Listen to this week’s “The Financial Physician” radio show. -Lou
Listen to this week’s “The Financial Physician” radio show. -Lou
I have been warning you. I believe that insured deposits will also be lost once the systemic banks all fail.-Lou
How and Why Banks Will Seize Deposits During the Next Crisis
As we noted last week, one of the biggest problems for the Central Banks is actual physical cash.
The financial system is predominantly comprised of digital money. Actual physical Dollars bills and coins only amount to $1.36 trillion. This is only a little over 10% of the $10 trillion sitting in bank accounts. And it’s a tiny fraction of the $20 trillion in stocks, $38 trillion in bonds and $58 trillion in credit instruments floating around the system.
Suffice to say, if a significant percentage of people ever actually moved their money into physical cash, it could very quickly become a systemic problem.
Indeed, this is precisely what caused the 2008 meltdown, when nearly 24% of the assets in Money Market funds were liquidated in the course of four weeks. The ensuing liquidity crush nearly imploded the system.
Because of this, Central Banks and the regulators have declared a War on Cash in an effort to stop people trying to get their money out of the system.
One policy they are considering is to put a carry tax on physical cash meaning that your Dollar bills would gradually depreciate once they were taken out of the bank. Another idea is to do away with actual physical cash completely.
Perhaps the most concerning is the fact that should a “systemically important” financial entity go bust, any deposits above $250,000 located therein could be converted to equity… at which point if the company’s shares, your wealth evaporates.
Indeed, the FDIC published a paper proposing precisely this back in December 2012. Below are some excerpts worth your attention.
This paper focuses on the application of “top-down” resolution strategies that involve a single resolution authority applying its powers to the top of a financial group, that is, at the parent company level. The paper discusses how such a top-down strategy could be implemented for a U.S. or a U.K. financial group in a cross-border context…
These strategies have been designed to enable large and complex cross- border firms to be resolved without threatening financial stability and without putting public funds at risk…
An efficient path for returning the sound operations of the G-SIFI to the private sector would be provided by exchanging or converting a sufficient amount of the unsecured debt from the original creditors of the failed company into equity. In the U.S., the new equity would become capital in one or more newly formed operating entities.
…Insured depositors themselves would remain unaffected. Uninsured deposits would be treated in line with other similarly ranked liabilities in the resolution process, with the expectation that they might be written down.
In other words… any liability at the bank is in danger of being written-down should the bank fail. And guess what? Deposits are considered liabilities according to US Banking Law. In this legal framework, depositors are creditors.
So… if a large bank fails in the US, your deposits at this bank would either be “written-down” (read: disappear) or converted into equity or stock shares in the company. And once they are converted to equity you are a shareholder not a depositor… so you are no longer insured by the FDIC.
So if the bank then fails (meaning its shares fall)… so does your deposit.
Let’s run through this.
Let’s say ABC bank fails in the US. ABC bank is too big for the FDIC to make hold. So…
1) The FDIC takes over the bank.
2) The bank’s managers are forced out.
3) The bank’s debts and liabilities are converted into equity or the bank’s stock. And yes, your deposits are considered a “liability” for the bank.
4) Whatever happens to the bank’s stock, affects your wealth. If the bank’s stock falls at this point because everyone has figured out the bank is in major trouble… your wealth falls too.
Not a stupid man.-Lou
Shorting The Federal Reserve
Submitted by Michael Lebowitz of 720 Global
Shorting The Federal Reserve
“I’ve never let my guard down by saying, I do not need to be hedged” – Paul Singer
Preservation of clients’ wealth is the most important fiduciary duty guiding investment managers. This obligation tends to be under-appreciated in the midst of financial asset bubbles when recency bias blunts the desire to sacrifice the potential for further gains in exchange for protection against losses. Inevitably, this is made painfully clear when a bubble pops and those once popular assets lose value and the manager’s clientele suffer. 720 Global has repeatedly urged caution as valuations are currently stretched on the back of reckless Federal Reserve monetary policy and poor economic fundamentals. This article presents the case for an asset that can help managers protect their clients and uphold their fiduciary duty owed to them.
Gold is neither a claim on the promise of future earnings like a stock, nor a liability owed by a public institution or a private party like a bond. It also lacks the full faith and credit of most governments, like a currency. Gold serves little industrial purpose, unlike all other commodities and is most commonly revered as a shiny metal used in ornamental display or jewelry. It is precisely these failings that make gold a unique and valuable asset and one that can play an important role in portfolio construction.
Gold is one of the few stores of value that is limited in supply, transportable, globally appreciated and not contingent upon the faith and credit of any entity. It cannot be manufactured or debased. Gold is the only time honored currency or in the words of John Pierpont Morgan (J.P. Morgan), “gold is money, everything else is credit”.
Thousands of years ago trade between people began through a system of barter. This method of payment was effective but very limiting. Trade could not occur unless both parties had the goods or services demanded by the other. If a metalsmith, for example, did not need wheat, a farmer seeking a new sickle would have to find alternative goods or services to offer the metalsmith.
These stark limitations and the growing desires to conduct trade with parties over further distances required a more robust system. Accordingly, trade graduated from the barter system to that of a common currency. Aristotle stated the rationale for a common currency eloquently:
“When the inhabitants of one country became more dependent on those of another, and they imported what they needed, and exported what they had too much of, money necessarily came into use”. At first, in almost all cases, the currency was a commodity. While eliminating some of the problems associated with barter, this system presented new ones. Carrying gold or other commodities such as silver, grain, shells, or livestock can be cumbersome and difficult to properly measure for weight and purity. Dividing most commodities into fractions for ease of exchange produced additional difficulties. Paying for an acre of land with a quarter of a cow must have presented quite a quandary.
The next step in the advancement of currency was the use of sovereign issued, standardized currency typically made with gold, silver, copper and bronze. The first known instance of such a currency, the Greek drachma (pictured to the left) dates back to approximately 700BC. The benefit of this commonly accepted currency was that the supply of money became regulated and standardized. Additionally, the limited availability of the metals made it hard to increase the supply of currency in any significant manner. These currencies held their value well as the worth of the coin was always tied to the weight and the price of the metal used. That said, there are instances where governments abused their authority by decreasing, or shaving, the metal used in each coin, temporarily unbeknownst to the public.
While coins were a big improvement from the days of barter, they could not fulfill the pressing monetary requirements of escalating global trade. To fill this need national banks introduced bank notes. Bank notes are essentially paper IOU’s, as we have today. The dollar bill, for instance, is backed by the full faith and credit of the United States. However, prior to the last 50 years, full faith and credit was rarely acceptable and accordingly most bank notes were backed by a commodity, typically gold or silver. One holding a bank note backed by gold or silver could always exchange the note for a fixed amount of the metal backing the currency. In 1792 the Mint and Coinage act authorized the Bank of the United States to establish a fixed ratio of gold to the U.S. dollar. While the fixed rate fluctuated over time, there was always gold and silver backing the currencies. Below is a picture of a $20 gold certificate.
On May 1st, 1933, President Roosevelt issued executive order 6102. This action ordered U.S. citizens to turn in their gold coins, gold bullion and gold certificates to the government. The order essentially made holding gold, in those forms, illegal for private citizens. The government set a rate of $20.67 per ounce for anyone exchanging their gold for cash. Surprisingly, and still deeply entrenched in the memory of many, personal bank vaults were raided in search of gold. 7 months later, having accumulated a significant amount of gold, the Gold Reserve Act was passed which raised the fixed rate of gold per ounce to $35.00. While rarely discussed in mainstream economic text books, this simple act was a massive devaluation of the dollar. With one swipe of a pen the amount of gold supporting the dollar was increased by 70%.
Roosevelt’s actions highlight an important distinction in the gold debate. Most critics of a gold standard today argue there is not enough gold in existence to back the current monetary regime. The truth is that the amount of gold is irrelevant, it is the price of gold that matters.
While the gold standard no longer applied to U.S. citizens, foreign nations were still able to exchange U.S. currency for the gold or silver backing it. In 1971, President Nixon signed executive order 11615 which suspended this right of exchange. The act officially took the U.S. off of the gold standard. Most other nations have since taken similar actions.
It has only been the last 44 years where gold plays little to no role in the backing of any major currency. Although there is still gold stored in Fort Knox and other vaults, it only represents about 7% of our monetary base at current prices. The nouveau logic surrounding this fiat currency regime states that confidence and trust for a piece of paper backed by faith will always trump the desire for people to hold something tangible.
History is littered with financial crises and other disturbing events resulting from reckless monetary policies. Part II of this piece, soon to be released, will chronicle one example of the ills of uncontrolled money printing, namely the actions that ultimately led to the French Revolution (1789-1799). This example is not as well-known as recent money printing schemes such as the Weimar Republic in 1923, Argentina in 1981 or Zimbabwe in 2008, but the lesson it provides is invaluable. The scale of money supply growth today is enormous but far from those achieved in the aforementioned countries. Nonetheless, all investors should have an appreciation for the path we are on and the fate that befell others that took similar paths.
We have now entered the period of maximum volatility and risk. I would get safe quick.-Lou
Occam’s razor says the stock market is in a downtrend
Investors can forget the “death cross,” “bearish divergences” and “symmetrical triangles,” and what the Federal Reserve says it will do about interest rates, and just focus on Occam’s razor: The S&P 500 abandoned its long-term uptrend in late August, meaning it is now in a downtrend.
Occam’s razor is the philosophical principle that suggests, all things being equal, the simplest explanation tends to be the right one.
One of the most elementary trading maxims on Wall Street is “the trend is your friend.” That’s basically what all the short-term technical patterns, economic data and earnings reports are used for, to determine which direction the longer-term trend is heading, and whether it’s about to change.
Once that trend is determined, a tenet of the century-old Dow Theory of market analysis says it is assumed to remain in effect, until it gives definite signals that it has reversed, according to the Market Technicians Associations knowledge base. In other words, the trend is your friend, until it isn’t.
After cutting through all the noise, a trendline is probably the best chart pattern to determine the trend, as it is also the simplest. And the simplest way to tell if a trend has reversed, is if the trendline breaks.
The S&P 500 SPX, -1.62% had been riding a strong weekly uptrend, defined by the trendline connecting the bottom of the last correction in October 2011 with the bottom of the November 2012 pullback and the October 2014 low. The S&P 500 fell below that line in late August, meaning the uptrend flipped to a downtrend.
Based on the Occam’s razor principle, the uptrend was the friend of investors for four years, but now it isn’t.
Thanks President Obama!-Lou
Record 46.7 Million Americans Live In Poverty; Houshold Income Back To 1989 Levels
An interview with Jonathan Cahn the author of most amazing book I have ever read, “Mystery Of The Shemitah”. Get it, it will blow your mind. Only four trading days until the last day of the Shemitah Year, Sept. 13. Markets are already in crash mode.-Lou
I have been watching trading in the stock market for 32 years and I can’t remember a day like we saw on Monday. The Dow was down over 1,000 points in five minutes after the open. The market rallied all the way back to down 98 by early afternoon but by 3pm the market plunged again down 700 and then rallied a bit to close down almost 600 points. I expect a relief rally all early as today. The market is way oversold and due to bounce as much as 1,000 points. The real crash will come during the historically risky Sept-Oct period. Truly historic times. If still exposed to the market, I would use this rally to lighten up. -Lou
U.S. stocks end harrowing session with biggest drop in 4 years
Marketwatch-Wall Street suffered one of its most volatile sessions in years Monday, with the Dow industrials plunging more than 1,000 points in the opening minutes, bouncing back to recover most of the losses and then fading into the final bell to record the biggest drop in four years.
Meanwhile the main benchmark S&P 500 slipped into correction territory, having fallen more than 10% from its peak reached on May 21.
“Short-term fear of the unknown is still in the driver’s seat, I would expect more volatility in the coming weeks,” said Kate Warne, investment strategist at Edward Jones.
Indeed, Monday’s trading session saw the main indexes plunge by more than 5%. Nearly 14 billion shares changed hands on Monday, the largest volume since August 10, 2011.
Investors remained concerned about global growth in the face of plummeting commodity prices and slowing growth in China, the second largest economy in the world.
The Dow Jones Industrial Average DJIA, -3.57% ended the day down 588.47 points, or 3.6%, at 15,871.28—its lowest settlement since February 2014. All 30 members of the Dow finished the day in negative territory.
The S&P 500 SPX, -3.94% dropped 77.68 points, or 3.9%, to 1,893.21, the lowest level since October 2014. The index is down 8% year to date. Nearly all 500 members of the index closed with a loss.
Both the Dow and the S&P 500 scored their biggest one-day percentage declines since August 2011.
The Nasdaq Composite COMP, -3.82% ended the day down 179.79 points, or 3.8% at 4,526.25.
“Trading volumes are driven by ETFs today, but we are not seeing a lot of panic, where people dump large amounts of stocks in one go. There are still buyers out there, who are picking up stocks that have seen large corrections. However, volatility is back, so seeing large intraday and day-to-day swings is not surprising,” said Brian Fenske, head of sales trading at ITG.
Sal Arnuk, co-head of equity trading at Themis Trading, described Monday’s open as painful. “There’s definitely blood on the street. You can check the level of the VIX,” Arnuk said.
What A Week, Markets In Danger Zone
Wow , that was one ugly week.
As I (and many) have been warning for months, the financial markets are in big trouble and a major decline could happen at any time. Well it looks like the time is now.
This weeks in U.S. markets:
Monday: Dow +68, S&P 500 +11, NASDAQ +44
Tuesday: Dow -34 S&P 500 -5, NASDAQ -33
Wednesday: Dow -162 S&P 500 -18, NASDAQ -40
Thursday: Dow -358, S&P 500 -44, NASDAQ -142
Friday: Dow -539, S&P 500 -65, NASDAQ -171
Between Tuesday and Friday the Dow lost 1,093 (6.3%), the S&P 500 132 points (6.3%), and NASDAQ -386 points (7.6%)
That makes this the worst week for the Dow since 2011. All in all, the Nasdaq 100 Index lost more value in the past two days than at any time since March 2008.
On Friday loses accelerated, as they had all week, and closed at the lows of the day as investors dumped stocks into the weekend.
Technical levels were broken through like a hot knife through butter and portend worse action ahead.
I would not be surprised if we saw a rebound next week as stocks are significantly oversold short term but as we enter the historically dangerous months of September and October I expect the markets to get very scary.
Commodities continue their deflationary plunge with oil briefly breaking $40 bbl before closing at $40.43. Copper, Iron Ore and many other commodities are plunging as world demand shrinks in the face of a dramatic worldwide economic slowdown
Treasury bond yields plunged as investors sought the perceived safety of U.S. debt. There is no way the Fed will lower interest rates in the September meeting in the face of plunging world markets.
What is causing the dramatic selloff in global stock markets and commodities?
World economic growth is slowing , mainly in China and other emerging market countries. Over 20 global stock markets are already in bear markets. The strong U.S. dollar makes repayment of debts denominated in dollars more costly to foreign countries.
Since the end of the 2008 financial crisis, investors have come to believe that central banks will always come to the rescue every time the markets stumble. That confidence is now being shaken.
China’s surprise devaluation of their currency has roiled world financial markets as other countries have or are expected to do the same to remain competitive resulting in a currency war.
The bright spot in markets this week? Gold and silver had one of the biggest short term rallies in years as money seeks safety in real assets as opposed to inflated paper ones. Look for continued strength in precious metals as markets continue to get roiled.
Here are some UGLY charts showing he technical damage:
DOW: 16,000 is the next level of support (a further 3% decline)
S&P 500: No real support until 1850 (another 6% lower)
NASDAQ: Support at 4,600