Thursday, January 3, 2013

Today's links

1--The four business gangs that run the US,

2---Wages and salaries will be down in first quarter, trim tabs

Now that we know that income and employment taxes for all workers are going to rise by about $150 billion or so this year, I am fairly confident that wages and salaries are likely to decline in the first quarter of 2013.

The $150 billion in higher taxes is made up of $110 billion from higher employment taxes, $10 billion for Obama care and $30 billion in higher taxes on rich folk. $150 billion in higher taxes reduces by more than 40% all of last year’s $360 billion, or 5.9% increase, in after-tax wages and salaries. Some of 2012’s $360 billion gain was the result of many high-tax bracket types, who in anticipation of increased taxes in 2013, took bonuses and income in November and December of last year instead of the first quarter of this year.

Using our blog site table on US income, wages and salaries rose $103 billion in Q1 2012 vs. Q1 2011. So if Q1 taxes this year grow $40 billion and if $40 to $50 billion of bonus income was recognized in Q4 of 2012, that means before we look at anything else, there will be no year over year income growth in the first quarter of 2013.

3---Congress Vacations While Sandy Victims Freeze, firedog lake

People in New York and New Jersey are huddled in the cold and dark and apparently the US Congress cannot manage to vote for Superstorm Sandy relief before they go on their vacations.
.... In the NYC metro area, it’s 24 derees at the hour I am writing this. People can die from exposure in that kind of cold.
John Boehner is so captive to the likes of Eric Cantor and Paul Ryan that he is refusing to allow the Sandy aid vote to come to the floor. Even GOP lawmakers from the Northeast are taken aback by this willingness to let fellow Americans freeze to death for the sake of politics.....

If Congress REFUSES TO DO THEIR JOB AND EVEN VOTE ON TIME CRITICAL LEGISLATION, then the President has ample reason to step in with emergency Executive Orders giving Sandy relief in a timely fashion. Congress has forced this on him by their own inaction. Further, he can force them to stay in session until they do their jobs and vote on a Sandy package.
How dare they vacation while their fellow Americans are freezing.

4---'Even people on Wall Street were blown away', Matt Taibbi

"The decision to not prosecute in this instance belies everything that the government has ever done with regard to drug prosecutions everywhere. I mean, when you think about the way they behave toward ordinary people who get caught up in drug cases, where they seize all your property and they use absolutely the maximum sentences they can possibly avail themselves of, and in this case they catch a bank that launders billions of dollars for Colombian and Mexican drug cartels … for years on end, and they can’t find something to charge these people with?"

"If the law doesn’t apply equally to everybody, then you don’t really have a system of law. And so you have a built-in defense for everybody in every drug case forever. I mean, if you get caught with a stem of marijuana, how do you not stand up and say, ‘You’re going to send me to jail for this where a guy who laundered a billion dollars for a bunch of murderers gets nothing?’"

5--Real average weekly earnings, word press

6---The Dawning of Domestic Drones, NYT

The drones are coming to a neighborhood near you.

The unmanned aircraft that most people associate with hunting terrorists and striking targets in Pakistan are on the brink of evolving into a big domestic industry. It is not a question of whether drones will appear in the skies above the United States but how soon. 
Congress has ordered the Federal Aviation Administration to quickly select six domestic sites to test the safety of drones, which can vary in size from remote-controlled planes as big as jetliners to camera-toting hoverers called Nano Hummingbirds that weigh 19 grams.
The drone go-ahead, signed in February by President Obama in the F.A.A. reauthorization law, envisions a $5 billion-plus industry of camera drones being used for all sorts of purposes from real estate advertising to crop dusting to environmental monitoring and police work.
 The deal just enacted implies a significant tightening of fiscal policy this year. Payroll taxes are going up and federal spending is being cut by the amount anticipated in the BCA. These measures will be a drag on growth, starting in the current quarter. Taken at face value, the deal appears to entail somewhat more fiscal drag for 2013 than we had assumed in our forecast. Second, we now face a difficult debate over raising the debt limit. An increase in the debt ceiling will have to be done by around the end of February (at this point, Treasury has not given a specific date; this may come within the next few weeks, but it has been indicated that there is about two months of headroom). The upcoming negotiations are likely to be even more difficult and contentious than the ones just completed. –Lewis Alexander, Nomura Global Economics
An ideal budget agreement would have limited near-term fiscal restraint while making structural changes to gradually stabilize public debt in the longer term. The latest agreement removes a good portion of the immediate fiscal tightening threat, but does nothing to resolve these longer-term challenges. –Steven Wieting, Citigroup
Something got done. But as one observer put it, celebrating the Senate for passing a bill such as this is equivalent to praising an arsonist for putting out his own fire. –Dan Greenhaus, BTIG LLC
The compromise package would impose slightly less fiscal restraint in 2013 than we assume in our forecast. We estimate this package would result in an overall drag on growth from fiscal policy of around 1.5pp. Our forecast assumes 1.6pp of fiscal drag on a Q4/Q4 basis in 2013, due to the expiration of the payroll tax cut, upper income tax cuts, and new taxes under the Affordable Care Act (ACA) that take effect today, and slowing federal spending due to the spending caps enacted last year. Thus, the package would impose about 0.1pp less restraint on growth than we have been assuming in our forecast. –Goldman Sachs
Domestic financial markets had a constructive tone heading into the final days of the fiscal cliff. Now that the uncertainty has been lifted the risk-on trade has pushed the 10-year Treasury yield back to the upper end of its recent range… Every household and every taxpayer is going to see their net pay decline in 2013. The bulls must address how is this going to lead to increased employment, especially as Obama Care kicks in. Moreover, recent consumer spending data show that holiday giving was up just 2.7% this year, or under 1% real growth. Is this really bullish? –Steven Ricchiuto, Mizuho Securities
We have allowed for a 0.2-point hit to 2013 growth from the sequester-related spending cuts — and a 1.1-point drag from all the items listed. Fiscal drag of just over one point on growth is sizable. However, the new fiscal drag will largely just replace the old fiscal drag. The unwinding of the 2009 stimulus package and state and local budget cuts have been subtracting about a point from growth recently, but those sources of drag are now fading. – Jim O’Sullivan, High Frequency Economics...
First, because the fight was concentrated on how the “rich” should be taxed, many investors may have the impression that this was a relatively small and narrowly focused tax increase. In fact, this represents a very significant increase in taxation on almost all Americans, with the most pain likely being inflicted by the expiration of the 2% payroll tax cut. From a macro-economic perspective, this is also where the impact is likely to be greatest – consumer spending on basic goods and services like groceries, clothing, restaurant meals and gasoline should all take a hit over the next few months due to lower take-home pay....
Finally, the impact of all of this should be to slow the U.S. economy in the first half of 2013 but not put it into recession. –David Kelly, J.P. Morgan Funds
The overall fiscal tightening looks to come in at close to 1% of GDP, implying a fiscal drag of just above 1pp on 2013 GDP growth. – Signe Roed-Frederiksen, Danske Bank
We got a minor step towards addressing the budget’s structural deficit. Make no mistake, the move towards austerity, however small it may seem, will more than likely set GDP growth to be lower in 2013 than it otherwise would be. This move, in fact, puts all the more onus on production rather than consumption to accelerate growth – which is how it should be in order to redress the imbalance in the US economy. As for how the tax impact was allocated, both political parties have clearly defined whom the economy’s and their electoral future rests — married families in major metropolitan areas earning between $115,000 and $450,000. –Steven Blitz, ITG Investment Research
After serving on the [FASB] board, I no longer trust bank accounting.”
-Don Young, Financial Accounting Standards Board

Do I trust Bank Accounting? Absolutely not.
-Ed Trott, Financial Accounting Standards Board member

There is no major financial institution today whose financial statements provide a meaningful clue” about its risks.
-Paul Singer, Elliott Associates

Perhaps the most damning quote in the entire column comes from former Federal Reserve Board member Kevin Warsh. He suggested that the financial statements a big bank files with the SEC are worthless:
“Investors can’t truly understand the nature and quality of the assets and liabilities. They can’t readily assess the reliability of the capital to offset real losses. They can’t assess the underlying sources of the firms’ profits. The disclosure obfuscates more than it informs, and the government is not just permitting it but seems to be encouraging it.”
 9--- America’s Bubble Dependent Economy, Big Picture

It’s stunning to think that average real earnings in the U.S. are almost 11 percent lower than where they were in 1973.
Policymakers’ focus should be on increasing worker productivity through: 1) reforming the country’s education system; 2) unleashing entrepreneurship; and 3) in the words of ECB chief, Mario Draghi, “doing whatever it takes” to empower small businesses.

This is tough political business, however, so we take the easy way out. The political pandering increases budget deficits, forcing the Fed to repress interest rates and print money to drive up asset prices. The boom side of the cycle is sustained longer than most expect because of the reserve currency status of the dollar. This temporarily generates artificially inflated demand (i.e, fake) through the wealth effect, which eventually collapses when asset markets crash.
Wash, rinse, repeat

10--"Not so fast"; Fiscal cliff averted?, counterpunch

It has done very little to deal with the real problem of fiscal contraction in the coming year, making the recovery much slower....

So the big story is that very little has actually been decided. On the one hand, lots of revenue has been lost relative to a scenario that saw all tax cuts for households making more than $250,000 phasing out (and most people, including me, thought that this really would be the starting point of negotiations). And only about $40 billion of effective stimulus that was set to fade away in 2013 was definitively clawed back (the unemployment insurance extensions plus refundable tax cuts passed in the American Recovery and Reinvestment Act that were extended), while about $120 billion in decent stimulus (the payroll tax cut) just seems completely off the table now. On the other hand, one-sixth of the automatic spending cuts called for under the sequester in 2013 have been deferred (and more action might be taken in the next two months) and tax rates for very high income Americans actually went up.

Between the payroll tax cut and the sequester, as well as the failure to undo the first discretionary spending caps negotiated under last year’s Budget Control Act (BCA), well over half of the fiscal drag for 2013 that was actually up for negotiation1 has yet to be deactivated. This means that relative to current policy, we will have roughly 1.6 million fewer jobs by the end of 2013 than if these had been definitively extended or replaced with equivalent stimulus.

What do we know for sure? The “fiscal cliff” was definitively not averted. Action wasn’t taken until after Jan. 1. Which (as we always said) was just fine—obsessive worrying about that date displayed a real ignorance about the economics of this situation. Worse than missing the date, of course, is that the fiscal contraction in the coming year wasn’t actually addressed in a definitive way. And another cliff—one that will see the sequester and the debt ceiling come to head—is in our future.

11---Fraud, Money Laundering and Narcotics. Impunity of the Banking Giants. No Prosecution of HSBC, global research

As I previously reported, (here, here, here and here), when the Senate Permanent Subcommittee on Investigations issued their mammoth 335-page report, “U.S. Vulnerabilities to Money Laundering, Drugs, and Terrorist Financing: HSBC Case History,” we learned that amongst the “services” offered by HSBC subsidiaries and correspondent banks were sweet deals, to the tune of hundreds of billions of dollars, with financial entities with ties to international terrorism and the grisly drug trade.
Charged with multiple violations of the Bank Secrecy Act for their role in laundering blood money for Mexican and Colombian drug cartels, as a sideline HSBC’s Canary Wharf masters conducted a highly profitable business with the alleged financiers of the 9/11 attacks who washed funds through Saudi Arabia’s Al Rajhi Bank.

While the media breathlessly reported that the DPA will levy fines totaling some $1.92 billion (£1.2bn) which includes $655 million (£408m) in civil penalties, the largest penalty of its kind ever levied against a bank, under terms of the agreement not a single senior officer will be criminally charged. In fact, those fines will be paid by shareholders which include municipal investors, pension funds and the public at large.

With some 7,200 offices in more than 80 countries and 2011 profits topping $22 billion (£13.6bn), Senate investigators found that HSBC’s web of 1,200 correspondent banks provided drug traffickers, other organized crime groups and terrorists with “U.S. dollar services, including services to move funds, exchange currencies, cash monetary instruments, and carry out other financial transactions. Correspondent banking can become a major conduit for illicit money flows unless U.S. laws to prevent money laundering are followed.” They weren’t and as a result the bank’s balance sheets were inflated with illicit proceeds from terrorists and drug gangsters.

Revelations of widespread institutional criminality are hardly a recent phenomenon. More than a decade ago journalist Stephen Bender published a Z Magazine piece which found that “99.9 percent of the laundered criminal money that is presented for deposit in the United States gets comfortably into secure accounts.”

12---Banks Use $1.77 Trillion to Double Treasury Purchases (aug 2012) Bloomberg

The gap between U.S. bank deposits and loans is growing at the fastest pace in two years, providing lenders with more funds to buy bonds and temper the biggest sell-off in Treasuries since 2010.

As deposits increased 3.3 percent to $8.88 trillion in the two months ended July 31, business lending rose 0.7 percent to $7.11 trillion, Federal Reserve data show. The record gap of $1.77 trillion has expanded 15 percent since May, the biggest similar-period gain since July, 2010. Banks have already bought$136.4 billion in Treasury and government agency debt this year, more than double the $62.6 billion in all of 2011, pushing their holdings to an all-time high of $1.84 trillion.

Faced with a slowing U.S. economy, unemployment above 8 percent for more than three years and regulations forcing them to hold more and higher-quality assets, banks are lending at below pre-recession levels. The bond purchases help explain why even after rising this month, Treasury 10-year note rates are about half the 3.5 percent median forecast of 43 economists in a Bloomberg survey a year ago.

“Bank deposits continue to explode and in turn they continue to buy Treasuries as the economy loses momentum, inflation is trending down, Europe continues to hang over our heads and political uncertainty reigns” said Michael Mata, amoney manager in Atlanta at ING Investment Management Americas, which oversees about $160 billion. “There is no reason forinterest rates to climb in any meaningful way any time soon...

The recent rise isn’t keeping up with record bank depositsas savings of U.S. households have risen to 4.4 percent of incomes as of June from 1.7 percent in 2007, the data show.
“Every bank is looking for a way to increase their yield,” said Mike Pearce, president of Bank of The West in Grapevine, Texas, whose company has been purchasing government securities after deposits grew faster than loans in 2010 and 2011. Instead of earning the Federal Funds rate of zero to 0.25 percent on the deposits, its bond holdings are yielding about 3.25 percent, he said.

13---Bond Tab for Biggest Economies Seen Falling $220 Billion, Bloomberg

The world’s leading economies will have $220 billion less sovereign debt to refinance in 2013, cutting supply after every major government bond market rallied for the first time since the 2008 financial crisis.

Average yields on government bonds have fallen to 1.4 percent from 1.76 at the end of 2011, the index shows.

Austerity has its costs. The International Monetary Fund forecast that fiscal tightening in advanced economies will be equivalent to 1 percent of their gross domestic product in 2013, compared with 0.75 percent last year. There will be no “significant fiscal consolidation” in emerging economies this year, the IMF predicted in October.

Growth Drag

“This 1 percent the IMF forecast is important because it will act as a bit of a brake on growth,” said Ewen Cameron Watt, the London-based chief investment strategist at the BlackRock Investment Institute, the research unit of the world’s largest asset manager. “The biggest contributor to growth in the fiscal deficit in the past five years has been shortfalls in revenues. Governments are looking for ways to raise revenues without killing the economy. Growth is going to be modest.”
The IMF cut its forecast for global growth for 2013 to the least since the 2009 recession. The world economy will expand 3.6 percent this year, it said in October. That’s less than the 3.9 percent predicted in July. The Organization for Economic Cooperation and Development, which advises 34 member governments on economic policy, also warned in November of the risk of a “major” global recession.
Sluggish growth will prompt central banks to hold official interest rates at, or near, record lows, according to economists surveyed by Bloomberg News.
Inflation Outlook
The Fed has been the biggest buyer of U.S. bonds, flooding the economy with more than $2.3 trillion through three rounds of purchases since the depth of the financial crisis in 2008.
Consumer prices in the U.S. will rise 1.90 percent in 2013 from a year ago, down from a 2.10 percent increase last year, according to analyst forecasts compiled by Bloomberg...

An agreement on how to deal with the fiscal cliff will do little to damp demand for Treasuries, said Akira Takei, head of the international fixed-income department in Tokyo at Mizuho Asset Management Co., which oversees about $39 billion. Treasuries fell, pushing 10-year yields up by seven basis points to 1.83 percent at 12:08 p.m. New York time.
“People in the market are thinking that an agreement on the fiscal cliff will take them back into a risk-on environment, but it won’t,” Takei said before the latest budget negotiations. “It’s not about avoiding austerity but how to execute austerity. An agreement will make the cliff less steep but won’t flatten it.”

14--When companies do massive buybacks to boost their own stock prices, the big winners are the very same top executives who make these resource-allocation decisions, naked capitalism

In the name of shareholder value over the decade 2001-2010, the 500 corporations in the S&P 500 Index (representing about 75 percent of US stock-market capitalization) expended not only 40 percent of their profits on cash dividends – the normal mode of rewarding shareholders – but also another 54 percent on stock buybacks, the purpose of which is to give a manipulative boost to a company’s own stock price. Large established companies did hardly any buybacks in the early 1980s. Over the past decade, buybacks by S&P 500 companies totaled about $3 trillion, which has left scant corporate resources for investment in innovation and high-value-added job creation.

When companies do massive buybacks to boost their own stock prices, the big winners are the very same top executives who make these resource-allocation decisions. Why? Because the largest single component of top executive pay is the income from exercising stock options – which become more lucrative when the stock price goes up, even if for just a short period of time during which the options can be exercised and the acquired stock sold.

Many corporate executives justify buybacks by arguing that they represent the best corporate investments available. How about investments in innovation and job creation? Or how about corporate support for government investments in the national knowledge base, which typically provides the foundation for enterprise innovation and profits? If top executives have been the big winners of this financialized buybacks-options game, then the big losers have been erstwhile members of the US middle class as well as tens of millions of younger Americans who will never have the opportunity of entering the middle class

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