On Thursday 21 May, federal regulators in the U.S. closed Florida’s BankUnited. That closure represented the largest bank failure this year and the second-largest failure in U.S. history. It will cost the FDIC nearly $5.0 billion. On Friday, regulators closed two Illinois banks located in farm country. Total U.S. bank closures, thus far in 2009, number thirty-six; eleven more than in 2008 and nearly four times more than in 2007. Last week’s bank closures encompassed both extremes of the spectrum – from the largest of the year to two small farm-community banks – suggesting the worst is not over for the industry. On Thursday of last week, S&P lowered its outlook for the UK economy, saying that government debt may increase to 100% of GDP in the next few years and the UK could, therefore, lose its AAA credit rating. The comment was barely printed on the wires before U.S. Treasuries – which had been showing signs of sickness well ahead of the S&P comments – confirmed the unwell state of American affairs by losing more than two full points on the day. Prior to Thursday’s news, FOMC meeting notes indicated the Fed was/is considering the purchase of more U.S. bonds; code for efforts to inflate/reflate the economy through quantitative easing. The U.S. has maintained a triple-A credit rating since 1917 but that is sure to end with reckless fiscal policies which, adding insult to injury, result in no meaningful economic improvement. GM may become “Government Motors” as early as this week as the company drives toward bankruptcy court. And, as if alienating international partners holds some sort of advantage, the Obama administration is so desperate to encumber American taxpayers, it has ‘requested’ British banks to act as “qualified intermediaries” for the purpose of collecting taxes on U.S. depositors in that country. The request puts British banks – already reeling from their own liquidity crisis – under a cloud of higher costs – in the untenable position of being accountable to the IRS. Banks have responded by suggesting they may refuse to accept American clients. A meeting between banking representatives, British brokerage houses and the Obama administration is slated for mid-June when banks say they will tell the IRS they’re not interested and both the administration and its taxing body should back off. Of course, neither the administration nor the IRS can make quid-pro-quo promises because no overseas depositor in their right mind would invest in the U.S. Last Friday, the dollar index hit its lowest level in more than two months in what appears to be an acceleration of U.S. economic devolution. The media has referred to loosening up in the money markets as ‘signs of recovery’. We call it the start of unbearable inflation. It is interesting that the Obama administration is attempting to enlist the aid of UK banks to corral U.S. taxpayers and, equally interesting, that U.S. federal growth has become so onerous the government feels comfortable taking over corporations, firing executives, developing plans to dictate executives’ compensation in private industry, and individual states teeter on the verge of bankruptcy even as Washington’s spending threatens to engulf the whole of national GDP. It is no coincidence America is witnessing a growing movement to restore the country to norms set forth in its Constitution. The political and economic blob that has become the federal government is in direct opposition to the precepts set forth in the document which, for the most part until about 1963, served as the law of the land. The final draft of the U.S. Constitution was delivered in 1782 – one year after the conclusion of the Revolutionary War – and, ironically, America has never been closer to disintegration than in the twelve months following its victory over the British. When the war ended, the economy was in a shambles. The country’s ‘army’ was in effect a relatively well-organized militia made up of farmers rather than the professional soldiers against which it fought. After the war, patriot-farmers returned to their land only to find, in many cases, government expropriation for back taxes. Inflation was rampant. Supplies of the most basic necessities had dried up. Civil unrest against the system they’d fought to establish became so pervasive it was, in many places, as if the war had never ended. The federal government, bound only by the Articles of Confederation, had no authority to levy taxes, establish policy or regulate trade. It operated completely at the ‘mercy’ of the states. And because the states were in such devastated condition, allocating resources and power to a centralized system was impossible in the absence of a formal agreement that served to clearly define the role of federal governance while preserving states’ sovereign rights. Over the course of the past 223 years, the Constitution has been interpreted, re-interpreted and misinterpreted more times than could ever be justified by Constitutional purists and, in the process, the federal government has grown into an unsustainable monster growing fat off the wealth and resources of the states. Representatives who were intended to be part-time employees of a system that would cause them to remain contributory individuals beyond the scope of their political duties have, over the life of the republic, come to establish dynasties of ‘public service’ which, in many cases, involve multiple generations of redundant family names. Representatives vote-in their own pay raises. Because they no longer work beyond the political realm, and because they are not responsible for insuring their own financial well-being within the confines of the general economy, they were long ago stripped of any identification with the common man they are purported to represent. The Articles of Confederation which hamstrung federal government gave way to the Constitution which was designed to preserve individual liberties and states’ rights. But through legal maneuvering and slow but steady efforts to garner more power, the federal government has become virtually everything it was never intended to be. After decades of unfunded mandates, federal intrusion into states’ affairs and the erosion of civil liberties on the corporate and individual levels, states have mounted a movement to reinstate their sovereignty. The movement which now involves 34 of the 50 states seeks to reassert tenth amendment rights , thereby reducing Washington’s ability to interfere; effectively seeking to curtail Washington’s power. It is, therefore, interesting, if not ironic, that 223 years after the first formal efforts to secure freedom from England, the current U.S. administration is attempting to harness its assistance – at the expense of English banks – in pursuing American taxpayers. It is interesting, if not ironic, that such efforts are undertaken at a time when, not unlike the late-1780s, the U.S. faces an unprecedented economic crisis which promises a repeat of (albeit far more dilatory) war-time debts, worsening raw material shortages due to reduced capital expenditures, raging inflation and tax revolts. The financial crisis which came to the fore in late-2006 is routinely compared to the Great Depression but we think that’s a mischaracterization. It is our view that, perhaps most ironically of all, the crisis underway will ultimately prove to be a more accurate reflection of conditions in post-Revolutionary War America. Government has become everything it was never intended to be and states and individuals are embarking on yet another quest for their freedom. The tyrant is not a monarch across the ocean, but a domestic federal government so ignorant of its boundaries, so possessed of hubris and so uneducated in its own purpose and responsibilities that it poses a threat to the very nation it was created to serve. In our view, the U.S. is entering a period wherein efforts to dismantle or retract federal power will result in its socio-political and economic demise. Practices and policies to date by the Obama administration, including the president’s comment Saturday in a public interview that the U.S. is “out of money” represent acts of self-sabotage (in the collective sense) so perverse they border on treason. Government securities of nations in turmoil are not good investments. Currencies of nations in conflict with themselves represent poor stores of value. There is only one hedge against the sort of instability we see escalating in the months and years to come: BUY GOLD.

The Westsound Bank in Bremerton, WA proved to be less than sound when, on Friday, FDIC regulators closed the institution, making it the U.S. 33rd bank failure this year. It was another week of discouraging economic news. Eurostat said that real GDP in the EU-27 was down 2.5% in the first quarter and down 4.4% from a year ago, weaker than expected and the worst quarterly drop since records began in 1995. Consumer prices were up 1.2% in April from a year ago in the region. StatsCan said manufacturing was off 2.7% in March to the lowest level in nearly ten years. Real GDP in Germany was down 3.8% in the first quarter, weaker than expected. Real GDP in France was down 1.2% in the first quarter. Real GDP in Hong Kong was down 4.3% in the first quarter and down 7.8% from a year ago. Corporate bankruptcies in Japan increased 15.4% in April relative to a year ago. The Federal Reserve said U.S. industrial production was down 0.5% in April – the 15th decline in the past 16 months – and that’s a number due to contract further as the sting from Chrysler and GM plant closings sets in. The Labor Department said U.S. consumer prices were unchanged in April but down 0.7% from a year for the biggest decline in 53 years. The core CPI, which excludes food and energy prices, jumped 0.3% last month, the largest increase since June 2008 and well above economist expectations for a 0.1% increase. Hogwash, we say. We are compelled to comment that U.S. inflation data is a pack of lies. That has been known for a very long while. But there are more lies on the way. The Obama administration has initiated rule changes for federal deficit reporting. The changes only reduce the reported level of the federal deficit; they do not impact the Treasury’s excessive funding needs. The twelve-month moving deficit through April 2009 rose to $1,278.6 billion from $1098.8 billion in March, based on last month’s accounting rules. Based on the new rules, the April number was $1,103.6 billion in April, versus $923.4 billion in March. Lies, damned lies and statistics, as the old saying goes portray perfectly the conundrum facing economists and analysts, consumers and producers who attempt to rectify their experiences with information imparted in official data releases. Despite official data to the contrary, sharp rallies in crude oil and gasoline during May are, in concert with rising agricultural commodity prices and crumbling bond values, evidence of the bottom in deflationary concerns. Stocks rallied over the past eight weeks on fictitious bank profits founded on the same fairy tale accounting employed in government data; economic data that – while still dour – came out better than expected; and notions that – among other things – sharp declines in U.S. business inventories are good things. All the while, un- and under-employment continue to grow; home prices in the U.S. dropped by the greatest amount ever recorded in the first quarter; and the U.S. auto industry has entered a full-fledged death spiral. The dollar index hit an intraday high of 90.31 on 6 March and, after posting a key reversal lower, has trended down since. If the dollar is going to correct in the short-term, it could rally back to about 86.00 on the index but we don’t expect a short-term recovery is the start of anything sustainable in the long-term. A correction from the dollar’s intact downtrend would presumably pressure energies and agricultural commodities and hold back stocks. It might last about six weeks, crossing the threshold into the second-half of the year. It will not help businesses, reinvigorate employment, bolster manufacturing or inspire confidence. And when the rally comes to an end, it may have something to do with the recognition that government rule changes (for deficit reporting, banks’ toxic asset valuations and whatever else is changed between now and then) do nothing to bring about an improvement in underlying conditions. That, among other things, reductions in business inventories, is the set-up for full-blown shortages. That a government which can’t keep its own accounting rules straight is in no position to run banks or car companies. That 500,000 job losses per month is still a helluva lot of jobs to lose and not counting those who’ve been unemployed for more than a year doesn’t mean there are fewer jobless. If the dollar is able to rally for the next little while, we see it as the greenback’s last rally opportunity for a long while.

Picking & Choosing

The U.S. government has said it is ‘saddened’ and ‘concerned’ over the prospect of bankruptcies in the newspaper industry but, unlike the generosity extended to the insurance and banking sectors, it will not bailout print media or automakers. It appears that unless the underlying business is Fed-related, there is no chance for assistance from Washington. Congressional democrats are, however, willing to support the military-industrial complex.
On Monday, democrats said they will seek the addition of $94.2 billion in spending for the wars in Afghanistan and Iraq. Because Congress is slated to recess at end-May and, because they say the funding is a matter of great priority, democrats will attempt to push through spending plans prior to the upcoming sabbatical.
We vehemently disapprove of government involvement in the private sector, particularly pseudo-government involvement such as that enjoyed by the Fed. Policies undertaken by Washington relative to which industries will be bailed out and which will not has concentrated on a ‘too big to fail’ approach. That means, by default, non-banking related businesses such as the whole of manufacturing are too small to save.