Consumer Debt, FDIC’s Problem List, Camels, Gustavs, Vipers and More!

by Addison Wiggin & Ian Mathias

  • U.S. household debt soars… now exceeds total American GDP
  • FDIC drops a bomb… at least 117 U.S. banks in danger of insolvency
  • Singapore SWF profits double despite rocky market… its favorite investment for next quarter
  • The single “man” that turned around the oil trade this week
  • Byron King on your disappointing resource investments
  • Airlines getting desperate… ditching life vests to save fuel!


  The worst must be over. For the third month in a row, consumer confidence perked up in August. Phew.

The Conference Board’s Consumer Confidence Index beat estimates yesterday, rising from 51 to 56. Consumers are especially optimistic about the future. Their “present situation index” fell a couple of points between July and August, but the “expectations index” shot up 10 points, from 42 to 52.

Glory be.

  We suspect a lot of that optimism comes from falling gas prices. The national average is down again today, to $3.66 a gallon. But the truth is, it may have more to do with this:


U.S. households now hold more debt than the entire U.S. economy produces in goods and services each year. Debt, like heroin, makes things seem a whole lot more euphoric than they realy are. Unfortunately, you need an ever larger amount to keep the high going.

  The American subprime habit is still growing, too.


  No surprise, then, that we’ve gotten the following report from the Federal Deposit Insurance Corp. (FDIC):

The FDIC announced yesterday that its list of banks in danger grew 30% in the second quarter, to 117 institutions — double the number of banks in trouble last year. The FDIC report was ripe with juicy retails. Here are the highlights:

  • Total assets of banks on the problem list now exceed $78 billion, compared with $26 billion in Q1
  • Net industry assets shrank for first time since 2002
  • Loan loss provisions of all FDIC-insured banks quadrupled over the last year, to $50 billion
  • Second-quarter net charge-offs $26.4 billion, versus Q1 $19.6 billion
  • Second-quarter U.S. bank net operating income $5 billion versus year-earlier $36.8 billion.

“More banks will come on the list as credit problems worsen, and assets of problem institutions will continue to rise,” said FDIC head honcho Sheila Bair. The FDIC mentioned that, historically, 13% of those on the list end up failing. Should that be true, about 15 more banks will bite the dust, atop the nine already resting in peace. Remember IndyMac — the biggest bust this year — wasn’t even on the list.

Of course, Sheila and her lieutenants don’t publish the names of the banks on the “problem list.” If they did, consumers might — gasp! — put their money in a safer place.

We, on the other hand, are not hindered by such pedantic details. Dan Amoss’ Strategic Short Report readers have short interests in four separate financials — each with severe credit risks. His last play on Lehman Brothers pulled in 462% in less than 3 months… Get the details here.

  If you’d like to make a “problem list” of your own, here’s how the FDIC does it:


C — Capital
A — Assets
M — Management
E — Earnings
L — Liquidity
S — Sensitivity to risk

The bigwigs at the FDIC rate each letter with a score of 1-5, 5 being the worst. If the average score is 4 or higher, you’re on the list. Yes, it really is that simple.

  The FDIC also announced that its deposit insurance fund fell to $45 billion — its lowest level since 1995. The only way it can rebuild the fund is to charge banks higher fees… in other words, it’s going take years for the FDIC to restore the deposit fund to what are deemed “adequate” levels.

  “The fallout of the credit crisis,” Temasek, Singapore’s SWF, announced this week, “will continue to dampen the global economy over the next 24 months, with sharply escalated oil and food prices beginning to test inflation expectations.”

Temasek’s forecast came cheerily attached to its fiscal year earnings announcement. The SWF managed to double profits for the fiscal year ending in April, to $12.8 billion. Pretty incredible, considering it dumped a whole bundle of money into Merrill Lynch in December . The fund got approval yesterday to up its stake in the Wall Street bank from 9% to 13%.

 “Recently, we’ve concentrated a bit more in the U.S. and U.K., because we see value,” said Manish Kejriwal, senior managing director. “The financial service industry is one we believe in.”

Interesting observation. Hard for us to buy into, though…

  Oil prices are back on the rise, thanks to this angry fellow:


Hurricane Gustav is currently on a crash course for the heart of the Gulf oil industry. While landfall isn’t expected until the weekend, Gustav’s projected path has encouraged traders to forget about the dollar/oil trade.

Light sweet crude is up a few bucks, to $119 today.

  But that’s scant consolation for many resource investors over the past month.

“August is almost always a tough month for resource prices and resource stocks,” notes Byron King. “A lot of people take vacations in August, including some folks who are key players in the resource markets.

“But the bottom line is that people are buying dollars and selling euros. This is based on their beliefs about the future, and not much else. Really, it’s not as if just one month is enough time for anything major to occur within the structure of either the U.S. or the European economic spaces.

“And in the space of one month, it’s not as if the underlying values of energy and resources are falling. People still need and want oil, corn, copper, etc. (At $119 per barrel of oil, they want less of it, to be sure.) But in this summer’s monetary phase — driven by sentiment — the dollar is strengthening. So pricing for energy and resources and their stocks is weakening.

“But really, how strong is the dollar over the medium to long term? Will the U.S. somehow magically balance its budget? Is there any hint that Congress will change the U.S. tax code to make American industry more competitive?”

Here’s what we recommend: Stay the course. And if you think the fall might be time to start nibbling on beaten resource investments, Byron’s your man. He’s got a new breed of energy investments all lined up, and he’s getting ready to pull the trigger. Check it out here.

  The dollar index pulled back from yesterday’s ’08 high. It’s down about a half a point this morning, to 76.9. Yesterday’s FDIC report proved to be a wake-up call for dollar buyers around the world… the U.S. economy and, subsequently, its currency aren’t exactly out of the woods yet.

If you care to know, currencies around the world look like this: yen 109, euro $1.47, and pound $1.84.

  But gold has kept to a tight range since we wrote you last. $825 an ounce again today. We suspect the imminent failure of more U.S. banks isn’t news to the average gold investor.

The major stock indexes in the U.S. finished flat yesterday. Yawn.

  Chrysler announced today it is looking to sell the Viper brand. It’s decided the luxury line is too expensive. As far as we know, there haven’t been any bidders yet. Saudis, China, Tata? Anyone?

   And here’s a fun tip: A Canadian airline has decided to stop carrying life jackets to save on fuel costs. Air Jazz, which operates about 880 flights a day, said it’s one of many measures the company is taking to lighten its load. So… if you find yourself aboard one of its planes plummeting into the ocean blue, the folks at Jazz would like to remind you that your seat cushion still floats.

At least those insipid pre-flight briefings will be a bit shorter.

   “I think it’s important to realize that thinking optimistically (Pollyannaism, if you will) might be a very rational viewpoint to take,” suggests a reader, adding to the I.O.U.S.A./Buffett-inspired conversation we’ve been having this week.

“If you look closely at the history of America, you’ll discover that we really shouldn’t exist. It is many stories of people bungling one thing or another and muddling through somehow. For example, a critical review of the Mayflower story reveals it as a story of religious zealots and gamblers making a poorly planned and executed stab at colonizing.

“And somehow out of that and many other poorly planned and executed events, we ended up with a pretty nice place to live. We now have democracy that’s lasted now over 200 years. The average person’s life stands much closer to the ‘that all men are created equal’ ideal than at any other time in history. And even if the world’s democracies ended tomorrow, the very fact that they existed at all and for so long is a source of wonder.

“So if you’ll excuse my own Pollyannaism, I’d rather think that, as with many other challenges before, we will overcome this one, too. For the last 200-plus years, the bet against the USA has been wrong. It may very well be that this is the time that bet will be right. After all, the only guarantee is that all nations decline and then disappear. Personally, though, I’m willing to withhold a judgment until I find out how this chapter of American history ends.”

  “I.O.U.S.A. ranged from very good to exceptional in many respects,” writes a reader. “The best, based upon the reaction of the audience I was in, was when a panelist drew loud applause by saying the government should stop bailing out failing institutions. Second best were clips of Ron Paul that generated shouts of ‘Write in Ron Paul!’

“In spite of Warren Buffett’s efforts to downplay it, the program did a reasonably good job of creating a sense of urgency. It could have done a much better job, however, by mentioning how the public is being deceived (and has been deceived since Clinton was president) by phony CPI, unemployment, etc., statistics and by manipulation of precious metal prices to absurdly low levels to give the impression that everything is fine. Part and parcel to this, it would have been beneficial to mention the mainstream media’s complicity in all this. It’s a pretty safe bet that the media’s take on I.O.U.S.A. will be that everything is fine; Warren Buffett says so.

“It was surprising that the movie took it so easy on ‘Bubbles’ Greenspan, as he was the architect of the financial crisis we’re in, prolonging and intensifying it by encouraging people to take out variable-rate mortgages, objecting to regulation of derivatives and vastly expanding the money supply. The panel criticized people for not saving more (anything?) and said that was essential for the health of our economy, but why would anyone leave money in their bank accounts, money markets, U.S. Treasuries or other investments yielding 2-4% while real inflation is running at least twice that high?

“Why would people want to invest or increase their investment in stock markets when so many industries are in shambles, like banking, air travel, automotive, real estate and construction — to name just a few? Saving will recover when and if inflation is tamed, the dollar becomes sound and, as pointed out well in I.O.U.S.A., people realize they have to fend for themselves and that the government will not rescue irresponsible financial behavior.”

  “Saw the movie again,” writes our last, “In Peoria, Ill., this time. Sad to say that there were only about 50 people in the theatre. But ALL stayed for the whole event and panel discussion. I’m taking my brokers to the next showing.”

The 5: Our inbox is still brimming with comments, suggestions and reactions to the film. We want to thank you for taking the project on with such intensity. It’s been a wild week. The film is quickly on its way to becoming one of the most successful documentaries ever produced.

Yesterday, we held a conference call to discuss our next step. While the movie is still in theatres in 12 major markets , we’re considering hosting another screening of Thursday’s event, including the town hall discussion, in 400 or more theatres around the country in mid- to late September. What do you think? Do you know anyone who’d still like to see the film in theatres? Schools and Congress will be back in session…

Let us know,

Addison Wiggin
The 5 Min. Forecast

P.S. “One of the reasons that I have stayed with Agora,” writes a reader, “and will continue to stay is your strong desire and ability to speak the truth… even when it is uncomfortable for either the writer or the reader. That is critical in any enterprise, and, in particular, in the field you have chosen. Addison, Bill, Eric and Dan have proven to be accurate and have demonstrated exceptional insight into our collective problems. I’ve come to expect candor and consistency from anything with your name on it.”

That’s a nice compliment. Thanks.


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