Monopoly Causes Hyperinflation

Rants, Respect, and Senator Bernie Sanders

Senator Bernie Sanders went for the gusto, holding an 8 1/2 hour filibuster. Old school. By actually standing up and talking for the entire time. Senator, you have my respect.

Not my agreement, mind you. You've said a few things, from the various quotes and excerpts I've seen, that I have to take issue with. But you have my respect. It's good to see an actual filibuster, instead of one of the lame "filibusters" we've seen over the past decade or so. Thank you.

That said, I have a few comments. On the tax cuts at one point, you said (according to USA Today):

"They're taking it from the middle class and working families and we're giving it to the wealthiest people in the country."

I assume that "they" are the people supporting extending the tax cuts, and "it" is money. Assuming I'm correct, I don't actually see how this makes any sense at all. A tax cut on the wealthy is not taking money from "the middle class and working families", nor is it "giving it to the wealthiest people in the country". It is simply a reduction in the amount of money that is taken - in a fashion that would be considered robbery[1] should one individual attempt to extract money directly from another in similar fashion - from any person who actually pays taxes.

It is true that some of the monies extracted from the wealthy (and from the middle class) are then granted to the poor through various transfer payments and entitlement programs. This fact does not create a permanent, ongoing obligation of the individuals from whom the money is extracted to continue to transfer those monies to the recipients in perpetuity. Except insofar as the government, who (for an administrative fee) processes the transfer of wealth, elects to continue the transfer.

In other words, if tax money is being transferred from the rich (and/or the middle class) to the poor, and the government chooses reduce taxes and decrease or terminate the transfer, the money is not being taken from the poor and given to the rich (and/or the middle class). It is simply being allowed to remain with those had the money in the first place.

On a related subject, why are tax cuts always described as benefiting "the rich" over "the middle class and working Americans"? Many of the rich - particularly when "the rich" are defined as any individual or family earning more than $250,000 per year - work for a living. Just because someone doesn't work in a factory or drone a way as a cubicle wage slave, doesn't mean they don't work for a living[2]. There is no inherent virtue in working a minimum wage job, and there is no inherent vice in earning thousands of dollars an hour, so can we please stop pretending there is?[3]

Of course, there is nothing groundbreaking in any of this. The people reading this who agree with me will probably just wonder why I'm preaching to the choir, and the people reading this who agree with Senator Sanders no doubt already have their counter-arguments ready to go. So let me close with this:

I have to give Senator Sanders for being honest in his beliefs. He certainly isn't getting rich as a Senator, and his voting record certainly seems[4] to follow his conscience. And that's worth respecting, whether I agree with him or not. So here's to you, Senator Sanders. Keep giving long speeches.

[1] No, really. This is not hyperbole. Robbery is, by definition, "the crime of taking or attempting to take something of value by force or threat of force and/or by putting the victim in fear". Taxes are extracted from the American people by threat of force and/or by putting the victim - I mean, the taxpayer - in fear.
[2] Oh, wait. I forget. The language of class warfare requires that "the enemy" (whatever class they may be) be made to seem like parasites.
[3] The answer, of course, is "no".
[4] "Seems", because only he can say for certain.

Bright Lights, Big Deficit

Here we are in Fiscal Year 2011 (as far as the US Government is concerned), and the Monthly Treasury Statement has been out for 2 1/2 hours now without a comment from me. This is a monthly release showing the highlights of what kind of stewards of the money we provide to the government to handle it's operating expenses (i.e. taxes). In October, we had a budget deficit of $140.4 billion dollars. Moving forward a month, the analysts were expecting the November budget deficit to be $130.0 billion. How did the government do with our money?

Not to put too fine a point on it, any reasonable financial planner would suggest that the government - if it were an individual coming in to his office to talk about his assets - talk to a credit councilor. Or consider bankruptcy.. In the month of November the US government had $145.96 billion in receipts and $299.355 billion in outlays for a total budget deficit (that month) of $150.394 billion dollars[1]. Year to date - and that means October and November - receipts have been $294.912 billion and outlays have been $585.738 billion, for a net of -$290.826 billion[2].

Coincidentally enough[3], Treasury prices ended down today. The 5-year note yield was up 0.102, the 10-year note yield was up 0.121, and the 30-year yield was up 0.038.

[1] To put that in perspective, it's something like having a monthly take-home salary of $4,000 and then putting $8200 on your credit card during Black Friday.

[2] Like [1] above, but doing it every month.

[3] Nah. Not really.

The Market's Up. Why?

There's green in them thar hills. The three major indices are, at the moment, up. Why should this be?

First off, there's the good news about our narrowing trade deficit in October. Domestic traders love that sort of thing[1]. But on top of that, China announced that it saw a 16% decrease in it's November trade surplus (down to $22.9 billion).as their imports jumped 37.7%. Domestic traders also love that sort of thing[2], because it means we can sell more of our stuff to them. And because it could point another trade deficit improvement in November.

Speaking of China, they have increased their reserve requirements again. For the third time. In the past month. The 50 basis point increase takes effect on December 20, and brings the requirement to 16.5%.[3]. Even more interesting, analysts that follow China are expecting to see that requirement continue to go up - possibly as high as 23%. The end result of this is to reduce China's money supply, which could be a signal that Chinese interest rates won't be going up.

Beyond that? Well, the tax cut "compromise" deal still looks dead in the water. The Senate will vote on it on Monday but, with Capitol Hill Democrats chanting "Just say no!" in closed-door meetings intended to rally the troops, that vote looks like a failure waiting to happen. President Obama remains confident that it will pass, because he feels that nobody on either side of the isle wants to look responsible for making "people's paychecks smaller on January 1st because Congress didn't act."

And finally, we have Consumer Sentiment. November came in nicely improved at 71.6%, and analysts are looking for a further (mild) increase to 72.0%. The actual results indicate a 74.2%, which is almost breathtakingly better than expected. The official press release is not out yet, but can be read here when it is.

[1] Unless they've bet hard against the US economy and invested heavily in the EU and the BRIC. But we care nothing for those unpatriotic fools! Nothing!

[2] See [1] above.

[3] In other words, if a Chinese bank wants to loan out 100,000 yuan it must have 16,500 yuan in cash on hand. For comparison the United States has a reserve requirement of 0% on loans under $10.7 million, 3% on loans from $10.7 to $58.8 million, and 10% on loans over $58.8 million.

U.S. Import and Export Price Indexes News Release

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The latest U. S. Import and Export Price Indexes news release (http://www.bls.gov/news.release/pdf/ximpim.pdf) was issued today by the Bureau of Labor Statistics. Highlights are below.
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U.S. import prices increased 1.3 percent in November, following a 1.0 percent advance the previous month. Rising prices for fuel and nonfuel imports contributed to both the November and October increases. Prices for U.S. exports also rose in November, increasing 1.5 percent after advancing 0.8 percent in October.

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News releases archives: http://www.bls.gov/schedule/archives/all_nr.htm
To subscribe or unsubscribe to BLS news releases please visit http://www.bls.gov/bls/list.htm
For help, email news_service@bls.gov
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The Trade Deficit Is Looking... Well... Not Terrible

The International Trade balance is out now. This is our nation's net exports. If the number is positive, we are exporting more than we are importing. If it is negative, we're importing more. This is one of those huge market movers, because net exports are a component of GDP calculations. Positive numbers mean a (potentially) improving GDP, while negative numbers mean a (potentially) worsening GDP.

And the estimates for this month indicate a potentially worsening GDP. For September, we came in at a net -$44.0 billion. Looking to October, the analysts are anticipating a second month at -$44.0 billion. As long as we don't come in worse than this, traders will feel minimal need for sorrow.

And where does that international trade balance stand? Well, counting both goods and services, we exported $168.7 billion and imported $197.4 billion in October. That works out to a net of -$38.7 billion, which is a substantial 12% improvement from September. Total exported goods came in at $112.3 billion and goods imports came in at $163.7 billion (a net of -$51.4 billion, which does represent a $5.7 billion improvement from September). Total exported services came in at $46.4 billion while services imports came in at $33.7 billion (a net of $12.7 billion, a $0.2 billion improvement from September).

All in all, not too bad. It would have been nice to see even more improvement in manufacturing exports - since that would be a really nice sign for the US manufacturing and production sectors - but I guess we shouldn't look a month-over-month 10% improvement in the mouth.

Anonymous, National Debt, And British Tuition Hooligans

The markets ended on a mixed note - Dow down 0.02%, NASDAQ up 0.29%, S&P 500 up 0.38%. The day's better than expected jobless claims data helped prop things up, but the (comparatively) strong dollar ratcheted up commodities prices and served as an anchor on any company that actually makes things. Of course, that's not the only reason the markets were flat. What else happened?

First, the Bush tax cut "compromise" deal appears to be dead in the water. The House Democrats approved a resolution of opposition to it, and Speaker Pelosi will "honor the resolution".

Speaking of budget deficits and the problems on Capitol Hill, Erskine Bowles and Alan SImpson, co-chairs of the National Commission on Fiscal Responsibility and Reform, released a statement in which they sate that there needs to be a bipartisan agreement to reduce the $14 trillion[1] US national debt before any long-term increase in the debt limit is approved. "Our businesses will not be able to grow and create jobs and our workers will not be able to compete without a strategy to get this crushing debt burden off our backs." They have proposed an austerity program of sorts, relying on cuts in spending and streamlining of the tax code, but the panel's own members didn't support it.

Douglas Shulman, Commissioner of the Internal Revenue Service, announced that information from it's lawsuit against UBS AG "...has proved invaluable in supplementing and corroborating prior leads, as well as developing new leads, involving numerous banks." This is, of course, in reference to the IRS pursuit of US taxpayers who shelter assets in overseas banks and then do not declare those assets. The IRS is also considering another amnesty program for tax evaders, since the one last year got around 15,000 individuals to declare their offshore assets.

By popular demand[2], we now turn to the Cyberwar. Operation Payback crippled Visa, MasterCard, and PayPal with a 30,000-node DDoS attack. www.paypal.com was down for several hours, rendering it unable to process payments, MasterCard's SecureCode service was also disrupted, although service has been restored, and both MasterCard's and Visa's websites went down for a while. Amazon.com has been declared the next target, not only for refusing to host Wikileaks but for then offering for sale a Kindle version of the Wikileaks documents[3].

What does all of this have to do with the market? Imagine the damage to Visa (symbol V), MasterCard (symbol MA), PayPal (a subsidiary of eBay, ticker EBAY), and Amazon.com (symbol AMZN) if Anonymous manages to keep them going down over the Christmas shopping season. Yeah. That got your attention.

In the "What Were They Thinking" department, the TSA pulled Meera Shankar out of line at the Jackson-Evers International Airport and frisked her. Because she was wearing a sari. Despite the presentation of her diplomatic credentials, establishing her identity as the Indian Ambassador to the United States. The Indian government is not happy about this...incident.

Finally, we have anarchy in the UK. Students protesting an increase in tuition fees in England[4] attacked the car containing Prince Charles and the Duchess of Cornwall. 37 people were hurt during the riot, and police made 22 arrests.

[1] Yes, trillion. With a "t".
[2] That is, one reader asked.
[3] Go figure.
[4] As much as 9000 Pounds sterling per year.

POMO Sugar On Me!

Ladies and gentleman, a little Def Leppard to go with your market day.

POMO day again. This time the Treasury was looking to buy Coupons[1]. $33.126 billion were submitted. $8.309 billion were purchased. Net effect on the bond market? Negligible, according to Bloomberg.

I now return you to your regularly scheduled market day.

[1] I got nothing here. I think they're the interest payments that you have left over when you take regular Treasuries and make STRIPS out of them, but I'm not positive.

Jobless Claims! Also, News!

Last week, we had some depressingly bad results for first time jobless claims - 425,000 were anticipated, and we actually had 436,000. Well, it's new jobless claims day again, and the Street is going for optimism. The consensus is that for the week ending 12/4, we will only see 425,000 new claims.

While we wait for the results, let's check the news.

Futures are up, partly on optimism about the jobless claims expectations and partly on general excitement that 2010 is almost over. No, that doesn't (just) mean that traders are looking to the future and wishing away the last few months of lackluster performance. No, it's also driven by the fact that with only 16 trading days left in the year, underperforming fund managers will be under pressure to snap up stocks with solid fundamentals and good performance. When (if) this happens, the sudden spike in demand will lift market prices.

Debate on the Bush income tax "compromise" deal should hit the Senate by Friday. Senate Majority Leader Harry Reid thinks it's pretty much a done deal, and Republicans believe that the Democrats should "...get together and look at the overall bill and realize this is the presentation on the table." In preliminary statements, the rank and file Democrats do not seem impressed. If it passes, look for the equity markets to have a little party (yay! lower taxes!) and the bond markets to sell off more Treasuries (aiee! increasing Federal debt!).

Looking to Europe, the Bank of England (in a move that surprised no one) voted to keep in place the 0.5% interest rate and 200 billion pounds of quantitative easing they've had in place since February. The response from the European markets was to shrug, watch Fitch Rating downgrade Ireland's sovereign debt (BBB+, down from A+), and then go ahead and hit a 26-month high on optimism about the US economy.

China and North Korea reached a consensus on North Korea Crazy's Yeongpyeong Island Tour. What was that consensus? That they "agree on the need to resolve the situation." The world can now breathe a sigh of relief.

Now, back to the first time jobless claims results. On the up side, the week ending 12/4 saw only 421,000 new claims - better than expected and better than the previous week. On the down side, the prior week figures were revised upwards to 438,000 new claims - which is not so good.

Treasury Department Statement on AIG's Transaction Agreement

Treasury Department Statement on AIG's Transaction Agreement

WASHINGTON – The US Department of the Treasury today issued the following statement from Acting Assistant Secretary for Financial Stability Tim Massad upon the announcement that American International Group Inc. (AIG) has entered into a transaction agreement with the US Department of the Treasury, the Federal Reserve Bank of New York, and the trustees of the AIG Credit Facility Trust to accelerate the repayment of U.S. taxpayer funds. This development is the next step in a process that will accelerate the government's exit from AIG and ensure that we recover our investment. When this transaction closes, which will occur no later than March 15, 2011, the Federal Reserve loan will be paid off with no expected losses and Treasury's preferred stock investment will be converted to common shares. Treasury can then sell those shares publicly in order to recover taxpayer funds over time.

"Today's announcement is a milestone in the government's long-stated efforts to exit our investments in private companies as soon as practical while protecting taxpayers," said Massad. "When all is said and done, we believe taxpayers will recover every dollar invested in AIG and stand a good chance of making a profit."

For additional background:

Treasury Update on AIG Investment Valuation, November 1, 2010: http://www.financialstability.gov/latest/pr_11012010.html

Treasury Releases Two-Year Retrospective Report on the Troubled Asset Relief Program,
October 5, 2010: http://www.financialstability.gov/latest/pr_10052010.html

Statement by the US Treasury Department on AIG Exit Plan, September 30, 2010: http://www.financialstability.gov/latest/pr_09302010.html

Treasury Names Two Appointees to AIG's Board of Directors, April 1, 2010: http://www.financialstability.gov/latest/tg_04012010.html

U.S. Treasury and Federal Reserve Board Announce Participation in AIG Restructuring Plan, March 2, 2009: http://www.financialstability.gov/latest/tg44.html ​

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It's Four O'clock Somewhere

A day in which the Dow ended up 0.12%, the NASDAQ up 0.41%, and the S&P 500 up 0.37%. A day in which NYSE trading volume hit 1.095 billion shares (down 0.528 billion from yesterday). A day in which equity traders seem to have looked at the news and said "Heck with it. It's 4 o'clock somewhere." All of the excitement came out of the bond markets today where, driven by concerns about the US' long term deficit[1], even the POMO buy-back of TIPS wasn't enough to keep Treasury prices up. Heck, it wasn't even enough to keep TIPS prices up (5-year TIPS yield up 0.108, 10-year up 0.156, 20-year up 0.116, and 30-year up 0.094).

For what it's worth, this is being seen as a correction. Not as a sovereign debt crisis. "For example, the cost of insuring US government debt in the credit default swap market was little changed at around 40 basis points..." That's a good sign.

Oh, and the banks love the rising yields. That means that they can plug their excess assets into low-cost Treasuries, get a better return on the money, and then use those secure assets as their reserve for lending. Coincidentally (?), the financial sector was up 0.27% - beaten only by technology.

Given how bland the markets were today, is there anything going on out there that could impact the markets in the next few days. Sure there is.

The BBC is reporting that Anonymous' war on MasterCard has crippled at least one payment firm's ability to process transactions that use MasterCard SecureCode. If accurate, this could indicate future problems for any credit card company - at least until they figure out how to circumvent the problem.

Gordon Brown, the former British Prime Minister, is predicting a major crisis in the euro in early 2011. Given that "early 2011" is about 3 weeks away, that could further shake up the already-traumatized European financial markets[3].

Russian jets disrupted Operation Keen Sword, the US-Japanese war games celebrating the 50th anniversary of the alliance between the United States and Japan. Keen Sword is taking place in the Sea of Japan, near territory whose ownership has been disputed by Russia and Japan since the end of World War Two. It's not exactly North Korea Crazy levels of international tension, but it is a reminder that you don't have to have Pyongyang involved to have border tensions.

[1] At least the equity and bond markets are beginning to react in opposition to each other again. That's something.

[2] $6.149 billion in TIPS were submitted to the Treasury for purchase, and the Treasury only took $1.63 billion of them. That should give you some indication of how much people want long term Treasuries right now.

[3] Assuming they actually care what Gordon Brown thinks.

Treasury Announces Pricing of Citigroup Common Stock Offering

Treasury Announces Pricing of Citigroup Common Stock Offering

Treasury Exits Citigroup Common Stock Position Netting a CUMULATIVE PROFIT FOR TAXPAYERS OF $12.0 BILLION

Washington – The U.S. Department of the Treasury announced today that it priced an underwritten public offering of approximately 2.4 billion shares of Citigroup Inc. common stock at $4.35 per share. This offering disposed of Treasury’s remaining shares of Citigroup common stock. The aggregate proceeds to Treasury from the offering are expected to be $10.5 billion. The total amount of Troubled Asset Relief Program (TARP) funds returned to taxpayers now exceeds approximately $261 billion.

"By selling all the remaining Citigroup shares today, we had an opportunity to lock in substantial profits for the taxpayer and avoid future risk. With this transaction, we have advanced our goals of recovering TARP funds, protecting the taxpayer, and getting the government out of the business of owning stakes in private companies,” said Tim Massad, Acting Assistant Secretary for Financial Stability.

Treasury received approximately 7.7 billion shares of Citigroup common stock at a price of $3.25 per common share from the exchange offers in July 2009 in exchange for the $25 billion in preferred stock received in connection with Citigroup’s participation in the Capital Purchase Program. The exchange was part of exchange offers conducted by Citigroup to strengthen its capital base. Treasury had disposed of approximately 5.3 billion shares to date in at-the-market sales with an average price of $4.05. Following the completion of the offering at $4.35 per share, Treasury’s average selling price for the entire 7.7 billion shares is $4.14.

Treasury invested a total of $45 billion in Citigroup pursuant to the TARP (and made a $5 billion commitment under the Asset Guarantee Program that was never funded). With this offering, Treasury has recovered all of the $45 billion plus approximately $12.0 billion in profits consisting of, dividends, interest and gain on the sale of Citigroup common stock and other securities.

Citigroup Investment Summary ($ in billions)
Underwritten Offering of Common Shares (12/6/10)	$10.5
Completed Common Stock Trading Plans as of 12/6/10	21.3
TruPS Repayment (10/5/10)1	2.2
Targeted Investment Program Repayment (12/9/09)	20.0
Interest and Dividends	2.9
Total Proceeds	$57.0
Total Investment	$45.0
Realized Gross Profit2	$12.0
1. The entirety of Treasury's proceeds from this sale represents a profit to taxpayers, because Treasury did not incur any losses on the $5bn in Citigroup assets it guaranteed in exchange for these TruPS®.
2. Excludes warrants from the CPP, TIP, and AGP investments and TruPS with an $800mm principal value held by the FDIC for Treasury's benefit.

In addition, the taxpayer will ultimately receive proceeds from the sale of the warrants for Citigroup common stock received under TARP as well as the sale of up to $800 million in TruPS® held by the Federal Deposit Insurance Corporation for Treasury’s benefit.

The offering is expected to close on or about December 10, 2010. Morgan Stanley acted as bookrunning manager. The underwriting fees for this transaction will be paid by Citigroup.

The results of this underwritten offering will be posted on Treasury’s TARP transaction report within two business days of its completion at www.financialstability.gov.

Copies of the prospectus supplement and accompanying prospectus relating to the offering may be obtained from Morgan Stanley & Co. Incorporated, Attn: Prospectus Department, 180 Varick Street, New York, NY 10014, by emailing prospectus@morganstanley.com or by calling toll-free in the United States 1-866-718-1649.

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It's POMO Day!

POMO: Permanent Open Market Operations.

Which means what? Well, an open market operation is one of the means by which a central bank controls short term interest rates and/or the base money supply in the economy. If the central bank is buying a financial asset then it's trying to pump more base money (typically newly printed cash) into the economy, which should in turn reduce interest rates (as there's such an embarrassing wealth of wealth that there's no real point in charging much of anything to loan it out). If the central bank is selling a financial asset, then it's trying to suck base money out of the economy, which should then increase interest rates.

Today? Today, the Fed is buying TIPS. Look for TIPS prices to rise and TIPS yields to fall. In theory, at least.

The Future's Are So Meh, You Don't Gotta Wear Shades

Right now, the domestic markets are still being driven by the news about the tax "compromise" from Monday. The news has helped drive Treasury prices down by 2%, pushing up yields. Why? Because this, combined with everyone's reaction to "Big" Ben Bernanke's comments on 60 Minutes, has bond traders worried about a long-term rise in the national debt.

Amusingly enough, the international markets are taking the improving yields as a good sign. According to Adam Cole[1], "the market is taking the rise in US yields as a positive for the dollar rather than a supply story. There are rising expectations for growth." As a result, the dollar is up against the euro and against gold.

China, which does not want to dominate the world thank you very much[2], does not agree. "For now, market attention is still on Europe and for the coming 6-12 months, it will not shift to the United States," said Li Daokui[3]. "But we should be clear in our minds that the fiscal situation in the United States is much worse than in Europe. In one or two years, when the European debt situation stabilizes, attention of financial markets will definitely shift to the United States. At that time, US Treasury bonds and the dollar will experience considerable declines."

Oh, apropos of nothing else, brace yourself for problems with your credit cards. Anonymous has declared war on MasterCard for blocking donations to WikiLeaks[4].

[1] The Global Head of Foreign Exchange Strategy for RBC Capital markets.
[2] "The international community should welcome and not fear China's peaceful development; help it and not hinder it; support it and not hold it back," says State Councilor Dai Bingguo. It doesn't have quite the same ring as "We will add your biological and technological distinctiveness to our own. Your culture will adapt to service us. Resistance is futile" or "all your base are belong to us", but it does carry a quiet air of understated menace.
[3] Director of the Center for China in the World Economy at Tsinghua University, and one of the academic members of the PBOC Monetary Policy Committee.
[4] A link that is probably not work safe, no matter where you are, now that Homeland Security is pushing to declare WikiLeaks a "terrorist website".

The Treasury Department Does Not Want You To Know Anything

Daily Treasury Guidance for Tuesday, December 7, 2010

On Tuesday, Secretary Geithner will attend the President’s Economic Daily Briefing at the White House. This meeting is closed press.

In the afternoon, Secretary Geithner will lead a town hall discussion with employees from the Treasury Department’s Office of Financial Stability. This event is closed press.

In the evening, the Secretary will host business leaders at Treasury for a discussion of the state of the economy, employment trends, and the Administration’s priorities for supporting the competitiveness of American businesses. This meeting is closed press.

The Futures Are Up!

And what are they up on? The tax cut compromise, that's what they're up on!

"What compromise?" you ask. Well, let me tell you...

At 6:32 PM last night, President Obama announced the details of the compromise between the Democrats and the Republicans on the subject of whether or not the Bush tax cuts will expire. As a reminder, the Democrats wanted to extend the tax cuts for anyone making less than $200,000 (about 96.9% of the populace, according to my calculations from IRS figures[1]) while the Republicans wanted to extend the tax cuts for everyone (about 100% of the populace, according to IRS figures).

How did the compromise work out? In the words of the President, "we have arrived at a framework for a bipartisan agreement. For the next two years, every American family will keep their tax cuts -- not just the Bush tax cuts, but those that have been put in place over the last couple of years that are helping parents and students and other folks manage their bills.... Now, under this agreement, unemployment insurance will also be extended for another 13 months, which will be welcome relief for 2 million Americans who are facing the prospect of having this lifeline yanked away from them right in the middle of the holiday season."

In other words, the compromise boils down to "the Republicans get everything they want, and the Democrats give it to them." An interesting definition of compromise, don't you think?

But surely that's not it? What else is driving futures?

Well, Reuters is reporting that China's central bank is getting ready to tighten the yuan by raising interest rates. Their CPI has hit a 27-month record high of 4.7% and this, combined with fears driven by US market concerns about the Fed possibly buying more than $600 billion in Treasuries, has China concerned about inflation. Rising interest rates are the universally-accepted cure for inflation, so get ready. Asian markets were down initially on the news, but recovered somewhat (mostly because the markets have already priced in more tightening).

And, of course, there's the Treasury announcing an underwritten public offering of it's remaining 2.4 billion shares of Citigroup common stock, at $4.35 per share. Once these are sold, that will eliminate the Treasury's full position of Citigroup common stock, although it will continue to hold warrants for more common stock as well as $800 million in TruPS[2].

[1] The President puts it at 98% in his speech, but what's 1.1% between friends?
[2] TruPS? Investopedia (http://www.investopedia.com/terms/t/trustpreferredsecurity.asp) defines them as "trust preferred securities), securities similar to debentures and preferreds that are generally longer term, have early redemption features, make quarterly fixed interest payments, and mature at face value. They also maintain the appearance of equities in a company's accounting statements, which sounds to me like an accounting trick to make the company look like it has less liabilities than it really does, but it is in accordance with GAAP. So it's legal.

Statement by the President on Tax Cuts and Unemployment Benefits (http://www.whitehouse.gov/the-press-office/2010/12/06/statement-president-tax-cuts-and-unemployment-benefits)
China rate rise talk builds as loans and inflation rise (http://www.reuters.com/article/idUSTRE6B60XG20101207)
Treasury Announces Public Offering of Citigroup Common Stock (http://www.treasury.gov/press-center/press-releases/Pages/TG994.aspx)

Super Diplomatic Ministerial Ninja Team, Sanjo!

So. What seems like it's going to push the markets around tomorrow?

First off, we have a compromise on the expiring "Bush tax cuts". Let's see here. The Republicans get an across-the-board two-year renewal of the tax cuts, a 2% employee payroll tax cut, extended breaks on dividend and capital gains taxes, and a 35% estate tax with a $5 million personal exemption. The Democrats get... well, they get a 13-month extension on unemployment benefits. And I guess they get to not be presented as the grinch that raised taxes on 96.9% of the American people for Christmas.[1]

I think we have to call this a win for the Republicans.

The European Central Bank still isn't bowing to pressure to conform to rumors and rain euros from the heavens. Or, as the Prime Minister of Luxembourg put it, "We don't have any new decision to announce to you."

European markets are expected to collectively throw themselves on the floor, kick their feet, cry and scream "I hate you ECB" until the bank gives in.

The Super Diplomatic Ministerial Ninja Team, consisting of Secretary of State Clinton, Foreign Minister Maehara, and Foreign Minister Sung-hwan, have officially urged China to "shape North Korea's behavior". There is no word on when the People's Glorious Revolutionary Atomic Mushroom Brigade will issue an official response.

There's the massive PR storm called "Operation Broken Trust" going on right now. I doubt that this will have any significant impact on the markets, though. It'll result in a few sexy show trials, a lot of trials that nobody will care about unless they were directly involved, and the remaining frauds remembering to cover their trails better.

[1] No matter which way you lean politically, you have to acknowledge that the Republicans were going to filibuster to death any bill that didn't extend the Bush tax cuts for everyone, and then blame the Democrats for "making them do it". Where did I get the 96.9% figure? IRS data. In 2008 (the most recently compiled year), there were 142,450,569 individual tax returns filed. 138,074,910 of those returns were for adjusted gross incomes below $200,000. The rest is simple math.

Interestingly enough, the same simple math reveals that this 96.9% of the income tax filing households paid 72.7% of the total income taxes that were actually collected by the IRS. The remaining 3.1% paid 27.3% of the total. That's a topic for a different time, but it's something to consider the next time someone says the rich (i.e. those making more than $200,000) aren't "paying their fair share".

News Flash: FBI Finally Notices Fraud, Launches PR Blitz

"Operation Broken Trust". It sounds like the sort of thing that we would have come up with as the name of a major offensive in the Indian Wars of the 19th Century, but it's the name of a series of "...criminal and civil enforcement actions that occurred from August 16 through December 1, 2010". The purpose?

To root out and expose massive investment fraud scams across the nation; and
To alert the public about many phony investment scams.

And why did they do it? Well, because

The FBI has observed a steady increase in investment frauds, in particular Ponzi and market manipulation schemes. Since January 2009, we’ve opened more than 200 Ponzi cases, many with $20 million-plus losses. Based on our current caseload, the top five Ponzi scheme hot spots in the country are Los Angeles, New York, Dallas, Salt Lake City, and San Francisco, but keep in mind that these scams can and do happen anywhere.

While I don't really need the FBI on my case, what with Homeland Security already watching my blog, let's be honest here. There was a whistleblower trying to deliver Bernie Madoff to the SEC back in 2000. The Inspector General of the SEC has repeatedly hammered the SEC for its failure to actually act on findings of Ponzi schemes and other frauds, even when its own investigators are the ones who brought the information to light.

So sure, the FBI now has 231 cases involving 120,000 victims and $8 billion in losses. Good for them. I'm sure that the SEC and our other regulatory agencies are really appreciating the FBI for providing the government with the appearance of giving a damn.

Maybe "Operation Broken Trust Two" will go after the SEC regulators, and the attorney generals, and everyone else that knew this was going on and stood back and willfully allowed it to happen.

But I'm not holding my breath for that.

Morning News

First off, there just isn't a whole lot in the way of major market measures this week. Jobless Claims on Thursday (expecting 425k new claims, down from 11/27's 436k new claims), International Trade (expecting a $44.0 billion trade deficit for October, unchanged from September), Consumer Sentiment (expected to be up 0.4 to 72.0), and the Treasury Budget (where a budget deficit of $140.4 billion is anticipated for November). That's all Thursday and Friday as well, so all we have to hang the blame on until then is the news.

And what a weekend for news it was! The Chairman of the Federal Reserve, "Big" Ben Bernanke himself, gave an extremely rate interview to 60 minutes. The interview is already over the news, so I probably don't need to say a lot about it. You can watch it several different places (http://www.youtube.com/watch?v=LxSv2rnBGA8&feature=player_embedded, for instance). A few of the things we learn are that he is extremely concerned about unemployment (expecting it to take 4 to 5 years to get back to normal), that he's far more concerned about deflation than inflation at the moment, that he doesn't think we'll see a double-dip recession unless we have a "very high unemployment rate for a protracted period of time", and that he doesn't think the current economic "recovery" is self-sustaining.

Oh, and to be fair to Big Ben, you know how all the headlines are talking about how the Fed is going to be buying more than $600 billion in Treasuries? Yeah, that was in response to a question about whether or not he could visualize a scenario under which the Fed buys more Treasuries. His response was, "Oh, it's certainly possible. It depends on the efficacy of the program. It depends on inflation. And finally it depends on how the economy looks" was not exactly the "yes, we will be shoveling dollar bills out of helicopter windows above major US metropolitan areas beginning tomorrow" that it has been made out to be. It was a reasonable (if vague) answer to a hypothetical (and vague) question.

Republican Senator Joh Kyl, on "Face the Nation" yesterday, indicated that negotiators are near a deal on extending the Bush-era tax cuts for everyone (not just the non-rich) in exchange for extending unemployment benefits. "Deal" should probably be understood to mean "Republicans make demands and the Democrats - terrified of the fact that they will no longer be the majority party in January - roll over". But hey, extended unemployment benefits will benefit the 11.39% of the populace that is currently out of work, and maintaining the Bush tax cuts should make the markets happy. Why? Because it's a rare Wall Street broker that does not qualify as "rich".

Oh, and since we haven't had one of these in a while, we have... drum roll please.... North Korea Crazy news! President Obama spoke with Chinese President Hu Jintao by phone on today. Our President asked Beijing to work with the US and other not-so-crazy nations to "send a clear message to North Korea that its provocations are unacceptable." President Hu has toed China's current line of not assigning blame for the deaths caused by North Korea shelling Yeonpyeong Island, and is quoted as telling President Obama that we need "dialogue, not confrontation; peace, not war".

Which would probably work better if we weren't talking about North Korea here.

Meanwhile, Pyongyang has indicated that it is willing to restart the 2005 six-party talks (between North Korea, South Korea, China, Japan, Russia and the United States). Beijing and Moscow are willing. The other three nations involved would like a few more guarantees that North Korea will actually negotiate in good faith. Rather than, say, sending a member of the People's Glorious Revolutionary Atomic Mushroom Brigade to kidnap the delegates, hold them in a tropical island with a giant laser on it, and demand "one billion dollars and a throne made of gold dust and moon rocks for the Dear Leader" for their safe return. Which seems to be more North Korea's style.

Lawmakers optimistic about deal on tax cuts (http://www.reuters.com/article/idUSTRE6B150O20101206?pageNumber=1)
China's Hu tells Obama Korea tension could go (http://www.reuters.com/article/idUSTRE6B50KX20101206)
US, allies, plot North Korea strategy -- without China (http://www.reuters.com/article/idUSTRE6B50SG20101206)

"We could raise interest rates in 15 minutes if we have to."

"Big" Ben Bernanke himself was on 60 Minutes today.



As the interview says, this is rare. Apparently, he decided to do it "because he believes his critics may not understand how much trouble the economy is in".

I suspect that is not a fair assessment. I don't think anyone has any real illusions about how much trouble the economy is in. It's probably more accurate to say that his critics do not agree with his solutions to the trouble the economy is in. But that's neither here nor there for the moment, because this is Big Ben's chance to shine. So watch the video, read the quotes, and revel in the rare interview provided by the Chairman of the Fed.

I'll have a few comments on the other side.

On unemployment:

"The unemployment rate is just not going down. Unemployment is just about the same as it was in mid-2009 when the economy started growing. So that's a major concern."

"At the rate we're going it could be 4-5 years before we are back to a more normal unemployment rate. Somewhere in the vicinity of 5 - 6 percent."

"More than 40% of the unemployed have been unemployed for 6 months or more, and that's unusually high."

On small businesses:

"A lot of small businesses are not seeking credit because their business is not doing well, because the economy is slow. Others are not qualifying for credit, maybe because the value of their property is going down. But some also can't meet the terms and conditions banks are setting."

On the subject of banks that took risks that caused the crisis not being willing to take risks to improve the economy:

"We want them [the banks] to take risks, but not excessive risks. We want to go happy medium. I think banks are back in the business of lending, but they have not yet come back to the level of confidence - overconfidence - that they had prior to the crisis. We want to have an appropriate balance."

On deflation:

"The other concern I should mention is that inflation is very very low, which you think is a good thing. And it normally is a good thing. But we are getting awfully close to the range where prices start falling."

On deflation:

"Well, I would say that this point, because the Fed is acting, I would say the risk is pretty low. But if the Fed did not act, then given how much inflation has come down since the beginning of the recession, I think it would be a more serious concern."

Is the $600,000,000 a bad thing?

"I know that some people think that. What I think they're doing is looking at some of the risks and uncertainties associated with doing this policy action. What I think they're not doing is looking at the risks of not acting."

What about the fear of inflation?

"This fear of inflation I think is way overstated. We've looked at it very very carefully. We've analyzed it every which way. One myth that's out there is that what we're doing is printing money. We're not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way. What we're doing is lowering interest rates by buying Treasury securities, and by lowering interest rates we hope to stimulate the economy to grow faster. So the trick is to find the appropriate moment when to begin to unwind this policy."

Is inflation a lesser concern for the Fed?

"No. Absolutely not. What we're trying to do achieve a balance. We've been very very clear that we will not allow inflation to rise above 2% or less."

Can you react fast enough to keep inflation from getting out of control?

"We could raise interest rates in 15 minutes if we have to."

What are the odds we will fall back into recession?

"It doesn't seem likely that we'll have a double=dip recession.... Now that being said, I think a very high unemployment rate for a protracted period of time, which makes consumers, households less confident, more worried about the future - I think that's the primary source of risk that we might have another slowdown in the economy."

Is the recovery self-sustaining?

"It may not be. It's very close to the border. It takes about 2.5% growth just to keep unemployment stable, and that's about what we're getting. We're not very far from the level where the economy is not self-sustaining."

On deficit reduction:

"We need to pay close attention to the fact that we are recovering now. We don't want to take actions this year that will affect this year's spending and this year's taxes in a way that will hurt the recovery. That's important. But that doesn't stop us from thinking now about the long term structural budget deficit. We're looking at 10, 15, 20 years from now a situation where almost the Federal budget will be spent on Medicare, Medicaid, Social Security, and interest on the debt. There won't be any money left for the military or for any other services the government provides. We can only address those issues if we begin to think about them now."

On taxes:

"Tax code is very inefficient, both the personal tax code and the corporate tax code. By closing loopholes and lowering rates, you could increase the efficiency of the tax code and create more incentives for people to invest."

In short, there really aren't a lot of surprises here. He reiterates his stance on the economy, demonstrates his confidence that the Federal Reserve is up to the challenge of getting the US through the not-really-a-recession-any-more, and generally reminds everyone that whether you agree with his policies or not, he has reasons that seem good to himself and the rest of the Fed for the policies he sets. He really isn't just tossing a dart at a board and seeing what sticks.

I will say I was surprised by his comments on how long it will take to see unemployment rates come down. I mean, the Fed has been pretty candid about thinking they'll stay at 9.5% or so through 2011, but I did not expect to hear him say "4-5 years". I also did not expect (but I do agree with) his comments about the tax code.

Will this interview mollify his critics?

No.

Did you really expect it to?

No.

But it does do a good job of allowing him to make his case to the American people, and of reminding them that he didn't just get the job because he has a nice beard.