Dave Gonigam – October 19, 2011
- OWS… why now? Mr. Obama weighs in from the campaign trail…
- Bank of America shifts risk off its books — onto yours… why shorting this “dead bank walking” is still a bad idea…
- “Undeniable”: Pento pinpoints the link between inflation and unemployment…
- A phony Social Security cost-of-living increase… and a far better alternative for income seekers…
- The dumbing down of America… useless politicians… complex corruption… where does it end?… and more!
One question surrounding the Occupy Wall Street (OWS) protest is “Why now?” In part, the “corruption” is complex and hard to articulate. Here’s one valiant attempt:
“In some ways,” President Obama boldly stated to ABC newsmen yesterday, “they’re not that different from some of the protests that we saw coming from the Tea Party. Both on the left and the right, I think people feel separated from their government. They feel that their institutions aren’t looking out for them.”
Duh.
Wait until they get a load of what Bank of America has just done.
With the blessing of the Federal Reserve, Bank of America moved the derivatives book off the balance sheet of Merrill Lynch and put them on the books of its own commercial banking unit. The result means yet another increase in liabilities for the U.S. taxpayer.
Again, let’s follow the bread crumbs:
This morning’s derivatives transfer announcement was initiated by a Moody’s downgrade of Merrill Lynch on Sept. 21. Merrill customers got jittery, perhaps rightly so.
Merrill Lynch can’t borrow from the Fed’s discount window. Nor is it backed by FDIC deposit insurance. But Bank of America’s commercial banking unit has both of those benefits.
Following a sketchy late-night deal on Sept. 14, 2007, covered in Andrew Sorkin’s book Too Big to Fail (now an HBO film), Bank of America owns Merrill outright.
Now with the transfer, derivative bets placed by formerly reckless Merrill traders are available for taxpayer bailout money… without all the nuisance of political debate in Congress.
Easy, peasy. Government bailouts by design. Love it.
How much money are taxpayers on the hook for? Well, we don’t know. What little we do know is courtesy of anonymous sources who leaked the news to Bloomberg.
Here are some figures:
- Derivatives held by Bank of America’s commercial banking arm before this shift: $53.2 trillion
- Total derivatives held by all units of Bank of America: $74.8 trillion
- Total deposits in Bank of America’s commercial banking arm backed by FDIC insurance: $1.04 trillion
- Amount of FDIC’s deposit insurance fund: $3.9 billion.
One assumes a sizeable portion of the derivatives are credit default swaps on eurozone government debt.
Recall that most of the big European banks are larded down with the sovereign debt of the nigh-insolvent PIIGS countries.
Recall, too, that to guard against the possibility of default, those European banks took out credit default swaps as a sort of insurance policy.
And recall thricely that U.S. banks happily wrote those policies, figuring the possibility of default was so remote it was like free money.
That was then. This is now… today… in Greece:
A two-day general strike is under way. Police are fighting protesters outside parliament ahead of a vote tomorrow on still more “austerity measures.”
The outcome of the vote is almost beside the point. As of this morning, traders in the credit default swap market peg Greece’s probability of default at 89.7%.
At last check, the yield on a two-year Greek government bond is 76.6%. When yields get that high, they’re not interest rates; they’re the amount of principal you’ll get back… if you’re really lucky.
“If things get out of hand in the euro area,” declared Citigroup chief economist Willem Buiter yesterday during testimony to the British parliament, “no bank in the financial integrated world will stand,” trotting out the global version of Too Big to Fail.
“During the Savings & Loan crisis,” blogger Yves Smith recalls, “the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corp. wind-down vehicle. It had to get more funding from Congress.”
The Bank of America’s move, she says, “paves the way for another TARP-style shakedown of taxpayers, this time to save depositors. No congressman would dare vote against that.
“This move is Machiavellian, and just plain evil.”
“I’ve taken a look at recommending a BAC short several times over the past year,” our forensic short strategist Dan Amoss said when Warren Buffett bought a boatload of preferred stock in Bank of America.
“But I kept coming back to the thesis” that Bank of America has enough friends in high places to survive whatever scandals might beset it. Under normal circumstances — like 2008, when Dan booked 468% when Lehman took a dive — BAC would be a good bet to dive, too. No longer.
BAC stock is up this morning.
Major U.S. stock indexes are flat after yesterday’s monster rally that overcame most of Monday’s losses. Disappointing quarterly numbers from Apple are offset by news that housing starts rose 15% last month.
Still, new building permits, a more reliable indicator of future activity, are down 5%.
Consumer prices rose 0.3% in September, according to the latest numerical contortions from the Bureau of Labor Statistics.
The year-over-year increase in the cost of living now works out to 3.9%. But the “core” inflation rate for people who don’t eat or consume energy is still 2% — right in the Federal Reserve’s sweet spot.
“The higher inflation goes, the higher the unemployment rate goes,” Michael Pento demonstrated to our Safety and Survival Summit audience on Friday.
“I did a study not too long ago,” he followed up with radio host Eric King yesterday, “and I compared the change in CPI to the unemployment rate. So if you go back in history — I started in 1971 — every time we experienced a significant increase in inflation the country has seen a spike in unemployment.”
“For instance, in 1974, we had an inflation rate of 12% and then we saw a dramatic rise in unemployment up to 9%. Then in the late ’70s and early ’80s, we saw a huge spike in the CPI, all the way up to 15%, and with just a small lag in ’82, ’83, we saw the unemployment rate go up above 11%.
“So here is the point: The Fed wants to create inflation because Bernanke believes inflation will bring about growth. He believes inflation and growth are synonymous.”
“However, for anyone who wants to view the official government information and data, what they will find by overlaying a chart of CPI on top of the unemployment rate, they will clearly see that there is a very high correlation between inflation and unemployment.”
Within a few minutes of the inflation number’s release, the Social Security administration announced this morning that recipients will get a 3.6% cost-of-living increase next year, their first since 2009… and almost enough to make up for the 3.9% “official” increase in the cost of living.
Alas, what Uncle Sam giveth with one hand, he taketh away with the other. Some portion of that 3.6% increase will be eaten up by higher Medicare premiums. How much higher, we won’t find out till later this month.
That’s rubbing salt in the wounds of seniors who are already stuck with a pitiful return on their savings — 1.5% on a three-year CD, for instance. Far better for income seekers is the “10-86 plan” uncovered by our income specialist Jim Nelson… delivering yields in the high single digits. Learn all about them right here.
Gold is adrift today, like nearly every other asset class except PIIGS government bonds. At last check, the spot price was $1,647.
The bid on silver is off more sharply, to $31.38.
We know demand for physical silver is high despite a spot price nearly 40% off its April highs… but we didn’t know it extended to this…
“At least three hospitals in the Delaware Valley,” reports Philadelphia’s KYW radio, “are reporting recent thefts of scrap X-ray films that apparently have some cash value.”
Cops believe the thieves pose as workers for the companies that recycle old X-rays. Once they make off with the film, they can wash it in chemicals to recover the silver within.
“Please help me clear up something I see from an ‘Occupy Banking’ Facebook page,” a reader pleads. “It says, ‘people need to understand that the easiest way to get rid of these monster banks is to pull your money out of them and bank locally, with non-MERS-affiliated banks.’”
“What,” the reader goes on “is a ‘MERS’ member? What does ‘MERS’ do? Is it a big deal if deposits get switched to a non-MERS member? If the deposits stay in the banking system somewhere, it shouldn’t be that bad, should it?”
The 5: MERS is short for Mortgage Electronic Registration Systems. It’s an electronic registry formed in 1995 by Fannie Mae, Freddie Mac and most of the big commercial banks. They did so to make it easier for your mortgage to get sold off and securitized.
Your mortgage could be passed off from a bank to Fannie to a hedge fund to a pension plan and MERS is, hypothetically, the owner of record the whole time. Thus, MERS claims to hold title to 60 million loans, roughly half of all U.S. home mortgages. And MERS forecloses on people even though it never invests a penny in a loan. (If this sounds like a mockery of property rights, it is.)
Would enough withdrawals from a giant MERS-affiliated bank take it down? Anything’s possible. We’ll know soon enough come “Bank Transfer Day” on Nov. 5.
“I would respectfully add one more thing to your reader’s list of things he would do if his goal were to ruin a country and its economy. It’s this: Ensure that schools do not teach anything to kids about how business and the economy really work.”
“When I was a volunteer teacher with Junior Achievement, I taught a grade 8 class of upper-income kids about the basics of business and economics. Lessons were once per week for 12 weeks and involved basics about how a business works, supply and demand, what is a profit, how banks work, how the stock market works, where does government get money to pay for teachers and other things, etc.”
“One question I asked was how much profit does McDonald’s make when they sell a hamburger for $1.49. Every single kid thought the profit per burger was $1.40-1.49! That works out to 94-100% profit margins! Of course, I explained the profit margin is just a few pennies per burger and they could erase that profit just by wasting napkins or ketchup.”
“They were all shocked to learn this, and wildly excited to learn more — about everything. In fact, the principal said my class was the first one that he knew of with 100% attendance plus all kids showing up early and staying late for every class. He wished all schools could integrate Junior Achievement lessons into their core teaching material, but felt that teacher’s unions would never allow it.”
“So I would suggest that all schools should teach kids about how private business works, how the real economy works and how their quality of life depends on businesses growing and making a profit. Kids would love it and any country would be better off when their business-savvy kids become decision-making adults.
“However, I fear that will never happen because teacher’s unions will continue blocking it while indoctrinating kids with anti-business propaganda.”
“The reader who blames ‘the people’ for political corruption is just plan nuts. Every single one of those politicians takes a (supposedly solemn) oath to support and defend the constitution. In fact, they all do the opposite.”
“To claim nonparticipants are to blame for the overt criminal and oath-breaking actions taken by politicians is to absolve the actual criminals of their actions.”
“In what universe is such an obvious baldfaced contradiction supported? None of this absolves ‘the people’ of being intellectually lazy morons, but excuse me, the person who takes criminal actions is the criminal.”
“Your numbers on the U.S. budget deficit,” writes a reader from Belgium, “are misleading because the U.S. places the costs of wars off-budget.”
“This ‘rule’ (it’s just an accounting convention, after all) is unusual when seen from Europe and does not apply in many other countries. Please add this cost to get the true deficit. If I were you, I would be a bit worried by this lack of transparency: I suppose that the Congress can change this ‘rule’ …? But will they?”
The 5: C’est vrai.
We’ll know the “true” total later this year when the Treasury Department issues its annual Financial Report of the United States Government. Last year, the “official” deficit was $1.294 trillion, but the real number using generally accepted accounting principles turned out to be $2.08 trillion.
Usually this report comes out a couple of days before Christmas… the better to bury the numbers.
Regards,
Dave Gonigam,
The 5 Min. Forecast
P.S. “The China story is slowing down,” writes Byron King, taking stock of developments like the GDP numbers we mentioned yesterday.
“The Chinese leadership has directed the central planners and bankers to choke it back. This affects the rest of the world, as well. We’re seeing the China slowdown in the sense of weakness in the price of copper, the oft-mentioned industry bellwether.”
“At the same time, I don’t want to overstate the magnitude of what’s going on. If Chinese growth declines from, say, 9% per year to 6.5% per year? It’s less than forecast, but still a big number. It’s not going to cause a resource crash, let alone a global recession.”
Byron explains why it would actually be a good thing for China to cool its heels… and he shares his own thoughts about Occupy Wall Street… in a wide-ranging edition of Daily Resource Hunter. Give it a look here.