Larry Summers on the Labor Force Participation Rate

The Labor Force Participation Rate (LFPR) is a key economic statistic today. Changes in the LFPR are shaping the direction of the capital markets, federal economic policy, monetary policy and, most importantly, politics.

The LFPR hit a new record low on Friday. The key question that must be answered is:

Is the current LFPR a temporary phenomenon, or is this the “New Normal?”

If the current LFPR is, in fact, the new normal (I think it is), it has profound implications on the macro economic outlook for the USA. Virtually all of the economic models used by CBO, OMB, SSA and private economists are assuming that the long-term LFPR will be in the mid-to upper 60s. The consensus is 2-3% higher than where it is today.

If you plug in a rate of 63% versus 67% over the next ten-years, it makes a huge difference on the size of the deficit and the public debt. It would cause the deficits at Social Security and Medicare to explode. The percentage of GDP attributable to the government would inevitably rise. The economy, and society in general, would be socialized.

I don’t think there is a macro economist or economic policy deep-thinker out there that does not recognize the significance of the LFPR, or that it’s hitting new lows.

Let me confirm the data. This from the BLS, Note that January's reading  fell 0.3% to a multi-decade low:

This chart is also from the BLS. The trend is obvious:

I think most of the Biz press had the story right. The drop in the LFPR was highlighted (accurately) by many:

Okay, I hope I’ve convinced you of two things. 1) The LFPR is a very important statistic, and 2) The BLS reported on Friday that the LFPR had fallen to a new record low in January.


Now listen to what Larry Summers had to say about the LFPR this morning on ABC’s This Week show. (This is a painless, no commercial, 90 second video.)

Larry Summers is a possible candidate as the next Treasury Secretary.  He has all the credentials. He knows where the bathroom is; he’s had the job before. But he blew it on the issue of what happened to the LFPR this month. He gave the wrong answer, with 10mm people watching.

Looking at the macro picture, anyone that is worth their salt should not have gotten this wrong. It’s too important. Possibly an explanation by Mr. Summers will be forthcoming.

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DOJ's Latest "Beat Down" on Swiss Banks

Wow! The Department of Justice took an extraordinary step yesterday. It indicted Swiss private bank, Bank Wegelin, for aiding and abetting in US income tax fraud. This is a big deal.

I’ll try to keep this fascinating story brief.

Bank Wegelin (W) has been around for 270 years. In Switzerland, it is referred to as a “Private Bank”. There are dozens of Private Banks in the country (less every week).

Private Banks do private things and charge big fees. Up until four years ago, the Swiss Private Banks were doing private things for private clients from all over the world, including many US names.

The DOJ sued the big Swiss bank, UBS, over this private business. UBS folded when the DOJ threatened a criminal complaint. (UBS would have had to close all its US businesses had a criminal complaint prevailed.) It ended up costing the bank $780 large and, for the most part, the DOJ got the “names” it were after.

Having blown UBS to smithereens, the DOJ set its sights on the other Swiss Banks. It targeted eleven Private Banks. W was on the list.

Talk of a settlement, including big buck fines and the release of more "names", has been in the press for a few months. Treasury Secretary Geithner met with Eveline Widmere-Schlumpf (Swiss Finance Minister) in Davos last week. It seemed like progress was being made on the thorny problem of the private banks: 

Widmere-Schlumpf:

“We’re hoping that we’ll reach an agreement with the U.S. within the next couple of months”

I was surprised when the non-USA assets of W were “sold” to Notenstein Private Bank on January 27. Notenstein is 100% owned by Raiffeisen Bank (R). This sale should have been a tip off that the conversation between Geithner and Widmere-Schlumpf was not as friendly and optimistic as the public comments suggested.

The Senior Managing Partner of W, Konrad Hummler (KH), commented on the sale of his bank: (Apparently he was surprised too)

“I never could have imagined that we, as owners of Switzerland’s oldest bank, would have ever considered selling”

KH was clear that the sale was a reaction to the pending DOJ hammer blow:

“The extraordinarily difficult situation and threat to the bank brought about by the legal dispute with the US”.

With the non-US assets stripped out of W, the DOJ suit is functionally against a dead person.

Note: Wegelin had no physical assets in the USA. It did have a bank account in the US holding $16.2mm. That was seized yesterday. But that amount is peanuts. The DOJ wants much, much more.

There's an unusual part to this which I find curious. W had an ‘old school’ way of doing business. To give assurances to its private customers that the bank was solid, and their money was safe, the Board of Directors of W assumed personal liability for the affairs of the bank.

No one has lost a Franc in the account transfers from W to R, so it would appear that those directors are now free from any liability. However, the DOJ has named EXECUTIVE X as a plaintiff in the charges files yesterday. So it would appear that Konrad Hummler’s (KH) problems are not over.

It just so happens that KH is also the Chairman of the Neue Zuricher Zeitung (NZZ), an influential Swiss rag. KH has a long history in Swiss banking. He used to run Swiss Bank Corp., which he later sold to UBS. He was the former head of the Swiss Private Bankers Association. He was an adviser to the Swiss National Bank for seven years!  (He lost that job in April, 2011 as the DOJ noose was getting tighter.) This guy is wired.


The DOJ might also pursue the former assets of W. This could be problematic. The timing (and the surprise) of the sale of W's non-US assets to Raiffeisen Bank (R) might have pissed off the folks at the DOJ. There are (unconfirmed) reports in the Swiss press that the sale price for W's non-US assets was CHF 700mm ($725mm). That might explain the actions DOJ took. That’s a lot of loot.

Will the DOJ go after R? This would seem unlikely. R has a very big presence in Switzerland. It is a retail bank with three million customers and branches all over. It is affiliated with Raiffeisen Bank International (RI).  RI is a very big bank in Eastern Europe with 13mm customers . Of further interest is that both R and RI are part of Unico Banking Group.

This consortium includes the big Dutch bank, Rabo and also the French bank, Credit Agricole. Maybe I’m nuts, but I don’t see the DOJ messing with a hornets' nest this size.

I think the DOJ's steps yesterday were just “shock and awe”. This puts more pressure on the remaining Private Banks. The DOJ blew up W in a rather spectacular fashion. Other Swiss bankers in the DOJ's cross-hairs must be crapping in their pants. Many of them are gathering up client dossiers - and getting ready to write big checks.

The DOJ is like a Rhinoceros. It's not very good looking, and when it puts its head down and charges into the brush, it tramples anything in its way. Nothing can stop it.

This matter will come to a head pretty soon. If it doesn’t, the DOJ will knock off the next Private Bank on the list.

Fines will get paid. Names will be turned over. Some individuals will be prosecuted. The “names” have some explaining to do. At the top of this list is the good old IRS. Other interested parties will include creditors, wives, ex-wives, ex-wives’-lawyers, current-wives’-lawyers, business partners, employers, the press, relatives and friends.

After a while, this will all be forgotten. Sort of. The door for Americans to hide money away from the IRS is closed. Sort of. The foreign banks won’t want American customers; it’s too much of a hassle. If you do find a Banca di..... outside of the USA, you will have to plunk down a SS card, and agree to have info given to the IRS.

The door is closed for all electronic money. But the door is not completely closed. This story is as old as the Egyptians. Folks have been cheating their partners, wives and the taxman forever. It’s not likely to stop.

I understand that cash boxes are filling up with bills in some locations. In a zero interest rate environment, that makes some sense. Sort of. It makes infinite sense if rhinos are around.

On second thought, this episode will not be forgotten. Many people have already been trampled. More are in harm's way. Such is life. It has left a scar on the US image in some of the financial centers. The US played hardball and won. You don’t win many friends playing hardball. But this had nothing to do with friends. (Switzerland was once a friend of the USA.) It was always about the money.

There are many pieces of this story that would make for a good movie. For the life of me, I can’t figure out who are the good guys. Maybe that's the point.

Entering the Intervention Zone

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One Around Two

We are near the edge on a few situations in the FX markets. I'm watching the EURCHF and the USDYEN.

The market traded EURCHF to a low of 1.2032 today. It closed at a (slightly) safer 1.2044. I would not be surprised to see this cross trade very close to the official peg of 1.20 in the not too distant future.

There is no doubt in my mind that the Swiss National Bank (SNB) will be involved when and if the EURCHF hits the 1.2000 mark. My guess is that 99% of everyone else who “votes” in this market believes the same. This begs a question.

“If everyone knows the cross can’t go below 1.20, then why in hell is it sitting 44 lousy pips away from the peg?”

The EURCHF is a very good funding currency for a carry trade. Yields on French and Italian bonds make it attractive, given that Swiss money can be had through the swaps with a negative Vig. It seems like the market wants to trade the EURCHF very close to the peg for the time being. That’s odd, given that it’s a “100% sure thing” that the SNB will protect the downside.

The Dollar is a sideshow for the Swissie. I doubt many are trading USDCHF these days. It’s worth noting that the Dollar got beat up for five big figures against the Euro the past week or so. Normally when you see Euro strength versus the dollar, you also see it in the EURCHF cross. Not this time around. It does make me go Hmmmm.

I think there are scenarios where the EURCHF could trade to the peg. If, by surprise… the Greek deal fell apart, money would move into the Franc. It could be something subtler. A reminder of just how fragile the Euro system is these days might do it. For example, this headline from the WSJ that came out after the NY close may scare the crap out of many people with bank accounts in the EU.

If the EURCHF does test the peg, it will probably happen during European trading hours. I expect the SNB’s new boss, Thomas Jordan, will stand up and bid 1.1999 for all the Euros the market has on offer.

A side story to this is what happens if the cross breaks the peg outside of Euro trading hours. What if some hedge-fund types lean on it at 3 PM on a Friday in NYC? The same question arises during Asian hours. If Monday morning, in Australia, the cross is offered at 1.1997, without a bid, it will create a big splash. That "100% sure thing" will immediately come into question. Mr. Jordan doesn’t want that.

There are only two possibilities for intervention outside of the Euro time zone:

1) The SNB can rely on the Central Banks of Australia, Japan and the USA. Those CB’s would act on behalf of the SNB during their respective market hours.

But, realistically, there is no chance in hell for this. The US Fed can’t play in this sandbox. For the Fed to participate in an effort to weaken the Franc would make it (and Tim Geithner) look silly. The USA has been threatening China with all manner of sanctions over China’s policy of maintaining an artificially weak currency. The Fed simply can’t help Switzerland do the same thing.


2) The SNB will give “resting” orders to commercial banks. The most likely name for this would be UBS. It would not surprise me if one of the other big banks had a turn at doing the SNB’s calling. JPM and Bank of Tokyo are likely candidates, Barclays may get put on the list if persistent intervention was required.

The resting order might be:

To: Bank of Tokyo, Tokyo - FX Department

Firm order, good till cancelled. SNB offers to purchase up to Euro 200 million versus CHF at 1.1999. Call Hans -immediately- if the first E50mm is executed.

With this, we get the EURCHF trading “one-around-two” (one pip around 1.200 or, 1.1999 – 1.2001).

A few thoughts about resting orders from CBs.

*The information always leaks.

*The bank operating for the SNB will be named.

*A bank that has a large resting order from a CB has a huge tactical advantage against other market players. (I know, I played this game.)

*A move into the intervention zone will rile other markets, most notably in the Euro funding markets.

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A Yen for a Yen Trade

The USDYEN is dangerously close to becoming an issue (again). The NYC low was 76.08. Anything under 76.00 might bring in the Bank of Japan (BOJ). The last time we were here was on 10/27. The chart:

Japan desperately needs a stimulus. It has gone to the cupboard for more ZIRP and deficit spending too many times. At 220% debt-to-GDP, its credit card is maxed out. My reading of the Japanese press is that more debt as a stimulus is not a viable alternative. (They are talking about doubling the VAT to 10%, to cover a portion of the deficits. Given that painful effort, they are not going to turn around and borrow more.)

The only option left is to fiddle with the FX rate. It would make a very big difference if the USDYEN was 85. The Japanese Finance Ministry folks must be looking at the SNB's actions with envy. A 15% devaluation off the low, coupled with a future exchange rate that was (somehow) pegged to the USD, or a basket of currencies, would be just the ticket.

Here again, I don’t think this will happen. The boys at the BOJ know that they would have to absorb a trillion in additional reserves if they drew a line in the sand with a currency peg. That doesn’t mean that they are not thinking about it. Some “Peg Talk” by some MITI types might get the ball rolling.

I think we'll see a break of 76.00 soon. The sparks will fly somewhere around 75.60. Given the deteriorating conditions in Japan since the October intervention, I do wonder if the BOJ might be somewhat more aggressive this time around.

CBO REPORT - OMG!

The Congressional Budget Office (CBO) is out with its annual report. It’s a blockbuster. This 165 page monster is filled with dozens of charts, graphs and detailed projections. It will be talked about for weeks. The report provides a dismal outlook for the economy. There is one data point I'd like to focus on.

Here is the CBO forecast for real GDP for 2012 and 2013:

The 1.1% Real GDP number for 2013 surprised me. The CBO’s expectations are way under those of both the “Blue Chip” economists and the Federal Reserve:

What does it mean if the economy is going to slow, as CBO now thinks? Some consequences:

The CBO now forecasts Social Security to run into trouble in just a few years. This is a very substantial change in the outlook for SS. Changed fortunes make it a certain that America’s favorite entitlement program will be on the table for a significant re-vamp.

The CBO has answered two critical question:

1) In what year does SS first goes into deficit (including interest)?

2) What is the size of the SS Trust Fund when #1 has been achieved?


Key data is here:

Using this information, we can estimate the Trust Funds (TF) balances over time, and compare them to what SS forecast in its report to Congress ten-months ago:

 

SSTF's "Intermediate" (Base) case:

The bottom line is that the SSTF is going to top out three years ahead of “schedule” and be $800B shy of what it was “supposed” to be.

I think the CBO report has created a big headache for a good number of folks in D.C. Most of them are running for office this year. They certainly won't be able to wave the CBO report as a measure of how well they are doing.

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Obama Bluffs on ReFi?

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In his State of the Union speech, the President said:

Millions of innocent Americans have seen their home values decline. And while government can’t fix the problem on its own, responsible homeowners shouldn’t have to sit and wait for the housing market to hit bottom to get some relief.

And that’s why I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low rates.  No more red tape. No more runaround from the banks. A small fee on the largest financial institutions will ensure that it won’t add to the deficit and will give those banks that were rescued by taxpayers a chance to repay a deficit of trust.

I found this interesting, and can’t wait to see the legislation that the Prez is going to offer up.

I have written four articles on the topic of a Mega ReFi (here, here, here and here). The first one was back in August. At first I thought there might be something behind all this talk. Now, five months later, I think it's all gas. We’re not going to see any big ReFi plan until after the next election. These are the issues as I see it:

The Administration has been trying to come up with programs that would aid underwater homeowners. This problem is, by far, the biggest domestic drag on the economy. So it makes sense that the Obama team is looking for ways to deal with it. There is one enormous impediment that they face in achieving this lofty objective. They don’t have the money to fill this very big bucket. If they tried to pass a bill that would raise the odd $200-300 billion needed, they'd fall flat on their face.

The Administration's thinking has been that underwater borrowers should get the benefit of today’s lower interest rates, and it should not matter if the borrowers are underwater by 25% or more. The White House would like the unrealized losses to be rolled over at a low enough interest rate to let those borrowers dig their way out of the negative equity hole in five or ten years.

To achieve all this, the President’s men leaned hard on the one guy who had to sign off on the plan. The President had to ask the permission of Edward DeMarco, the Acting Director of FHFA. DeMarco is ultimately responsible for what happens with our dear friends, Fannie Mae and Freddie Mac.

I have followed DeMarco’s words since he was appointed Acting Director. He repeats the same thing every time he has a chance to describe the goal of his job:

As FHFA has noted on numerous occasions, with taxpayers providing the capital supporting the Enterprises’ operations, this “preserve and conserve” mandate directs us to minimize losses on behalf of taxpayers.

In my opinion DeMarco has lived up to that. He has taken steps that have reduced the risks and the ultimate costs that the taxpayers face with Fannie and Freddie (F/F) . It’s for that same reason that he has not allowed F/F to be the agencies of the Administration’s economic plans.

These plans would force F/F to reduce interest rates on outstanding mortgages. As some of those mortgages are in inventory at F/F, the ReFi will result in additional losses. More importantly, the ReFi’s will require a waiver of many existing representations, and warranties of existing borrowers. In the end, there would have been a cost to all of this. The plan was for F/F to absorb the costs over time, and therefore kick the can down the road. (Why the President said there would be no cost)

DeMarco has nixed those plans. I’m amazed by this. DeMarco has been beaten up by the likes of Elijal Cummings (the new wanna-be Barney Frank of housing, ....only in America…) 

The President can send powerful forces wherever he likes.

He has very tough guys available to do the really hard jobs when needed. 

But even the President can’t bend Ed DeMarco. The reason, I believe, is that Mr. DeMarco has “protection”.






A year ago,  the Administration tried to junk DeMarco. It wanted its own guy in charge of the old Agencies. It wanted Ed out of the way so that they could conduct economic policy (quietly) using F/F's $6 trillion of power.

I thought the appointment was a shoo-in at the time. That was not the case. The appointment was squashed by one of the strongest hands in D.C.  - Senator Richard Shelby (R. Al) put his thumbs down. Without Shelby's support in the Senate, no appointment was going through. So DeMarco kept his job, and the Administration's plans got checked by powerful forces. The question is, “Is this check mate?”

The legislation that the President promised in his SOTU address can’t be a rehash of what was previously tried with Fannie and Freddie. That door is closed, at least until the next election. Therefore, I anticipate that the President will attempt to use the other big D.C. player in the mortgage business, the Federal Housing Authority (FHA). This entity could, in theory, be used to achieve Obama’s objectives. It could guarantee the payment of the new mortgages that would be required. In the process, it would transfer risk (both credit and interest rate) from F/F to FHA. That would make DeMarco happy.

While this plan is a possibility, it will never happen. The FHA is already in financial jeopardy (link). It needs a capital injection into its reserve fund for the existing book of business ($1T).

FHA would need a very big slug of additional capital to handle the ReFis that the President wants. (There are approximately 10mm homeowners, all underwater who would be eligible.) There is no way in hell that the FHA could get that much money this year. To do so would require the blessings of Senator Shelby. He has already tipped his hand; he won't back off in 2012.

I think we will see some legislation on this from the WH. It will get talked about on TV, but it’s dead on arrival. The President will claim that he tried, and he will blame Republicans for the failed effort. I wonder if the upcoming failed effort is not a "planned failure". One that has been put "out there" purely for the political theater that will come with it.

President Clinton abused used F/F. He wanted the Agencies to be an engine of his social objectives. Bush also abused used F/F. He wanted F/F to be an economic engine while the country was at war. Obama also would like to use abuse F/F. He's trying to trump what the last two Presidents did. He wants F/F to be the vehicle (and the loss generator) for a big ReFi plan, and he wants to use the Agencies to push his social agenda. I'm amazed that after all of the history with the Agencies that this Administration is repeating the sins mistakes of the past.

Bully for Ed DeMarco for standing up on behalf of the folks that will foot this bill, the poor taxpayers.

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Deutche Bank's Ackermann on the LTRO

Note: I'm experimenting with video. Bear with me.

Bernanke Goes All In

Well, we got an inflation target from the Fed. Basically, thinking at the Fed has been eliminated. The process has been automated. Bernanke has convinced the Fed board to adopt Core PCE as a determinate of monetary policy. So long as CPCE stays below 2%, Ben is going to have his foot planted on the monetary metal. It’s “full speed ahead” according to the Chairman. He's pushed things off until 2014 - a very long time from now.

My question: “Why is the Fed using CPCE versus another measure of inflation?” The very good news is that there is answer, and it comes from a very "reliable' source  – The Federal Reserve. A detailed analysis on this topic was conveniently made public just a month ago.

Alan Detmeister produced a doosey of a report. Ya gotta love the title page:

This beast runs 25 pages, it includes tons of charts and references. It compares the utility of using Core PCE to a dozen other inflation yardsticks. There are easy-to-understand formulas to support the conclusion:

Guess what? Good old Alan makes a compelling argument. Anyone who tries to question the use of CPCE is going to get hit over the head with this report. This is just one of the many charts that prove (according to Detmeister) that CPCE is the only way to go when considering monetary policy:

There’s just one teeny problem with Alan’s work. He did all of that comparing and studying using data from pre-2010. Using that information, CPCE lines up very well as a consistent barometer of inflation. But the analysis falls to shit when you look beyond 2009. CPCE took a nose-dive after 2009 (versus CPI and Core CPI):

Information on CPCE and the other measures of inflation is available monthly. There’s no reason (that I can think of) why the Fed chose to deliberately omit two years of data that would conflict with the “desired’ conclusion. To me, it looks like the authors manipulated the report.

I think the Fed made a mistake targeting inflation. It's now stuck with the choice. It can’t go back on this without looking awfully stupid. The policy of allowing CPCE to determine the direction of monetary policy will last the until the end of Bernanke’s term at the Fed. Then it will be abandoned in favor of more pragmatic approaches to decision making.

I think there is enough monetary juice in the global system for there to be a risk of inflation north of 2%. We shall see. I think Bernanke is going to get his balls squeezed. He deserves that fate, he put them in a vise. As of today, he no longer has choices. He’s made himself a slave to a single dopey statistic.

The markets are the best measures of how people perceived today's announcements from the Fed. The dollar pissed on the Fed in general, the gold market hit Bernanke square in the face with an ingot.