hammered and was down 10% on the month. That base metal is used in both residential and industrial production. Given this move in commodities, no surprise that equities in general and especially within the emerging economies were down on the month. Moving right along . . .

EQUITIES

The equity markets were up approximately 2% the first week of the year, but then came off hard. In my opinion, the selloff was a function of the points highlighted previously (withdrawal of government and central bank supports) but also the realization of the following:

1. Global economy remains challenged. Greece is on the edge of a sovereign default.
2. Our domestic economy, especially within the labor and housing sectors, continues to face an uphill climb. State and municipal finances are a mess.
3. Washington is also a political and fiscal mess. You already knew this.
4. Obama’s slamming Wall Street and promoting the Volcker Rule to remodel banks is not exactly leaving Wall Street with a warm and fuzzy feeling.
5. The prices of stocks look quite full relative to earnings generated and earnings projected.

So where are investors putting cash? Moving right along . . .

BONDS

Interest rates on government debt came down (remember rates down, bond prices up) and other sectors of the bond market held up quite well as investors look for a bit of a safe haven while trying to generate some sort of yield. In my opinion, the bond market looks overpriced given the ongoing risk of defaults (corporate and consumer) but also given the massive deficits at the federal, municipal, and consumer levels. Each of these sectors of our economy have enormous funding needs. As Uncle Sam lessens his ability to provide that funding, I believe interest rates have to move higher.

Risks remain abundant. Navigate accordingly.

LD

Welcome to my Sense on Cents Week in Review where I provide a streamlined recap of the major economic news and the month-to-date market moves. Pack lightly as we have much ground to cover. That said, let’s enjoy the journey as the twists and turns along our landscape are truly fascinating and historic in nature. Let’s navigate.

ECONOMIC DATA:

1. Housing Starts: a disappointing report as starts fell 4% after an upward revision to a 10.7% increase in the prior month. I still take all the housing numbers with a pound of salt knowing that delinquencies and defaults continue to move higher.

2. Producer Price Index: a better than expected core reading of no increase leads me to believe that deflationary forces continue to be prevalent in our underlying economy.

3. Jobless Claims: very disappointing report of an increase of 36k indicative of the ongoing issues in the labor market.

4. Leading Economic Indicators: a surprisingly strong reading of a 1.1% increase. What gives? Peel back the onion and we see it is largely reflective of Fed-induced and Fed-supported factors impacting the markets much more than real economic activity. I discount this report heavily.

The following market statistics are the weekly close and the month-to-date returns:

U.S. DOLLAR

$/Yen: 89.86 vs 93.00, -3.4
Euro/Dollar: 1.4137 vs 1.4323, -1.3%
U.S. Dollar Index: 78.27 vs 77.86, +.5%

Commentary: the overall U.S. Dollar Index improved on the week given an increase in risk premiums reflected in declining equity and commodity markets. Are we witnessing early stages of an unwind of dollar carry trades that dominated trading in 2009?

COMMODITIES

Oil: $74.14/barrel vs $79.62, -6.9%
Gold: $1093/oz. vs $1098, -.4%
DJ-UBS Commodity Index: 134.9 vs 139.2, -3.1%

Commentary: Commodities weakened across the board driven by a story indicating China is implementing curbs in bank lending. Chinese economic activity propped up by massive stimulus supported a number of commodity markets, primarily oil and metals, in 2009. Many in China are concerned that an asset bubble has been created; the story of curtailing lending would lend credence to that concern being reality. The China story also had major negative implications for our equity markets.

EQUITIES

DJIA:10,173 vs 10, 428, -2.4%
Nasdaq: 2205 vs 2269, -2.8%
S&P 500: 1092 vs 1115, -2.1%
MSCI Emerging Mkt Index: 1013 vs 989, -.8%
DJ Global ex U.S.: 198.7 vs 201.09, -1.2%

Commentary: equities were down approximately 4% across the board and have now crossed into negative territory for the year. Many market prognosticators believe, “as January goes, so goes the year.” Will we rebound in the last week of the month? Earnings reports (IBM, GE, Citi, BofA, Morgan Stanley) were mixed, at best. In my opinion, the earnings were actually disappointing and indicative of a continued, challenging economic landscape.

BONDS/INTEREST RATES

2yr Treasury: .79% vs 1.14%, -35 basis points or -.35% (rates down, bond prices up)
10yr Treasury: 3.60% vs 3.84%, -24 basis points or -.24%

COY (High Yield ETF): 7.01 vs 6.89 +1.7%
FMY (Mortgage ETF): 18.50 vs 18.24, +1.4%
ITE (Government ETF): 57.80 vs 57.07, +1.3%
NXR (Municipal ETF): 14.32 vs 14.64, -2.2%

Commentary: interest rates on government bonds dropped by 8 basis points on the week. Bonds, in general, were flat to only slightly better across a wide array of market segments. The increase in risk premiums reflected in the equity and commodity markets also pushed out spreads somewhat in the bond market, although not dramatically. I believe more of the money exiting equities and commodities moved into cash as opposed to being reallocated to bonds. In fact, given the deficit concerns and tight risk premiums currently reflected in many sectors of the bond market, I could envision a selloff in the riskier bond sectors while the safer government bond sector remains static with little improvement.

SUMMARY/CONCLUSION

Risks remain high. Markets are clearly unsettled. What are the risks? Will our economic landscape regain the calm induced by the massive flow of Fed liquidity? The risks are centered in the following areas:

1. A continued weak economy, especially within housing and labor.

2. Washington in disarray. The markets may ultimately like political gridlock, but for now the weakness in Washington is pervasive.

Speaking of which, somebody tell Obama to cease and desist with campaigning, throw a tie back on, act Presidential, and get back to work. His actions and words (i.e. Friday’s Town Hall in Ohio) convey a President and a presidency focused on polling and political expediency. The markets view that style and approach as weak and risky.

3. The “thrown the bums out” mentality directed at Congressional incumbents on both sides of the political aisle has poured into the debate of whether Ben Bernanke should be reconfirmed for another term as chair of the Federal Reserve. This uncertainty also unsettles the market.

4. Just what will come from Obama’s plan to rein in proprietary trading and risk on Wall Street? More uncertainty and unsettledness . . . and thus greater risk.

5. When and how will the Fed withdraw stimulus and support for the market? How will that play out? How will it be executed? Are we in a bubble? Can we gently ease the air out of the balloon?

All these questions are historic in nature. Sense on Cents will be monitoring closely. Please join me this Sunday evening to discuss these points as No Quarter Radio’s Sense on Cents with Larry Doyle Welcomes Back Michael Panzner.

Have a great day and weekend.

LD

Market Returns:

Equities: while market analysts continually measure the market from March 6th, unless one purchased the market on that date and at that point, it is much more intellectually rigorous to measure returns on a YTD (year-to-date) basis. Although I will incorporate short term movements, focusing solely on the short term increases the risk that we “miss the forest for the trees.”

The equity markets posted solid returns for the third month in a row. Although the returns in May were positive, they were not as largely positive as the prior two months. Year to date, the DJIA is slightly below unchanged while the S&P 500 is slightly positive. The tech heavy Nasdaq continues to outperform and is solidly positive (+12.5%) on the year. Why? Many tech companies have significnatly less debt burden and refinancing risks.

Bonds: the high yield sector continued to outperform (+9.7% MTD, +24.3% ytd). The mortgage and municipal sectors largely marched in place. The front end (shorter maturities) of the U.S. government bond market held steady as the Federal Reserve indicates they will keep the Fed Funds rate at 0-.25% for an extended period. The long end (intermediate to long maturities) of the government bond market sold off dramatically (+35 basis points on the 10 yr) under the weight of very heavy supply.

Currencies: the U.S. dollar had a very difficult month relative to almost every other major currency. The greenback gave back almost 4% relative to the Japanese yen, although it remains within the trading range for the year. The dollar particularly suffered versus the Euro on concerns of a potential downgrade of U.S. government credit due to the ongoing fiscal deficit.

Commodities: this is where the real action occurred this month. Commodities, in general, posted their largest monthly gain in 34 years. Oil was up 30.1% on the month and 55.6% on the year. Gold rallied 11% on the month and is up a like amount for the year.

Looking Behind the Numbers . . .
As I view the monthly and annual numbers, I am drawn to a comparison of a football pass thrown in a game. That is, when the football is thrown, three things can happen and two of them are not good. The pass can be completed, fall incomplete, or be intercepted.

Similarly, our economy can gradually improve with credit lines opening, housing and employment stabilizing, and markets improving – much like a completed pass.

Our economy can stumble under the weight of a surge in delinquencies and foreclosures in the residential space, a wave of commercial real estate defaults, and a double digit unemployment situation – much like an incomplete pass.

Our economy can stabilize with enough traction to create velocity in the growth of the money supply. Given the trillions of dollars injected both directly and indirectly, a hint of velocity will likely spark a sharp increase in the expectation of inflation even prior to actual signs of inflation. The price action in the commodity and currency space are sending warning signals on this front. This development is akin to an intercepted pass.

Economic Review . . .
As I look back on the wealth of economic data, I am continually struck by the downward revisions to prior months’ numbers. Although consumer confidence has increased, in my opinion, virtually every other statistic both here and abroad shows ongoing caution signs. These numbers include retail sales, housing, employment, and industrial production. Overseas the export data is decidedly weak.

Perhaps the markets are discounting an expectation of improved economic data due to the $780 billion Stimulus Bill starting to kick in later this year. The major money center banks have clearly been stabilized, although it took a fabrication in their accounting (via a relaxation in the mark-to-market) to do so.

The movement in commodities is clearly indicating a sign of improved economic activity and/or heightened inflation, or both. It is not inconceivable that our economy does get inflation sooner than later combined with minimal credit flow due to ongoing writedowns on delinquent or foreclosed loans. Combine these two components and we have a very real chance of stagflation over the next few years.

The Path Forward . . .
The steepening of the yield curve (rates on short term maturities relative to long term maturities) is very positive for our banking industry. The banks can continue to borrow money at extremely low rates and earn significant interest on almost any sort of lending that occurs. That said, new loan demand is not strong while demand for refinancing is quite strong.

My concern currently is not with the major money center banks. I am VERY concerned with the non-bank banks (Freddie Mac, Fannie Mae) and the Federal Home Loan Banks (FHLBs). Given the ongoing surge and expected high levels of residential loan defaults, these institutions will bleed money. The insurance sector, despite some recent improvements in their stock prices, also concerns me given their commercial real estate holdings primarily.

I do believe longer term interest rates will continue to work their way higher under the weight of supply of global government debt, and expected ongoing heavy demand (May was a very heavy issuance of both bonds and stocks) by municipal and corporate issuers. Do not be surprised to see our 10 yr Treasury note get to 4% and 30yr fixed rate mortgages get to 6%.

The deleveraging process will continue as the economy adjusts to life without a vigorous securitization business (remember the securitization business on Wall Street provided 40-45% of total credit to our economy).

Add it all up and I think the following will occur:
- equity markets will now move sideways in range bound fashion;
– the bond market will move lower in price, higher in rates;
– the dollar will gradually decline;
– our economy will be filled with more stops than starts.

Please share your thoughts and comments!! Thanks.

LD

(Editor’s Note: Paulie Abeles is taking Monday night, April 13th, off to be with family.)

Join me from 8:00 to 9:00 p.m. ET on NoQuarter Radio for Sense on Cents with Larry Doyle. These are truly historic times in the global economy. Let’s “navigate the economic landscape” without the pandering or nonsense found elsewhere! What is truly going on in the economy? Where are markets headed? What is happening in Washington and how is that impacting Wall Street? So much to cover.

Tonight my guest will be Louis George Rieger, Chief Investment Strategist at Greenwich Investment Management. Following graduation from Yale Law School, George accepted a position at T. Rowe Price Associates LLC, where he became an officer and stockholder. In 1984, George founded RRH Capital Management, Inc. At RRH, George established the firm’s record in the management of not-rated, tax exempt bonds and high yield equities. George founded Greenwich Investment Management in 2006. George’s legal education has proven valuable in structuring municipal bond issues. He brings over 35 years of experience in the securities industry.

The developments in the markets, economy, global finance, Wall Street, and Washington are occurring at breakneck speed. I will try to slow things down a bit and provide a sense of perspective. What did we learn in the markets over the last week and month and what do they mean for the weeks and months ahead? What is happening overseas and how does that impact us here at home? What is happening in the municipal sector and how will that impact the markets and our personal finances?

Ultimately this show is less about the markets and the economy and more about you! Please join us and share your questions, thoughts, concerns, and opinions. A well diversified portfolio is the best form of risk management, and in a similar vein we look for a diversified audience so we can all truly benefit from a wide array of opinions and perspectives as we try to most effectively navigate the economic landscape.

What is on your mind? What would you like to address? Please share your questions and thoughts by calling in to (347) 677-0792, and also join our live chat room, which I’ll start up about 10 minutes before the show begins!

Many thanks to Larry Johnson and the rest of the team at NoQuarterUSA for providing such a vibrant vehicle as NoQuarter Radio.

Let’s review the objectives and commitments, each followed by questions and/or comments that I have:

1. Address countries providing tax havens.
My question: who will police?

2. Develop a Financial Accounting Stability Board to regulate currently unregulated financial entities, primarily hedge funds.
My questions: how will it be staffed, operated, and judgments adjudicated? (I don’t like FASB as the acronym to be confused with Federal Accounting Standards Board)

3. Develop global policies and outline to address compensation
My questions: who and how will this be implemented? how will it be regulated? will there be punishments for those not participating?

4. Develop a global systemic risk oversight body.
My Question: who and how?

5. Develop a common global approach to address toxic assets within the banks.
My Questions: will this approach be akin to the FASB relaxation of the mark-to-market? How will it be implemented? Will it employ free market principles or manipulate those principles?

6. Utlilize a global growth and recovery stimulus plan of $5 trillion via global central banks.
My Question: will every country and region go along with this?

7. Global central banks will maintain a fiscal expansionary posture.
My Question: what if inflation increases?

8. The IMF and other international agencies will receive $1 trillion. $750 billion directed to the IMF, $250 billion of which will be in the form of Special Drawing Rights. The G-20 will look for these international institutions to strengthen their independence. The G-20 looks for emerging economies and developing countries to get a greater voice in these international institutions.
My Comment: China just won BIG RIGHT HERE!!

9. The G-20 countries will look to kickstart international trade.
My Question/Comment: Congratulations!! How do they plan on doing this in the face of the global protectionist measures and financial protectionism being enacted everywhere?

10. The G-20 will meet in New York City again in September.
My Comment: is this really a very good idea? Can you imagine the rioting that may ensue there? I wonder if body piercing is optional to get involved in the fun?

In summary, the global equity markets are responding positively to these commitments along with the relaxation of the mark-to- market. I am concerned that free market principles have taken a back seat to potentially excessive political and accounting manipulation. That said, the global economy and global banking system will receive significant hard dollars along with significant accounting cover to help itself heal. My personal opinion is world leaders are trying to buy time but will risk real inflation to heal the global recession.

I will say, though, there will certainly not be a dearth of material for Sense on Cents to address as we navigate the economic landscape!!

LD

A precursor to the turmoil roiling our economy and markets today occurred on a smaller, but certainly very dramatic, scale in 1998. The meltdown of the hedge fund Long Term Capital Management brought the market to its knees at the time. LTCM was effectively taken over by a consortium of Wall Street banks at the behest of New York Federal Reserve Chairman, William McDonough. The firms injected approximately $3 billion dollars in order to stabilize LTCM and then unwound it in an orderly fashion.

The lessons learned in the LTCM crisis were obviously not learned well enough because we are experiencing them again a multiple hundred fold. The centerpiece of our current fiasco is AIG (known at Sense on Cents as “Ain’t It Great”).

The dramatic story of Long Term Capital Management is captured in a book I strongly recommend for anybody interested in the history of the financial markets. When Genius Failed, by Roger Lowenstein, is a great read and truly captures the intrigue, egos, and tension of that period. As the current turmoil unwinds I look forward to the books published on this period, as well.

While books can be entertaining, they are not the vehicle for learning real lessons. Personal experience is always the best teacher.

I dealt personally with the partners of LTCM during the development of their firm, throughout its 4 year duration, and its downfall. LTCM operated in a totally quantitative style where the models embedded in black boxes dictated transactions. AIG did the same.

LTCM thought they had a diversified book of exposures across foreign and domestic sectors of both the credit and equity markets. AIG did the same, although their greatest exposure centered on the sub-prime mortgage space.

LTCM viewed themselves as both bigger and smarter than the market itself. AIG did the same.

LTCM totally mispriced liquidity risk, that is the risk that another human being needed to provide liquidity for the unwinding of a trade. AIG did the same.

LTCM was not officially bailed out. Although the principals and investors in that fund were largely wiped out, the firm did not outright fail as the consortium of banks injected capital. Did the moral hazard of that experience play into the AIG debacle? This point will be debated in the months and years ahead.

One angle of the LTCM meltdown that has received very little public attention over the years was the manner in which Wall Street banks managed their own books and capital during that period. In short, the senior executives of the consortium of banks involved in saving the system during the LTCM meltdown became totally aware of LTCM’s positions. That confidential information was tremendously valuable because those positions obviously needed to be unwound. In layman’s terms, if I know you are in a position of having to sell something, I can drive the market lower in your face so you are forced to sell at an ever lower price. It is widely speculated that Goldman Sachs effectively front ran the unwinding of LTCM’s positions and made hundreds of millions of dollars in the process.

Fast forward to today’s situation with AIG. The Wall Street banks certainly know what AIG’s positions are along with the fact that the government is trying to unwind these positions. Do you think Wall Street traders are sitting idly by as AIG tries to unwind this mess? Why has AIG needed an ever increasing amount of government money? Very simply, the markets that AIG has exposure to are continuing to weaken as they try to exit positions. Why are they weakening? It would be naive to think that other Wall Street traders are not once again front running AIG much as Goldman Sachs’ traders supposedly front ran LTCM in 1998.

How can the government prevent any front running on behalf of Wall Street banks? Regulators should be scouring the trading records of every AIG counterparty on a regular basis. Are the regulators doing this? The government and regulators are certainly stretched very thin. Are Wall Street traders taking advantage of the situation? It would be naive to think they are not.

Trust but verify!! Actually, why should we trust a crowd that has provided no basis for trust to this point? Let’s just verify!!

LD

I truly relish the honest perspectives offered by a number of our Thought Leaders. A recent piece posted by Professor Ken Rogoff, a former chief economist for the International Monetary Fund, and currently a professor of Economics and Public Policy at Harvard, lays out a logical road map for global interest rates, economic growth, sovereign defaults, and inflation. Let me preface Rogoff’s piece by stating the road will be long and steep!

What does Rogoff think about the prospects here in the United States under the Obama administration? He writes, “US long-term growth could be particularly dismal, as the Obama administration steers the country toward more European levels of welfare assistance and income redistribution.”

I strongly recommend Rogoff’s What is the Deficit Endgame? Please access a wealth of other global perspectives at the Thought Leaders link (in the left sidebar of Sense on Cents), which provides access to leading global economists and over 400 periodicals from around the world.

LD

At the core of most, if not all, of our economic problems lies housing. I do not need to replay the tape of low rates, shoddy underwriting, and Wall Street securitizations that all played a dramatic role in creating a bubble the likes of which we have never seen and hopefully never will again. All that said, housing is an enormous market with a wide array of factors impacting it. How does one track it? Are we supposed to rely on our local brokers telling us things feel better? Should we ask contractors if they are bidding on jobs? Dare we rely on our local or national media outlets to provide their expertise and pandering? If we did, housing may have bottomed 14 different times in the last 10 months. In all seriousness, how can we track housing? Welcome to Sense on Cents.

There are two indexes that have developed over the last few years and are enormously respected by market participants. One index, the S&P/Case-Shiller Home Price Indexes, is released on a monthly basis. This index tracks a variety of regions in the country but not every region. Still, all things considered, this index is widely watched as a reliable indicator of health in housing. The index is typically released toward the end of each month. The most recently released report was on February 24th, A Look at Case-Shiller Numbers, by Metro Area. In this report, all indications are that housing has yet to see any support.

Aside from the Case-Shiller Index, there is another index that tracks trends in housing and allows investors to reflect their opinions. This index, the ABX (Asset Backed Index), was created a few years ago by Wall Street to track trends in housing. Clearly given the emphasis on Obama’s housing, plans put forth by Secretary Geithner would have put some optimism in this index, right? Well, we are all aware of the enthusiasm put forth in Obama’s plan to support housing; however, no plan is a panacea and every plan has unintended consequences. Despite the best intentions in Washington, the market sees no bottom in housing.

The ABX is not traded on an exchange and thus easily tracked. Enter my friends at 12th Street Capital who shared with me a few days ago that the “ABX went out at its ALL TIME LOWs yesterday. The real money sellers continue to push it lower in conjunction with the stock market and other credit markets and clearly the street has no interest in supporting the current levels, hence unless you have some real money buyers come into the
market you could expect to see continued softening.”

There you have it. Both indexes that track housing are at all-time lows. Thus, while the stock market had a nice bounce the other day, before we get overly ebullient about the potential for stocks, we want to see if we are seeing any sort of support in these two indexes. For my money, these will be the first two indicators showing a turn in our economy and giving me confidence to invest in stocks.

LD

Oddly enough, the ABX market did not participate in the rally on Tuesday. In 2008 I would have said that the next day rally in ABX would almost be a certainty, however with continued uncertainty regarding government intervention on mortgages and MBS, it seems most longs are carefully picking their spot in the MBS market.

Part 1
In this clip, Geithner wears both the political and policy hats. While promoting the Obama agenda initially (housing, education, healthcare, energy), he then turns toward the specifics of unlocking the consumer credit securitization markets via the TALF (Term Asset Backed Securities Loan Facility). This facility attempts to restart the securitization market and model which I wrote was broken back on November 12th (The Wall Street Model Is Broken…and Won’t Soon be Fixed). That market provides approximately 40% of the financing to a wide array of consumer finance markets. Geithner attempts to portray a measure of confidence and aggressiveness. The market has currently responded with a vote of no confidence.

Part 2
Geithner addresses further specifics about the TALF and the public/private partnership that would be connected to the effort. The specifics of this public/private partnership are not addressed but, in essence, the government would provide financing (loans) for private entities to purchase asset-backed securities currently clogging bank balance sheets. Geithner does not provide specifics on the terms of the loans and MORE IMPORTANTLY does not address the fact that the government will likely share in the losses on these securities going forward. I believe many private investors are salivating at the potential for this program. Our Economic All Star John Mauldin commented that this partnership is the equivalent of government money coming in the front door and going to hedge funds out the back door. Mauldin proposes a suspension of the “mark to market” accounting rule that forces banks to mark these securities to depressed levels in the presence of no buyers.

Geithner defends his aborted initial delivery on his grand plan as “mismanaged expectations.” He also inaccurately describes mortgage rates as being close to 5%. The “mortgage mirage,” in which many people can not get a mortgage, has 30 year conventional mortgage rates closer to 5.5% and Jumbo rates in the 7% range, but virtually inaccessible.

Part 3
Geithner is forceful in this clip in stating that the government will stand behind the 20 largest banking institutions. These banks represent approximately 70% of the banking industry and – without using the phrase – Geithner is saying they’re “too big to fail.” He defends the capital injected as ultimately being in the best interests of the economy and taxpayers. He rails on the mismanagement and gross compensation practices at many of these institutions. He appreciates the anger and outrage of responsible people who are sufferring from the damage caused by those who have been irresponsible. All good.

When addressing the need for global regulatory changes as well as domestic regulatory changes, I suggest Secretary Geithner listen to former Australian Prime Minister and Treasurer Paul Keating who undressed him this past weekend. Keating opines that the IMF and World Bank will see a massive shift in power to the surplus economies of the East from the debtor economies of the West. Here at home, when Geithner talks about focused accountability, let’s see if he and the Obama administration effect the necessary changes in the corrosive influence of lobbyists as well as addressing the incompetence displayed at the SEC and FINRA.

Part 4
Geithner attempts to make the case that investors, both foreign and domestic, will continue to invest in our country and our U.S. government debt if they have confidence. The administration has the obligation to maintain that confidence. The first step in maintaining the confidence is displayed in the budget proposed by President Obama. Geithner puts his political hat back on in promoting the Obama agenda as being economically sound, laced with fiscal discipline, and promoting their moral obligation.

Investors are less sure about Geithner’s feelings and have voiced their indecision by exiting the markets since this budget was proposed.

Geithner further addresses the necessity for individuals, corporations, and governments to live within their means. Investors have roundly responded that they believe this administration and Congress are doing anything but living within their means given the undisciplined spending in the Stimulus plan, the budget, and the Omnibus Bill.

Geithner uses the lessons of the ’90s as justification for raising taxes going forward. He prefaces his remarks that taxes will only be raised “when the economy recovers.” Charlie Rose appropriately challeneges him on the overly optimistic economic assumptions utilized in the budget. I would ask why the base case GDP in the Bank Stress Test of 2% growth in 2010 is not the same level of GDP used in Obama’s budget. The budget assumes 3.2% !!

Part 5
In this clip, Geithner is largely wearing his political hat. He defends the Administration’s vetting process as he staffs Treasury. He further pushes the Obama agenda. In regards to criticism he has experienced, he responds that it is purely part of the job.

On the auto front, he dodges the question of bankruptcy.

Charlie Rose then questions him on what he has learned so far in his role as Treasury Secretary. Geithner responds that many may not know that he spent a large part of his career at Treasury serving under Robert Rubin and Larry Summers. He holds them in very high regard and seems to promote that respect for them is universal. He does not address that Rubin was at the core of the lack of regulatory oversight that we have had for the last decade, as well as being the prime architect of the massive systemic risk that Citibank has developed.

When asked if he could see the problems developing that now envelop our economy, Geithner ducks in stating that most people missed it.

Part 6
Geithner remarks that both capitalism and our financial system have already changed and will continue to change as the necessary regulatory systems are put in place.

Geithner further adds that he is confident America will respond to this crisis because it is not a question of ability but a question of will. He believes this Administration possesses the will to make every necessary move to restore our economy.

In my personal opinion, it is also most definitely about ability as well. Do we have the measure of integrity and quality in our elected officials? Chuck Hagel, Leon Panetta and others have railed on the corrupt system of lobbying, campaign contributions, and persistent fundraising that has polluted our country and the process of government. While the Obama Administration has spoken about addressing parts of these issues, their actions and policy proposals to date indicate otherwise.

I found the Geithner interview to be interesting, while not exactly enlightening.

He is both politician and policy maven. To this point, the markets have graded him as decidedly mediocre. Although, to be fair, Washington as a whole is graded no better.

LD

Video provided by CheneyWatch.org for NoQuarterUsa.net YouTube channel

Along with the aformentioned, I have also previously remarked on my high regard for John Mauldin, one of our Economic All-Stars. John himself possesses an insightful global perspective and has a circle of friends and confidantes that are simply off the charts.

In John’s weekly Outside the Box, he shares with us the perceptions of Michael E. Lewitt. Mr. Lewitt writes at length on topics we have covered here previously, but his level of detail and thoughtful analysis are well worth the read.

Topics covered include:
1. economic policies proposed by Obama administration are not promoting long term growth.

2. market outlook . . . sell rallies as earnings and prices are projected lower by 10-25%.

3. R (ecession) vs D (epression) . . . whatever you want to call it, our economy is going to have low growth at best when growth does return . . . time, time, time . . .

4. changing dynamics in the world of investing mandate that people get further up the learning curve . . . . Come to Sense on Cents!!!

5. bank nationalization, in perception or actuality, is a drag on the economy as a whole and specifically for well managed banking institutions

6. holds particular scorn for the “bank robbery” that occurred at Merrill Lynch during the bonus payouts in late 2008.

7. GM is bankrupt in all but name, so now it is time to deal with the truth and go through the bankruptcy process..

8. Obama’s budget utilizes wildly optimistic economic projections and is set up to fail. Government waste MUST be eliminated.

9. the coming meltdown in eastern Europe “will have major negative consequences for world financial markets.”

As I read Lewitt’s piece, Reality Bites, I kept nodding my head and whispering to myself, ‘that’s right,” “yep, I agree,” and “why doesn’t the media cover this?”

This piece may take two sittings to read, but as you look to navigate your own economic landscape it is a must read. Please share it with friends and colleagues as well.

LD

I was struck a month ago by the incriminating statements put forth by Senator Chuck Hagel and CIA head Leon Panetta, which I highlighted on February 16th in Legalized Bribery. Those statements bluntly indict our massive system of lobbying, political fundraising, and the quality of those running for elected office! In light of that article, I am more and more convinced that our elected officials have turned their offices into massive for profit machines at the expense of our public well being.

I commend the authors of this report, Roger Weissman and James Donahue, for taking the time and making the extensive effort to expose the truth. The full report, 231 pages in length, spares no detail. In studying it, I found the information and analysis riveting. Let me try to summarize it for you.

The report chronicles in real detail how Wall Street showered Washington with $1.7 billion in campaign contributions and $3.4 billion upon lobbyists over the last ten years. That money went from the lowest members of Congress to the President of the United States. 55% of the contributions went to Republicans and 45% went to Democrats. Yes, a truly bipartisan effort.

The authors are beyond thorough in laying out how the . . .

financial sector showered campaign contributions on politicians from both parties, invested heavily in a legion of lobbyists, paid academics and think tanks to justify their preferred policy positions, and cultivated a pliant media — especially a cheerleading business media complex.

The report highlights the electricity crisis in California in 2000 and the Enron debacle as precursors of our current situation.

They quote FDR in his statement, “our enemies of today are the forces of privilege and greed within our own borders.” The same clearly holds true today.

Where were our leaders with the vision and foresight to protect the public? Feeding at the Wall Street trough!! Let’s review what the $5.1 billion bought Wall Street and who in Washington facilitated the process. Later I will highlight a number of politicians who collected substantial amounts of these dollars.

Part I : What Did the Money Buy?

1. the repeal of the Glass-Steagall Act which separated commercial and investment banking activities. This act came out of the Great Depression. Former Fed chair Paul Volker supported Glass-Steagall in the late 90’s and still does today. The expected repeal of this Act allowed for the merger of Citibank and Travelers Insurance even before the formal repeal. President Clinton, Treasury Secretary Robert Rubin, Congressman Phil Gramm, and Fed Chair Alan Greenspan were the primary supporters of this repeal.

2. the allowance of off-balance sheet accounting which promoted the increased leverage in banks.

3. the executive branch rejects financial derivative regulation. The CFTC (Commodities Futures Trading Corp), led by Brooksley Born’s effort, sought to exert regulatory control over derivatives. The CFTC was squashed by Robert Rubin and Alan Greenspan. Then Deputy Treasury Secretary Larry Summers told Congress that CFTC proposals would cast regulatory uncertainty over a thriving market. Aside from Rubin, Greenspan, and Summers, Senator Richard Lugar and SEC Chair Arthur Levitt also supported the Clinton administration’s lack of regulatory oversight.

4. Congress also blocked financial derivative regulation through legislation engineered by Senator Phil Gramm.

5. in 2004, the SEC succumbed to massive lobbying by Wall Street allowing for voluntary regulation. This acquiescence is the grossest example of the inmates running the asylum. In 1975, the SEC ruled that debt to net capital ratios had to be less than 12 to 1. This “voluntary regulation” led by Goldman Sachs and then CEO Henry Paulson allowed investment banks to develop their own net capital requirements. Merrill Lynch went to a 40:1 ratio. Then SEC chair Chris Cox acknowledged this voluntary regulation was a complete failure!

6. the bank self-regulation goes global.

7. the total failure to police the mortgage banking industry and its predatory lending. People may never have heard of outfits such as Aames Financial, Delta Funding, Ameriquest, Long Beach, and many more. These firms propagated massive frauds in lending to unqualified borrowers. They need to be brought to justice.

8. the federal government preempted a number of state consumer protection laws which would have mitigated a lot of the predatory lending.

9. the government allowed for purchasers of loans to escape accountability. Only the original mortgage lender would be liable for the predatory and illegal features embedded in the mortgages. This immunization of the investment banks eliminated their legal exposures and facilitated the continuation of fraudulent lending practices.

10. Fannie Mae and Freddie Mac expand their footprints into the non-prime mortgage market. Many politicians fed from the Freddie and Fannie troughs, but nobody more than Chris Dodd and Barack Obama.

11. the merger mania in the banking industry has led to institutions now deemed “too big to fail.” This report believes these institutions should now be treated like highly regulated public utilities.

12. the debacle that played out with the rating agencies only further facilitated this mess. These agencies were and still are massively conflicted.

Part II: Who Paid What and Who Collected How Much 1998-2008?

– Commercial Banks spent $154 million in campaign contributions and $383 million on lobbyists.

— Accounting Firms spent $81 million in campaign contributions and $122 million on lobbyists.

— Insurance Companies spent $220 million in campaign contributions and $1.1 billion on lobbyists!!

— Investment Banks spent $512 million in campaign contributions and $600 million on lobbyists.

A very large percentage of the lobbyists were former government officials!!

While the report makes a number of recommendations, a few strike me as self-evident and vitally necessary:

1. derivatives must be regulated.
2. limited leverage within financial institutions
3. revise the compensation system for financial institutions so timing of reward is linked to elimination of risk
4. consumer advocacy groups

The list of politicians receiving the largesse runs approximately 80 pages and covers the Presidency to seemingly every member of Congress. I was also struck by the consistency of contributions received during each election cycle by Senators Schumer (D-NY) and Dodd (D-CT). Schumer represents the Wall Street territory while Dodd has been a longtime senior ranking official on the Senate Banking committee.

As I perused the financial data specifically for 2008, I paused and reflected on the fact that these institutions were, and to a large extent still are in dire financial straits. While in the process of receiving government support, they had made or were making campaign contributions. As the government has haphazardly reviewed expenditures at these organizations, let’s shed the floodlight right back on these campaigns. It is not difficult to track campaign contributions to politicians back to taxpayer funds injected into these firms. In light of that, I know it will never happen but I believe the political campaigns should return those dollars to the public. Who received how much money in 2008? While not totally comprehensive, my back of the envelope analysis shows the following:

Barack Obama: $3.9 million
John McCain: $2.1 million
Hillary Clinton: $2.5 million
Rudolph Giuliani: $1.1 million
Chris Dodd: $650k
Mitt Romney: $1.060 million
Rham Emanuel: 160k

President Obama, Madame Secretary and gentlemen, please make those checks payable to “American Taxpayer” and let’s begin to return some integrity to our political process.

Where’s the media to shed light on this travesty? Oh yes, they are compliant and cheerleading.

Robert Rubin, he’s our man, if he can’t do it, Greenspan can,
Alan Greenspan, he’s our man, if he can’t do it, Paulson can,
Henry Paulson, he’s our man, if he can’t do it, Dodd can,
Chris Dodd, he’s our man, if he can’t do it, Gramm can,
Phil Gramm, he’s our man, if he can’t do it, Obama can…

Uh, oh!! We got real problems!!

LD

**Cross-posted from my blog, Sense on Cents. Come by and visit!

The Unemployment Rate jumped from 7.6% to 8.1%. The rate was expected to move to 7.9%. The 8.1% rate is a 25 year high.

Non-farm Payrolls lost 651k jobs against an expectation of a loss of 650k jobs. In line with expectations, right? Well, one needs to look at the revisions to the prior two months to get the full picture. Non-farm payroll revisions from the prior two months show a further loss of 161k jobs over and above initial reports. That’s ugly!! Total jobs lost since December 2007, when the recession officially began, are 4.4 million!! More than half of those jobs have been lost in the last 4 months.

Average hourly earnings only rose .2. This number is not exactly robust and will further pressure consumers who are already cash constrained.

Average workweek remained steady at 33.3 hours. With fewer workers, but no increase in the workweek, this indicates that expected GDP will remain sluggish.

Jobs were lost across virtually every sector of the economy with the exception of healthcare. Manufacturing and construction were particularly decimated with losses of over 100k.

While the actual unemployment rate is 8.1%, that figure does not fully represent the actual health of employment in our country. Why? Very simply there are thousands of workers who have given up looking for work. They do not figure into the rate. Additionally, there are thousands who are underemployed, meaning they are working part time but would like to work fulltime.

Analysts do not see any news in this report indicating an improving economy.

Market reactions are generally muted. Stocks are effectively unchanged, and bonds are down a touch. Remember, next week the U.S. government is auctioning another $67 billion in a variety of notes to finance our growing deficit. Look for rates to rise in front of that supply.

I have done some market analysis over the last few days and see no reasons to get constructive on buying the market at this juncture. The forces at work in the economy continue to indicate challenging times on the horizon. The programs from Washington are receiving mixed reactions and muted benefits at best.

We may still get days like this past Wednesday which are nothing more than bear market rallies. The bearish trend remains in place and the path of least resistance remains LOWER.

LD

**Cross-posted from my blog, Sense On Cents. Come by and visit!

We watch daily hearings on Capitol Hill in the spirit of doing what is right for our country. Please!! Spare me the nonsense and pandering. While collectively we deal with markets that are now down over 50%, the pols and the bankers have effectively robbed the bank and left the taxpayers with the bill to clean up the mess. Barron’s wrote a brief piece on this topic: how the Financial Sector Spent $5 Billion Lobbying Washington Over the Last Decade!!

It is high time we attach names and faces to those politicians and lobbyists who fed at this trough!!

LD

Cartoon by David Fitzsimmons, Arizona Daily Star

While I have written twice over the last week about eastern Europe being the weakest link in the world of global finance, Mauldin and his colleague Niels Jensen of Absolute Return Partners provided insights and analysis that is numbing.

Why is George Soros short the euro? Let me provide a synopsis of Mauldin’s and Jensen’s “Europe On the Ropes.” This piece is somewhat lengthy, but a MUST READ!! A link is provided at the end of my review.

Jensen initially provides a backdrop of the collective guilt across all market participants in this global economic meltdown. The U.K. government is targeted by Jensen for their total lack of fiscal discipline in the process. He further adds that the outlandish banking compensation was a direct correlation of the leverage employed. Jensen focuses on the preponderance of supposed AAA rated CLOs (Collateralized Loan Obligations) backed by corporate loans and credit cards. The leverage employed by the European banks dwarfed the leverage employed by U.S. banks.

To this point Jensen’s analysis is enlightening but not earth shattering. He then enters into the rate of expected defaults on the European banks’ balance sheets, the exposures to eastern Europe, and the specifics of mortgage borrowing by eastern European citizens from European banks. I started to get a little queasy.

Jensen’s comparisons of the details in this crisis relative to the Asian crisis experienced in the late 90’s is scary. His focus specifically on Austria and the level of their debt exposure is also daunting. My queasiness increased.

Please read the Mauldin/Jensen report in its entirety so you can gain a further appreciation of the pressure in that part of the world and the implications for these economies, countries, and their political stability. Last Sunday evening on NQR’s Dollars & Sense, I spoke at length about the global government funding needs. On that very topic, Jensen writes:

Public debt to rise and rise

. . . the banking sector cannot, in the current environment at least, raise sufficient capital to stay afloat, so more, possibly a lot more, tax payers’ money will have to be put forward. This can only mean one thing. Public debt will rise and rise. The official estimate for the UK for next year is already approaching 10% of GDP, an estimate which will almost certainly rise further. We probably have to get used to running 10-15% deficits for a few years, a fact which seriously undermines the notion of government bonds being next to risk-free.

BCA Research has calculated the effect on public debt in a number of countries, as a result of further bank losses being underwritten by tax payers. Obviously, those countries with the largest banking industries (as a % of GDP) will be hit the hardest.

Mauldin and Jensen are clearly on the cutting edge of the weakest link in the global economy today. In light of this color, there is no surprise why George Soros is short the Euro.

I would never raise undue anxiety, but this situation is very fluid and needs to be watched daily. I will be doing that as I try to help you navigate the economic landscape!!

LD

The dynamic at work in the weekend’s emergency meeting held in Brussels is a play on beggar-thy-neighbor policies implemented during times of economic stress.

There are actually a number of factors influencing the European Union’s refusal to provide bailout money to these eastern European nations. Included in these factors are the following:

1. lack of coordination even within the eastern European countries themselves. Certain countries, such as Poland, are in better shape than others. Beggar-thy-neighbor within a beggar-thy-neighbor framework!!

2. a desire by some of these eastern European nations to accelerate their formal acceptance into the European Union fell on deaf ears. The acceptance into the EU would have helped them gain the stability of the common currency, the Euro.

3. problems within the EU itself as certain countries, such as Ireland and Portugal, are already massively stressed with their own financial problems.

Where do these eastern European countries go now to get help? They will likely solicit the IMF, International Monetary Fund initially. The IMF is already hard strapped for funding.

While the EU Rejects a Rescue of Faltering Eastern Europe, my concern is that ultimately this stress will cause the eastern European nations to become more isolated from their western European neighbors. In the process of aligning themselves more with their Asian neighbors to the east, we may see heightened political tensions and instability as well. It may be premature to make the assumption that this situation ultimately leads to increased politcal tensions in this part of the world, but that assumption is not a stretch by any means.

Clearly in the German mindset is the desire to maintain strict support for its currency, the Euro. I can never get away from the fact that embedded deep in the German culture is the experience of hyperinflation after the Weimar Republic. That experience was truly the precursor to the German fascist state, which led to WWII.

It is very conceivable that we will see other political changes develop during this time of turmoil. I will be monitoring in an attempt to help us all navigate the economic landscape.