The short note

As the Washington pols act like a pack of ‘Tween girls fighting over who is not talking to who about what and the shutdown goes into its second week, a big problem is developing in the short note.

Yields on short-term Treasuries and Bills are shooting higher on the threat that default will hit this paper first and hardest.

Today corporations can borrow short-term paper cheaper than Uncle Sam.

One-month LIBOR is at 0.17 percent while the one-month Treasury bill is trading at 0.26 percent. The liquidity providers — institutional money — may chase better returns knowing the US will make good and pull out of buying short-term commercial paper.

This short paper squeeze, which is used by many corporations to fund day-to-day operations was the scenario that was the cause for the TARP bailout.

Cratering stock prices be damned, if the commercial paper market is squeezed on yield, then publicly trade companies will be showing up at the Fed window again in order to make payroll, pay vendors and roll over shorter duration notes.

This can all happen sooner than next week, look for 0.35 1-month T-Bill to be the line in the sand for the first shoe to drop perhaps as early as tomorrow.


No Dimon Jubilee

As the US stumbles into the new week of shutdown and futures this Monday morning show triple digit decline on the Dow Jones, there is still no word on JPMorgan’s global settlement for crimes against individual investors.

The shutdown may have a smaller effect on the SEC than most other federal agencies, due to the fact that they are somewhat self-funded, through the  surcharge they get on every trade made.

Still we are a week out of JPMorgan’s CEO Jamie Dimon being “perp walked” down to Mary Jo White’s offices for discussions on what charges will and will not be included in the settlement and whether criminal charges will be brought against the firm, ala SAC Capital Advisors.

News late last week came out that Dimon had relinquished his role of chairman of the JPM banking unit on June 30th of this year was met with tepid coverage, despite it signalling a thwarted attempt at appeasement to shareholders and regulators over the Whale trade.

Given the new SEC stance on admittance of guilt when settling charges, the delay could be in language over who will admit to wrongdoing. The company for sure, but are the feds — including the Dept. of Justice as well as the SEC — looking for Dimon’s scalp?

A thought could be that JPM’s head of commodities, Blythe Masters, may be the sacrificial exec the feds will take.

Not sure anyone in Washington wants to see a neutered JPM leadership as we slow march towards debt crisis.

Treasury and the Federal Reserve might need familiar faces around the conference table on a Sunday morning in the near future to help settle cratering markets as the ceiling comes down.

So figure any announced settlement will come after the debt ceiling crisis is resolved.

It's Austerity, not a Cliff

America cannot avoid the so-called Fiscal Cliff.

There is no cliff. It’s austerity. It’s the same austerity that is causing the Greek people to riot on the streets and set themselves on fire in defiance of the government’s policy of cutbacks in order to pay bondholders.

The Federal Reserve has one more quiver in its arsenal than Greece. It’s the dollar. Greece is unable on its own to cheapen the euro to help bail itself out of the debt spiral it and other southern European countries, ie: Spain, Italy and Portugal are presently going through. The fact that the euro is trading near $1.30 to the dollar is the proof that the fed’s unannounced policy is a cheap dollar. No one will say it but the market’s actions speak volumes.

While US price inflation is rising much more than any core CPI report states, wages, however,  are stagnant as 25 percent of the workforce struggles to find meaningful employment. So as prices climb and wages remain flat as they have for three years you have an increase of deflation, which the Federal Reserve is battling to combat. The central bank has few tools to fight deflation except creating another bubble to inflate the economy.

Meaningful employment equates to a full-time job with decent salary with health benefits.

I have requested from the Bureau of Labor Statistics numerous times what percentage of the US labor force falls into the category of having a meaningful job regardless of salary. They cannot provide that breakdown.

My hunch is that number may be astonishing low for new hires since 2007. Look how the hours worked for the week number has moved into the mid-30s since 2008 and has barely moved.

More workers are taking part-time positions without benefits in a struggle to make ends meet.

Back to the deflation aspect of the economy. The Fed’s one tool to combat deflation is asset bubbles. You can see that in their bond market manipulation otherwise known as Quantative Easing. Ben Bernanke is punishing savers with his ultra-low bond yields. Retirees and soon-to-be retirees are getting near zero interest on bond returns and saving accounts. The Fed wants to chase them into riskier investments such as stocks. This is the bubble aspects, equities.

As equities tick up on seemingly no news or better yet bad economic news, the bubble gets larger and thinner.

So while Congress and the Obama administration debate the tax rate on the upper 2 percent aas being the be all and end all of our economic problems, be aware the cliff for the middle class is coming.

There is no way taxes, social security contributions are not going to rise and rise significantly. We have a $16 trillion hole with more being requested by Washington as the debt ceiling will rise in the first quarter of next year.

There is little that can be done if we continue on the path of enriching entitlements.

More to come on this as I will be far more active on this blog in the near future.

Crude Reality


Wall Street and Washington are playing a crude joke on the US economic recovery.

Higher gasoline prices have drained over $25 billion from the US economy since September, as skyrocketing oil costs have eaten into consumer’s wallets.

But the issue isn’t supply — it’s Ben Bernanke and hedge funds.

The Federal Reserve chief has kept the dollar weak with his “quantitative easing” stimulus plan. Wall Street sees commodities like oil as a security, a hedge on the watered-down greenback. They can run up oil prices on nothing more than speculation that China may suddenly need more oil.

Oil prices have hovered near $100 a barrel recently (though a disappointing jobs report brought it back down to $88 a barrel on Friday). OPEC is of course pleased with the high prices, and refuses to increase production — but privately, even they’re puzzled by the increase in prices. There hasn’t been a spike in the demand for oil recently; in fact, the recession has decreased use.

Yet New Yorkers pay more than $3.45 at the pump, and economists are forecasting $4 or even $5 a gallon gas by spring.

“That’s over a $145 billion annualized ‘hidden tax’ on the consumer,” says Peter Buetel, president of Cameron Hanover, who covers the oil industry.

“Gasoline prices at the pump have increased over 27 percent since Bernanke began telegraphing his move in September,” Buetel added.

Stephen Schork, an energy analyst who runs the Schork Report, wrote in a November posting that Bernanke’s easing started the run-up in crude oil through a weakened dollar. Then the fast money on the Street took the ball and ran with it.

But it isn’t as if the oil market suddenly had a switch turned on in September. Energy prices never really retreated during the recession, and some analysts believe the price of gasoline should now be more than a dollar lower than its current $3-plus average across the country.

While most of the equity cheerleaders have celebrated stocks’ year-end moves and said that gold and silver may be bubbles, crude oil prices have soared more than all other investments.

Precious metals were up 8 percent for the final quarter of 2010. The Standard & Poor’s 500 index gained 13 percent during the same period while crude, facing stiff headwinds of a stronger dollar as the euro weakened on Irish and Greek debt woes, gushed over 16 percent.

Cameron Hanover’s Buetel estimates that 40 percent of the run-up in crude prices by year’s end can be laid at the feet of Wall Street.

The crude reality for consumers is that this is the same Wall Street crowd chasing profits, which took crude prices to $147 a barrel in July of 2008, only to crater to $33 a barrel by December of that year as the fast money moved elsewhere.

It’s a big part — oil at $147 a barrel — of what exacerbated the recession in 2008.

“In a fragile economic recovery, $25 billion that does not buy movie tickets, pay restaurant bills or make a retail purchase could mean a longer time for economic recovery,” said Buetel.

Disappointing holiday retail sales bear this out.

Just this week Discover Card officials said that 47 percent of consumers spent less on gifts this holiday season because of higher gasoline prices and the sales figures from retailers showed declines across the board.

So where were the sales? Investors will likely get the answer when the oil companies report their earnings later this month.

Schork said that $90 a barrel translates into $3.15 a gallon and $95 a barrel to $3.30 gallon.

“At $95, we begin to see demand destruction,” said Schork, which means consumers cut back on gas purchases.

That has little effect on Wall Street banks and hedge funds that are bidding up the price to get a better return for their investors.

At the end of last year, Wall Street money mangers controlled 200 million barrels of oil in futures contracts. That level is five times the amount of oil Nymex controls in its Cushing, Okla., crude oil storage facility.

The Commodities Futures Trading Commission, under the FinReg rules passed last year. is charged with reining in Wall Street speculators by this month. But the panel will not have any subtenant rules until late spring at best.

The Real Mortgage Fraud


Up until now, large banks and mortgage servicers have stated that they used false documentation and illegal signings and notary signatures to alleviate the huge backlog of foreclosure processings.

Although filing a false document with a US court would be fraudulent if you or I did it, this is only the tip of the iceberg for the banks.

Once it is revealed that the rash of foreclosures was begun to allow the banks to clear their balance sheet of toxic assets before mark to fantasy expired and also profit by it, the entire mortgage securitization market will crater.

Here is how it works:

If you have a delinquent $250K loan that the bank wishes to get rid of. It bundles this loan with other bad loans and sells it at $0.40 on the dollar.

The purchaser of the paper then forecloses on the house and sells the house for $150K. That’s a 50K profit on the foreclosed property.

Now if you do this 100,000 times the bank clears the bad paper and makes a tidy profit because the seller is either another arm of the bank or has a kick-back clause tot he bank.

Now if this scenario is “allowed to be” unveiled by any of the many ongoing investigations into this mess, then the entire mortgage market will seize.

This fraud will make robo-signing look like jay-walking in the grand scheme of things. It was a means to get the bailed out banks out from under the mess they caused.

For more on Wall and Washington and the economy see: