Another $100 – $150 billion needed?

Posted by Ray on November 22, 2010 under Main | Be the First to Comment

The US banking system is still a mess no matter what the regulators and pundits say. From the Volker Rule to Basel III to fraudclosure there are issues that will have to come to ahead at some point in the not so distant future. Specifically, the Financial Times reported that because of the Basel III tier 1 capital requirements the top 35 US banks may be short $100 – $150 billion dollars. This means more capital raises for many of these banks, but don’t worry analysts say this is manageable.

Other parts of the FT’s article states that many of these banks may have to selloff $500B, in total, of assets to avoid the capital raise. The issue is that if all these banks, which the article admittedly says is not equally distributed between the top 35 banks, have to selloff $500B in assets to avoid a capital raise who will buy these assets? If the liability of these assets equals higher capital requirements buyers may be few and far between which means lower prices for the assets being sold or they will have to raise capital. Of note is the shortfall is only because of Basel III and not because of any other issue outstanding.

Remember how so many of these capital requirement issues were supposedly put to rest because of our “stress tests”? Clearly the stress tests, as has been stated time and time again, were worthless. In fact rumors are making their rounds that another round of stress tests are on the way for US banks. What is interesting about this is that the stress tests lack total credibility for 2 reasons. First, look at the EU’s stress tests which passed most banks and look what is happening in Ireland, they were a farce. Second, without good accounting rules, i.e. mark-to-market vs. mark-to-fantasyland, the stress tests are bogus. A loss is a loss and simply pretending it doesn’t exist is the most idiotic thing I have ever heard of and if investors do not do their research it can lead to major losses. In my opinion this is nothing more than state sponsored investor fraud.

What is missing out of all of these bank articles is the whole fraudclosure mess and its impact on the banks. As stated previously there is no remedy for a broken chain of title except to modify the mortgage which starts a new chain of title and eliminates the problem. There are issues with this though. First, doing nothing means that all of those MBS are worthless because there is no cash flow and the creditor cannot collect the collateral, think about that for awhile. Second, if your only option is to modify the mortgage it means that the MBS is worth less than face value. Either way someone somewhere is taking a loss and that means there may be a put back to the originating bank. When the Fed put back bonds to BoA that should concern investors… it’s the Fed telling banks you ripped us off.

If these put backs continue or escalate, which they will because who wants to take a loss on paper that was misrepresented to begin with, that could mean that banks have much larger problems than Basel III capital requirements. If the put back is widely exercised banks will need a lot more money than $100 – $150B. They might need a trillion or more, who really knows anymore? Frankly, Basel III is the last thing anyone should be worried about. People should be worried about what the put back risk is for many of these banks because the put back risk is far greater of an issue than the sub-prime crisis ever was. I believe we will find out if there are indeed “no more bank bailouts” or not. My guess is we will all be shareholders of some big banks in the near future. In the meantime I am waiting for my dividend check from our previously made, wildly profitable, insert sarcasm here, investments into GM, Citi, BoA, Ally…

You can fool some people some of the time

Posted by Ray on November 8, 2010 under Main | Be the First to Comment

I believe what the Federal Reserve has begun was completely idiotic and unnecessary which will ultimately hurt the majority of the American people. However, many economists disagree with what I just said. I guess you can fool the people sometimes, but economists can be fooled all of the time. Part of economist’s problem, and why they are so horrible at predicting things, is because they live inside of models and rarely look up. They are also way overpaid for what they do which adds more of a problem with their theories since higher prices do not impact them as fast as it impacts 80% of Americans who live paycheck to paycheck.

Paul Krugman is one of those people who has been far more wrong than right, but for some reason people still listen to him, odd, really, really odd. Mr. Krugman has taken aim at Jim Rogers recently claiming that inflationist’s have gotten the last few cycles’ dead wrong. Really? So, oil going from $50 to $147 never happened. Gold rising to new highs isn’t happening. Food prices going ballistic did not happen then and is not happening now, sure, whatever. The fact is that prices, including food and energy, have moved higher this year and before the collapse of 2008, but Krugman says that did not matter… why do people read him?

It is my opinion that higher food and energy prices helped collapse the system in 2008. As prices rose people diverted more money to the things they needed the most, food and heat which took away from our consumption oriented GDP. After the collapse began we saw these prices ease, a lot, and GDP did pick up after the crossing point was reached. Of course, government intervention helped and many people simply stopped paying much of their debt which has helped GDP since now one cannot pay their bills, not lose their home and now needed a new Kindle or iPad. Now we have rising commodity prices again, but no one seems to think this is bad news. Well, it is.

While mainstream economists talk about “sticky” CPI, excluding food and energy while concentrating on wage inflation as the sole indicator of inflation proves that most economists have lost their minds. Wage inflation does not have to come before food and energy inflation, I am not sure why anyone thinks this is always the case, and if we look back at 2008 we see a similar situation, rising commodities and flat to lower wages. This is a major red flag, but most mainstream economists don’t care. These economists look at me or a Jim Rogers and assume we do not have a clue about what we are talking about. The do not seem to understand that an economy can go from deflation/disinflation to inflation overnight, it happened in Germany. Maybe they are right, but at the same time they are so devoid of reality it is not even funny.

To think food and energy prices do not matter to people is idiotic. It is the same as saying fish can live fine out of water as long as they can hold their breath long enough. With money being diverted to $4 gas or $5 loaves of bread it is clear that we will continue to have deflation in color TV’s which means economists will not see any inflation, anywhere. This is a common sense issue which might fool Wall Street people into believing everything is fine, but Main Street, well, Main Street is not quite that stupid. They know $4 a gallon gas and $5 loaves of bread is bad news. They know that those iPads will be out of reach when a greater portion of their incomes are moving towards those unimportant things… like eating. This is bad news for the economy.

I have no illusions, the market will go up and economists will demand more QE because it is “working”, but this policy is not benefiting Main Street, it is killing it. More and more investors are moving out of stocks which negates the “wealth effect” of magical 9% S&P gains which are based on pure liquidity and not fundamentals. While stocks will move higher I am betting silver and gold will continue to outperform, along with other commodities. This is a catch 22 to the Fed because higher commodity prices is bad for the people, but good for GDP growth, even though it is imaginary growth, but that doesn’t seem to matter as long as the politicians are happy. So much for an independent Fed.

I think the recent views and writings of major economists have proven that they are completely worthless. To think intentionally driving the prices up for the basic essentials in life with high unemployment and flat incomes is barbaric. The worst part is economists all say this is a good thing, what world do they live in? We might get wage inflation out of this at some point, but it will be after price inflation is in full swing and major damage is done to the consumer. I also have no idea how the Fed can reverse this latest policy decision without blowing itself up, I actually believe this is now a permanent policy the Fed is following, just like Zimbabwe.
The biggest question is will Tim Geithner and Ben Bernanke be impeached for lying to Congress when they said they would not monetize the national debt? They should be, the last I checked lying to Congress was frowned upon, but we do now live in bizzaro world.

The Fed is doing everything I feared it would do and they are inflating the country out of its debt, they say they are not, but what credibility can they possibly carry with the people now? On top of that, their actions speak louder than words. When you are intentionally trying to create inflation and write an op-ed about it that makes it harder to say we are not trying to inflate our way out of our trillion’s in debt. Everyone can see what is happening and when Brazil is giving you a smack down, as well as Russia, man, you got problems.

As far as economists, perhaps they should be put on a salary that mirrors the national average in their respective areas so they can understand how higher commodity prices really impact the people. It is easy to say higher prices don’t natter when you make high 6 or 7 figure salaries for playing with computer models, but on a modest 5 figure salary I bet they will see things differently. I am not one of those ‘social justice’ people, but in this case I might make an exception since they are all being complacent in one of the greatest snow jobs ever given to the people. This will do nothing for the people other than create misery and it certainly will not improve the image of Wall Street. We are not a banana republic because we voted in Republican. We are a banana republic because we have idiots in charge of our monetary policy. Stay long commodities.

Silver, the trade that was easy to see

Posted by Ray on November 4, 2010 under Main | Be the First to Comment

There have been lots of things happening in the silver market lately all of which reinforce my bull case for being long. Long time readers know I have been pounding the table of silver for the better part of 2 years now.  The one aspect of the market that I have concentrated on is the supply/demand side of the equation. It stands to reason that with some 2 billion souls entering the middle class they will all want cell phones and other modern toys. All of these toys involve silver to some extent in their production.

The supply of silver is not unlimited and very few miners solely look for the shiny metal, it is typically a byproduct of copper and gold mines. Silver is also not recycled the way many other metals are which means it is used once and never again and that is unlike many other metals that are usually recycled. I believe that the reason people believed silver had an unlimited supply is because it was so cheap, but now we find out, I have known for awhile, that the prices were manipulated by 2 big banks, HSBC and JPM. This is not conspiracy talk anymore as 2 lawsuits have been filed and Bart Chilton has admitted the manipulation.

Moving forward I believe we will continue to see higher prices as the shorts cover in the silver market. I also think that COMEX does not have enough supply to meet physical demand for the metal if investors want to take possession, which they will eventually. That means there may not be enough silver at any price to meet demand. It sounds unbelievable, but it could happen. I would not bet the farm on the COMEX thing being the driver, but I would bet the farm on Asia and India driving demand well into the future.

The other very obvious factor in the recent rise in silver prices is the dollar. In the US we have to ask if silver is really climbing or is the dollar just tanking so hard making it more expensive to us. Frankly, it is both things happening at once which should worry my fellow dollar bulls out there. I think the dollar will break its all-time low in the near future thanks to Mr. Bernanke. You cannot print as much money as you want without repercussions and the repercussions of massive printing are the dollar losing much of its value. Out of everything happening out there right now the dollar’s slide is what scares me the most and it should scare you too.

Silver is the barometer of inflation, in my book at least, and the rise in price is signaling trouble ahead. Everyone believes the dollar will always be there in its current form and nothing like Zimbabwe or Argentina can happen in the good ole US of A, but bad things can and do happen here all the time and with an obscene monetary policy that Brazil, Russia, China and now Germany are criticizing bad things are sure to happen here. I would be a buyer of silver not just to profit from it, but to hedge my wealth with it. That means owning it physically, not in a brokerage account or in storage somewhere, but where I can see it. If the dollar breaks its all-time low things may get ugly and as we buy up our locally produced products we will see what the inflationary pressure is like when we are forced to buy, suddenly, very expensive Chinese goods.

Doom and gloom you are thinking, maybe, but I prefer to say this is a realistic situation now. I know I would rather be prepared instead of just hoping things will work out. In my experience hope is a wonderful thing, but hope isn’t reality. Reality is that thing outside your window and our reality may just turn into a nightmare and suddenly moving from the city to the country, farmland specifically, with a shot gun and you silver and gold hoard may suddenly make sense. After all, this is the advice some hedge fund managers gave their wealthier clients in recent years.

Buy silver on any dip and I am sure that in 5 years, or much sooner, you will be extremely happy. As for equities, well, if you think these gains are real you are delusional. Ben is simply propping up prices to make people think they are wealthy, but if the dollar keeps falling at some point the rise in equity prices will not offset the loss of purchasing power of your dollars, just ask any Zimbabwean about that. They had the best performing market over the last 10 years, but would you be holding their currency? I think not. Silver, gold or other commodities are your hedge, not stocks and not TIPS.

QE2: Savior or Suicide

Posted by Ray on November 3, 2010 under Main | Be the First to Comment

The long awaited decision was announced today by the Fed, $600B in fresh money printing followed by continued reinvestment of proceeds from its first round of easing. This equals about $900B in total QE by our monetary masters. Speculation is rampant in the media about its success or how it will be an epic failure. The funny thing is, no one really knows what will actually happen. Personally, I am still perplexed as to why they are doing it at all, it is stupid.

The Fed is also completely out of ammo which many have stated, myself included, and all they have is the printing press. I want to stress something here and you should pay attention, this whole QE thing is experimental and no country that has ever tried has succeeded. Therefore, I have a predetermined outcome, but at the end of the day you or I have zero idea if it will work. I will lay out a case for its failure based on what I know. I am sure many will disagree and that is fine, but in time one of us will be right.

The economy has a demand problem, not a liquidity problem. Over 2 years ago we had a massive liquidity problem which is why Lehman failed, but now the Fed has dumped trillions into the system along with the federal government. All of that money dumping ended the liquidity crisis and now banks, supposedly, have excess reserves just sitting at the Fed waiting to be loaned out to that sucker who wants to pay 15% interest on money the bank got for free in order to buy that new LED flat screen TV that is just calling his or her name. The problem is the sucker doesn’t want to buy that TV because he doesn’t know if he will have a job next week or is worried about retirement, etc.

We have a demand problem, not a money shortage. I say that with a grain of salt because money velocity is dropping which technically means there are dollar shortages. However, I contend that that dollar shortage is because people are paying off debt to simply saving their money somewhere 9under the mattress??). Regardless of the reason no one wants to buy big ticket items and I do not blame them. After all we got here because of excess debt and no one wants to leverage up to buy senseless items. No amount of QE will change this, sorry, but it won’t. Job security and rising wages will create demand, but that is not happening either. Demand is stuck where it is, weak.

The Fed knows this and they know QE will not change this so why did they do it? I really do not know. Sure, everyone has their own reasons for it, but at the end of the day it is all speculation. I know what they are trying to do, create wage inflation and inflation in general, which they will do eventually, but by their chosen path, QE, they are creating the worst possible outcome, inflation without wage inflation. Stop laughing, it can happen. How you may ask, simple dollar devaluation is inflation, but dollar devaluation does not guarantee wage growth. The only way to get wage growth is through demand with inflation, what the Fed did will not do this. Frankly, everyone should be terrified of Mr. Bernanke and he should be punished for lying to Congress when he said he would not monetize the debt, he is.

I can rattle off all sorts of conspiracy theories as to why the Fed is doing QE, but they are too laughable to mention. I do think one thing makes sense, it is a back door bailout of the banking system, again. There is a little issue I am sure you are familiar with, the foreclosure crisis, and this crisis is a huge, enormous, problem. If you are a bondholder it is one thing to have a borrower default on the debt, the cash flow ends and you get to take the collateral, a home in this case, to recover your capital. However, this whole chain of custody issue, there is no legal remedy for it and all those pundits who claim that this is no big deal are either stupid or scared to admit the truth, means that there is no collateral to collect now. Essentially the borrower can keep the house and screw the lender if the paperwork is messed up, how would you like to own a MBS now? Your bonds are worthless… or are they?

If there was fraud in the loan, as we are now seeing, the bondholder can put back the bond and be repaid their original capital. This is the problem that is starting to rear its ugly head, the put back, and it could be huge. Think about all the paper the banks would have to buy back and now think of all the synthetic derivatives that were written against that bond. What a mess. A big costly web of a mess. I do not know how big the problem can be, but I think part of the QE might help these banks by either allowing the bank to front run the bonds the Fed is buying or by infusing the bank with capital.

It doesn’t matter really, but I think that was one of the reasons for QE2. We have been told for over a year now how great things are now and we are in a recovery so why do QE at all? We have inflation, it is not sky high, but it is there in the PPI and the CPI is still positive. If the CPI were negative I would say we have deflation, but it isn’t and at best we had disinflation which does not justify such a crazy move as monetizing almost a trillion dollars in paper. The Fed sees that no real recovery has happened and maybe that is the reason for the latest round of easing. Regardless, the banks are going to benefit from this, remember the Fed asked them how much they should buy from them.

I stated about a year ago that we can have inflation without wage inflation. We are about to see if that once crazy theory of mine is right. The Fed has now monetized trillion’s in debt and I can say, with history on my side, this has never ended well for any country who has ventured down this path. America is a special place because of our freedoms, but we are not so special that math and history doesn’t pertain to us. All of the people warning about the Fed’s insane moves might be right and the sky very well might be falling. Heck, if things were as great as we have been told over the past few months by the talking heads and our politicians, who no one believes, why are we even having this conversation? Things are not well and I fear we may be in the calm before a very bad storm like we have never seen before.

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