Banking Faux Reform, New Accounting Rules, Unsavory Jobs Stats and More!

by Addison Wiggin & Ian Mathias

  • Panic response to Obama bank reform… Why it’s really no big deal
  • Big Four bank defies new accounting standards, plays more balance sheet games
  • Jobs, jobs, jobs… A few statistics the government would prefer you didn’t know
  • Bill Jenkins on recent dollar strength, and how long it can continue
  • Readers unusually peeved by the Heritage Foundation’s economic rankings… chill, folks…


  “Never have so many stocks fallen so far, in such a short time, over an event of such little consequence.”

After we wrote that sentence, we felt like it deserved Churchill-esque quotes, but found no one but ourselves to attribute it to.

We refer to the 2% tumble the major U.S. indexes took yesterday in response to President Obama’s bank reform plan.

We read the mainstream coverage of this proposal so you wouldn’t have to. Here’s the gist:

  • Banks that take deposits from folks like you and me would no longer be allowed to dabble in hedge funds, high-frequency trading, and the like. The idea is that if Mr. Banker wants to play the markets, he shouldn’t expect a backstop in the form of federal deposit insurance or low-interest loans from the Fed
  • The other part is more gauzy: A cap on the market share of any one firm. How that cap would be measured is something the administration says it’ll work out with Congress later.

Right. If Ron Paul’s effort to make the Fed transparent got chewed up in committee, what do you think’s going to happen to this one?

Three points about the bill’s impact…

  • The timing of this announcement is no accident: According to poll conducted right after the Senate election in Massachusetts, a majority of people who voted for Obama in 2008 but opted for Republican candidate Scott Brown on Tuesday believe "Democratic policies were doing more to help Wall Street than Main Street"
  • Celebrity banking industry analyst Dick Bove says this bill is great news for Goldman Sachs. Unlike most of its competitors, Goldman doesn’t take deposits from you and me, so it could just keep on keepin’ on
  • Ironically, while major bank stocks took a 5% beating yesterday, regional bank stocks jumped by about as much. Earnings numbers from wobbly regional behemoths like KeyCorp and Fifth Third are looking sharp; all those extend-and-pretend games with commercial real estate are working their magic… for now, anyway.

“Extend and pretend” was supposed to go the way of the dodo in 2010. But it appears our pal Buffett may have more sway than even we give him credit for.

As we noted in November, the new rule from the Financial Accounting Standards Board — the sexily titled FAS 167 — required banks to bring their rotten off-balance sheet “assets” onto their books as of Jan. 1. Some have complied.

Not so, Wells Fargo. Wells has $2 trillion of such assets. The amount taken onto the balance sheet? $10 billion. One-half of one percent. Wells explains about half of these assets are mortgages backed by Fannie, Freddie and Ginnie Mae, and thus don’t pose a threat to its solvency. Heh.

Even if we concede to that for the sake of argument, what about the rest? No explanation offered.

If Wells’ thumbing of the nose turns out to be standard industry practice, rendering FAS 167 meaningless, the financial sector might well avoid the carnage we anticipated would come from a more honest accounting. But eventually something’s going to blow up somewhere, and it will be September 2008 all over again… except worse.

  “The dollar index has made a significant turn up,” says our currency trader Bill Jenkins, “and looks like it finally might be headed into the strength that we were looking for last fall.

“First, we have the dour reports that have been coming across the wires for the United States, like the surprise downturn in the nonfarm payrolls report. Add to that the disappointing retail sales numbers (which are hard to synch with the fact that retailers were reporting some higher sales during Christmas). We also have reports of a record U.S. budget deficit. But like the Unsinkable Molly Brown, the dollar doesn’t seem ready to get knocked off its stoop.

“Does that betray a strength — or a fear — we cannot yet define?”

“Absolutely, yes. Last week, we witnessed another huge Treasury auction as the United States pawned off more debt on its friends. The U.S. dollar is still being supported as the ‘near and dear currency’ to have in the event of a catastrophe. The various elements of a trouble stew that have been brewing in Europe, such as Dubai World, Greece’s possible default and the ongoing troubles in Eastern Europe, have shown forced volatility and movement into the dollar despite its inherent faults.

“So we see that regardless what the U.S. government may be doing to the dollar, the rest of the world has confidence that the dollar will still pull through. They will be sadly disappointed. But that does not stop them from forcing the dollar up in the near term.”

Bill is, as is his wont, scheming for a way to parlay this trend into some big near-term gains. (Here’s where you can join in.) But we have to wonder how the proposal launched this week to boost the debt ceiling by $1.9 trillion is going to sit with foreign confidence in the dollar…

The question of our time: How long before enough is enough even for those investors from countries and currency jurisdictions facing disastrous fiscal challenges of their own?

  A troubling pattern emerges from unemployment data just released in 13 states: Growing numbers of people stopped looking for work last month. 31,000 in Michigan. 13,000 in Oregon. And so on.

Conveniently for the U.S. Labor Department, those people will no longer count in the U-3 unemployment figure, the one trumpeted in mainstream media, which currently stands at 10%.

  Here’s one unemployment number that, near as we can tell, hasn’t been massaged. Otherwise, how could it look this awful?


One out of every 25 people in the American work force has been out of work for six months or longer. That’s a good 60% worse than the previous record set during the early-’80s “double dip” recession.

  “They say that during the Depression of the 1930s, unemployment went as high as 25%,” muses Doug Casey. “That’s interesting, in that at the time, half the people in the country were still farmers. They knew how to make the things they used in daily life with their own hands, and how to grow their own food. There was less specialization in the economy, and people were more self-sufficient. That made them better able to cope with an economic depression.

“So it seems to me that that depression wasn’t anywhere near as bad as this one is going to be. It was caused by the inflation of the currency in the 1920s, by the Federal Reserve, and was prolonged by the actions that Hoover took, which were in exactly the same vein as those Roosevelt took later. Hoover was quite a dirigiste — I mean Roosevelt applauded all the things Hoover did, but Hoover didn’t have the panache and good PR that Roosevelt did. But everything these two did — and both were disasters, lengthening and deepening the Depression — was trivial in comparison with what’s being done today.

“The government today is making things far worse than in the 1920s and 1930s. Everything the government is doing is not just the wrong thing; it’s exactly the opposite of the right thing. But more importantly, as far as unemployment is concerned, this inflationary boom has gone on much longer than that of the ’20s. Not only does that call for a bigger correction, but unsustainable patterns of production and consumption have become far more ingrained.”

  Doug’s forecast may be more chilling than even he realizes. As he points out, farmers made up a much higher percentage of the work force then than they do today… and John Williams figures the nonfarm unemployment rate back then was around 35%. Compare that with John’s current unemployment estimate of just under 22% and you can see why even our cynical heart just skipped a beat.

Doug Casey is a favorite every year at the Agora Financial Investment Symposium… and early bird registration is now open. That’s how you secure the best available price, and a hotel room close to all the action. Details here.

  Despite the miserable performance of mutual funds over the last two years, one fund had a fairly successful 2009 — too successful, it turns out.

The Marketfield Fund, managed by Michael Aronstein, jumped nearly 25% on the strength of its commodity investments. But it turns out there’s an IRS rule that says a mutual fund must make at least 90% of its gains from stocks and bonds. Run afoul of this rule, and the fund has to pay taxes. Oops. Aronstein is working around this by shifting the fund’s fiscal year.

“I’m OUTRAGED by regulatory stupidity,” writes Resource Trader Alert editor Alan Knuckman, who passed along this item to us (and who’s not afraid to resort to the occasional all caps in an e-mail). But rest assured this rule has no impact on the performance of the RTA portfolio. Last week, he closed out a position for a 67% gain in just 31 days. For more of where that came from, look here.

  “Heritage’s survey of free economies,” a reader writes, “must be a joke by a right-wing foundation to slam the U.S. when it is under a president it dislikes. How could Hong Kong possibly be a freer economy than the others on the list when it is under Chinese domination and subject to its whim? Sure, the Chinese government hasn’t done anything adverse as yet, but that’s only because it’s in its self-interest at this time to not openly exert that control. And oh, by the way, while they are lost in admiration for Hong Kong, would Heritage applaud the U.S. government buying shares in the S&P 500 companies, a la the Hong Kong government in the late ’90s during the Asian financial crisis?”

The 5: Uh… we only pointed out that Canada had moved up a notch. Heh.

  “It is worthy of note,” writes another “that in the top 10, all but Switzerland, Denmark and Chile are part of the Anglosphere. Also notable — by its absence — is the former mother country. Another interesting point is that with the exceptions of the U.S. and Canada, all these countries have a population smaller than that of Texas.”

The 5: The U.K. just missed the top 10, coming in at No. 11.

  “You guys have been touting the virtues of Brazil ad infinitum. Where is Brazil on the list of "world’s freest economies"?

The 5: A fair question. Brazil ranks No. 113. But the number doesn’t tell the whole story.

The Heritage report says despite the twice-elected president’s socialist rhetoric, “He has operated as a pragmatist. He and his economic team have implemented prudent fiscal and monetary policies and pursued microeconomic reforms, and Brazil has benefited from surging prices for its booming exports of commodities. A strong currency regime has contributed to rising living standards, and the middle class is growing.”

Still, for the record, we have not been “touting the virtues” of Brazil, rather ogling its wares. Fact is, we could really care less whether the economy is “freer” or “less free” in the eyes of the Heritage Foundation… we sent Byron down there to check out the massive oil discovery that’s getting exploited as we speak. More from Byron to come…


Addison Wiggin

The 5 Min. Forecast

P.S. Last call! The window for your exclusive access to the Silver Eagles we’ve been mentioning all week ends this evening. If you’re interested in “Early Release” MS-70s, don’t wait. Tomorrow, it’ll be a different story.

P.P.S. As of this morning, our appeal for aid to the Hospital Albert Schweitzer in earthquake-stricken Haiti has generated 1,642 donations worth a rough total of $82,100. Many thanks to everyone who’s stepped up. There’s still time to donate, and goodness knows, there’s still the need.



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