The Blather in Basel

by Addison Wiggin

  • Historic agreement means no more banking crises… after the year 2018

  • Joe Six-pack sits out the bear market rally… Why this could mean a rerun of the “flash crash”

  • The greatest investments during the Great Depression… and how opportunity is knocking again

  • U.S. government takes sides in 1,354-year conflict, sets stage for radically higher oil prices

  • How some of the worst “tax deadbeats” are on Uncle Sam’s payroll

Over the weekend exactly two years ago, a few smartly dressed gentlemen gathered in an otherwise unremarkable boardroom in New York's Wall Street district. They spoke in hushed tones. They sipped coffee from white porcelain teacups.

While their manner was indistinguishable from any other meeting held before or after in that oak-paneled office, by the end of the day, they'd arranged to rescue Merrill Lynch, allowed Lehman Bros. — one of Wall Street's most venerable firms — to declare bankruptcy and kicked off a series of events that would lead to the $180 billion taxpayer bailout of insurance megalith AIG.

This past weekend, the meddlers were at it again. Some of the same gentlemen, aided and abetted by a host of international cohorts, met in another more-lavishly appointed room. This time, they devised a plan so audacious it will ensure that a crisis of the magnitude witnessed in '08 won’t ever happen again. Ever.

The group is called the Basel Committee on Banking Supervision (BCBS). It comprises high-level operatives from 27 countries. They met in seclusion yesterday in mountain town of Basel, Switzerland.

Many of the usual suspects, at least those that could be identified, were in attendance — Federal Reserve Chairman Ben Bernanke, New York Fed chief William Dudley, FDIC head Sheila Bair. European, British, and German central bank luminaries represented their countries' wealthy interests, as well.

What they decided today will reverberate through credit markets for years to come: Banks will be required to double their capital reserves.

In practical terms, that means they can’t leverage higher than 22-to-1… and if they want to pay out dividends, they can’t leverage higher than about 14-to-1. This requirement will take effect in 2015. Any sooner and “the measures would make short-term borrowing prohibitively expensive,” explains the Financial Times, and the worthies gathered in Basel surely do not want that.

In the same spirit, further measures aimed at reducing banks’ dependence on short-term funding won’t come into effect until 2018. And the rules do not address the items left off the banks’ balance sheets.

Ah, who are we kidding… we can't hold up the pretense anymore.

The details of the cleanup after the Panic of '08 are so pedantic and boring, we've come to write about this group like they're a secret cabal of powerful men and women, rather than the tedious set of snivelers they are.

If nothing else, maybe some of the words we pen will help enflame passions in some future conspiracy buffs’ efforts to connect the dots from Jekyll Island through Bretton Woods to the Trilateral Commission and Vince Foster. We hold no other ambitions…

And it's going to be a long row to hoe before we get through this mess, so we may as well try to have a little fun along the way.

Meanwhile, the news from Basel is fueling a Monday-morning rally, with the S&P up nearly 1% in the first 20 minutes of trading. Doesn’t hurt that Chinese industrial production numbers are up too. The on-again, off-again China slowdown is off again — at least for the moment.

It’s a safe bet Joe Six-pack isn’t taking active part in this morning’s rally. “[Individual] investors have withdrawn $62 billion from stock mutual funds year to date,” notes Dan Amoss, citing research published by the Investment Company Institute.

Perhaps wisely so.

“Normally, after a huge rally like the one we saw in 2009, the investing public feels better about adding to mutual funds. Sustained bull markets require public participation. Since the public is withdrawing its influence on pricing, most of the daily fluctuations in the stock market are at the mercy of impatient (and often leveraged) speculators.

“When high-frequency traders shut down their systems last May 6, much of the incremental demand for stocks vanished. This could easily happen again.”

If you’re not Joe Six-pack, and happen to be in the market for "crash" insurance, you’d do well to consider Dan’s strategy, where rather than taking their lumps with the masses, readers are up 50% in two months on a play that anticipated another housing downturn. Learn how Dan’s system works here.

With stocks rallying this morning, the dollar index is down a commensurate 1% — clinging to 82.

Here we note a curious trend. Since late April, when stocks reached their post-panic highs, almost any pop in stocks has coincided with a fall in the dollar. Or… vice versa. The inverse correlation between the Dow and the dollar index has been, well, striking…

Gold, meanwhile, is flat-lining at $1,247.

“The Great Depression of the early 1930s was one of historic technological progress as well as investor opportunity,” writes Patrick Cox, looking back to another era which required a lengthy and drawn-out cleanup following a speculative bust.

“For many, it seemed like the end of the world. It was difficult to see a brighter future. If you were an investor then, however, there were a number of enormous and obvious technological trends changing the way people lived. One was radio. For the first time, Americans had a way to bring real-time news and entertainment into their homes. Radio boomed in the darkest days of the Depression. Forward thinkers who invested in the underpriced stocks of brand-new companies like Motorola would become rich.

“Another new technology, home refrigerators, was also transforming America. Electrical refrigerators saved consumers money by allowing them to buy and preserve larger quantities of food. Market penetration of home refrigerators accelerated during the Depression, making investors in the new technology rich in the process.

“In fact, technological innovation gave those who believed in the future huge and obvious ways to ride a financial wave to future riches. The ideas behind Hewlett-Packard, Texas Instruments, Xerox and Unisys were born in the depths of the Depression. The lucky few who invested in these ‘science fiction stocks’ laid the foundations of fortunes. Emerging technologies like neoprene and nylon offered similar opportunities.

“We’re there now. Nearly unbelievable technologies are emerging today. Better yet, a fearful market has seriously underpriced these revolutionary technologies.”

Identifying large-cap stocks with that sort of mega-potential is the purpose of our newest publication, Technology Profits Confidential. Patrick is working on the publication along with the newest addition to our editorial team, Ray Blanco.

The first issue went out last week to readers of Patrick’s existing publication, Breakthrough Technology Alert. Later this week, you’ll learn how you can access this new publication… at no cost, for the rest of your life. Stay tuned.

The FDIC shuttered a bank on Friday afternoon, the first time it had done so in three weeks. Horizon Bank of Bradenton, Fla., is no more. That brings the body count for 2010 to 119. RIP, Horizon Bank of Bradenton!

The biggest U.S. arms sale ever is about to get even bigger. As we noted here in The 5 last month, the Obama administration sweetened a deal cut by the Bush White House with Saudi Arabia — throwing in another 130 attack helicopters, to bring the total value to $60 billion.

This morning comes word from Washington of another $30 billion to beef up the Saudi Arabian navy.

The White House will sell the entire deal to Congress as a "jobs program" — 77,000 jobs in 44 states, if you believe Boeing’s estimates. More important, according to The Wall Street Journal, is that it reinforces “a broader policy aimed at shoring up Arab allies against Iran.”

And thus, Washington policymakers, mired in their own economic woes, are taking sides in a conflict that goes back 1,354 years. Perfect. In the ongoing spat between Sunni and Shiite Muslims, Iran is fueling a Shia resurgence across the Middle East, including oil-rich Saudi Arabia, where the Sunni House of Saud has ruled for the last 80 years. The U.S. doesn’t want that to happen.

But rather than draw out the details here in The 5, you can learn how this arms deal is one more link in a chain of events that could lead to all-out warfare and $220 oil. Our oilman Byron King has been following developments keenly and has assembled a compelling presentation packed with relevant maps and data. You can watch it here.

Not that we're the first to point this out… but on a sarcastic and snarky Monday, we can't help ourselves. During an election season when we can't get away from political rhetoric exhorting the Feds to crack down on “tax deadbeats,” we learn that some of the worst deadbeats are… federal employees.

Say it ain't so.

All told, Uncle Sam’s employees owe $1 billion in back taxes. Among workers on Capitol Hill — you know, the folks who write tax policy, among other things — 4%, or 638 people, are in arrears to the tune of $9.3 million. The average tab run up by a House employee is $15,498.

The Washington Post has assembled a handy guide of many federal agencies, how many deadbeats they employ and how much they owe. If you don’t mind raising your blood pressure on a Monday, here it is.

“You are correct,” writes a reader with words that always stroke our ego. “Beginning in 2011, HSA funds can no longer be used to purchase over-the-counter medicines. What you did not report is that the new law also increases the early withdrawal penalty from 10% to 20%. So if you need to access your money for nonmedical reasons, you will lose 20% right off the top.

“I am concerned that something like this might also happen to IRA and 401(k) accounts. We already know that Americans are pulling money out of these accounts in record numbers. How long before the penalties are increased here as well?

“In my opinion, the solution is to stop participating in these government-sponsored plans. The benefits of tax deferral do not outweigh the risk that the government will change the rules and cheat you out of your own money. Get your money out of these plans now before it is too late!”

The 5: This week, the Labor Department holds hearings on “lifetime income options for retirement plans.” That sounds like code for the “guaranteed retirement accounts” notion first floated in 2008 — and flagged for us at the time by Strategic Short Report editor Dan Amoss.

“This seems to be the second effort,” Dan commented last week, “by the statists in Congress to slowly boil the American people like a frog… put everyone in 'safe' Treasury-backed annuities to help plug long-term deficits and then inflate the value away.”

We’ll keep an eye on these hearings this week. Stay tuned. In the meantime, if you'd like to fight back — just a little bit — consider Jim Nelson's approach presented here.

“Please consider the tax on the sale of investment property," another reader writes in response to our item Friday about the new 3.8% federal tax on investment income for so-called high earners, "where there is not the personal residence protection.

“This 3.8% tax, along with increased capital gains tax (15%, raised to 20%), will be substantial. Forget about 1034 Like Kind Exchanges, where there are many requirements and time limitations. An investor might desire to invest in other areas, e.g., gold, stocks, etc. Thanks for your great advice.”

The 5: Hmmm… we wonder how the tax bite for an individual who owns investment property will compare to the tax bite on corporations that own apartment complexes?


Addison Wiggin

The 5 Min. Forecast

P.S.: “If you look at some of the markets here [in Chicago],” our Resource Trader Alert editor Alan Knuckman told Bloomberg TV on Friday, apparently onto opportunities outside the concerns we've raised today, “they’re driven by supply and demand.

"The stock market may be lagging behind them, but if you look at a lot of physical commodities — you look at corn, you look at sugar, you look at cotton, you look at silver — you look at some of these things, they’re doing very, very well — even though the stock market’s kind of lagging behind.”

That's why we love this guy. In his words, "It all comes back to commodities."

Alan’s readers are waiting for his signal to sell a sugar position that right now is up 438%. If you’d like to get in on his next recommendation, here’s where to go.


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