Economic Stories of Relevance in Today's World -- June 23, 2013

The Rational Market Myth — Paul Craig Roberts - June 20, 2013 - One of the myths of economics is that markets are rational. Theories are based on this assumption, and the belief that markets are rational fuels the argument against regulation. The market response to the Federal Reserve’s June 19 statement that it will taper off its bond purchases if its forecast comes true is unequivocal proof that markets are irrational.              The Federal Reserve’s statement that it “currently anticipates that it would be appropriate to moderate the monthly pace of purchases [of bonds] later this year” depends on a very big if. The if is the correctness of the Fed’s forecast of moderate economic growth and employment gains.                   The Fed has not stopped purchasing $85 billion of bonds each month. So nothing real has changed. Indeed, there was no new information in the Fed’s statement. It has been known for some time that, according to the Fed, its bond purchases will gradually cease.                 In response to this repeat of old information, the stock and bond markets sold off in a major way on June 19-20. This market response to the Fed’s statement indicates that the Fed’s forecast is unlikely to come true. Low interest rates and a high stock market are totally dependent on the liquidity that the Fed is injecting by printing $1,000 billion per year. If this liquidity is not injected, what will sustain the markets? If the markets crash and interest rates rise, how can the Fed expect recovery?                In other words, the participants in the stock and bond markets know that the markets are bubbles created by the printing press. There is no real basis for the high stock and bond prices. The prices are an artificial reality created by the printing press. Rational markets would take into account the printing press element and would price stocks and bonds at a much lower level.                     Zero real interest rates mean that there are no risks. But how can there be no risk in Treasury bonds when the debt is growing faster than the economy?                         Normally, high stock values mean strong profits from strong consumer income growth and retail sales. But we know that there is no growth in real median family income and real retail sales.                     I suspect that the reason the Fed made the announcement, which seems to be derailing the Fed’s forecast of recovery on which the announcement depends, is to relieve pressure on the US dollar. For several years the Fed has been printing 1,000 billion new dollars each year. There is no demand for these dollars. So far these dollars have inflated stock and bond prices instead of consumer prices. But the implication for the dollar’s price or exchange value in currency markets is clear. The supply is increasing faster than the demand. If the dollar falters, the Fed would lose control. Rising import prices would soon drive domestic inflation and interest rates far higher than the Fed’s targets.                 Washington has succeeded in getting Japan and the EU to print yen and euros in order to eliminate the likelihood of flight to other large currency alternatives to the dollar. Smaller countries have also had to print in order to protect their export markets. With so many countries printing money, the Fed’s statement implying that the US might stop printing makes the dollar look good, and, indeed, the dollar rose on the currency exchange markets.                           Having neutralized the alternative currency threat to the dollar, the Fed and its agents, the bullion banks, the banks too big to fail, are still at work against the gold and silver threats to the dollar. Massive short selling of gold began at the beginning of April. Again on June 20 massive shorts of gold were sold at a time of day chosen to maximize the price decline. Only those who intend to drive down the price would sell in this way.                   Since QE began, the Fed has deprived retirees of interest income and has forced retirees to spend down their capital in order to pay living expenses. Judging from the initial market response, the Fed’s latest policy announcement is adversely impacting bond, stock and real estate investors, and the manipulation of the bullion markets continues to wreak destruction on wealth stored in the only known safe haven.                     How can a recovery happen when the Fed is destroying wealth?.....


“If The Yield Goes Significantly Higher The Market Is Going To Freak Out” - The Economic Collapse Blog - Michael - June 21st, 2013 - If yields on U.S. Treasury bonds keep rising, things are going to get very messy.  As I write this, the yield on 10 year U.S. Treasures has risen to 2.51 percent.  If that keeps going up, it is going to be like a mile wide lawnmower blade devastating everything in its path.  Ben Bernanke's super low interest rate policies have systematically pushed investors into stocks and real estate over the past several years because there were few other places where they could get decent returns.  As this trade unwinds (and it will likely not be in an orderly fashion), we are going to see unprecedented carnage.  Stocks, ETFs, home prices and municipal bonds will all be devastated.  And of course that will only be the beginning.  What we are ultimately looking at is a sell off very similar to 2008, only this time we will have to deal with rising interest rates at the same time.  The conditions for a "perfect storm" are rapidly developing, and if something is not done we could eventually have a credit crunch unlike anything that we have ever seen before in modern times.                   At the moment, perhaps the most important number in the financial world is the yield on 10 year U.S. Treasuries.  A lot of investors are really concerned about how rapidly it has been rising.  For example, Patrick Adams, a portfolio manager at PVG Asset Management, was quoted in USA Today as saying the following on Friday...                 If interest rates keep rising, it is going to have a dramatic effect throughout the economy.  In an article that he just posted, Charles Hugh Smith explained some of the things that we might soon see...           In addition, rapidly rising interest rates would throw the municipal bond market into absolute chaos.  In fact, according to Reuters, nearly 2 billion dollars worth of municipal bond sales were postponed on Thursday because of rising rates...                   We are rapidly moving into unprecedented territory.  Nobody is quite sure what comes next.  One financial professional says that municipal bond investors "are in for the shock of their lives"...            This is one of the reasons why I write about China so much.  China has a tremendous amount of leverage over the global financial system.  If China starts selling bonds at about the same time that the Fed stops buying bonds we could see a shift of unprecedented proportions.                          Sadly, most Americans have absolutely no idea how vulnerable the financial system is.                      Most Americans have absolutely no idea that our system of finance is a house of cards built on a foundation of risk, debt and leverage.                  Most Americans have complete and total faith that our leaders know what they are doing and are fully capable of keeping our financial system from collapsing.                    In the end, most Americans are going to be bitterly, bitterly disappointed.


The Real Cost: Rising Interest Rates and Monthly Mortgage Payments - Wall St. 24/7 - June 21, 2013 -  The latest rise in interest rates is already having impact on the on housing affordability. As rates rise, mortgage payments on new and existing home sales go up as well. Even though interest rates are still incredibly low. That being said, we wanted to analyze how the move in the 10-Year Treasury hitting 2.50% for the first time since August of 2011 is going to impact the mortgage costs for borrowers.              For starters, many banks are still requiring a 20% down and we are no changing that figure for calculations. The daily mortgage rates advertised at Bankrate.com showed rates ranging from 4.25% up to 4.85%. We decided to use an average home price of $300,000 since the U.S. Census Bureau showed the average home price peaking above $300,000 before the recession and with prices up handily since the last measurement of $272,900 from 2012. We broke this out in a smaller table below.                         The graph here from Bankrate.com shows that 30-year mortgage rates are getting up to 4.25%, but they were down at 3.50% less than sixty days ago. So on a $300,000 house here is the change in payments after deducting your 20% down and not considering your property tax payments:

• $240,000 at 3.50% is $1,077.71 Per Month
• $240,000 at 3.75% is $1,111.48 Per Month
• $240,000 at 4.00% is $1,145.80 Per Month
• $240,000 at 4.25% is $1,180.66 Per Month
• $240,000 at 4.50% is $1,216.04 Per Month

Now, let’s pretend rates keep rising and home prices do not go down. That may seem unlikely, but many shortages still exist in local markets. Lets pretend that rates keep climbing:

• $240,000 at 5.00% is $1,288.37 Per Month
• $240,000 at 6.00% is $1,438.92 Per Month...

20 Signs That The Pharmaceutical Companies Are Running A 280 Billion Dollar Money Making Scam - The End of the American Dream - Michael - June 20th, 2013 - If you could get 70 percent of Americans addicted to your drugs and rake in $280 billion a year in the process, would you do it?  If you could come up with a “pill for every problem” and charge Americans twice as much for those pills as people in other countries pay, would you do it?  If you could make more money than you ever dreamed possible by turning the American people into the most doped up people in the history of the planet, would you do it?  In America today, the number of people hooked on legal drugs absolutely dwarfs the number of people hooked on illegal drugs.  And sadly, the number of people killed by legal drugs absolutely dwarfs the number of people killed by illegal drugs.  But most Americans assume that if a drug is “legal” that it must be safe.  After all, the big pharmaceutical companies and the federal government would never allow us to take anything that would hurt us, right?  Sadly, the truth is that they don’t really care about us.  They don’t really care that prescription painkillers are some of the most addictive drugs on the entire planet and that they kill more Americans each year than heroin and cocaine combined.  They don’t care that antidepressants are turning tens of millions of Americans into zombies and can significantly increase the chance of suicide (just look at the warning label).  All the big pharmaceutical companies really care about is making as much money as they possibly can.  The following are 20 signs that the pharmaceutical companies are running a $280 billion money making scam…

Bank of America ordered us to lie, ex-workers say - Commentary: Abused government program to stop foreclosures - Market Watch - Al Lewis - June 19, 2013 - Several former Bank of America employees filed declarations in a federal court last week claiming the mortgage lender told them to lie to customers seeking loan modifications.                       Bank of America BAC -1.55%  fired back, essentially calling them the liars. “Each of the declarations is rife with factual inaccuracies,” the bank responded in a statement emailed to media.                 Bank of America also attacked the credibility of the lawyers who gathered these declarations as part of a class-action lawsuit filed in 2011 in Boston’s federal district court. “These attorneys are painting a false picture of the bank’s practices,” the bank said in the statement, adding it would respond more thoroughly in court next month.                         It always makes for engaging courtroom drama when witnesses call the defendant a liar, and then the defendant says the witnesses are liars. But if these witnesses are liars, they’re liars who worked at Bank of America. Read more about the allegations.                   It’s also worth noting that Bank of America was among five mortgage servicers that reached a $25 billion settlement with state and federal regulators last year to resolve similar allegations of abusive foreclosure practices.                And here’s the other thing: Ever since the Obama administration started the Home Affordable Modification Program, or HAMP, in 2009, we’ve been hearing about people who say they applied for a loan modification only to hear that the bank inexplicably lost their paperwork — and then their homes were foreclosed.                    Former Bank of America employees allege the bank had this paperwork all along. Saying it didn’t was part of a scheme to deny loan modifications and to steer financially troubled customers into more expensive re-financings.                      Oh, if only Snidely Whiplash, and all the other mustachioed villains from yesteryear’s melodramas, could see the way banks can foreclose on granny’s homestead today.                   The employees say they got bonuses for denying as many loan modifications as possible. And for putting homes into foreclosure, they say Bank of America rewarded them with gift cards to Target and Bed Bath and Beyond -- where housewares are sold, if you can fathom that irony.                 The accusations are so outrageous, it’s best to read them in the former employee’s own words — which they have submitted under penalty of perjury. 

Staten Island Sandy Victims Charged for Unused Water - The bills have been as high as $500 - WNBC (New York) - Jonathan Vigliotti - June 23, 2013 - Staten Island residents whose homes were devastated by Sandy say the city is charging them hundreds of dollars for water they haven't used since the storm.                     Some of the bills have been as high as $500, which Rep. Michael Grimm calls ridiculous.                  "That's $500 these people could use to replace a washer or dryer or refrigerator swept out to sea during Sandy," Grimm said at a press conference Saturday.               The Department of Environmental Protection sent a letter to residents saying they were subject to a minimum charge of $1.19 a day even if they weren't using water in their homes.                "I couldn't believe what I was seeing, $320 for water," said Stephanie Argento about a bill she got for her South Beach house, which she hasn't been living in. "That's money I could put to my rent."

Grimm said he has contacted the Department of Environmental Protection and asked them to waive the charges but has yet to hear back.                Last November DEP suspended billing and interest for more than 9,000 homes that were damaged by Hurricane Sandy and each account has since been carefully reviewed and more than half a million dollars in leak forgiveness has been granted, Ted Timbers, a Department of Environmental Protection spokesman told NBC 4 New York.              The Department of Environmental Protection told NBC 4 New York that billing hasn't resumed if a home is uninhabitable.

I will graduate with $100,000 in loans - CNN Money - By Jennifer Liberto - June 19, 2013 - When Kelly Mears graduates from Union College in the summer of 2015, she will have $100,000 in student loans. Armed with a political science degree, Mears will join more than a million Americans who have racked up breathtaking amounts of student debt.                     Mears is also one of 7 million undergraduates caught in the middle of a debate in Washington over government-subsidized student loans, as interest rates are set to double to 6.8% from 3.4% on July 1.                   "It just seems to be a part of the growing American experience to go to school, graduate and work off that debt for the rest of your life," Mears said.               Super-borrowers with $100,000 of student loan debt aren't the norm. The average student graduates with $27,000 of loan debt.                 The New York Fed said those who borrow $100,000 or more are about 3.1% of borrowers nationwide. But it's easy to see how students get there, with four years of private college tuition running $116,000 on average, according to the College Board.


Business majors most likely to be underemployed, report finds - CNN Money - Angela Johnson - June 19, 2013 - What you major in can mean the difference between making an annual salary or making Frappucinos post-graduation, according to a recent report.                       While underemployment is an issue facing many graduates, those who major in business administration and management, criminal justice, drama, English and psychology, are more likely to work in jobs they are overqualified for, according to a report released Tuesday by career web site PayScale.
Based on an analysis of PayScale's 40 million job profiles, the report looked at the top ten majors most affected by underemployment, and the most common jobs graduates with bachelor's degrees in these fields settled for post-graduation.              Those who majored in business administration and management are 8.2 times more likely to find work in a job beneath their skill level, the report found. Those with criminal justice and drama degrees are nearly 7 times more likely to be underemployed, and liberal arts, anthropology, psychology and English degree holders aren't doing so well compared to their peers either.



Estimate shows wages would drop under Senate immigration bill, despite economic uptick - Fox News - Published June 19, 2013 - While supporters of the Senate immigration bill tout a new analysis that shows the legislation would boost the economy and trim the deficit, critics are seizing on another, less rosy stat -- the average American wage would drop, and not recover for more than a decade.                 The analysis from the Congressional Budget Office projected that, if the Senate bill passes, the influx of new immigrants would have the effect of slightly bringing down the average wage.                Specifically, the estimate showed average wages for the entire labor force "would be 0.1 percent lower in 2023."                   It would affect lower- and higher-skilled workers more than those in the middle of the spectrum.                The detail, included in a catalog of more positive statistics, was not lost on one of the bill's chief critics, Sen. Jeff Sessions, whose office blasted out the projection as evidence the bill would hurt the workforce.               "The wages of U.S. workers -- which should be growing -- will instead decline," Sessions, R-Ala., said. "It would be the biggest setback for poor and middle-class Americans of any legislation Congress has considered in decades."                   Democrats, and some conservatives, disagree strongly with Sessions on that point. The CBO estimated that the bill would actually boost the economy -- or gross domestic product -- by 3.3 percent over the next decade, and by 5.4 percent the decade after that.                  Wages would eventually rise, the office said, but not for roughly a dozen years. Effectively, the CBO said it would take time for the economy to catch up with the influx of workers.                   "As the labor supply initially increased under the legislation, less capital would be available for each worker to produce output, and thus workers' output, on average, would be lower for a time. That decline would reduce average wages relative to those under current law," the report said.


 DAK Americas closing Navassa plant - (WWAY Wilmington, NC) - Brandon Taylor - June 19, 2013 -  Six-hundred people will soon be out of work after a Brunswick County factory closes its doors.                   Charlotte-based DAK Americas says it will close its plant in Navassa this fall. The company's President and CEO Jorge Young made the announcement earlier this afternoon at a news conference in Wilmington.                           He says the Cape Fear Manufacturing Site in Navassa will close at the end of September. That means hundreds of full-time and contract workers will be out of work.                   The plant makes PET resin, polyester staple fiber and raw materials for the other two.               Young says today has been a very difficult day, but he says the employees handled the news very professionally.                       "Closing the Cape Fear Site will strengthen our ability to supply those markets in a more cost competitive way," Young said.                   Young says the company has put between $100 and $150 million dollars into the plant over the past 12 years.                     The company says employees will get a severance package.


NC alone in choice to end extended unemployment checks - WRAL (Raleigh) - Bruce Mildwurf - June 20, 2013 - orth Carolina lawmakers had a tough choice this spring: Change how unemployment benefits are calculated, potentially cutting off benefits to tens of thousands of people, or allow the state's debt to the federal government to continue as a drag on the economy.                         The Tar Heel state was one of many in the same situation, but North Carolina lawmakers were the only ones who chose the quicker fix. Effective July 1, 71,000 people will see their extended benefits end.
During the 1990s, states gradually cut back on the unemployment tax they charged to businesses, explained Duke University economist Aaron Chatterji. When recession hit in 2008, and unemployment claims began to climb, the states lacked the trust fund to pay those benefits. They borrowed from the federal government, and now that bill is coming due.                   "Most states have these have this deficits with the federal government," Chatterji said. "They are all dealing with it in different ways. North Carolina is unique in terminating the program so abruptly."                  In order to pay down that debt, lawmakers agreed to a plan that reduces state unemployment compensation, eliminates extended benefits and raises employer contributions into the system. Under the plan, the debt owed will be paid off in 2016, three years early. It takes effect June 30.                 "We believe it's the right decision," said Sen. Bob Rucho, R-Mecklenburg. "Had we not made these changes to start putting some fiscal sanity back into the system, that fund would not exist for any future people."          In a statement issued Friday, Sen. Phil Berger, R-Rockingham pointed the finger of blame on Democratic administrations past.

More U.S. senators concerned by Shuanghui-Smithfield deal - Reuters – June 21, 2013 - More U.S. senators on Friday raised concerns about a Chinese company's plan to buy U.S. pork company Smithfield Foods Inc (SFD.N), particularly in light of restrictions that China continues to place on imports of U.S. meat.                   "This review must be thorough and take into account the full range of national security interests," the top Democrat and Republican on the Senate Finance Committee said in a letter to U.S. Treasury Secretary Jack Lew and U.S. Trade Representative Michael Froman.

"In particular, we urge that due consideration be given to the impact of the transaction on food safety in the United States," added Senators Max Baucus, a Montana Democrat and the committee's chairman, and Orrin Hatch, a Utah Republican.                  That echoed a demand made on Thursday by 15 of the 20 members of the Senate Agriculture Committee.                  Chinese meat company Shuanghui International hopes to buy Smithfield, the world's largest pork producer and processor, for $4.7 billion in what would be the biggest takeover of a U.S. company by a Chinese firm.              The companies, out of what lawyers said was "an abundance of caution," filed the proposed deal with the Committee on Foreign Investment in the United States (CFIUS) which reviews foreign investment for any potential threat to national security.               Many CFIUS experts believe it is unlikely the Obama administration will decide that Chinese investment in the U.S. food sector is a national security threat.                    "I think the Chinese will bring home the bacon," said Timothy Keeler, a former U.S. Treasury and trade official who now advises companies with deals that go before CFIUS.

Senator Rand Paul speaks at Audit IRS Rally