Dave Gonigam – October 4, 2011
- The bear market of 2011: Only 40 S&P points away from surrendering all the QE2 gains
- The bank you’ve never heard of that could set off a worldwide panic
- “Virtual bank run” at a major airline…
- Sovereign wealth fund’s big gold bet…
- Eye candy for gold bugs… reader musings on the demise of the euro and the Occupy Wall Street protests… retroactive tax increases, and more!
Welcome to the new bear market. What little good QE2 accomplished has now vaporized.
Shortly after the open this morning, the S&P 500 dipped to 1,087 — 20% lower than the April 29 high of 1,363, thus meeting the formal definition of a “bear market.” That much you’ve likely already heard if you were unfortunate enough to turn on your radio or TV.
Here’s what you likely haven’t heard: 1,087 is only spitting distance from 1,049 — the level of the S&P on Aug. 26, 2010. That was the day Fed chief Ben Bernanke delivered his annual speech in Jackson Hole, Wyo., and signaled that a second round of “quantitative easing” was in the bag.
The market’s performance since then has been Bernanke’s benchmark. Something to brag on. A point of pride…
- Nov. 4, 2010: “Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action,” he wrote in The Washington Post the day after QE2 was made formal policy
- Jan. 13, 2011: “Our policies,” he said at an FDIC forum on small business, “have contributed to a stronger stock market, just as they did in March of 2009, when we did the last iteration [of quantitative easing]. The S&P 500 is up about 20% plus and the Russell 2000 is up 30% plus.”
Indeed it was. It is no more.
The Federal Reserve “will continue to closely monitor economic developments,” said chairman Ben Bernanke during snoozer testimony to Congress this morning, “and is prepared to take further action as appropriate to promote a stronger economic recovery in a context of price stability.”
Funny, he didn’t say squat about the stock market.
In any event, the suggestion that the Fed is still standing at the ready to mainline more QE heroin was enough to ease traders’ withdrawal pangs. The major indexes have bounced off their early-day lows.
“Banks are still undercapitalized, overleveraged and still burdened by far too many derivatives,” said GoldMoney’s James Turk to King World News today.
“The only uncertain thing is: On which side of the Atlantic will a major bank collapse? Because there are so many insolvent and fragile institutions around, it is hard to say which domino will topple first. I don’t think investors fully understand at this point the potential ramifications.”
“When the first domino toppled in 2008, central banks stopped the contagion at Lehman, but they didn’t solve the problem, which has now become larger and much more severe than it was three years ago.”
“What this means is that once the first domino topples, this event may be beyond the control of any one government or even central banks.”
What Mr. Turk is describing would be 2011’s version of Creditanstalt, the private Austrian bank that collapsed in May 1931, intensifying the Great Depression.
The contagion began in Austria, whose government responded with draconian measures. “The introduction of exchange controls in Austria,” recalls Russell Napier in his book Anatomy of the Bear, “had created concern among depositors in German banks that the balance sheet of their institutions may be undermined.”
“As more than half of all German bank deposits were owned by non-Germans, a loss of confidence by these investors had very serious international consequences. There was a full-scale banking crisis in Germany by July, and exchange controls followed. As U.S. bank deposits in Austria, Hungary and Germany were frozen, the stability of U.S. bank balance sheets was further undermined.”
That encouraged Americans to pull their money out of U.S. banks. Total deposits shrank from $58.1 billion in December 1930 to $49.5 billion a year later.
Between April-August 1931, 573 banks failed. In the following two months, the number accelerated to 827.
Which brings us to the question: Who is a possible candidate for 2011’s version of Creditanstalt?
The French and Belgian governments are stepping in today to save Dexia, a French-Belgian bank with major exposure to Greece.
We pause here for three relevant statistics:
- Dexia’s market cap, after the share price collapsed 30% the last two days: €2.0 billion
- Dexia’s total holdings of Greek government debt, according to Reuters: €3.8 billion
- Greece’s probability of default, according to the credit default swap market today: 91.7%.
You can see how this might be a problem.
Details of the rescue are still being worked out, but it “looks likely to involve a breakup of the bank’s assets,” anonymous sources tell Reuters, “and the creation of a state-supported ‘bad bank.’”
This wouldn’t be Dexia’s first rescue. Not by a long shot.
Readers with keen memories will recall that Dexia played a prominent role in Federal Reserve ledgers that were finally thrown open earlier this year after Bloomberg went all the way to the Supreme Court to obtain them.
It turned out Dexia was the biggest borrower from the Federal Reserve’s discount window at the peak of the Panic of ’08 — grabbing onto a $31.5 billion lifeline on Oct. 24.
Why was the Fed so eager to help Dexia? Because Dexia guaranteed a boatload of municipal bonds in this country — everything from the Texas Veterans Land Board to the Los Angeles County Metropolitan Transportation Authority.
“If Dexia went bankrupt, it could have been a catastrophe for municipal finance and money funds,” recalled Matt Fabian of Municipal Markets Advisors. Dexia literally provided guarantees to buy the bonds if investors walked out. That made it possible for money market funds to buy the bonds.
Yes, money market funds. The safest of all investment vehicles, or so we’re always told.
We pause here to note some additional relevant statistics…
- Percentage of U.S. money market fund assets invested in the short-term debt of European banks, according to Fitch: 42.1%
- Percentage of these European holdings parked in the commercial paper of French banks with massive Greek exposure, according to Moody’s: 55%.
But the vulnerability of money market funds to Greece is even bigger than these numbers indicate… because as noted above, the funds also hold municipal bonds guaranteed by the same European banks exposed to Greece.
If this sounds like an accident waiting to happen, it is. In fact, it’s another facet to the “mother of all bubbles” that Addison is warning about in his most recent forecast. We got quite a response to it over the weekend; if you haven’t given it a look yet, here’s your chance.
Shares of American Airlines parent AMR are recovering today after shaking off rumors of imminent bankruptcy — a major factor behind yesterday’s sell-off.
Driving the rumors were the fact 240 pilots retired in August and September, cashing in AMR shares at the Aug. 1 price — a phenomenon our short strategist Dan Amoss describes as a “virtual bank run.”
AMR has been on Dan’s “hit list” since early this year. And he sees more trouble ahead. “AMR lately has been paying high interest rates to roll over its debt — including loans collateralized by aircraft.
“It’s a terrible time to be raising junk debt. AMR still has a decent amount of liquidity, but lenders are looking ahead to distant debt maturities, estimating the amount of cash burn between now and then. They don’t like what they see.”
As of yesterday, Dan’s AMR short recommendation was good for a 67% gain. If you missed out on that play, there’s no shortage of other candidates… as Dan shows you here.
Despite Ben Bernanke dangling the prospect of more QE, gold is selling off. The spot price is holding above $1,600, but at $1,614, it’s down significantly from where it was overnight.
Silver has broken below $30 again, to $29.79.
Knowing a bargain when it sees it, Qatar’s sovereign wealth fund is about to plow $10 billion into gold producers.
The first acquisition: $1 billion for European Goldfields, developer of the largest gold-mining project in… drumroll, please… Greece. Heh, gold mining might be the only remaining viable business in Greece.
The investment amounts to a nearly 10% stake, according to the London Telegraph. Future targets for Qatar Holdings are in Africa and Russia.
For sheer ooh-and-ahh impact, check out this gold bar on display recently at a shopping center in Nanjing…
It’s 99.999% pure and weighs 99.999 kilos. That’s 1/10th of a metric ton, or if you prefer, 3,215 troy ounces.
At today’s spot price, that’s worth nearly $5.2 million. And they have only two guys standing guard around it, we’re told…
“Old Spanish currencies are circulating now in Spain in many cities and towns,” writes a reader who noted the rumor last week that Germany is printing deutsche marks in case of a euro collapse.
“As in the aftermath of World War II, people tend to trade and use instruments they know when others are no longer available. If the euro loses its ability to settle values, the many Europeans will be returning to what they knew before to do so.”
“I suggest that rumors regarding the printing of local currencies are signaling their return since the euro is ‘lost in the welter of debt it enabled.’ The problem with Greece right now is they are facing a collapse of any system to get payments to anyone in the country and they do not have the cash to start up printing drachmas again, even when they may have to. That is really down and out.”
“In a sense, the same thing is happening here. Utah signaled it when it legalized gold and silver for payments within the state.”
“The people who are demonstrating on Wall Street and other locations around the country seemed to have chosen the wrong location to vent their frustrations,” writes another reader.
“Why are they not marching on the Capitol Building in Washington, D.C., or the White House? The occupants of these buildings are the ones that have caused the most damage in our country. The parties on Wall Street that have made bad business decisions in the past would not be there today if the people in Congress, the White House and the Federal Reserve had not rescued them.”
“We have an election year coming up, and it would not surprise me to find out that some of the current occupants of Washington, D.C., are behind these demonstrations. Is there a better way to deflect attention away from what they have done than to shift the focus elsewhere?
“The American Jobs Act, a certain person’s recent road trip and now these demonstrations — something tells me there is more to this than a disgruntled few who decided to protest against executives making a large salary. Could it be that someone’s agenda wants to highlight those salaries to promote their claim that they need to be taxed at a higher rate? I don’t know for sure, but I wonder.”
“I’m waiting for the day,” writes another, “the demonstrators actually invade a trading floor and stop the trading! What do you think will happen then?”
The 5: In 2005, about 35 Greenpeace protesters tried to take over the floor at the International Petroleum Exchange in London.
The traders “kicked and punched them back on to the pavement,” according to an account in the Times. Two of them landed in the hospital.
“We bit off more than we could chew,” said one demonstrator. “They were just Cockney barrow boy spivs. Total thugs.”
Electronic trading continued during the fracas. So even if the NYSE is invaded, the high-frequency computers will keep doing their thing, it would seem…
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. The only thing worse than a tax increase… is a retroactive tax increase.
That’s what the heirs of Connecticut developer and self-made millionaire Monty Blakeman face, to the tune of $100,000.
Blakeman died on April 23. On May 4, the Connecticut legislature expanded the estate tax. Up to that point, it applied to estates of $3.5 million or more. Now the threshold is $2 million. And the law was made retroactive, applying to anyone who died after Jan. 1.
“My dad said the state of Connecticut was making it harder and harder to stay in business,” says son James Blakeman, who’s suing the state. “They’re already going to get a lot of money out of us.”
So it goes now, with cash-strapped state and local governments unable to print money to keep their many promises.
Even if you don’t have a net worth of $2 million, they’re coming after you too… as Addison spells out in his updated forecast. You can review the laundry list of new taxes and weird fees — and help shelter your nest egg from the next round of assaults — by following this link.