American Bankster

Welcome to American Bankster, the blogsite that examines current events in finance and banking as they devolve into losses of personal liberties and individual freedoms.

"Give me the right to issue and control a nation’s money and I care not who governs the country.” Meyer Amschal Rothschild, International Banker

"Those that create and issue the money and credit, direct the policies of government and hold in their hands the destiny of the people." Richard McKenna, former president of the Midlands Bank of England

"We have in this country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal Reserve Banks. Some people think the Federal Reserve Banks are U.S. government institutions. They are private credit monopolies; domestic swindlers, rich and predatory money lenders which prey upon the people of the United States for the benefit of themselves and their foreign customers. The Federal Reserve banks are the agents of the foreign central banks. The truth is the Federal Reserve Board has usurped the Government of the United States by the arrogant credit monopoly which operates the Federal Reserve Board. Congressman Louis T. McFadden, Chairman of the House Banking and Currency Committee, addressed the House on June 10, 1932. 75 Congressional Record 12595-12603

Wednesday, April 29, 2009

The Promise of Recovery, The Reality of Decline

Stocks, crude oil, grains and metals improved on Wednesday despite news that U.S. first quarter GDP declined by an unexpectedly large 6.1%. Analysts had been expecting a decline of 4.3%. The rally in stocks - against continued news of dismal housing results, poor corporate earnings and rising unemployment - is completely unjustified. Equally unjustified is strength in the U.S. dollar. And it is the eventual crash of the latter that will have the greatest impact on both the U.S. and global economies. The promise of recovery is senseless against the reality of ongoing decline.

Monday, April 27, 2009

COMEX gold gained $46.20 last week to settle at $913.60. On Friday, the FDIC closed four more U.S. banks taking the year’s total of failed institutions to 29 – not including two savings and loans. Also on Friday, the government informed 19 U.S. banks of their stress test results. Banks have been sworn to secrecy on their test results until the Treasury makes them public on 4 May. Over the course of last week, media covered the story that Bank of America’s Ken Lewis was essentially forced – by the Fed and Treasury – into buying Citigroup or (be responsible for) greater systemic weakness. Both the Fed and Treasury denied the claims, but some news sources actually came up with transcripts of meetings that leave little doubt Lewis had little choice in the matter. There was also news that federal regulators are preparing for Chrysler’s bankruptcy. It seems the government can’t get enough of corporate America. We are often questioned about our hyperinflationary forecast for the U.S. economy and, among other things, the main argument seems to be that – short of an interest in consumer borrowing – hyperinflation cannot ensue. We beg to differ. Inflation results from three events, all of which boil down to monetary phenomena. Inflation can gain traction with wage growth; with rising commodity prices; and/or with currency devaluation. Since joblessness continues to grow across the U.S., it doesn’t seem that wage-pull inflation will be a problem anytime soon. Those left with jobs work fewer hours and some retain hours, for lower wages. This is precisely the opposite of what happened during the 1970s, when skilled workers shipped off to Vietnam throughout the 1960s left employers in the position of raising wages to attract qualified help. By the early-1970s, contractions in global commodity production began to result in higher prices that escalated from the markets (exchanges) to wholesale levels and, ultimately to the retail level. It is worth noting that by 1981, when U.S. inflation averaged 13% per annum, neither China nor India were demand factors. Concomitant with rising wages and increasing commodity prices, the U.S. was involved in the Vietnam War, the War on Poverty and had just embarked on the War on Drugs. Globally, faith in governments was folding, adding to pressures on currencies’ values that eventually led to the floating exchange rate system. Today, the Fed and Treasury jawbone a great deal about the threat of deflation but the real threat facing the U.S. and world economies is inflation. While it may not commence with wage-growth, there is little reason to believe it cannot begin with commodity price inflation. Interest rates are, for instance, a major driver of commodity prices. When the Fed decides to get out of the interest rate manipulation business, we believe rates will turn higher in earnest, virtually overnight as a reflection of risk premium for the U.S.’ worsening fiscal position. Of course, physical supplies are critical to prices for staple commodities such as wheat, corn and soybeans. Strength in soybean prices over approximately the past two months is tied to gradually declining U.S. stocks and reduced output from South America. Despite price stabilization in recent months, relative to the July 2008 highs, there is little to indicate commodities in general – but perhaps agriculture in particular – have experienced resurgence in capacity utilization to offset the impact of peak demand. Subsidies in developed economies continue to reward non-productivity while the developing world still struggles to reach consistent levels of output. Subsidization also prevents the transfer of technology from industrialized economies to those in need of it most; those area s The ‘new economy’ made up of technological software and state-of-the-art hardware displaced capital from ‘old economy’ drivers such as agriculture. But since 2001, analysts, consumers, economists and traders have been witness to the resurgent old economy as gold, crude oil, industrial metals and agriculturals experienced supply declines and price rallies. As for agriculture, rising input costs and market volatility have done much to discourage what had been routine crop-year planning. And what input costs and volatility have failed to contribute to farmers’ uncertainties, a lack of available credit has supplied. In short, the reasons that agricultural commodities prices rallied to new highs in 2008 are no closer to being resolved than they were in 2001 at the bottom of the cycle. Given the existence of the credit crisis and the extreme likelihood the U.S. government will burden agriculture with additional climate change regulations the conditions that reignited the commodities bull in 2001 were less dire then, than they are now. Inflation is purely a monetary phenomenon. But that doesn’t necessarily mean money can only flow, for instance, from banks to borrowers as a means of stimulating the economy. Higher commodity prices – particularly higher agricultural commodity prices – can accomplish the same end. As CPI and PPI data (lame as it is) came out from end-2008 through most of the first quarter of 2009, declines in the indices were primarily a result of lower energy prices. Since consumers’ net incomes in the U.S. are stalled at about 1990 levels, heightened inflationary pressure over the past year or more has been the result of rising commodity values as banks began cutting credit lines reducing consumers’ access to cash. The dollar turned decidedly lower last week and, barring unforeseen government interference designed to prop it up, the greenback appears to be headed lower, adding to inflationary pressures already in place from commodity prices.

Tuesday, April 21, 2009

Banking: The New Con Game

The FDIC closed two more failing banks on Friday (American Sterling Bank in Missouri and Great Basin Bank in Nevada), taking total U.S. bank failures – less than one month into the second quarter of 2009 – to 25, on par with total bank failures in all of 2008. That number is set to grow. Coral Gables-based BankUnited, the largest bank headquartered in Florida, could be taken over by federal regulators if it doesn't boost its capital by merging or finding a buyer within 20 days, under an order last week from the Office of Thrift Supervision. The order issued on Tuesday gives BankUnited 15 days to submit a binding merger or acquisition agreement to regulators. Banks reported earnings last week and, along with the previous week’s reporting of greater than expected results from Wells Fargo, JPMorganChase and Citigroup stunned the investing world with astounding results (relative to where banks have been financially over the past eighteen months). Defaults on credit cards were, for JPMorganChase, up very substantially over the reporting period and that is nothing for them to take in stride. Job losses (reportedly down 53,000 over the past week – but still indicative of more than 600,000 per week losing their main sources of income) are projected to grow, which means banks can look forward to increases in credit card defaults going forward. But the real issue that allowed banks to tender better than expected earnings results rests with the fact accounting rules have been changed. Banks now can, as we disclosed in last week’s letter, assess their value of their toxic waste assets themselves. There is no oversight as banks make grandiose assumptions about the value of mortgages that are not being repaid and properties that are not being sold. At some point, banks’ valuations of toxic waste will have to be reassessed; perhaps only when foreclosures make the market, which they’ve not yet begun to do. And at that point, banks will look far uglier than the picture they now portray. On 4 May, the U.S. Treasury will reveal results of its bank stress tests and, at this point, there is much concern about how and how much of the results to make public. The tests were supposedly designed to determine if banks have sufficient capital to make it through losses over the next two years if the economic downturn worsens. The Treasury issued the tests to the nation’s top 19 banks and it withheld the results prior to first quarter earnings releases in order to prevent test results from impacting first quarter earnings. But the delay in releasing those results could prove to be a two-edged sword. If the results are positive, there isn’t a thinking person on the planet who won’t wonder about the validity of the tests. At the same time, offering evidence of continued deterioration in banks’ solvency could lay the groundwork for further punishment by investors. First, there is a problem in that such tests had to be administered at all. That should be the primary consideration by (potential) investors. Second, it is more than fair warning, in our view, that since the tests covered the potential for losses over the next two years there is an inherent suggestion that economic conditions will continue to deteriorate. It is more than a little telling that first quarter macroeconomic data shows growth, unemployment and falling prices alone are worse than those in the FDIC’s baseline scenario for 2009 and even worse than those for the more adverse stressed scenario for 2009. The "pessimistic scenario" used in stress tests for banks represents a crucial factor going forward. In it, unemployment rises to 8.9% by the end of 2009, and home prices fall an additional 22% for the same period. It's glaringly obvious that the pessimistic scenario is far too optimistic. Unemployment is over 8.5% officially and more than double that level via other reporting means. Home prices lost 19% of value y-o-y in January. Clearly, worse still scenarios are needed to arrive at a test that has any value at all. But the resistance from the banks against such scenarios means anything meaningful won't even be considered. Increasingly economists and analysts are coming to the same conclusion: Fraud between collaborative corporations and government officials has created the banking nightmare that has unfolded over the past year. Banks’ worsening positions are being covered up by U.S. policymakers but they can’t hide the results that have come to light to date relative to the economy as a whole:
1. World economies are plummeting at depression-level speed by all key measures; production, consumption, trade, profits, asset values, capital flows and more;
2. Unemployment is soaring. In the U.S. it is close to 20% when all excluded and understated categories are included;
3. Pensions and benefits have been lost;
4. Homelessness is rising sharply, the result of more than six million U.S. foreclosures as tent cities pop up across the nation;
5. U.S. foreclosures increased 24% in the first quarter of this year while increasing 46% year-over-year in March alone.
The devastated state of the U.S. economy should be sufficient to make it clear that banks cannot possibly be in better shape than there were a few months ago. It should be enough to indicate that, in the absence of widespread recovery, banks don’t stand a chance of getting better anytime soon – let alone over the next two years. Conditions for the non-Wall Streeter of appreciable means or those uninvolved in high level politics grow more distressing each day. Government involvement in the banking crisis in particular and the economy in general assures that a worse outcome is not far off as Washington contrives new schemes to keep the public’s eyes off its slights of hand. If the U.S. government were a business, its management would have been brought up on criminal charges by now. The Obama White House – and Bush before him – has consistently rewarded failure, provided the failing business is a bank. More incredibly, it had done so without much public outcry – until last week. The fifteenth of April is tax day in the U.S. and protestors gathered in more than 500 cities to convey their disgust with government intervention for which private citizens continue to pay the price. There is no previous time at which we can recall such an orchestrated coming together of the American public to make contact with its government. The big issue is whether government was listening. We will guess it was not. While the domestic economy continues its collapse Obama visits hostile governments in the Middle East and South America, apparently pursuing his “we hope they like us” foreign policy. Lackeys in Washington are busy coming up with new tax schemes and other programs to lure the private sector into their bank rescue plans. The last issue left for the private sector is whether it can retain any semblance of confidence in its government. Tea party protests across the nation represented stress test results the government didn’t anticipate: Protests were symptomatic of the low threshold for continued government interference, spending and lack of accountability, reflecting the public’s waning confidence in all levels of government. The American public is taking notice of the schemes designed to salvage crooked banks, enrich politicians and soak taxpayers for the cost. Irrespective of the results of bank stress tests, we expect they – as further Treasury efforts at economic rescue – will be viewed with skepticism and disbelief due to sharply contracting confidence and, as confidence goes, so goes the currency. In the latest lunacy from Washington, banks will be allowed to repay TARP funds, but only if they meet certain requirements that prove repayment is in the public interest. Frankly, we don’t understand how the repayment of private sector funds could ever be anything but in the public interest. But this latest scam from Washington is supposed to be in the public interest by preventing some ‘shaky’ banks from returning TARP funds as (according to statements made by Obama on Sunday) “…they are going need different levels of assistance of taxpayers”. Last week’s tea parties suggest taxpayers are about ‘full-up’ on government intervention and running on empty in terms of wanting to bailout the banks.

Monday, April 20, 2009

Fascist America

The issue of high flying Washington spending as the balance of the economy crashes and burns is one which is only just beginning to speak to the issue of confidence. If the dollar broke to record lows between 2002 and mid-2008 (with the exception of 2005) on an abundance of supply, then the next source of disruption for currency value – when it hits – will be abundant supply and plummeting confidence. The promises made by Obama are going up in smoke and the wreckage he’s about to leave behind will result in greater carnage than if the credit cycle bust were allowed to fulfill its economic function without federal interference. In fact, we’d go so far as to say Obama’s spending is so perverse and extensive; his foreign policy so amateurish; his economic policies so fascist[1]; his staff and cabinet so filled with jaded political hacks; his acts, policies and colleagues represent, in real and figurative terms, terrorist acts of an economic nature against American and global citizens alike. The future of the American economy could not be bleaker than if Osama bin Laden was chairman of the SEC, secretary of the Treasury and chief economic advisor all rolled into one. But the U.S. doesn’t need a high profile terrorist such as bin Laden when it has Barak Hussein Obama. It is more than a little interesting to note that, while most people (particularly Obama) like to compare his reaction to the credit crisis as something akin to FDR’s less than constructive reaction to the Great Depression[2], in reality Obama’s work more closely mirrors Mussolini’s fascist Italy. Mussolini rose to power by convincing the masses he had all the answers to their socio-economic and political ills in the wake of WWI. There are some basic tenets of fascism that deserve address: Belief in violence; disbelief in the legal process; and rabid nationalism but, perhaps primarily, a complete and utter lack of respect for the individual, among other things. Mussolini’s reaction to the post-WWI depression was to halt the involvement of national syndicates in the domestic economy and to expand the direct role of the state[3]; “…rationalization, reorganization and cartelization were encouraged in industry.”[4] “The first major instrument of state intervention was creation of the [Italian Assets Institute] in 1931 as a state corporation to buy up shares of failing banks, beginning a process by which the state would directly or indirectly control most Italian banking assets.”[5] Mussolini’s government was equally fond of large-scale infrastructure projects. They were one of the first initiatives introduced coincident with bank takeovers. By 1933, the government had created a state-run entity that infused capital into failing industrial enterprises. The state came to control the banking system. This should all be starting to seem eerily familiar for Americans. By the mid-30s, Mussolini was given to saying Italians should prepare for the coming struggles and learn to eat and sleep less. By 1939, the government had acquired 21.5% of all the capital in every joint-stock company in Italy resulting in the government owning a controlling interest in every major economic sector and a greater ownership interest in the national economy than any other government west of Moscow. The lira was de-coupled from the gold standard in 1936. The currency plummeted in value. Taxes rose precipitously, and price controls were pervasive. Mussolini’s tactics sound a lot more like those employed by Washington today, than anything FDR undertook, though we have no great respect for the latter’s efforts either. Because there has been no link between gold and the dollar since 1971, the U.S. is far more vulnerable to currency collapse than Mussolini’s Italy was in the 1930s. The U.S. has had more than a generation in which to engage in unfettered money supply growth. It has had far more than a generation to accustom people to the sense of growing wealth, even as their purchasing power declined, making resistance to unreasonable and empty promises that much more difficult to muster. The end of Italian fascism came only when the people rose up against consequences that included rising unemployment, the resurrection of a truthful and trustworthy media amid growing resentment toward the wealthy and powerful few. It came as confidence in the fascist ‘ideal’ was shattered along with the value of the currency. Confidence in the U.S. government is growing so thin that, prior to Hilary Clinton's recent trip to China, unconfirmed reports posited that Clinton planned to offer China the right of eminent domain over U.S. real assets in a bid to get the Asian giant to continue investing in U.S. debt. In advance of, and subsequent to, Clinton’s trip China made noise about its desire for some sort of guarantee relative to returns on its investments in U.S. securities; China doesn’t want to get repaid with worthless dollars. If reports of Clinton’s proposal proved accurate, there would be no further room for debate over Washington’s view of the value of the individual. It would, as if more evidence were required, offer proof positive that individual rights have no place in the Obama administration. It would be an enormous blow to the already shaky confidence of Americans and those nations which still exhibit some degree of belief in the country. It would, presumably, hasten the decline in the dollar which is ultimately doomed due to excessive money supply growth and an industrial infrastructure so bereft of capital investment that price inflation, as a consequence of shortages in the supplies of everything from basic raw materials to finished products, is insured in the years to come whether economic recovery takes place or not. (We are of the position that Obama will eventually impose price controls. They will prove to be as fruitless as those imposed by Nixon and the ultimate lifting of price caps will result in volcanic price explosions.) Because of the incredibly shrinking U.S. manufacturing base (accounting for no more than 11% of U.S. GDP in 2008 and a number sure to decline substantially in 2009) and government’s insistence on the freeing up of credit markets (to further the debt standard under which the U.S. economy has operated for the past forty years) there can be no economic recovery. Even communist China has figured out that production is critical to economic growth. Production is the means by which China emerged from the dark, economic shadow of Mao, making slow but steady progress over the past thirty years. A country that makes nothing and has nothing of value to sell to interior or exterior markets cannot realize employment growth, cannot fund its deficits without excessive taxation and borrowing (and at current levels, even with excessive taxation, U.S. deficit reductions are impossible despite Obama’s claims to the contrary) and cannot hope to avoid the wrath of the governed once confidence has been shattered. What’s more, Americans live in a culture which, with the speed of advancement having accelerated over the past generation, has become an instant gratification society. Following Obama’s speech to Congress, 41% of Americans said they were more confident about the future of the economy. All things being equal, that still means 59% of Americans – more than half – are not confident. In other words, Obama’s exorbitant spending better yield quick results or the 41% who helped boost his ratings from their post-inauguration low (in advance of the address) will be tipping the scales even farther in favor of the pessimists. As indicated somewhere (way) back at the beginning of this commentary, we noted that the banking crisis is intensifying. There is more than growth in FDIC takeovers to substantiate that comment. In recent reporting of bank reserves and the monetary base, both total reserves and the monetary base rose, but the growth was in excess reserves, while required reserves fell. In the two weeks ended 25 February, year-to-year change in the St. Louis Fed’s Adjusted Monetary Base (seasonally adjusted) rose to 88.4%, versus 81.9% in the prior two-week period. Annual growth in required reserves (not seasonally adjusted), however, slowed to 27.8% from 58.7% in the prior period.[6] Decreases in required reserves suggest more bank failures are on the way. Between dismal (at best) economic news relative to jobs, housing, the auto sector and banking and government’s extreme over-reach in making promises and spending capital that defy reason the confidence of U.S. consumers – already having exhibited record-breaking declines vis-à-vis Census Bureau data – is on the brink of wholesale collapse. Since confidence is the only thing holding up the value of the currency, the U.S. can no more afford deteriorating confidence than it can Obama’s nearly $4.0 trillion budget. We see April as critical in terms of timing for a resumption of the disastrous 2007 debt market peak (represented by the top in the S&P/Case-Schiller home price index). The U.S. dollar has been hinting at efforts to turn lower of late, only to turn around and rally against the euro. It’s worth mentioning, however, that only the EU was slow to match interest rate cuts imposed by the Fed, the BOE and other central banks. We are not fans of fiat currencies, but do believe fiscal restraint – even if only in relative terms – not to mention the likelihood for growth in interest rate risk premiums will ultimately support the euro over the dollar. If the greenback manages to maintain rally mode into April, we suspect mid-month could mark its peak. In the end, however, we believe that nothing will fare better than gold. The market recently declined on profit-taking after a rally to record highs. It appears set, at present, to move into more sustainable bull territory.
[1] In the words of Benito Mussolini, ”Another word for fascism is corporatism”. Make no mistake: Obama is not interested in socializing America as many would claim, neither is he the ‘communist’ Alan Keyes recently accused him of being. His interest is in corporate-government alliances; the partial and/or controlling interest in corporations by government.
[2] We happen to agree with the argument that FDR’s intervention in the economy prolonged the depression, worsened people’s economic prospects and did little to lift the country out of its catastrophic state. It was, instead, the onset of WWII that caused the economy to resume some degree of growth and that was wholly the result of the restarting of factories for the production of armaments, ammunition, equipment, etc.
[3] “A History of Fascism 1919-1945” by Stanley G. Payne p225, pp1
[4] IBID
[5] IBID
[6] Shadow Government Statistics, John Williams, 27 February 2009