Saturday, May 19, 2012

When You Own The Bank: The Story Of Ireland & Germany

It is always interesting for me to both see and hear the thoughts and discussions of those viewing the financial markets outside the United States. In the US we tend to think of ourselves as better than others, something I've tried to prove over the years is a ridiculous notion because the US economy is nothing more than a thin layer of beautiful ice ready to collapse.

The following video comes from inside the country of Ireland and looks outward at the surrounding Eurozone. The goal of the video is to persuade those living in Ireland that one of the oldest rules in business is still true today: When you owe the bank a hundred thousand dollars (or euros) the bank owns you. When you owe the bank a hundred million dollars you own the bank.

At no time has this been more prevalent in history than during the current currency wars that are taking place every day around us in the global economy. A country such as Germany will purposefully let a grenade blow up in their face in order to reduce the value of the currency and create a competitive "trade advantage." History will look back on this process as a time of complete lunacy, just as those that have studied Austrian economics can understand as they watch it unfold live today.

Friday, May 18, 2012

Facebook IPO Day Winners: Everyone Who Didn't Buy

I read an excellent blog post from billionaire Mark Cuban earlier this week titled "The Facebook is the most important IPO to EVER hit the Stock Market - but not for the reasons you think."

He mentioned that he had a handful of people approach him in the week to ask him if he was going to buy shares. These were people that were normally not interested in stocks.

This also happened to me a few times today; I received texts from some people that I had not heard from in a while who know that I follow the financial markets, asking me what I thought about Facebook. I told them politely that I was going to be staying away from the offering.

The importance of this, as Cuban describes in the article, is not people talking to each other but people talking to each other about the stock market. Since the financial crisis hit in late 2008 the "retail" investor has left the market and they have not returned. You can follow TIC flows every week on how people choose to invest in their 401k or IRA and for almost four straight years money has flowed out of stock funds and into bond funds.

People have become disinterested in the market at best and terrified of the market at worst. A major reason people have left stocks, other than they have been burned twice badly in the last decade (2001-2002 & 2008-2009) is that they are losing trust in the market itself. Over 70% of the shares traded per day on the stock exchange are through high frequency trading machines. The other 30% is composed heavily of hedge funds and money managers who have the ability to manipulate prices in the short term through massive leverage.

So what happened minutes after Facebook was available for trading to the public? There was a computer malfunction that caused initial orders not to process. What a disaster. You could not have scripted it any worse for a market desperately looking to gain the public's trust.

Facebook shares collapsed downward multiple times throughout the day to the initial $38 level and it took major institutional buying from the underwriters to keep the price from falling into the red. Minutes after the bell closed (and the headlines could announce Facebook was "up" on the day) the stock moved into the red. As of this writing, anyone who purchased the stock at any point today is now down.

While every person on the planet was watching Facebook, I spent the first half of the week (Monday, Tuesday, and Wednesday) watching the sentiment indicators closely on the precious metals. The daily sentiment index for silver reached 6% on Wednesday meaning 94% of investors felt that silver was moving lower from that point. This was lower than the silver sentiment levels reached at the lowest levels of the 2008 financial collapse.

I was in the market with force purchasing shares of PSLV on Tuesday and Wednesday at the depths of despair, and I spent the rest of the week occasionally checking in on the Facebook insanity.

We'll check back in a few years to see which investment (FB) or (PSLV) was the correct one to be focused on this week.

To read the Cuban blog post click here.

Rick Santelli Discusses Greecifornia

Thursday, May 17, 2012

Modern Day Bank Run In Europe

The bank run over in Europe continues every day in a quiet manner. It's only when we receive updates on the actual numbers that we realize how quickly the process is taking place. This is mostly because banking today is handled electronically. Every depositor does not have to stand outside the bank in a line to pull their money. They can sit down at their computer or handle the transaction over the phone. It is an easy process (for now) to move money from Greece into Germany, France, or Switzerland; and that is exactly what is taking place.

The following chart shows total Greek bank deposits from 1998 to present day. You can see the peak in January 2010 just months before news began to reverberate around the world that the Greek government was having trouble paying its bills. The smart money connected the dots immediately and began to pull their funds. Slowly, others have caught on to this process, and it is now turning into a landslide.

It is not only households that are shifting their cash out of the Greek banking system. The following graph shows domestic households and corporate deposits. It is down 31% from the peak and falling fast. This is how a bank run looks in the modern world. It is seen on graphs, not in pictures of lines outside the building.

While most anticipated this process happening in Spain, the speed at which it is taking place is alarming. The smart money, just as with Greece, has spent the past six months rapidly moving their funds out of harms way. Slowly this trickle is beginning to turn into a flood. We received news this morning that the recently semi-nationalized Bankia has seen over 1 billion euros removed over the past week. The following chart shows Spain's deposits, which have only begun to fall.

Why is this occurring? Let's begin with Greece as it sets the blueprint for the entire Eurozone because all events happen their first. It is looking more and more likely that Greece will have to be removed from the Eurozone because of both political backlash within the country and the cost to keep them on life support from the other members of the Eurozone (who also happen to be bankrupt).

If Greece were to leave the euro they would immediately move back to the drachma currency. Overnight the currency would be devalued significantly. Estimates show this devaluation to be in the range of 40-80%. If a citizen went to sleep the night before the devaluation they would wake up the following morning with X number of drachmas in their bank account instead of euros. These drachmas may purchase up to 80% less in goods than the euros meaning they have lost 80% of their wealth overnight. No one will lose actual paper currency - they will only lose purchasing power. This is a key concept I have been discussing on this web site since day one of its creation. Now we may get to see it play out first with Greece.

This is why the "smart money" immediately began moving their money. By placing their funds in a German account they will still hold euros when the devaluation takes place. They can now purchase 80% more goods than their neighbor when the devaluation takes place.

This process is going to take place in Spain, Italy, Portugal, and possibly even France depending on how quickly the contagion spreads. Greece has close to $90 billion in derivatives contracts that will likely default if they are removed from the euro. These losses will then be taken at the French, German, and American banks. Can you see how quickly the contagion spreads with a default?

Greece is only a spec of dust in size in the derivatives world, but it has the ability to take down the financial system all by itself.

For a discussion on how bank runs around the world could impact precious metals see Why Precious Metals Could Surge During A Deflationary Bank Run.

h/t The Big Picture

Wednesday, May 16, 2012

Bill Fleckenstein On Bank Balance Sheets

I live in the Charlotte area so Bank of America is a common conversation topic. I often hear people talking who do not work in the financial industry about trading Bank of America shares. They talk about buying it at 8 and "riding" it up to 10. Then they wait for it to fall so they can re-buy and purchase it again.

During the conversation they will ask me what I think Bank of America shares are worth or where I think they are going. I tell them zero. They laugh and we move on to talking about another topic like sports.

I listen to some of  the most intelligent bank analysts in the world, people like Chris Whalen, and I consistently hear them say that they have no idea what the bank shares are actually worth. They will then say that the CEO's of these companies have no idea what the companies are worth. There is so much happening on their balance sheets with hidden derivatives, accounting gimmicks, and government backstops that it is impossible to determine.

Purchasing a large bank stock is the truest form of gambling.

Bill Fleckenstein took some time to speak with Bloomberg this week regarding this very topic, the general market, and the value he sees in gold mining shares.

How The Government Spends: 1962 Vs. Today

The following shows the way the American government has changed where it chooses to spend money over the last 40 years. The growth of medicare, medicaid, and the safety net programs have been a huge addition to spending "crowding out" others areas that some would argue could be more stimulative for economic growth. Click for a larger image:


Tuesday, May 15, 2012

Jim Rogers On Farming, Metals & More

I was speaking with my wonderful Mom on Mother's Day and about my sister, who is currently dating a farmer. While my parents are happy that she has found a great guy who treats her well, I am beyond ecstatic with his profession. It is too early to tell whether they will ultimately get married, but I take every chance I get to let her know that his profession will be one of the most lucrative this decade. Becoming a farmer today is similar to entering Wall Street finance in 1992 or the real estate industry in 2002.

The legendary Jim Rogers spoke with Maria Bartiroma on this subject and much more in this CNBC interview below. He sees a continued correction in precious metals, which will present an opportunity to purchase more, and huge trouble for the global economy in 2013 - 2014. He even takes a moment during the interview to tell Maria to quit her job and learn to drive a tractor.


Monday, May 14, 2012

Art Cashin: Greece Leaving The Eurozone Would Be "Lehman On Steroids"

For more on the market consequences of the European political circus see Europe Votes Out Austerity: Sets The Stage For The Real Crisis.

Spanish Rates Soaring & CDS Costs Rising: Waiting On LTRO Part 2

Spain 10 year bond spreads over German 10 year bonds have blown out to all time record highs. What this means is that an investor deciding whether to put their money into either a German bond or a Spanish bond is demanding 4.82% more in interest to take on the risk of investing in the Spanish government.

This risk aversion can also be found in the Credit Default Swap market, which has moved up to new highs. This means the cost to purchase insurance on Spanish debt defaulting is now at record levels.

The next graph shows the amount of money the Spanish banks have had to borrow from the ECB in order to survive. You can see that total borrowings were at 100 billion euros back in November and the graph has essentially moved in a parabolic trend higher to over 250 billion in April.

Up next, we have Spain's non-performing loans in their banking system. In the US, when a bank reaches 5% in non-performing loans they are shut down. In Spain, 20% of all the loans in the banking system are now non-performing. The chart below provides another parabolic view of the pain in Spain.

In addition to holding a mountain of toxic real estate loans (creating the graphs above), Spanish banks have spent the last 6 months taking hundreds of billions in loans from the ECB at 1% and using the money to purchase government bonds (pocketing the spread). This has allowed an investor who is smart enough to sell a brief period to exit their position in Spanish bonds. Now the Spanish banks are loaded with both toxic real estate loans and toxic Spanish government loans. The graphs below show this process taking place. The graph on the left shows non-residents holders of Spanish debt plunging (dark blue line) and domestic holders soaring (light blue line). The domestic holders represent the banks.

The same process has taken place in Italy, which can be seen on the graph above to the right. Italy has been fortunate to remain out of the spotlight so far during 2012. This will change after the bond market is finished with their Spanish slaughter. The 10 year bond in Spain is once again firmly over 6% and rising fast. We all wait for the European Central Bank to make its next move.

h/t Sober Look, Zero Hedge

Stories From The American Dream

The following may not be in the real estate brochure your realtor provides for you when you close on your 3% down FHA loan that may be underwater before you get back in your car after closing.


Sunday, May 13, 2012

Europe Votes Out Austerity: Sets The Stage For The Real Crisis

It is fascinating to watch what is taking place around the world today in the political arena and then try to extrapolate forward what it means for both the markets and the global economy moving forward.

Since the European debt crisis hit in the spring of 2009, the Eurozone has essentially tried to do "the right thing." The right thing means that they would try and solve the problems like adults - cutting government spending in countries where the bond markets were in revolt. The alternative would be to allow governments to continue spending recklessly and allow the European Central Bank to print an endless amount of money to purchase the debt (the United States strategy).

By choosing to cut spending, known as austerity, it means immediate pain for those inside the country. When an economy is in recession like Greece and the government is forced to cut spending during the slow down it creates a spiraling effect of additional pain leading to additional cuts needed.

This has taken place not only in Greece, but in Portugal, Ireland, Spain, Italy, and France. The most recent election in France created a major change in the landscape of how policy will be driven moving forward. The people chose to elect a President, Francois Hollande, who promised to immediately reduce the pain of austerity and go after "the rich" through massive tax increases.

There are tremors now running through the political landscape of both Greece and Germany where the people are calling for the same action - a reduction in austerity, meaning a reduction in the immediate pain.

Our world is set up to provide people will immediate pleasure. The barrage of information that comes forth on a daily basis through televisions, radio, phones, iPads, or social media provides headlines on how someone plans to "fix" the problem now. It is the way we have become wired as a civilization.

The deflationist argument has been that the political voice of the people would never allow governments to continue reckless spending financed by a printing press. However, something very dangerous has taken place in the global economy that has set the stage for this to unfold on a dramatic scale.

America has chosen the second path discussed above. They have chosen to push government spending full throttle in combination with quantitative easing programs (printing money to purchase the government debt). The United States appears to have recovered from the financial crisis far better than Europe with its stock market soaring higher, interest rates at low levels, and all levels of borrowers coming back into the market to take a taste of the free money.

The people in Europe have watched this process taken place and are now angry at their politicians for forcing them to suffer. They see the "magical" economic formula the United States has created and they now want a taste of the brew. 

Ironically, while they have been facing severe short term pain over the past 18 months the austerity programs and cleansing of their banking system were actually setting the stage for real economic growth in the coming years.

This week there have even been calls inside Germany, one of the lone voices opposed to additional quantitative easing problems, to ease up on the austerity restrictions and allow the ECB to enter the market with additional force.

The truth is that what the United States is doing is not helping its economy in any way. It is only postponing and increasing the size of the pain that will be felt when the real crisis arrives. If the Europeans need a model to look at for long term health and sustainability of an economy they should look to Iceland. Iceland allowed their banks to collapse, cut government spending, and cut taxes, taking massive short term pain when the financial crisis arrived in 2008. They were the only major economy in the world to do so. They purged the toxic debt from their system, devalued their currency, and started new with a strong foundation. Today their economy is roaring.

I have always felt that the ultimate conclusion to this experiment in monetary madness will be a global quantitative easing program aimed at alleviating the pressure of the massive debt build up we have created over the past 40 years. This final QE would cause the system to "break" and bring on the arrival of a completely new monetary system that will be created out of chaos.

This has happened about every 40 years throughout history. Our current monetary structure was created in 1971.

The question is: how much deflationary pain will be allowed before both the people and the politicians call for the central banks to "save them?" This thought experiment is playing out all across the Eurozone today. The people of Greece are now calling for a new political leader to guide them out of the shackles of austerity. Everyone agrees that they want to cut government spending, cut social programs, and increase taxes, as long as none of those things include their government aid or their taxes.

So far during this process we have seen that as soon as the people begin to feel pain they vote out the current politicians and bring in new electorates that promise them the pain will immediately be removed.

You must watch the events closely in Europe on the political front because they are moving every day toward giving the European Central Bank the green light to unleash a massive scale of quantitative easing.

This will be the rocket fuel that brings the precious metals toward the final stage of their bull market run. When Europe begins to print you will see them joined by Japan, the UK, China, and the United States in unison. It will be like watching the grand finale of a fireworks display, and the people around the world will then understand what happens when short term pain can no longer be pushed off until tomorrow.

I will continue to provide daily updates on the political movements in Europe in the "Today's Market News" tab at the top of the page.