Iceland Collapses, Gold Soars, “Bad Banks,” Trader Evolution and More!

by Addison Wiggin & Ian Mathias

  • Entire nation falls to credit crisis… Iceland’s government calls it quits
  • Gold surges past $900… global investors see metal as the only currency worth holding
  • TARP can’t save banks, government hints… Dan Amoss on the “real issue” for financials
  • Rob Parenteau on why the whims and wishes of CEOs are more important than you think
  • Have you evolved into worthy trader? A physical trait common among alphas in the fast-money world

  As if the herring blight weren’t bad enough, “Iceland’s Government Could Topple” headlines the AP today.  

The poor little island. First, its banks collapsed, then its curency, then its No. 1 industry… then the rest of its little economy. Now the rats are leaping overboard as the whole ship starts to sink. Iceland’s prime minister and commerce minister resigned over the last few days. 

“The anger and distrust of the public is too deep for me to be able to regain their trust," commerce man Bjorgvin Sigurdsson said, trying to take the noble route. He quit… effective immediately. Prime Minister Geir Haarde announced this morning he plans to dissolve the government and then resign.

That’s the Icelandic parliament in the background.  


Well, at least, this kind of thing could never happen in the U.S.

  The U.S. witnessed its third bank failure of the 2009 over the weekend. The FDIC closed up First Centennial, once believed to be worth about $677 million. The FDIC will spend around $227 million cleaning up the mess.

At a rate of one failure a week, 2009 is on track to be the worst year for flailing banks since the S&L crisis in 1989. 534 bit the dust that year. More than 4,000 failed in 1933, the height of the banking panic during the Great Depression. Given that the credit crisis has begat only 28 failures so far, we’ve either got a long way to go… or nothing much to worry about.

  We know which way the gold market is leaning on that question:

Gold is at $910 and rising this morning.

Looking around the globe today, every major currency is in the crapper — and we’re not the only ones to notice. The euro is being torn apart by once-booming members Ireland and Spain. Nor is Greece helping matters much. Across the channel, the pound is getting leveled by outright fear in the London banking scene. Switzerland and its franc are rapidly losing their safe-haven status. China’s manipulating the yuan, as Tim Geithner insists. If Japan isn’t doing the same, it will soon — its export economy is on the verge of collapse. Commodity currencies are no longer propped by $100 oil. And the dollar — you know our stance… we have only five minutes.

So gold owners can breathe easy today. You own the world’s most popular currency, if only until the dust clears.

  “China will keep its currency stable,” insisted China’s finance ministry over the weekend, “and will not depreciate the currency to support exports.” The Chinese responded to Geithner’s accusation much as we thought they would.

“China has never tried to gain advantage in international trade by manipulating its currency,” the commerce ministry official said. “This kind of wrong accusation against China on exchange rate issues will intensify protectionism within the U.S., and it will not help resolve the problem

More importantly, “this kind of accusation” doesn’t exactly encourage the Chinese to keep buying up American debt, which we need them to do now more than ever.

  After all, the $700 billion TARP will probably not be enough to maintain the status quo for the U.S. financial system.

American banks might need “some increased investment” beyond monies currently allocated to the TARP, hinted House Majority Leader Nancy Pelosi over the weekend. How much, she didn’t say. But don’t fret: “Whatever we have to do,” she explained, “will have to be clearly explained to Congress and to the American people.”

Yeah, that explains everything.

When asked if $700 billion would be enough, Larry Summers, head of the new president’s Economic Council said Sunday, “What ultimately will be necessary is something that will play out over time.”


  “The real issue now,” opines our short seller Dan Amoss, “is the shareholder equity of the money center banks. Existing shareholders and management of Citigroup, for example, want to remain as conservative as possible, while the government wants them to lend aggressively.

“This has been the problem with the TARP. In general, the new capital injected into unhealthy banks has been hoarded. This has clogged up the transmission mechanism for getting the Fed’s newly printed money into the banking system. The Fed and Treasury certainly realize this, and I expect they’ll find a way to ‘fix’ it. So an important policy change may be announced soon, perhaps as early as next week.

“I expect some combination of a ‘bad bank’ and an alteration of fair value accounting and regulatory reserve requirements. The authorities know they need to take action to stop the self-destructive feedback loop of write-downs, capital raises, write-downs, capital raises, etc., etc. If that requires setting up a gigantic, expensive new ‘Resolution Trust Corp.’ to quarantine toxic assets, so be it. They may also force settlement of credit default swaps, because they’ve now realized the futility of guaranteeing the criminally negligent contracts written by AIG.

“Any ‘solution’ to this crisis will be highly inflationary. Gold and gold stocks are beginning to anticipate this. Taxes simply cannot be raised enough to pay for these bailouts.”

  At the epicenter of the bank meltdown, we’ve seen some improvement, albeit of an illusory sort. Existing home sales jumped 6.5% in December… thanks to a massive decline in prices. The median price crashed 15.3% year over year in December, to just $175,400. According to the National Association of Realtors, that’s likely the biggest annual decline since the Depression.
But couple those prices with the government’s manipulation of mortgage rates, and a whole slew of buyers pulled the trigger in December. Sales popped to a seasonally adjusted 4.7 million, way above the Street’s expectations. Approximately 45% of those purchases were the result of a “distressed” sale.
For all of 2008, only 4.9 million homes were bought and sold. That may seem like a lot, but it’s down 13% from 2007 and for a nation — heck, an entire financial system — that had retooled itself to leverage infinitely rising house prices… oy, it’s painful.

  “CEO confidence has dropped below the lows of 1980,” says Rob Parenteau, citing a Conference Board study, “As with so many other U.S. sentiment readings, about the only good thing we can say about that is… we are getting very close to zero. By design, they can’t go any lower.

“CEO confidence may seem like a very subjective item, but it does matter. J.M. Keynes highlighted the role of confidence in making capital investment decisions, since future earnings could not be known with certainty. He openly warned the Roosevelt administration to stop bashing businessmen if the country wanted to escape a depression. Austrian School adherents also allow a key role for the perceptions of entrepreneurs as they seek out profitable opportunities to expand.

“If the CEO confidence readings are correct, a capital spending decline of 10-15% is currently in the cards for 2009, which is a larger drop in capital spending than we saw in any of the three prior recessions, including the aftermath of the tech/telecom bubble.

“On a price-adjusted basis, the growth of the U.S. private nonresidential capital stock has been winding down since the late ’60s, with the exception of the tech/telecom boom. For the late Dr. Richebacher, declining capital was always a dead giveaway that the fundamental drivers of U.S. economic growth were ailing, while credit shenanigans were creating an unsustainable illusion of growth. Perhaps more people now understand what he was talking about.”

  In market news, the S&P allowed GE to maintain its AAA rating this morning. The fate of the firm hangs solely on its dividend and credit rating. And as the market logic goes, if GE can’t be AAA, no one can.

Caterpillar, another Dow component, said profits fell 32% in the fourth quarter of 2008, gave a dark 2009 forecast and promised to “remove about 20,000 workers from our business.”

Pfizer — still another Dow member — announced a $68 billion buyout of rival drug maker Wyeth. Thumbing their noses at the “credit crisis,” Pfizer borrowed money from five different banks to pull together the $26 billion needed for the deal. If the deal goes through, it’ll be the biggest merger since AT&T and BellSouth in 2006.

Pfizer also quietly announced its net income in the fourth quarter crashed 90% from the same time in 2007. Uhh…

  The Dow interpreted all this news by opening up about 30 points. Go figure.

  This morning begins what may be a historic week in the markets: 137 of the S&P 500 report earnings over the next five days. And we learn just how death defying investors in the American equities markets are willing to be.

  As if joined at the hip, Oil’s been following gold over the last few weeks. It’s to $48 a barrel this morning. And unfortunately, gas prices are trailing along behind. Gas is up 20 cents over the past month, to a national average of $1.84 a gallon.

Still… that’s a buck cheaper than at this time last year.

  “The longer a trader’s ring finger,” suggests Agora Financial analyst Sam Buker in Whiskey & Gunpowder this morning “the more money he’ll make.” Sam is citing a Cambridge study in which the U.K.’s leading minds went around London measuring digits of various investors, which might help explain why the pound is tanking.

“Those with the longest fourth digit made over five times the money of their less-well endowed colleagues. The average salary was $537k. The long-ring group netted a healthy $828k, while the shorties had to make do with $145k.

(Source: BBC)

“Don’t know diddly about Darwin? Think it’s just about DNA? The real work of evolution starts with hormones. And the reminder of some serious prenatal hormonal action lies in the ring finger. Those with the longer fourth digit relative to the second often display rapid-fire execution ability. (See also: aggression, fertility, confidence and sporting ability). This ratio is set before birth and stays with us throughout life.

“The accidental in utero testosterone junkie may well be set for high-stakes finance on the trading floor, simply because the developing brain becomes wired with a greater sensitivity to testosterone’s effects.”

OK, so we admit. Each of your editors checked three or four times while editing this little piece. We couldn’t help it. But you’ll be happy to learn, our ring fingers — on all four hands — are longer than our pointers.

  “The government statisticians,” writes a reader, “seem to believe that people are stashing money in their mattresses and not consuming. If my experience is any example, here is what is really happening. I am now voluntarily subsidizing my significant other, who is underemployed; one of her children, who despite having earned a B.S. is still virtually unemployed almost two years after graduation; one former wife who does not have a degree and cannot find work of substance at all; one child who has a B.S. and is underemployed; and, finally, one child who will graduate with a B.S. in May and who has no job prospects whatsoever except bartending.

“Therefore, it is my feeling that the decrease in consumption is due at least in part to the fact that those of us who are lucky enough to still be making money right now are in the unenviable position of being forced to at least partially support the living costs of family members who are unable to currently support themselves. I envision support payments well into 2010, and therefore will be working well into my 70s, thanks to the necessary cash outflows to family and the 35% decrease in my portfolio value.

“I would sum up my sentiments with one hand gesture, but I am unsure how to e-mail it.”

The 5: We’re only surmising, but suspect that gesture would include neither the ring nor the index fingers.


Addison Wiggin
The 5 Min. Forecast

P.S. On Friday, we were invited to speak to dinner guests at the L’Hirondelle Boat Club, Baltimore’s oldest country club. On the roster of events for the year, you’ll find junior bowling tournaments and oyster roasts. For some reason, they thought squeezing a talk by yours truly entitled “One Nation. Under Stress. In Debt.” into the schedule would be entertaining.

While seated next to Stan White, a former Baltimore Colts football player and now a local legend, we got around to the subject of mortgages, refis and bailouts. No surprise there. Most of the group was pretty well versed in financial matters. They were keenly interested in what the next bubble was going to be. Sure they’re tired of taking losses in their stock portfolios, and watching equity get squeezed out of their homes, but if a clear trend could develop in the stock market, they’d still be willing buyers. 

Hmmmn… we thought. You’ll recall on Friday, we mentioned this very phenomenon. The next bubble began, in our opinion with the changes we detailed to the stem cell policy research at the Federal level…  and include Mr. Obama’s intended tax incentives for alternative energies research. Our man Patrick Cox is on the front line of these changes. So we’ll be discussing them in depth tomorrow in a special dedicated issue of the 5 Min. Forecast. If you want to get the jump on them, check it out here.

But with this very enthusiasm, let me also remind you of the words of the great speculator George Soros on getting rich in the markets: “The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited."  


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