Tag Archives: Federal Reserve

Bend Over, America!

We have all known for some time that the ongoing  banking crisis was originally started by some sort of banker-naughtiness and what we have in common with the vast majority of Bank Directors is that we don’t really understand WHAT happened. But we do know that someone somewhere is guilty and needs to be spoken to very severely.

It was good to hear that the US government via its  regulator (Federal Housing Finance Agency), has filed suit against seventeen financial institutions. Specifically, they want answers as to why $200 billion in bad mortgage-backed securities was sold to mortgage companies Fannie May and Freddie Mac.

They made their announcement just as the Stock market closed last Friday afternoon – their timing was exactly what you would expect but nevertheless totally wasted. Today will be the  day when their proposed action will shake out on the markets. Fortunately for the stock prices, the Swiss have moved to protect their own currency which has had a small positive impact on equities.

So what did the bankers do?

Imagine that a bank grants a $100,000 mortgage which results in the borrower repaying say, $1000 per month. Now imagine 1000 such mortgages. If the mortgages were pooled , you’d have a “product” which generates an income $1,000,000 per month. Then you sell shares in the product to investors such as other financial institutions. Here comes the good bit: You omit to tell the institutions buying shares in your new product that the mortgagors (the borrowers) have absolutely no chance of making the $1000 per month repayments. Thus, the banks sold and also  invested in worthless products because they could not generate any income.

These were the famous Sub-prime Bonds. The term “sub-prime” describes the borrowers – the so-called NINJAS to whom the banks lent billions. NINJAS? No Income, No Job or Assets.

(That was a very simplified explanation but it does demonstrate the principle of dealing in debt – you create debt by lending and then sell shares in it).

Embarrassed financial institutions then either sold-on these “investments” and/or attempted to hide their mistakes through the medium of  creative accounting, by keeping these items  “off balance sheet”.

The US Government’s move on the banks is perfectly justified but any legislation will take years and so leave the banks with permanently damaged balance sheets and income.

The other downside will be that banks, having been bitten once by their OWN greed are unlikely to ever lend money for house purchase as aggressively ever again.

The Fed now fully expects the banks to pay for mortgages which they granted five or six years ago.

Fannie May (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) guaranteed most of the dodgy mortgages and are currently the subject of a Federal takeover and have been placed into conservatorship, which in US law is a form of temporary nationalisation

US banks have so far benefited from a $700 billion Federal bailout but nevertheless both Obama as well as the Federal Reserve have been accused of being too easy on the banks.

In fairness to the American banks, most of the money that they were handed by the Fed has been repaid. However, the rescue of Fannie and Freddie could cost the government as much as $350billion.

To add to the banks’ headaches, they are not only being sued by the US Government but also by many private investors who have also lost money.

So, at a a time when the banking industry is trying to rebuild whilst at the same time being urged to lend, it  is having its share values decimated. Then there’s the inevitable and customary Lawyer Bonanza which could add BILLIONS more to their expenses.

The principle of the legal actions is simple: The banks screwed-up through near-fraudulent activities and  pushed all Western economies into recession.

Someone HAS to pay.

The FHFA claims that banks were negligent and misrepresented the mortgage-based bonds they were selling because of sloppy underwriting, that is to say, they did NOT carry out proper checks on the people to whom they were lending money.

That is going to be a very difficult defence for the banks.

The FHFA further argues that  the Sub-Prime Bonds should NEVER have been marketed because the underlying “assets” did not conform to normal investor criteria. Yet another difficult position to defend.

Meanwhile, some bankers are attempting to shift the blame to Fannie May and Freddie Mac, while others  are hoping to settle the claims in order to limit litigation. Our own RBS intends to fight any action. RBS is being sued for over £30 billion.

The most sensible outcome will be for all lawsuits to be settled. That would generate another outflow of cash from the banks but would also draw a firm line under the shenanigans leading up to the 2008 crash.

In the United States, the banks are not just being sued by the government for marketing questionable financial products. They are also being sued in respect of bad foreclosure practices and evictions as well as lawsuits over mortgage debt losses.

Such bank payouts will reduce and weaken their capital levels –  further  harming banks’ ability to lend.

With politicians everywhere pointlessly (and theatrically) screaming for banks to enable economic growth as well as stimulate housing markets, the road to full economic recovery looks more impossible than ever.

Over here in the UK, we are still awaiting ANY indication from the government of ANY litigation.

So far, the best that we can do is PPI – but even after being TOLD to pay out, our banks continue to drag their feet and not distribute refunds as fast as they might.

It seems that here in the UK, the promise and lure of fat post-Westminster banking directorships is far too strong – as well as the rather ambiguous relationship between our bankers and politicians.

Nowadays, even on the world stage, politicians become bankers and bankers become politicians – especially in Europe.

It’s the ONLY logical reason for our politicians to sanction not-only immunity to our bankers but even after such catastrophic failures, to continue rewarding them with the glittering prize of the over-inflated, stock-market-generated bonus.

Go for Gold!

Eighteen months ago, I predicted that during 2011, gold would hit $2000 per ounce. So far, it has I topped-out at just over $1900 and then pulled back to about $1750

There was a 10% price drop in three days! That appears to have frightened some but has also done a lot of good because gold has been hugely overbought in the last few months and was due  a correction.

This correction is likely to continue to well below $1500. I am therefore no longer predicting $2000 per ounce.

It will rise to above $4000!

Within a few months, Ben Bernanke’s “do nothing , wait and see” policy will no longer be viable and the American economy will begin to crumble, closely followed by a mega-slide in Euro stocks.

At that point, those who do not become jammed in the exits will once again rush for gold – at the point when Bernanke and other Finance Ministers begin to oil the money-printing presses for more empty Mickey Mouse “quantitative easing” money!

Although we  are already in a Bear Market, there will still be unexplained rallies, falls and adjustments but thanks to politicians who have lost the art of decision-making, gold is still the way to go.

p.s. this is a fitting time to once again pay tribute to our former Prime Minister, Gordon Brown.

THIS is what he did!

States of the economies.

The next economic and banking collapse is going to make the 2008 crash look like a slight adjustment.

Once-powerful Western economies are booking  quarterly GDP growths of 1% or less. For the non-mathematicians, that is within a rounding error of ZERO growth. So when you hear a Chancellor deriving solace from an economy achieving  a growth of say 1.5% which was “better than the expected” 1.3%, we know that they and we are in trouble.

Politicians and central bankers have exhausted their entire repertoire on a THREE YEAR attempt to put their economies in order whilst at the same time propping-up a broken banking system. None of it has worked!

They all know that the tsunami is coming but there is no high ground to run to.

European politicians are rushing about, turning inaction into an art-form whilst economies and banks  are merely standing on the trapdoor and holding hands hoping that somehow all this will go away and the entire system will somehow self-right. Their impotent prevarication can (and will) only result in two things – collapse and bankcrptcy.

Bankruptcy of governments, business and of private individuals.

Last week we had the very first example of a banker who more-or-less threw-in his hand, admitting that there was little-else that money could do. The Federal Reserve’s Ben Bernanke had the choice of either printing more empty dollars or not. The so-called Quantitative Easing 3 would have increased US inflation and made Investment Bankers happy. It would have enabled the bankers to further plunder the markets and create more of those illusory profits. They’ve been operating on that basis for two years now and perhaps Bernanke decided that enough was enough.

Mainlining money is never the long-term solution – it’s too addictive!

However, No U.S  Quantitative Easing   has simply accelerated the collapse of the United States economy.

Yes! It’s as clear-cut as that.

In the end, Bernanke took a leaf from the politicians’ book and decided to do nothing but sit and wait. NO mention of QE3 and no steps to promote economic growth.

He has decided to kick the the whole thing forward yet another month in the vain hope that Congress can deliver the next promise. THAT’S what you call a long-shot!

For the moment both Europe and the USA appear to be quite content to pause and doze in the middle of their joint economic tightrope until someone else (as yet unknown, probably China) comes along to coax  them out of their torpor.

Unfortunately, America and Europe are entwined in such a way that if Europe falls, so will the USA.

We used to dismiss the  PIIGS nations as the ones heading for the econo-slaughter house — Portugal, Italy, Ireland, Greece and Spain.  Their problem is very simple – they have debts so huge that there is absolutely NO prospect of them ever being repaid.  Their politicians  are also waiting for something miraculous to happen sometime in the future.

The Euro saviour WAS supposed to have been the “strong man of Europe”, the one with the largest economy – Germany. Unfortunately,Germany has also hit the economic buffers. It’s growth in this year’s second quarter was  just 0.1 percent!

France, Europe’s second-largest Euro-economy, has also ground to a halt. President Sarkozy’s has followed the UK route with huge budgetary cuts. That certainly looks good on paper and may lower deficits  but will  produce an  impossible drag on an already-waning economy. THAT will inhibit growth and ultimately lower tax revenues – which will inevitably result in higher taxation.

The United Kingdom’s Chancellor can take the credit for showing everyone else the way to economic stagnation through the triple whammy of  Government budget cuts, rising inflation and plunging consumer confidence. EXACTLY the conditions to discourage anyone from risking any sort of entrepreneurial initiative or borrowing from the banks to fund commercial expansion. That is, if the banks weren’t continuing to sulk.

Europe is frantically cutting spending in a desperate attempt to postpone the inevitable debt meltdown. Meanwhile  Washington continues to rack-up up its national debt at the eye-watering rate of more than 10 percent per year.

All that America has achieved so far is to have its credit-rating slashed by Standard & Poor’s while its local governments, states and cities frantically try everything from releasing prisoners early to selling off the family silver.

The ENTIRE Western economy has ground to a shuddering halt with the weird unwanted bolt-ons of climbing inflation and consumer confidence at near an all-time low.

So what IS the solution?

The solution is comparatively simple and should be attempted in stages.

The first would be to reconcile ALL sovereign debt.

Secondly,  the markets and banks would collapse – but at a controlled rate.

Thirdly, it should be admitted that the Euro and the Eurozone were both very bad ideas which developed into a grotesque sacred cow.

Then we could ALL start again.

The alternatives are greater budget shortfalls, greater deficits, even faster growths in  government debt, followed by  catastrophic collapses and Depression.

The former all require  political decisions of such magnitude that even the politicians have come to realise  that we do not have anyone  with even remotely the courage to  raise his or head above the parapet to take control.

So for the moment, it seems as if we’re knowingly headed for an economic holocaust.

So, unless the politicians wake up soon, we need to create hell and not wait for it.

From “Brother, Can You Spare a Dime,” lyrics by Yip Harburg, music by Jay Gorney (1931)

They used to tell me I was building a dream, and so I followed the mob,
When there was earth to plow, or guns to bear, I was always there right on the job.
They used to tell me I was building a dream, with peace and glory ahead,
Why should I be standing in line, just waiting for bread?

Once I built a railroad, I made it run, made it race against time.
Once I built a railroad; now it’s done. Brother, can you spare a dime?
Once I built a tower, up to the sun, brick, and rivet, and lime;
Once I built a tower, now it’s done. Brother, can you spare a dime?


What did the Greeks ever do for us?

The politicians are very happy to accept credit for taming the debt dragon which, in fact, they themselves created by allowing the banks a free rein for far too long.

The Bank of England’s solution of Quantitative Easing, that is to say handing more and more cash to the banks has done little else apart from allow institutional investors and  the investment banks to maintain Stock prices at  falsely high levels and to push Commodity prices to new stratospheric levels.

These days, the name of the game is to hunt around for any excuse to push the markets higher and higher – not by buying stock and holding it but by keeping it on the move, i.e.   “working those shares”, thus making a dying market look as if it is in rude health.

Last week’s announcement about a possible Greek bailout moved prices up as did the Greek government’s announcement that their austerity measures had been voted through. Good news is all that investors want to hear.

They are all in La-la land!

Scratch the surface and what do you see?  How do all the investors really feel about the possibility of a Greek default? In short, they KNOW that it is going to happen.

That is clearly demonstrated by how much they are willing to pay in premiums for the insurance  contracts which are designed to protect them from future losses in case of default.

The equation is simple, the more the likelihood of a default, the bigger the premium.

The billions in bailouts have made no difference to the perceived likelihood of Greece defaulting and in fact, the likelihood of a total collapse and default is increasing daily.

Today, the cost of insurance against a Greek default is FOUR times greater than it was when their Euro partners announced the very first bailout package.

On May 12, 2010  the European Union (EU) and International Monetary Fund (IMF) announced a €110 billion  bailout for Greece. At that time, the cost of insuring $10 million in bonds against a Greek default was close to $540,000. Last week, it was $2.3 million –  FOUR  times more!

As a comparison, when Lehman Brothers failed and even when the likelihood of a global collapse was at an all-time peak, the absolute maximum that investors were willing to pay for $10 millions-worth  in Greek debt-default insurance was only $52,000.

So, the premium for the cover has increased from $50,000 to over $2 million for the same amount!!  THAT’S FORTY TIMES MORE!!!

To put it simply, investors believe that the likelihood of a Greek default is over 40 times greater today than it was at the height of the 2008 financial crisis.

Meanwhile the politicians are celebrating. Do they really believe that as far as the Greek economy is concerned it’s “job done”? Of course not. Not really!

It’s all window dressing, prevarication, obliquity and procrastination, designed to protect the Sacred Cow of the Euro for the time being, in the vain hope that by some miracle, under-investment and austerity will reboot the Greek economy.

The austerity measures which have been agreed for Greece – massive tax increases and suffocating spending cuts will make it impossible for Greece to pay both its bills AND its debts.

In the United Kingdom we are following the same path to decreasing government revenues by killing entrepreneurial confidence and creating the ideal conditions for another recession – or worse.

Like any business, making staff redundant and selling assets is not the way to generate higher net revenue because in the background, debts are constantly increasing. Both Sovereign States and Commercial enterprises have been forced into this totally nonsensical process.

Without new revenue streams and by “over-slashing” costs there is only one possible end-game. All that we are all achieving is putting-off the evil day whilst at the same time hoping for the lottery win which never comes.

The lotterry win which our own Chancellor is hoping for, is a sudden Phoenix-like rising of  non-existent entrepreneurs who do not have the non-existent backing of the banks. These entrepreneurs’ job (theoretically) is to create new businesses or grow existing ones in order to create employment and produce goods which we can exchange for foreign currency.

Greece is hoping for a similar Miracle on Skid Row but in reality, it will survive through the summer and then the begging bowl will reappear. This time, however, it will remain empty.

So, who do we believe? The politicians who have achieved very little except boot the can along a narrowing cul-de-sac OR the investors who are willing to pay incredible insurance premiums to protect the money that they have lent? The Dreamers or the Pragmatists?

In spite of very generous Euro handouts, Greece is already twitching and Rigor Mortis will have well and truly set-in by the final quarter of 2011.

The answer of who to believe is telegraphed to us daily by people who know – the global investors. Nowadays “buy and hold”  investment seems almost anachronistic.  If you look at Stock prices every day,you will see that they move up and then down , then up again….etc……What is known as a volatile market.

So what WILL the end game be?  What will the Greeks do for us?

Firstly, both European and American banks will collapse (again). European Banks have loaned money to Greece but it is the American Banks who are holding a lot of European bank debt. If European bank shares plunge to ridiculously low levels, financial markets could freeze whilst at the same time, investors will want to withdraw their non-existent money.

Incidentally, money is already being withdrawn and in the last 10 days, over $50 millions has gone from primary money market funds.

Secondly, the market for short-term debts — especially corporate IOUs (commercial paper) may freeze up. (That’s what happened in 2008 as a result of the Lehman Brothers collapse). The difference is that for instance in the United States, the Federal Reserve will not step-in with guarantees or cash – they have said so. Safety net gone.

No doubt other Central Banks will come running-in with the sticking plaster and splints but hopefully, by then, we will have learned to recognise more futile attempts at a temporary fix.

Thirdly, Greece has more cash tied up in debts than their economy produces in a year (debt/Gross Domestic Produce ration of over 100%).  Greece is not alone. Their protests and riots may be just a foretaste of what most Western economies will experience in the not-too-distant future. America is just one example of an economy which has passed the danger threshold and is currently playing a waiting game.

It is not just the well-publicised countries such as Spain, Portugal, Ireland and Italy which are on the brink. The United Kingdom is not far behind.

So what do we do? Do we dance to the politician’s drum-beat?

To a certain extent we have to. Even a wounded tiger is dangerous, so we are forced to ride it along with our governments.

However, we should follow the facts and not believe government “spin”. Do not forget that a skilled tailor can make a hunchback look straight – and our governments have been sewing like crazy for nearly three years!

We (as individuals) should ensure that whichever institution (bank or insurance company) is holding our money, has the ability, will and wherewithal to fulfil its obligations. Not all of them do. Some will have to rely on more government handouts and guarantees.  When you want your money, you want it in full and NOW.

Finally, we should all be very very vigilant.

Remember the 2008 crisis?  The banks did see it coming but to all outward appearances, it all seemed sunny and “business as usual”. Profits….. bonuses……..obsequious governments prostrating themselves before the Gods of Banking…..

Once bitten……….

Nearly forgot: Happy July 4th

Currency Wars.

I have been predicting the collapse of the dollar followed by the collapse of the pound sterling for about 12 months. the phrase ‘double-dip recession’ has now gone into the language but again is one of those phrases which is quite meaningless because I do not believe that we ever came out of recession.

Economically speaking, we have all been whistling in the dark.

Today the US dollar plunged to its lowest level against the Japanese yen in 15 years and fell to its lowest level against the Swiss franc in 27 years.

The world currencies which are going to do well in the next 5 to 10 years of those which belong to countries who have something to sell, that is to say countries which have minerals and metals in the ground and/or any sort of manufacturing. Australia is such a country and today the American dollar fell against the Australian dollar to its lowest-ever level.

Again about 12 months ago I predicted that gold was headed for $2000 an ounce. Today it is already at $1360 an ounce. That’s what happens when the dollar plunges and  investors start to buy gold by the ton!

World governments are plugging the odd financial hole here and there but, in the grand scheme of things, they are impotent to stop the meltdown of the dollar.

Apart from accelerating the value of gold, what else is the demise of the mighty dollar achieving?

There are only THREE major asset classes. Gold, commodities and currencies. As investors dump the dollar and rush for the exits marked gold, commodities and other- currencies-as-long- as-it-isn’t- the- dollar, there are two certainties. The first is that very soon the US government will have no choice but to devalue the dollar. The second is that  the dollar’s plunge has put incredible pressure on the price of food as investors rush to invest in wheat, corn, soya etc.

By the end of this year, the United States and the United Kingdom will be leading the Western world in unemployment statistics as both economies  are losing jobs at a greatly accelerating rate. In 10 days time,  the British Chancellor will give the British unemployment statistics  even more momentum by declaring thousand more public sector job losses. In the past four weeks, the United States has declared another 95,000 job losses.

Both the Federal Reserve and the Bank of England are inking the printing presses – ready to print even more dollars and sterling.  That will inevitably lead to currency devaluation which in normal circumstances would inflate an economy . However, after the United States and United Kingdom, there is a long queue of countries also wanting to down-value their currencies. That way (if such a thing were possible), they could all default on each other’s debts. Never mind, perhaps the banks will bail them out.

As recently as two days ago, both the IMF and the G20 admitted that this is not the end of the world’s economic troubles but the beginning of something truly terrifying:

Currency Wars.

It is simply a question of who blinks first and which economy can print money the fastest.

So what of the investors? They will produce what is known as a self-amplifying problem. That faster governments print money, the faster the investors will dump any currency they hold and the faster they will invest in gold and commodities. That will inevitably give rise to chronic  inflation and a very unpleasant end-game.

Will all these shenanigans affect the pound or dollar in your pocket?

Before you ask that question, make sure that you still have pockets that haven’t been picked by your government.

(THIS is from just over a year ago)