International Forecaster Weekly

A Worse Economy Is The New Normal

Goldman Sachs raking in massive profits, growth in high-frequency trading, bogus CPI figures, subprimes still being sold off, the need for financial policy reform cannot be overstated, PIMCO Paul McCulley has ideas for the economy, clamor for another stimulus package, zero hedge is a bad recommendation

Bob Chapman | July 18, 2009

Due to the fact that Goldman Sachs is currently the favorite of Washington they are raking in massive profits during a time when most banks and brokerage firms are struggling for survival.
Due to a very successful second quarter, Goldman has set aside $226,156 per employee in compensation – a 75% increase per employee. That means annualized compensation could be $1 million per employee for the year. We find this of great interest inasmuch as the recently converted bank received a $10 billion taxpayer bailout via Goldman’s connections in Washington. They also received a myriad of benefits from several other government schemes over the past two years. It is nice to know that in part American taxpayers made this possible while unemployment is running on a U6 basis at 20.5%, and Americans are losing their homes by the millions.
Pay surged 75% in the second quarter and compensation and benefits costs were $6.65 billion, up 37% from the equivalent quarter in 2008.
The immense profits of 33% were mainly due to trading profits of $2.7 billion. Goldman made up 24% of the Black Box program. Program trading made up 73% of all NYSE trading.
High frequency trading is one of the fastest-expanding strategies on Wall Street. The Street is no longer a place of raising capital, but a vast gambling casino. This is moral hazard at its utmost. Needless to say, the most egregious example is Goldman Sachs. A perfect example of too big to fail as an owner of the Fed. There is no question its activities distorts markets. They are leaders in credit default swaps and taxpayers bailed out Goldman via AIG for $13 billion that you were allowed to pay for. In addition, Goldman is the world’s largest insider-trading hedge fund and they are kings of crony capitalism. Almost everything this conglomeration of crooks are involved in is to the detriment of the US economy and the American people collectively. They rig markets with the complicity of our government who they have bought and paid for. They are master manipulators and creators of bankruptcies.
Then we have the arrest of Russian-American programmer Sergey Aleynikov, who allegedly tried to steal Goldman’s secret code to unlocking Goldman’s method of front-running stock, and commodity trades. This platform, that we were told came from the government, allowed rapid fire trading of stocks and commodities. In fact, the industry considers such activity as front running. In this process Goldman says there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways. If that is the case, what is to stop Goldman from doing the same thing? Did they manipulate markets? Their earnings say they did. Goldman was able to read data on trades before it’s committed, and place their own buys and sells according to that nanosecond, thus, allowing them to essentially steal boatloads of money every day from the traders and others worldwide. Goldman was able to front-run any transaction, stealing pennies in each transaction.
The criminals here may be both Sergey and Goldman or just Goldman. We’ll probably never know because the Illuminati protects their own. One thing is for certain and that is that Goldman won’t be using that program any more and markets could well return too normal. All such kinds of market manipulators have to be stopped. The     FBI has to get to the bottom of what has really transpired here.
The bogus CPI figures were released for June up 0.7%, the largest increase since July 2008.
       The surtax on incomes of $280+k for healthcare will kill small biz, which creates something like 70% of new jobs.
        The surtax on wealthier Americans would be imposed based on adjusted gross income, meaning it would also apply to capital gains and dividends, which are currently taxed at a 15 percent rate.
       Pollster Frank Lutz says public support for Obama Care has fallen 10 points in the past 3 weeks.  That’s why Team Obama is trying to jam it through now – before public dissent chills Congress.
       Wells quietly sells $600 million in troubled subprime loans   The industry publication said the loans sold for 35 cents on the dollar, about double what most hedge funds were offering.   
       National Mortgage News: How exactly did the publicly traded Wells wind up with so many crummy non- prime loans from these once highflying firms? Answer: I don't know and Wells isn't talking.
             Perhaps one reason the PPIP (Public-Private Investment Program) and the Federal Deposit Insurance Corp.'s 'Legacy Loan' sale initiative (involving whole loans, presumably residential and commercial mortgages) hasn't caught fire is 'sunshine,' that is, the concept of disclosure. If bankers and investment bankers use these government programs that means all the messy details of their crappy investments might see the light of day, which could anger shareholders — and maybe even board members who might lean toward being "activists.
            No matter how you do the math, Wells is going to take a nice hit on the sale, if it hasn't done so already. Will the public ever get wind of the NPL sale price (outside this story)? That's hard to say. The Securities and Exchange Commission requires that publicly traded companies disclose "material events" in their 10-Qs and Ks but when you have a mega bank the likes of Wells a $600 million loan auction might garner a sentence in the next earnings report, at best.
      Goldman’s record quarter was partly the result of increased leverage and exposure.  Why was Goldman allowed to lever up?  (Yeah, we all know why.)  Zereo Hedge: Why Does Goldman Need A Fed Exemption For VaR Calculations?    Lately the topic of Goldman's VaR has taken on significant prominence, not least because as Zero Hedge disclosed yesterday, it hit a record high.
            The clue may come from a February 5 letter by the Federal Reserve to Goldman CAO Sarah Smith.
     The letter had come in response to GS requests for "temporary exemptions from the application of certain aspects of the Board's Market Risk Rules for state member banks and bank holding companies and the Board's general risk-based capital rules for bank holding companies."
     Citigroup is close to a secret agreement with one of its main regulators that will increase scrutiny of the US bank and force it to fix financial, managerial and governance issues.
    Pacific Investment Management Co.’s Paul McCulley said the Federal Reserve should push inflation above its long-term target to coax consumers to spend money if the U.S. economy stays mired in recession.
    “The way to make monetary policy effective is for the central bank to promise to be irresponsible,” McCulley wrote in a July commentary posted to Pimco’s Web site, citing a 1998 paper written by Princeton University economist Paul Krugman.
    “Radically” different central-bank policy may be needed to change inflation expectations if the U.S. economy starts to resemble Japan’s era of deflation, McCulley wrote. He said the U.S. economy is not currently suffering from deflation. In addition to Krugman’s paper, McCulley cited a May 2003 speech by Fed Chairman Ben S. Bernanke as a blueprint for policy.
    McCulley and his colleagues at Newport Beach, California- based Pimco, the world’s largest bond fund manager, have forecast a “new normal” in the global economy that will include heightened government regulation, lower consumption and slower growth. The U.S. government may need to enact a second stimulus plan to spur growth in the coming months, McCulley said July 7 in an interview with Bloomberg Radio.
    If consumers and businesses continue to hoard cash, monetary policy makers may need to boost inflation until prices are as high as they would have been without deflation, McCulley wrote.
      Commuter traffic on the Port Authority of New York and New Jersey’s bridges, trains and tunnels dropped “significantly” in the first half of 2009 as job losses mounted, the authority said today.
           Volume on the authority’s six crossings between New York City and New Jersey fell 3.1 percent to 59.4 million vehicles from the same period a year ago, with Lincoln Tunnel traffic dropping 5 percent, the agency said in a statement. Ridership on the agency’s PATH trains declined 3.5 percent to 35.7 million.
          Truck traffic dropped 11.2 percent to 3.8 million in the first half, costing the authority $3.6 million in toll revenue.
      The average length of unemployment is higher than it's been since government began tracking the data in 1948.
      Goldman Sachs, the Wall Street leviathan that is heavily invested in the cap-and-trade carbon market scam, has admitted it has developed and used software that can manipulate such financial markets.
          From the mortgage bubble, Goldman learned an important -- and very valuable -- lesson: Government policies, especially if shaped by a network of former Goldman officials, could be used to create vast profits, indeed whole markets.
         Having survived, thanks to the million-dollar bailout from Obama and the Joyce Foundation, the Chicago Climate Exchange went on to merge with Climate Exchange Ltd in 2006. Goldman Sachs took a 10% stake in the firm at the time and later increased its holdings to at least 19%. CCX is also 10% owned by Generation Investment Management, a firm founded and chaired by Al Gore and co-founded by the above-mentioned former Goldman CEO, Hank Paulson.    
    There was a great clamor last week for a second Federal stimulus - because the first one wasn't working. President Obama threw cold water on that idea over the weekend, when he rejected calls for a second stimulus and suggested that we need to be patient and give the first stimulus time to work.
    Well, President Obama will soon be changing his tune, says our guest Gary Shilling.
    By the third or fourth quarter, Gary says, the government will launch a second stimulus. Next year is an election year, and despite ballooning deficits, politicians won't sit idly by and watch themselves not get re-elected because the economy has failed to recover.
    The second stimulus will finally trigger an economic recovery...but it won't happen until next year.
    In the meantime, Gary thinks, the stock market will crash again, with the S&P dropping 35% to 600.
    More than 175 prominent economists warned that politicians' attacks on the Federal Reserve are putting "the independence of U.S. monetary policy…at risk," and urged Congress to back off lest it undermine the Fed's ability to manage the economy and thwart inflation.
    The 185-word petition, initiated by a band of academic economists, reflects growing unease among professors, former Fed officials and some investors that the vehemence of the criticism from Congress of the Fed's handling of the financial crisis suggests a readiness in Congress to weaken the freedom the Fed has to move interest rates as it sees fit.
    The US Federal Reserve believes that the recession will end “before long” but predicts that unemployment will remain at high levels for several years to come.
    Members of the federal open market committee raised their forecasts for unemployment, according to minutes from their last meeting three weeks ago, and now expect it to reach between 9.8 and 10.1 per cent in the last quarter of this year. They expect it to remain at about 9.6 per cent next year and 8.5 per cent in 2011. [How can the economy improve if unemployment is rising?]
    The House proposal aims to extend insurance coverage to 37 million Americans over the next decade, covering more people through Medicaid and providing subsidies to help others meet a new federal mandate to purchase insurance. Democratic aides said the proposal would cost more than $1.2 trillion over the next 10 years, and would ensure that 97 percent of Americans were enrolled in a health plan by 2015.
    About half of the cost would be covered by reducing spending on federal health programs, primarily Medicare, which serves the elderly and the disabled. But much of the rest of the money would come from a new tax on families earning more than $350,000 a year and individuals earning more than $280,000. The taxes, which would take effect in 2011, would affect about 2.1 million taxpayers, the nonprofit Tax Policy Center projected.
    The surtax would start at 1 percent and rise to 5.4 percent on income exceeding $1 million. Combined with the expiration next year of tax cuts enacted during the Bush administration, the surtax would drive the top federal tax rate to 45 percent, the highest level since lawmakers rewrote the tax code in 1986.
    House leaders defended the plan by saying it targets those most able to pay -- the wealthiest 1.2 percent of households -- while honoring President Obama's pledge to protect the middle class from higher taxes.
    Mortgage applications in the U.S. rose for a second week as the lowest borrowing costs since May propelled a surge in refinancing.
    The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan increased 4.3 percent to 514.4 in the week ended July 10, from 493.1 in the prior week. The group’s refinancing gauge jumped 18 percent, while the index of purchases fell 9.4 percent.
    “We will see more refis as rates come down,” Robert Dye, a senior economist at PNC Financial Group in Pittsburgh, said before the report. “It’s nice to see mortgage rates coming down; that’ll be a linchpin for the recovery.”
    Lower monthly mortgage payments will help limit the damage to household finances caused by mounting unemployment and sinking home values. Economists are incorporating an easing in the housing slump, now in its fourth year, in their forecasts of an economic recovery in the second half of 2009.
    Today’s report showed the mortgage bankers’ refinancing gauge increased to 2,009.4 from the previous week’s 1,707.7. The purchase index fell to 258.8 from a three-month high of 285.6 the prior week.
    Combined sales of existing and new homes climbed to a 5.1 million annual pace in May, the highest level so far this year. Purchases slumped to a 4.8 million pace in January, the lowest level since comparable records began in 1999.
Pending Sales
    In another sign the housing slump may be bottoming out, a July 1 report from the National Association of Realtors showed the number of Americans signing contracts to buy previously owned homes rose in May for a fourth consecutive month.
The share of applicants seeking to refinance loans climbed to 54.9 percent of total applications last week from 48.4 percent.
    The average rate on a 30-year fixed-rate loan fell to 5.05 percent, the lowest level since the week ended May 22, from 5.34 percent the prior week. The rate reached 4.61 percent at the end of March, the lowest level since the bankers group’s records began in 1990.
    At the current 30-year rate, monthly borrowing costs for each $100,000 of a loan would be $539.88, or about $74 less than the same week a year earlier, when the rate was 6.22 percent.
    The average rate on a 15-year fixed mortgage fell to 4.59 percent from 4.83 percent the prior week. The rate on a one-year adjustable mortgage decreased to 6.47 percent from 6.58 percent.
    Reporting from Washington -- Despite evidence that banks are regaining their health, the Treasury Department is pressing forward with a highly controversial program to help finance purchases of toxic assets that were at the heart of the nation's plunge into economic chaos last year.
There is no genius in what Goldman Sachs has been doing. They control our government in that they were able to get the latest version of the Inslaw/PTECH/PROMS software and front run the market including their own clients, and too, at the same time fulfill the demand of the “Working Group on Financial Markets” in manipulating our stock and commodity markets. These people are lowlife, white collar, scum. Goldman Sachs is simply a criminal enterprise as is our government.
We are two years into the credit crisis and the commercial credit market continues to shrink. This is where business and manufacturing borrow money on a short-term basis to fund projects. As of July 15th, funding fell $39.7 billion to $1.098 trillion, off from the prior week’s $1.136 trillion. It peaked in August 2007, at $2.2 trillion. That is off 26% in nine months, or $1.1 trillion.
The May net TIC figure was minus $66.6 billion versus minus $38.0 billion in April. That capital has been flowing out of the US for four of the last five months.
MGIC has stopping writing mortgage insurance, because without 20% down it’s unprofitable. The housing and mortgage business are still in freefall and tight credit won’t loosen up anytime soon.
The NAHB, the National association of Home Builders, was 17 in July, up from 15 in June. They obviously see stabilization, which escapes us. They must be overjoyed over the $8,000 taxpayer subsidy tax credit for first time buyers; 60% or more of which will have loan failures. These are almost all subprime loans carried by the FHA, or the American taxpayer. Recovery cannot take place until the foreclosure crisis and the giant inventory overhead is wiped out and that will be in 2013 at the earliest. In 2011 and 2012, we are going to have another subprime crisis. Government did not lean anything.
CIT Group bondholders are discussing whether to swap some of their claims for equity to reduce CIT’s indebtedness. The company needs $6 billion in cash. They have already received $2.33 billion from the taxpayers via the Treasury.
On Thursday the Fed’s balance sheet rose $80.2 billion to $2.07 trillion, basically on a purchase of $64 billion of MBS, mortgage based securities, from banks.
In addition the Fed monetized $1.5 billion of TIP’s. It also monetized $7.5 billion of two and three year paper on Tuesday.
The July employment Report should be terrible. Last year the B/D model only created 25,000 jobs. Over the past three months the B/D ratio created 210,000 jobs per month. That means July’s number will be between 500,000 and 800,000.
Last month in Long Beach, CA loadings inbound fell 23.5%. Outbound was off 26.9% and empties fell 15.1%. The total was off 22.4%.
       It didn't take long to run into an "uh-oh" moment when reading the House's "health care for all Americans" bill. Right there on Page 16 is a provision making individual private medical insurance illegal.
      The provision would indeed outlaw individual private coverage. Under the Orwellian header of "Protecting The Choice To Keep Current Coverage," the "Limitation On New Enrollment" section of the bill clearly states:
           Except as provided in this paragraph, the individual health insurance issuer offering such coverage does not enroll any individual in such coverage if the first effective date of coverage is on or after the first day" of the year the legislation becomes law.
           So we can all keep our coverage, just as promised — with, of course, exceptions: Those who currently have private individual coverage won't be able to change it. Nor will those who leave a company to work for themselves be free to buy individual plans from private carriers.
        From the beginning, opponents of the public option plan have warned that if the government gets into the business of offering subsidized health insurance coverage, the private insurance market will wither.
Drawn by a public option that will be 30% to 40% cheaper than their current premiums because taxpayers will be funding it, employers will gladly scrap their private plans and go with Washington's coverage.
     Zero Hedge: The CNBC Business Model  - With the recent elimination of anything even remotely approaching journalistic rigor or analysis, and its substitution with endless propaganda and the pitching of "hope" as an investment conduit, many have been scratching their heads over the question of just how
it is that CNBC is still on the air, let alone make money: after all selling hope is a very expensive process.  
I provide the answer.
     Below is an early segment from CNBC in which Joe Kernan provides his analysis of Schwab's just released results. As the video quality is pretty bad (yeah, I know, sorry) I will summarize how it works:
1. Intro - Kernan: Glowing review of Schwab's EPS "beat"
2. Kernan: "Schwab is a fine, fine company and a fine individual."  
3. Kernan: "...and quite a sponsor for us."  
4. Kernan: "...and we are ready to just be sponsored on Squawk Box."
5. Conclusion - Kernan: "...I don't think you can have too much [of Schwab]."
6. Cut to Charles Schwab Commercial.
So now you know.  
http://zerohedge.blogspot.com/
    Treasury officials say the program is still needed because the assets -- complex securities on the balance sheets of banks that have virtually no market to trade in because they are so difficult to value -- still pose a threat.
    "The outcry from those in need of loans is substantial," said Lee Sachs, special advisor to Treasury Secretary Timothy F. Geithner. "We need to keep taking steps to help regenerate credit creation in this country.
    But some outside critics say the government has moved so slowly to address the toxic assets that the problem is largely fixing itself and that the program's design from the very beginning was so complex that it was bound to fail.
    California’s credit rating, the lowest among U.S. states, was cut for the second time in as many weeks as lawmakers and Governor Arnold Schwarzenegger met behind closed doors to resolve a ballooning budget deficit that left the state paying bills with IOUs.
    Moody’s Investors Service yesterday lowered California’s credit rating two steps to Baa1 from A2 and said its evaluation may be reduced further unless legislators quickly solve the cash crisis. The announcement was made as Schwarzenegger retreated to his Sacramento office with legislative leaders yesterday for seven hours of talks over how to fix a $26 billion deficit. The negotiations are scheduled to resume later this afternoon.
    Michigan's unemployment rate for June of 2009 jumped to 15.2%. That's a 1.1% increase over the prior month.
Rates usually climb or fall by a few tenths of a percent. It's rare to see such a substantial increase or decrease.
    But experts say the struggling economy combined with the ailing auto market means Michigan has been hit harder than other states.
    International demand for long-term U.S. financial assets fell in May, as Russia, Japan and Caribbean banking centers trimmed their holdings even as China stepped up its purchases.
    Total net sales of long-term equities, notes and bonds were a net $19.8 billion in May, compared with buying of $11.5 billion the month before, the Treasury said today in Washington. Monthly foreign investment flows dropped $66.6 billion in May, compared with a decline of $38 billion in April.
    While Treasuries have been a haven for investors during the credit crisis, emerging economic powers continue to question the dollar’s status as the U.S. runs up record debt to fund the economic recovery. At a Group of Eight summit last week in Italy, China repeated calls for a “diversified and rational” global currency regime. Russian and Brazilian officials said the issue may come up at the wider G-20 forum in Pittsburgh in September.
    “We still need the foreign capital,” David Wyss, chief economist at Standard & Poor’s in New York, said before the report. “We’re still borrowing. It’s important to see a significant inflow.”
    China, the biggest foreign holder of U.S. Treasuries, increased its holdings of government notes and bonds by $38 billion to $801.5 billion. Holdings in Hong Kong also increased. Japan, the second-biggest international investor, reduced its total by $8.7 billion to $677.2 billion. Russia’s holdings fell $12.5 billion to $124.5 billion. Holdings at Caribbean banking centers also fell, declining by $9.9 billion to $194.8 billion.