Tuesday, August 18, 2009

It's Inflation Stupid

What happened Monday in the Precious Metals Markets? Was the market gripped by fear, panic? Were frustrated Bulls flushed out of the market by a CRIMEX press of their huge short position? Or did US Dollar strength in the face of a global dump in the equity markets simply spook the Precious Metals into a sell-off?

I found it intensely amusing that the global sell-off in stocks Monday was blamed on "concerns" that US consumers are too skittish to sustain, let alone ignite, a global economic recovery. This was reported as news? LOL, doubts about any recovery have been numerous for weeks, and all ask the same question, who is going to drive this "recovery" the US Government persistently predicts "is coming"? US consumers are too focused on paying down debt, and keeping their jobs to spend more money they don't have. It should come as a shock to no one that US consumers are not going to pull the global economic recovery forward. In fact, the US consumer is going to ultimately get left behind if and when a global recovery takes root.

That being said, consider for a moment the real root of the current rally in stocks that began back in March. Endless lip service has been paid to the "green shoots of recovery" story that has supposedly lifted stocks off their lows and to recent yearly highs. Never mind the fact that these green shoots have been fertilized with pure manure, as in phony economic statistics conjured up to give the appearance of "growth" even though they just show that the pace of economic decline has slowed at best. The headline writers have convinced gullible global investors that everything is Hunky Dory. Happy Days will soon be here again. NOT!

Well then what has driven stock prices higher? It's Inflation Stupid. It's no coincidence that the current rally in stocks that began in March coincides exactly with the most recent top in the US Dollar. It is no secret that the Dollar has been falling weekly since the Fed announced their Quantitative Easing plans for this Summer back in the middle of March. The Fed is clearly debasing the nations money supply. A debased money supply equals Inflation. This Inflation is just beginning to gain traction in the asset markets. The green shoots of recovery are turning brown, withering and dying from a fertilizer overdose. We prefer to refer to this fertilizer as bullshit.

So what's your point? The point is simple. Yesterday's global sell-off was certainly sparked by the "realization" that the American consumer is in dire straits and will not be leading the next global economic recovery. But this revelation is unlikely to short circuit the current rally in stocks and commodities because Inflation is ALIVE AND WELL.

It is also worth considering that Monday's global stock sell-off had less to do with the American consumers sentiment and more to do with American bank failures. Bank failures across the country are beginning to accelerate, and the size of the banks failing is getting substantially larger. The bank failure story, and the dwindling insurance fund at the FDIC should be on every investors radar. Renewed fears of a banking crisis may be just the catalyst the Precious Metals Markets need to get them over the hump.

The CRIMEX is sitting in a very precarious position as the Precious Metals enter their season in the sun between September and January. Any catalyst that might spark a surge in the Precious Metals will catch the CRIMEX hugely on the wrong side of the market. The ensuing short squeeze could be legendary. Clearly the CRIMEX goons have made every effort to set up a wall to stifle the seasonal advance in the Precious Metals knowing that the seasonal effects on these markets will most certainly take Gold through $1000, even without any "fear catalyst" driving it forward. Today's CRIMEX bet is bigger than the one they made in 2005 to keep Gold bottled up below $450. That August 2005 CRIMEX bet is now a legendary failure as Gold subsequently rose 62% from $450 to $730 over the following eight months. Imagine a 62% rise in the Gold market should the CRIMEX fail in it's efforts to hold the market back here at $1000...

BB&T buys Colonial bank; 4 other banks fail
NEW YORK (CNNMoney.com) -- Troubled Colonial BancGroup will be bought by rival BB&T Friday, the government said after state regulators closed the bank whose assets had been frozen by a federal judge.

The Montgomery, Ala., bank, which has 346 branches spread across Florida, Alabama, Georgia, Nevada, and Texas, is the sixth largest bank failure in U.S. history and by far the largest failure of 2009.

With $25 billion in assets and $20 billion in deposits, Colonial is 100 times larger than the typical bank to have failed this year.

Regulators want Guaranty bids by Monday
NEW YORK (Reuters) - U.S. banking regulators have asked prospective buyers of struggling Texas bank Guaranty Financial Group to submit bids by Monday, the Financial Times reported, citing people familiar with the matter.

Guaranty is the second-largest publicly traded bank in Texas, with about $16 billion in assets, according to its website.

Last month, the lender said there was "substantial doubt" that it can continue as a going concern after loan losses and write-downs left it short of capital.

CIT Group records $1.68 billion 2Q loss
NEW YORK (AP) -- Commercial lender CIT Group Inc. said Monday in a regulatory filing it lost $1.68 billion in the second quarter, and again warned it might have to file for bankruptcy protection if it fails to restructure its business.

Losses mounted in the quarter as the embattled New York-based lender as borrowing costs exceeded income from lending to customers, and as it set aside more money to protect against future loan losses.

In its quarterly report to the Securities and Exchange Commission, CIT said there is still "substantial doubt" about its ability to continue operating.

Just last month, CIT was bailed out with a $3 billion loan from some of its largest bondholders as it faced a cash crunch. It also launched an offer to repurchase $1 billion in outstanding debt that was successfully completed Monday, helping to stave off a potential bankruptcy filing.

Despite the completion of the tender offer, CIT is still facing some challenges. It could continue to struggle with liquidity issues as more debt is due to mature next year.

Coming Soon: Banking Crisis of Historic Proportions
We have a confluence of five factors that have the potential to create damage to banking not seen in 80 years, and that includes the Great Depression. We'll hit these factors one at a time.

First Factor: Banks Are Not Doing Enough Business

Commercial bank credit growth has dropped to 2%...

Now, it is a good thing that banks are conserving capital, since they need to increase capital to offset bad loans.

But, if asset valuations deteriorate (and that is quite possible), the banks need to increase earnings to "earn their way" out of their problem. Interest paid by the Fed for reserves on deposit there (by the commercial banks) are not producing nearly the same level of income as new credit issued commercially under our fractional reserve banking system with much higher interest .

If credit issuance does not increase year over year, banks can not improve their financial condition unless the quality of their existing loan portfolio improves.

Second Factor: Banks Are Failing at a Rate Not Anticipated Two Months Ago

...150 banks are in trouble. Some of these will be larger than many of the 77 (mostly community) banks that have gone under FDIC receivership so far in 2009.

Banks mentioned as being in trouble by Bloomberg (here) include Wisconsin’s Marshall & Ilsley Corp. (MI), Georgia’s Synovus Financial Corp. (SNV), Michigan’s Flagstar Bancorp (FBC), Chicago-based Corus Bankshares Inc. (CORS), Austin-based Guaranty Financial Group Inc (GFG), and Colonial BancGroup Inc. (CNB) in Montgomery, Alabama.

Third Factor: Defaults Are Going to Increase for Several More Quarters

With home mortgage foreclosure rates remaining very high (and possibly increasing) and with the bulk of the commercial real estate defaults yet to come, the failure rate of banks is likely to increase further in the next nine to twelve months, not decline. The situation will be compounded if commercial and industrial (C&I) loans also default at higher rates because of a weak or non-existent recovery.

Fourth Factor: The FDIC Is in Trouble

Rolfe Winkler (here) points out that the accelerating rate of bank failures may exhaust the Deposit Insurance Fund (DIF) at the FDIC, requiring that agency to draw on its credit line with the Fed. Rolfe calculates that the FDIC is currently on the hook for $8.3 trillion in insured deposits, had only $41.5 billion in reserves as of March 31 and has drawn that lower since.

Since only a small portion of deposits actually are paid out of DIF (failed banks have assets that cover most deposits), FDIC needs only a small fraction of covered deposits in reserve.

However, less than 0.05% is most likely several fold too small in a distressed banking system. The section title says the FDIC is in trouble. That is a polite way of saying they are bankrupt.

Fifth Factor: We May Be Going to Historic Lows in Bank Credit

Because we are approaching the one year anniversary of a growth spike in bank credit in September, 2008 (see the first graph in this article), there is likely to be continued pressure on the year-over-year growth rate. The year over year growth of credit may be driven much lower than the current 2% within the next couple months due to the negative effect on comparison due to the spike a year earlier.

Without a strong recovery, there is little hope of a good outcome for the non-oligarchy banks. With a return to recession, in 2010 (and possibly 2011 and 2012) there could be carnage in regional and local banks not seen since the early 1900s, and maybe even worse than what occurred then.

Gold and Why Gold Now
By Darryl Robert Schoon
Modern banking is essentially a Ponzi-scheme on a global scale. Bernard Madoff’s Ponzi-scheme was but a smaller, private version of the public model used in the world today. What people do not understand is that bankers loan money which doesn’t exist and then receive compounding interest and repayment of previously non-existent funds in return.

While this might be considered an abomination and nightmare, it is a wet-dream for bankers and those who profit from such a system. Charging interest on the loaning of gold and silver was believed to be a sin during the Middle Ages, but, today, the charging of interest on the loaning of money that didn’t previously exist and the receiving of the previously non-existent principal back plus interest is considered nothing less than a miracle—at least by the bankers who profit thereby.

The very birth of paper money was conceived in sin. In its genesis, central banking’s paper money was always a fraud. Believed to be backed by equal amounts of gold or silver, in actuality it was never so, no more than were the demand deposits of savers available upon demand in banks.

When US depositors rushed to the banks between 1930 and 1933 to withdraw their savings, they found the banks didn’t actually have their money and thousands of banks were forced to close.

This is what happened to Bernie Madoff’s clients when they requested their money en masse in 2008. This was Bernie Madoff’s nightmare. It is also the nightmare of all bankers because—just as with Bernie Madoff—the depositors’ money isn’t really there.

When the Great Depression alerted savers to the fact that the banks didn’t actually have their money, bankers and government decided something had to be done to prevent bank runs from occurring in the future.

So, they created the FDIC, the Federal Deposit Insurance Corporation, which would maintain a fund composed of bank insurance premiums that would protect depositors against any losses up to a certain proscribed amount.

But while Americans now believe their savings are backed by premiums paid into the FDIC fund, no such fund exists; and, although the FDIC regularly reports how much money is in the FDIC fund, the fund itself, like modern economics, is a fraud.

The following is an excerpt from an article, The Mythical FDIC Fund, by William M. Isaac, former Chairman of the FDIC. It should be titled:



By William M. Isaac

William Isaac, former Chairman of the Federal Deposit Insurance Corporation, (FDIC)

…When I became Chairman of the FDIC in 1981, the FDIC's financial statement showed a balance at the U.S. Treasury of some $11 billion. I decided it would be a real treat to see all of that money, so I placed a call to Treasury Secretary Don Regan:

Isaac: Don, I'd like to come over to look at the money.
Regan: What money?
Isaac: You know . . . the $11 billion the FDIC has in the vault at Treasury.
Regan: Uh, well you see Bill, ah, that's a bit of a problem.
Isaac: I know you're busy. I don't need to do it right away.
Regan: Well . . . it's not a question of timing . . . I don't know quite how to put this, but we don't have the money.
Isaac: Right . . . ha ha.
Regan: No, really. The banks have been paying money to the FDIC, the FDIC has been turning the money over to the Treasury, and the Treasury has been spending it on missiles, school lunches, water projects, and the like. The money's gone.
Isaac: But it says right here on this financial statement that we have over $11 billion at the Treasury.
Regan: In a sense, you do. You see, we owe that money to the FDIC, and we pay interest on it.
Isaac: I know this might sound pretty far-fetched, but what would happen if we should need a few billion to handle a bank failure?
Regan: That's easy - we'd go right out and borrow it. You'd have the money in no time . . . same day service most days.
Isaac: Let me see if I've got this straight. The money the banks thought they were storing up for the past half century - sort of saving it for a rainy day - is gone.
If a storm begins brewing and we need the money, Treasury will have to borrow it. Is that about it?
Regan: Yep.
Isaac: Just one more thing, while I've got you. Why do we bother pretending there's a fund?
Regan: I'm sorry, Bill, but the President's on the other line. I'll have to get back to you on that.

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