Banks in Peril… Record Fed Lending, Greenspan Forecasts, Commodity Correction, and More!

by Addison Wiggin & Ian Mathias

  • Hey, Cramer, sure we’ve hit a bottom? Banks borrow record funds from Federal Reserve
  • Jobs report delivers mixed employment data… but nearly guarantees economic recession
  • Greenspan back in the spotlight… three totally unusable forecasts from Mr. Bubble himself
  • Commodities correct… July concludes as worst month for resources since 1980
  • Investing in IPOs? One trend you can’t afford to miss
  • Plus, the overpopulation debate boils over… highlights from the flood of e-mails in The 5’s inbox

  Struggling banks borrowed a record amount of funds from the Fed over the past week… more than any other week during the whole “credit crisis.” 

U.S. banks borrowed an average $17.45 billion from the Fed’s discount window every day. That’s easily the most action the discount window’s ever seen, and the second consecutive week of record transactions. 

“It is an understatement to say that the U.S. banking system is in uncharted territory,” suggests James Turk. “The Federal Reserve is providing more than just a ‘helping hand.’

“This chart should alert everyone to the perils of putting your wealth on deposit in a bank. The magnitude of the borrowing by banks shown on this chart is signaling that the banking system is suffering from more than a lack of liquidity. The real question we need to be asking ourselves is whether the banking system is solvent, i.e., whether the assets of banks in the aggregate have greater value than the banking system’s liabilities.

“The above chart indicates to me that we are on the cusp of a crackup boom. Owning gold and silver and avoiding the dollar are now more important than ever.

  Not only did the Fed dole out record funds from the discount window this week, but Bernanke and his crew also conducted another wave of TAFs and TSLFs. Earlier this week, the Fed “successfully” conducted its 17th TAF. Banks were able to secure another $75 billion in emergency loans.

And yesterday, another TSLF came and went. In less than 30 minutes, the Fed took on another $28 billion in illiquid asset-backed securities in exchange for U.S. Treasuries.

Between the TAFs and TSLFs, the Fed has now dedicated over $1.5 trillion to keeping financials afloat.

  The U.S. economy lost another 51,000 jobs in July, the seventh consecutive month of net job losses in I.O.U.S.A. While a big loss, the monthly decline in American jobs was a bit better than the consensus forecast. The surprise in today’s Labor Dept. report came courtesy of the unemployment number… the Street wanted it to stay put at 5.5%, but unemployment rose to 5.7%.

We’ve said it before: Such a period of government-reported job losses has always coincided with an economic recession. We’ve said this before too… the monthly jobs report has huge margins of error and is widely believed to be manipulated by the guv’ment. So take it for what it’s worth…

And looking back, we can confirm our usual suspicions about Wednesday’s ADP jobs  report and yesterday’s jobless claims number. In short, if you aim to predict the BLS’ monthly jobs report, ignore the former and heed the latter.

  The U.S. housing crisis is “nowhere near a bottom,” opined Alan Greenspan yesterday. In an interview with CNBC, Greenspan provided a litany of lackluster predictions: Chances of recession are still “50/50.” It will “take a while” for markets to stabilize. The U.S. will soon face “a very substantial change in the balance between growth and inflation.”

“Greenspan has no shame,” declares Agora’s Australian adviser Dan Denning. “He is monetary history’s greatest villain since John Law. This is the same man who essentially called Americans morons for preferring fixed-rate over adjustable-rate mortgages. If Americans understood more how inflation destroys their money, and connected the dots between Greenspan’s rate cutting and the current mess, he’d be forced to do his interviews from undisclosed locations for fear of being set upon by mobs of foreclosed homeowners.”

  Markets are having a hard time figuring this week out. Equities have endured breakneck volatility this week, all to go largely nowhere. For example:

  The currency trade ails from the same disease this week. The dollar has been trending up since Monday, but by a small margin. The dollar index got a decent boost on Tuesday, about half a point, courtesy of a better-than-expected consumer confidence reading. But since then, it’s been hovering steady around 73.3, with a slight bias toward buying the greenback. If you’re traveling this weekend, it’ll be $1.55 per euro, $1.97 a pound and $1 will get you 107 Japanese yen.

  The commodity trade, however, has been decidedly nasty as of late. In fact, the Reuters-Jefferies CRB index, a popular basket of commodities, just capped off its worst month in 28 years.

Aided largely by oil’s $25 decline, the CRB’s 10% fall is the biggest monthly drop since 1980. Natural gas, wheat and corn all suffered big falls, too… but like oil, all from record highs.

Oil, by the way, is rallying a bit today. Light sweet crude is up two bucks, to $127 a barrel. Gasoline prices are still falling here in the U.S. We’re down another cent today, to a national average of $3.89.

Gold is still holding up this morning. You can get an ounce of the stuff for about $905.

  Here’s an interesting trend… since April 1 (no, this isn’t a joke), emerging market IPOs have accounted for 70% of total worldwide offerings.

“Globally, the number of IPOs during the second quarter fell by 56%, to 205,” reports Jason Simpkins of Money Morning, “while the amount of money raised through IPOs fell 64%, to $31.5 billion… However, that steep decline was largely the result of a collapse in more advanced, Western economies.

“Indeed, there has been an undeniable upsurge in emerging market IPOs, but what is most amazing is that Asia, and China in particular, has been largely absent from the picture.

“That’s because the credit crunch and turbulent markets in the developed world have had a negative impact on Asia, which, unlike Latin America and the Middle East, has been unable to rely on the strength of commodities for growth.”

  “I’m sorry, but believing in global overpopulation as a reason for soaring commodity prices is falling for a scapegoat,” writes a reader responding to our ongoing overpopulation debate .

“The real reason is simply that capitalism has done what America has espoused since World War II and taken over the world — with the forecastable result of making a whole lot of previously very poor people a lot less poor and therefore creating a whole lot more demand. Higher demand with relatively less growth in supply = higher prices. Nothing to do with more people — everything to do with more (relatively) rich people. But that is the beauty of capitalism: It creates wealth (and demand) wherever it goes. Perhaps your correspondents are really more worried about a world where their lifestyles are no longer subsidized by the fact that a lot of people in other countries couldn’t afford to compete with them for the resources of the globe?”

  “If we would eliminate Social Security,” writes a reader, “(which, at 71, I collect, while holding a full-time job and running a small cattle ranch) and legalize self-euthanasia, we would cut way back on population, particularly the least productive and most costly group. Those who could not support themselves due to lack of preplanning and whose lives were (to them) not worth living would eliminate themselves. If we would also eliminate welfare, many who are being born would cease to be born, as birth control is pretty easy these days and more of the lazy young would have to cease being lazy and go to work. If we could just get the government out of the way…”

The 5: Heh… when composing your follow-up hate mail, please note that we didn’t write that.

  “I have respected your writing and commentary for some time, but this debate about population growth is a bit disturbing,” writes another. “Having children is a right for every man and women born on this Earth. If you have government regulate population, you inevitably run into a situation in which governments will be able to choose who lives and dies. To see the response from supposedly well-educated people who want population controls so they don’t have to pay more for gas is ridiculous, and they should take a step back and see how precious every life is.

“Now, I am not religious, but even I find it disgusting that people will trade a potential life for a cheaper meal or drive to the mall. The only thing that keeps us going is new people, who if given the opportunity, will learn, grow and contribute to solving the problems society faces. I am actually scared, as well as appalled, that people think more of a mineral than a life. Get real. Or better yet, see a shrink, because you probably have a mental problem to deal with.”

  “It’s not an overpopulation of people that is the problem, but an overpopulation of dollars!” exclaims a reader, likely onto something. “You could have taken your average silver quarter in 1964 and bought a gallon of gas with it. You can take that same 1964 silver quarter today and convert it to 2008 currency and it will still buy that same gallon of gas. Nothing has changed but the value of the paper currency you carry around in your pocket…

“There are more resources on this planet than we have been led to believe, in my opinion. And we feed more people per acre today than we did yesterday, and will feed even more tomorrow. Alternative energy sources are being developed every day. And don’t forget the indomitable human spirit, with its ingenuity and resourcefulness. Haven’t you heard?: Necessity is the mother of invention. We’re going to be all right, all 6 billion of us. There are not too many people in the world. There are too many dollars and too few people with wisdom, courage and faith.”

  “Just bought my ticket for I.O.U.S.A. ,” writes a reader. “I paid only $12.50 per ticket here in Las Vegas. However, even at $19 a ticket, I would have bought it. I am sure that it is worth even more than that. How often can you go out for an evening and learn about what is happening in our country economically?”

The 5: That’s the spirit. Don’t forget to forward your ticket purchase confirmation e-mail to customerservice@agorafinancial.com for a free one-year subscription to Strategic Investment. If you already subscribe or are an AFR Member, forward it anyway… we’ve got a surprise for you.

Cheers,

Ian Mathias
The 5 Min. Forecast

P.S. If you don’t live in the U.S, we’re sorry — there isn’t yet a way for you to see I.O.U.S.A. in international theaters. If you can’t make it across the border for the screening, stick with us… we’ll find a way for you to see the film.

rspertzel

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