Dave Gonigam – June 17, 2011
- Ex-TARP watchdog on why “you should be scared” of a new financial crisis
- The $41 billion trigger… and how even money market funds aren’t safe (again)
- Two critical commodities double in three weeks… and a way to play the trend
- Paper stocks perform… but one sub-sector outperforms
- Private passenger rail line goes above and beyond… and readers revolt: Has The 5’s mailbag sunk to Jerry Springer depths?
The number of voices concerned about a new financial crisis grows…
“You should be scared,” says Neil Barofsky, who was inspector general of the $700 billion TARP program to bail out the banks until last spring. “I am scared.”
“You can’t not be scared,” he tells Dan Rather in a new interview. “You can’t look at what happened in the run-up to 2008 and see how it is not going to repeat itself, given what we have done.”
With comments like these, Barofsky made a lot of enemies, starting with Treasury Secretary Tim Geithner.
Time and again, Barofsky raked Geithner and his minions over the coals for their decisions — especially the one to pay AIG’s trading partners — Goldman Sachs, Deutsche Bank, etc. — 100 cents on the dollar for their toxic stew of worthless derivatives.
“The largest banks are now 20% larger today than they were going into the crisis,” Barofsky told Corporate Crime Reporter last week. Standard and Poor’s “estimated that the upfront costs of another bailout could be up to $5 trillion.
“And when you think about the focus on our budget issues, our deficit and our debt — what happens with the next crisis and we have to come up with another $5 trillion to bail out our system once again?
“It’s a terrifying concept.”
Which brings us back to our original question: What would trigger a crisis so massive as to spur a bailout seven times the size of the last one?
U.S. banks have $41 billion of exposure to Greece, according to a new report from the Bank for International Settlements (BIS). What form that exposure takes is something the report leaves to the imagination.
“We can only make educated guesses,” says economic consultant Kash Mansori — who reckons most of it is in the form of credit default swaps with European banks.
That is, if Greece defaults and the European banks take a bath on their Greek government bonds, they can come to the U.S. banks to collect on the “insurance policy” they took out.
All told, European banks have $165 billion in outstanding loans to Greece.
Ironically, that’s the same figure Greece is at risk of defaulting on come July 11.
According to this morning’s action in the credit default swaps market, traders give Greece a 78.5% probability of default — down slightly from yesterday’s 78.9%.
No wonder Alan Greenspan emerged from wherever he emerges from these days to tell Charlie Rose a Greek default could put U.S. banks “up against the wall.”
But even if U.S. banks could absorb a $41 billion hit from Greece, that’s not the whole story.
It turns out 44.3% of U.S. money market fund assets are invested in the short-term debt of European banks, according to a report from Fitch.
Yes, money market funds — the place where your money is supposed to be rock-solid safe. Until it’s not.
As happened the week of the Lehman-AIG meltdown in 2008, when the Reserve Primary Fund “broke the buck” and its net asset value fell below the customary $1 per share.
Moody’s, meanwhile, says 55% of these money-market holdings in Europe are in the commercial paper of French banks with massive Greek exposure — Societe Generale, BNP Paribas, Credit Agricole. French banks account for nearly one-third of the outstanding loans European banks have to Greece.
So we have a scenario that looks something like this:
- Greece defaults
- The market value of the French banks’ commercial paper is downgraded
- Money market funds refuse to fund new issuances of that commercial paper
- Suddenly, the French banks don’t have enough liquidity to meet their obligations
- Meanwhile, European banks hit up U.S. banks for their credit default swaps, putting said U.S. banks, in Mr. Greenspan’s words, “up against the wall.”
Oy… There’s no news we see today that indicates this is close to being fixed before the European Central Bank’s self-imposed deadline of July 11. And even if it is, with another bailout, it just puts Greece further in the hole and assures a replay of the scenario.
You need to be ready. You might wish to consider this six-part action plan… before it’s too late.
Given that Wall Street has the attention span of a flea, and there aren’t live TV pictures of riot police firing on protesters in Athens, Greece doesn’t matter. Thus, the Dow has huffed and puffed its way above 12,000 again.
The Conference Board’s leading economic index — a gauge that gives us a glimpse at the next three-six months — perked up 0.8% in May. That was even better than the most-optimistic guess among the 51 economists surveyed by Bloomberg.
The key drivers were low interest rates, rising consumer confidence, and an uptick in building permits.
Gold and silver are turning in another steady-as-she goes performance, as they have all week. Gold is at $1,537, silver at $35.70
Don’t look now, but the price of several rare earth elements doubled again in the last two weeks.
A report from the research firm Industrial Minerals says the Chinese government is tightening its control across the board — mining, production and exports. And since China accounts for 97% of world production… price increases are inevitable.
A kilogram of dysprosium oxide, used in magnets, lasers and nuclear reactors, cost about $720 at the start of June. Now, $1,470. Europium oxide, used in plasma TVs and energy-saving light bubs, has likewise doubled.
“China has long said it will consolidate the industry, but it’s moving more rapidly than many observers anticipated,” says Dudley Kingsnorth, an industry veteran who now heads up the research firm. A further tightening of export quotas is a matter of when, not if.
While rare earth prices are rising this month, rare earth stocks are falling. Industry bellwether Molycorp is down 27%, while the rare earth ETF is down 10%.
Many rare earth stocks got ahead of themselves this year… but Byron King still has his eye on one that’s awaiting its big moment. He believes it will prove the “dark horse” that beats the other non-Chinese firms into production.
You can learn all about this company in a package of special reports that comes with a discounted membership in his premium advisory, Energy & Scarcity Investor. There’s a cap on the number of reports we’re issuing, so you’ll want to move on this soon.
Hmmn… a British blogger named Elliot Uttridge recently wrote a complaint letter to the privately owned Southeastern commuter rail service. His train from Gravesend to London was 14 minutes late one day. The service was poor.
Oh, and “I would like to bring to your attention the lack of attractive women on this morning’s train,” he added.
“You should hire some attractive women,” he added, “and, I guess in the interest of fairness and nonsexism, some attractive men too, to wander the trains.”
Southeastern wrote back. Profusely.
“I’m sure you will recognize that it is difficult to provide services that suit each passenger individually,” read the reply. “This is partly because beauty is in the eye of the beholder, but also because we cannot discriminate against those passengers that do not meet your criteria.
“Nevertheless, if you are able to ask a few of your attractive female friends to join you on your journey, then this would not only help boost our revenue, but would also help to ensure that your request for the provision of attractive women is suitably catered for.”
Said a Southeastern spokesman, “It is clear this man was in regular communication with our customer services and shows the human side of the company.”
None of our business, really, but maybe Southeastern’s manpower would be better devoted to making sure the trains are on time — Mr. Uttridge’s original complaint — than composing clever correspondence.
“If there are no Social Security checks on Aug. 3,” writes an American reader with an eye toward the debt-ceiling deadline, “there is going to be one almighty howl of anguish — and I will be part of it.
“Social Security is a kind of contract between the government and the people, after all, and reneging on same is the same as a large insurance company reneging on a life policy — except that SS affects the still living.
“Does Congress want to see thousands of retirees clogging the capital Ellipse? It might well happen. We were idiots to rely on the oaths of presidents and others politicians, but we did, and maybe we deserve what we are possibly going to get, but it ain’t going to be pretty.”
The 5: Good choice of specific language — “a kind of contract.” Because as the Supreme Court ruled in Flemming v. Nestor in 1960, Uncle Sam is not contractually bound to hand out Social Security benefits.
By the way, we see the AARP is dropping its long-standing opposition to cutting Social Security benefits. Evidently, even AARP leaders sees the numbers don’t work and they want to get in front of the parade,. rather than play catch-up.
This is as compelling an argument as any we’ve seen recently for getting yourself set up with alternative streams of income. It’s why we had Jim Nelson launch Lifetime Income Report 2½ years ago. Check out his latest ideas here.
“As a professional licensed locksmith,” writes a reader winding down our strategic default discussion, “I have gotten a considerable amount of work from bank short sales and repossessions over the last few years.
“Here’s the most interesting story I’ve heard. A couple buys a modest new home in New Jersey with an acre of property. A year later, they take out every penny of equity in the home out in cash and purchase another new home in Pennsylvania in full with the cash.
“They then let the New Jersey home go into foreclosure. Since they own the Pennsylvania home outright, they cannot be evicted. Now I am sure there will be lawsuits and possibly a lien on the Pennsylvania home, but they have a roof over their heads, instead of being homeless.
“It’s totally dishonest…yet clever.”
“The whole question of fight or flight is pretty entertaining, but demonstrates a lot of naivete,” writes another reader. “As a Baptist missionary, I took my young family and lived for 20 years in Brazil.
“What many people who wish to flee may forget is that there is a price to pay for being the foreigner. First, there is the language barrier (in most countries), which means that you will frequently be deceived and/or ripped off. Also, there is a certain emotional strain that comes with not being as fluent as you would like to be.
“It takes years to understand a local culture and discover your niche and how to get along. Don’t forget that in most less-privileged countries it won’t be so easy to form friendships with folks of similar living standards.
“While there is a lot of red tape in America, in many countries there will be other hidden taxes that will be required, often illegal bribes, and other ethical challenges await.
“On the other hand, the fight camp seems pretty bold, but I wonder how many have really been through a serious armed uprising! It seems to me that the Civil War began with a lot of folk wanting to go out and picnic while watching the ‘battle.’ With the kinds of weapons now available to the military, gangs and thugs and the ‘honest protesters,’ I don’t think I want to be around to watch the conflict.”
The 5: The term “fight,” at least as applied to the fight-or-flight theme of this year’s Agora Financial Investment Symposium, is more of a figurative term applied to one’s capital… as in, what are you going to do with your money when the government comes looking for it to balance its horrendous fiscal gap?
After this week’s letters on the voting-or-violence theme, we can forgive a reader for taking things rather more literally.
The symposium is now only six weeks away… and if you can’t make it in person, you can now sign up to for speedy delivery of all the sessions, recorded in high-quality digital audio. We expect to turn around these recordings — and a handy written summary of all the investment recommendations — within a week of the final session.
That would put it in your inbox by Friday, Aug. 5. It’s the next best thing to being there… here’s where to sign up for a significant discount.
“It amazes me,” writes our next-to-last correspondent, “that readers still write you when a good deal of the time all they get in response is abuse and rude comments from other readers. Why bother?”
“I am not pleased,” adds another, “with the talk show format taken with the feedback section. This deteriorates quickly into a personal back-and-forth shout of individuals in the spirit of the Lake or Springer shows.
“I know I do not have to read The 5 with these rants, attacks and repetitions, but I would like to continue getting the meaningful matter and thoughts held within the reported news and editors’ comments and observations.
“Thanks for your comments and observations — keep those up!”
The 5: Thanks for the input. We’ll do our best to keep the conversation on the enlightening side.
But all the same, if there’s a growing sense of impending crisis, and people are getting angry, and they’re expressing that anger in our inbox… well, isn’t that something you also want to know? That’s what has been interesting to us. And why we’ve been publishing your comments.
The mood among your fellow readers may be one of the most telling leading economic indicators…
Have a good weekend,
The 5 Min. Forecast
P.S. It’s not just Greece: “California inched closer to a repeat of its 2009 fiscal crisis,” says this morning’s Financial Times. Gov. Jerry Brown vetoed a budget blueprint. The state Treasury may have to start issuing IOUs again.
Addison is getting a look at the situation first-hand, as he visits Hollywood to work on a festival cut of the new documentary. He’s staying at a place overlooking downtown L.A., built by Orson Welles. And he sends along these pictures…
The cut of the film that emerges from the editing suite this time will be shown next month at both FreedomFest in Las Vegas and at the Agora Financial Investment Symposium in Vancouver.
Look for more from Addison on Monday. In the meantime, make sure you get your CD and/or mp3 recordings of the Vancouver sessions at the lowest price possible. Signing up couldn’t be any easier.
P.P.S. Paper stocks have had a decent run in the last two years. Big players like International Paper are up close to 70%.
But it’s the small fries that have truly outperformed. Greg Guenthener and Jonas Elmerraji advised readers of Penny Stock Fortunes to take profits today on KapStone Paper and Packaging for a 200% gain. Don’t feel bad if you missed out. You can be on board for their next recommendation right here.