Banksters At It Again!

  • Bank stocks in trouble… and the media aren’t telling even half the story
  • Rickards on how banks are playing the same games they did a decade ago
  • Harvard joins the war on cash… and why Europe’s the ultimate lab rat
  • Gloom spreads over the small-business landscape… why taxes will remain high and go higher… reader invokes the history of “the turtles”… and more!

Hmmm…. Suddenly, the elite media are wringing their collective hands about the banks.
“Nervousness About Global Banking Giants Intensifies,” says the business blog at The New York Times. “Five Reasons Behind U.S. Bank Stocks Sell-off,” offers the Financial Times.
To be sure, Bank of America, Citigroup and Morgan Stanley are all down at least 25% so far in 2016 — compared with about a 10% loss for the S&P 500.
Part of the problem, as the mainstream acknowledges, is dashed expectations. All last year, the Federal Reserve promised us it would raise interest rates. So traders bid up financial stocks, figuring the profits would roll in as banks could charge higher interest rates for loans while continuing to pay a pittance on CDs and such.
But the Fed delivered only one teensy increase at the end of last year, with the promise of four more during 2016… and that promise is evaporating as the “expert consensus” acknowledges the economy is weaker than it thought. Gee, who’da thunk it?
Still, the mainstream assures us there’s no chance the banks will get us into another Panic of 2008. No sirree.
“Most banks,” tut-tuts the NYT, “are substantially stronger than they were in 2008. And since then, the banks have managed to earn profits even as they have dealt with a barrage of government lawsuits as well as economic and financial turbulence in Europe and Asia.”
In addition, the mainstream assures us the current trouble at the banks has nothing — repeat, nothing — to do with the low price of oil.
Sure, there might be isolated issues with commercial real estate in Texas or North Dakota or other energy-intensive regions.
But “In itself, a lower oil price will not do much direct damage to the big banks’ balance sheets, say analysts,” sniffs the FT. “Total energy exposures amount to less than 3% of gross loans at the big banks, which have mostly investment-grade assets, and which have already pumped up reserves.”
The reality is not only much worse than the mainstream portrays it: It’s worse than you can imagine.
“After the fraud, deceit and corruption of bank behavior from 2004–08, you would think that a generation would have to come and go before the banks played those kinds of games again,” says Jim Rickards. “You’d be wrong. They’re doing it now in a big way, and investors are going to get whacked for the second time in less than 10 years.”
And the trouble has everything to do with the low oil price.
A few days ago, Jim met at a private club in Manhattan with a bank analyst. You’d recognize the name, but Jim’s sworn to secrecy. This fellow has 25 analysts who do nothing but look at banks’ financial statements.
What’s obvious now from many of these statements is this: “Banks and drillers spent 2015 playing the ‘extend and pretend’ game,” says Jim. “Drillers stopped putting in new wells in late 2014 (new investment didn’t make sense at the lower oil prices). But they pumped more from existing wells just to generate cash flow. This enabled drillers to pay interest on their debt for a year.”
The banks went along. “They gave forbearance on principal payments and used mark-to-market scams to keep the loans on their books at higher valuations than the market justified. That way, they could keep their stock prices inflated also.
“By avoiding write-downs on energy loans, bankers could cook the books in 2015 and still pay themselves large bonuses.”

JP Morgan

JPMorgan Chase CEO Jamie Dimon got a $27 million bonus for 2015 — up 35% from the year before.
[Photo by Flickr user Steve Jurvetson]

The expectation was that oil prices would rebound, the drillers could resume payments and the loans could stay on the books at their original value. But as you know, oil did not rebound.
“You can play the valuation game for a while, but not forever,” says Jim. “In January, bankers suddenly reversed course and started to dump energy assets and write-down loans.”
Gee, we haven’t heard the term “write-downs” much since the banks got burned on mortgage-backed securities in 2007–08.
Important point: The fire sales and write-downs aren’t reflected in the lousy earnings numbers we’ve heard from the banks in recent weeks; those only reflect activity through last December. We won’t hear the really bad news until the first-quarter numbers are reported in April.
And the write-downs are becoming ever more extreme… even if they’re not making headlines yet.
Jim had an even more hair-raising conversation recently with a portfolio manager. He’d made a substantial bet on energy in mid-2014. The position was written down about 50% last year — in line with much of the energy sector.
But last month, it got written down again — to 7 cents on the dollar.
“There really was no ‘news’ that should cause a bank suddenly to mark down a position so drastically,” says Jim. “But this portfolio manager report fits perfectly with the information provided by my analyst friend. The banks are suddenly and drastically throwing in the towel as of January.
“The rush to mark down assets is on,” Jim concludes. “And once one bank does it, they all have to do it!
“When banks lie about their asset valuations, they’re all in it together.”
This too, we learned in 2007–08. “This kind of group fraud was portrayed in the recent movie The Big Short,” says Jim. “In the film, the hedge fund heroes who saw the collapse in housing coming found ways to short the housing market despite analyst ridicule and investor angst.
“The most frustrating part for them was when the housing market actually did start to collapse but the housing indexes stayed high. It suddenly occurred to them that banks were propping up prices until they could dump their inventory on suckers.” This delayed the day of reckoning, for all of six months.
“Once one bank came clean,” Jim explains, “the others had to write down assets too. The bank Ponzi scheme crashed catastrophically all at once. This is because regulators and auditors force the banks to write down all their positions once one bank sells any assets at the lower price.”
We end our analysis where it began: Several major banks are down 25% on the year, compared with the broad market down 10%. “In recessions and bear markets, these levels will typically drop 40–80%,” says Jim; “that’s not unusual at all.
“When will the market realize how bad things are for the banks? Probably in April when first-quarter bank earnings are announced.”
For the conservative investor, Jim is hard at work developing a solution set so you’ll be ready when April arrives. Watch this space for an announcement soon.
In the meantime, if you’re of a mind to take on something a little more aggressive, Jim’s proprietary “Kissinger Cross” system has flashed a bank-related trade with the potential to triple your money by this September. There’s no better time to jump into Rickards’ Intelligence Triggers than now: Click here and Jim will show you how his system works.
The major U.S. stock indexes are slipping further into the red this morning after staging a “recovery” of sorts once we went to virtual press yesterday.
The Dow managed to close above 16,000 yesterday… but now it’s back below that figure.
Gold sits around where it did 24 hours ago, at $1,195. The 10-year Treasury rate remains a skootch below 1.75%.
Crude slipped below $30 yesterday afternoon, where it remains at last check.
Surprise, surprise: Small-business owners are feeling gloomier.
The monthly Optimism Index from the National Federation of Independent Business for January slipped 1.3 points, to 93.9. That’s the lowest figure in nearly two years.
The NFIB survey asks its members 10 questions in compiling the index. It’s just two of them that dragged down the number this month — expectations of whether the economy will improve and expectations of whether sales will grow. (Other than that, Mrs. Lincoln thought the play was splendid.)
The “single most important problem” of the survey reveals taxes are now firmly in first place, cited by 21% of survey respondents… followed by 18% citing regulations and 15% who say they’re having trouble finding qualified workers.
Don’t look now, but the war on cash is snowballing.
Because all bad ideas have be run through the Kennedy School of Government at Harvard, the Kennedy School has obliged with a paper saying that banning large-denomination bills would “make it harder for the bad guys” — meaning tax evaders and drug dealers.
Of course, that’s not the only motivation. Even the mainstream has figured out what we were telling you last fall. “You don’t need to be a conspiracy theorist,” says a Wall Street Journal piece, “to recognize that if a central bank drives interest rates into negative territory, it’ll struggle to manage with physical cash. When a bank balance starts being eaten away by a subzero interest rate, cash starts to look inviting.”
And of course, if the banks are really in as much trouble again as they were in 2008 (see above), a ban on cash would prevent pesky depositors from demanding their money, no?
Don’t panic yet: Just keep an eye on the eurozone, where they still have €500 notes — about $565 — and where the European Central Bank first ventured into negative interest rate territory 18 months ago. We Americans have been stuck with $100 as the top denomination since 1969 — when a C-note was worth $645 in today’s money.
And for the record, as of this morning, a 10-year Japanese government bond pays a negative yield. 10 years!
It was 10 days ago that we told you how the Bank of Japan had lowered its benchmark rate below zero for the first time.
“The reality is that Americans will be paying high taxes for the foreseeable future,” a reader writes, “given military spending being 34% of the global total (versus 23% of global GDP) and 21% of total government expenditures (including veterans benefits and services). Other factors like aging baby boomers will also keep taxes high.
“Americans are not getting a good return on their $600 billion-plus of annual military expenditures by virtue of the tax rates, endemic deficits and declining standards of living. Global hegemony must return economic benefits to cover the expense. Otherwise, Roman-like decline is inevitable.
“If Americans want to reduce their taxes, then the first step is to oust the neocons and liberal hawks from Washington and cease getting involved in wasteful foreign conflicts like Iraq. There is also waste in other areas of ‘Big Government,’ but at least this is largely spent in the USA and helps the domestic economy through the multiplier effect and a counterbalance to boom/bust capitalism.”
The 5: That was the central point of Empire of Debt — one of the foundational books here at Agora Financial, penned by our fearless leader Addison Wiggin along with Agora Inc. founder Bill Bonner.
As Bill summed it up a couple years ago, “Empires are expensive. They are typically financed by theft and forced tribute. The imperial power conquers… steals… and then requires that its subjects pay ‘taxes’ so that it can protect them.
“The U.S. never got the hang of it. It conquers. But it loses money on each conquest. How does it sustain itself? With debt.
“It doesn’t take tribute from the rest of the world; it borrows from it. As far as we know, no other empire has ever tried to finance itself by borrowing.”
“I see a huge, shiny, red button that says ‘Global Reset’!” writes one of our newer regulars on a host of recent topics. “In fine print, it says, ‘Global economy may grind down. In the event of a power shortage, press the reset button.’
“I find the noise and your kicking it around in commentary very entertaining!
“Turtle traders do, in fact, seem to be the best! When is the Turtle Traders Super Bowl? Does anyone listen to the turtles’ predictions? Have you ever heard any noise from a turtle? Why do turtles not listen to the noise? They were born shellshocked! Perhaps turtles are reincarnations of the many, many late, great traders?????
“Learned from the beginning you need LLC or S Or C corp. to get the best tax breaks… have not paid taxes because I did not owe any! Although a flat tax would be a whole lot simpler and not require the professional tax preparation fees (ooooh, more cash to stash), I would miss the quest for loopholes!
“Thank you, 5, for my daily shot of joy that makes life so much more fun!”
The 5: We’re glad someone finds the decline of civilization as entertaining as we do…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. If you didn’t pick up on one of that last reader’s topics, “turtle traders” were among the first successful traders who mastered the art of “trend following.”
Recalling a trip to a turtle farm in Asia, master trader Richard Dennis said one day in the early ’80s, “We are going to grow traders just like they grow turtles in Singapore.” And so he put a help-wanted ad in the business press that specified previous experience was not necessary.
After just two weeks of training, the 14 people he hired began trading alongside Dennis. Over the next 4½ years, they amassed a total fortune of $299 million in today’s dollars.
Our own Michael Covel tells the story in book-length form in his 2007 volume The Complete TurtleTrader: The Legend, the Lessons, the Results.
But if you prefer to cut to the chase — and start building your own fortune whether the market’s moving up, down or sideways — we direct you to Michael’s latest book, The Trend Following Way: A Proven Strategy to Beat the Market and Retire Rich.
It’s not available on Amazon or at your neighborhood bookseller. You can get it only through us. Best of all, you get new trades each month with our newest entry-level advisory, Trend Following With Michael Covel.
As long as you’re willing to break Wall Street’s rule to “Buy low, sell high,” you’ll be set… as Michael explains right here.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

Recent Alerts

An “Asymmetric” Gold Trade

So much for gold’s latest run past $1,800… And yet, Jim Rickards says: “We have a setup for asymmetric trade in gold.” Read More

Gold (Standard) Resurrection

“We’re going to see a collapse of confidence in all paper currencies,” says Jim Rickards. “The only question is what will replace today’s dollar-based monetary system?” Read More

Trump Raid: Point of No Return

The last thing The 5 wanted to write about this week was the FBI raid on Donald Trump’s estate. But down the rabbit hole we go… Read More

Wall Street’s Biggest Delusion (“The Pivot”)

“Wall Street thinks that the worst of the rate hikes are over and that the Fed will begin easing by early next year,” observes Paradigm’s macro expert Jim Rickards. “But will it?” Read More

The Return of Cash (But Will It Last?)

Remember when the pandemic prompted folks to conduct more commerce electronically? No more, at least not in the U.K. Read More

Beyond Alex Jones: Censorship 2022 Style

Two weeks ago, the social media industry crossed a Rubicon — slapping a “misinformation” label on an expression of opinion about the economy. Read More

Growing the IRS Goon Squad

At the heart of our harangue today is a plank in the “Inflation Reduction Act” that would build out the IRS’ capacity to audit and harass everyday taxpayers. Read More

“But Where Does Dave Get His News?”

Paradigm Press, New York Times, BBC, Financial Times, Wall Street Journal, Drudge Report, Twitter, conservative news sites, teletype machines, international news channels Read More

Pharma Scandal: Doctored Photos and Wasted Billions

An extremely important medical story the mainstream mostly buried… Read More

Welcome to the New Paradigm

Paradigm Press, financial publishing, Jim Rickards, James Altucher, George Gilder, Ray Blanco, Zach Scheidt, Alan Knuckman, Byron King Read More