Has the Federal Reserve become the Central Bank of the World? That is what some members of Congress are asking after the Federal Reserve revealed the details of 21,000 transactions stretching from December 2007 to July 2010 that totaled more than $3 trillion on Wednesday. Most of these transactions involved giant loans that were nearly interest-free from the Federal Reserve to some of the largest banks, financial institutions and corporations all over the world.
In fact, it turns out that foreign banks and foreign corporations received a very large share of these bailouts. So has the Federal Reserve now become a completely unaccountable global bailout machine? Sadly, the truth is that we would have never learned the details of these bailouts if Congress had not forced this information out of the Fed. So what other kinds of jaw-dropping details would be revealed by a full audit of the Federal Reserve?
It is important to try to understand exactly what went on here. Banks and corporations from all over the globe were allowed to borrow gigantic piles of money essentially for free. Yes, when you are getting interest rates such as 0.25 percent, the money is essentially free. These loans were not available to everyone. You or I could not have run over to the Federal Reserve and walked away with tens of billions of dollars in loans that were nearly interest-free. Rather, it was only the megabanks and megacorporations that are friendly with the Federal Reserve that were able to take advantage of these bailouts.
In this way, the Federal Reserve is now essentially acting like some kind of financial god. They decide who survives and who fails. Dozens and dozens and dozens of small to mid-size U.S. banks are failing, but the Federal Reserve does not seem to have much compassion for them. It is only when the "too big to fail" establishment banks are in trouble that the Federal Reserve starts handing out gigantic sacks of nearly interest-free cash.
Just think about it. Which financial institution do you think is in a better competitive position – one that must survive on its own, or
I am back from the Forbes cruise to Mexico and starting to deal with a thousand things, but first on the list is making sure you get this week’s Outside the Box. And a good one it is. In fact, it is two short pieces coming to us from friends based in London over the pond.
Both of them have to deal with the unfolding crisis that is Europe, which is going to unfold for several years as they lurch from solution to solution. The first is from Dylan Grice of Societe Generale and reminds us why we should put no stock in what leaders say about a crisis. He has lined up the statements of leaders from one crisis after another. He finds a simple, repeating pattern. And shows where we are now.
The second is from hedge fund manager Omar Sayed, who I met last time I was sin London. A very bright chap and good guy. He offers us very succinctly four paths that Europe can take. Some of them are not pretty. It all makes for a very interesting OTB. I trust your week will go well.
Your over-dosed on guacamole (and it was worth it) analyst,
John Mauldin, Editor
Outside the Box
Flashback to Crises Past: Three Stages of Delusion
Popular Delusions
By Dylan Grice
The recent sequence of reassurances from various eurozone policymakers suggests we are in the early, not latter, stages of the euro crisis. Only an Anglo-Saxon style QE will prevent dissolution of the euro. Such a radically un-German solution will only be taken with a full acceptance of how serious the euro’s problems are. But denial persists.
The dawning of reality hurts. Prodded and bullied along a tortuous emotional path by events unforeseen and beyond our control, we descend through three phases: the first is denial that there is a problem; the second is denial that there is a big problem; the third is denial that the problem was anything to do with us.
US policymakers’ three steps during the housing crash fit the template well. Asked in 2005 about the danger posed to the economy by the housing bubble, Bernanke responded: “I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis.” Here was the…
I think this day chart of the 30 year says it all. After the very stinky NFP numbers the bond made a predictable jump higher. But it wasn’t long after that the air started leaking out and the bond closed on the lows.
Why the stinky price action when we get a big miss on NFP number? QE and the talk of stimulus done it. The numbers were so bad that by 9:30 talking heads and pundits concluded that the tax cuts were coming and we might just get a break on Social Security payroll deductions any day. Forget about restraining QE-2; the talk went straight into high gear with the only question; “How big might QE-3 be?”
So with that gibberish in mind bonds headed to the crapper while gold set new highs. The confirm that QE is now driving bonds lower came late in the day when there was a convenient leak of a Sunday TV appearance by Ben B. The only quote leaked was: “We might do more”. Stocks liked that talk and ended up; while the bonds ratcheted down another notch.
I am pleased that the market has made the connection that more QE and more stimulus is bad for bonds. The market is the only discipline left that may slow the insanity creeping over D.C. When market forces turn on the “New Monetarism” and shut the door on the insanity, the policies will change. Until they get hit hard over the head the Fed will continue to print. We are getting closer by the day. Consider this graph of the long bond since QE-2 was announced:
Long rates have backed up by 40 bp in just the past month. The exact opposite reaction that ‘the Bernank’ wants. How deflationary is this increase in interest rates? Mildly so. My guess is that the impact of rising rates exactly offsets the stimulative benefit of keeping short rates at historic lows. Yes, more debt is financed short term than long, but a back up in mortgage rates and the increase in long term fixed rate capital for municipalities and corporations will offset any benefits from ZIRP.
On the question(s): “Will interest rates fall from the current levels of ~3% for ten-year
Unlike Zimbabwe, the U.S. can easily get the currency it needs without being beholden to anyone. But wouldn’t that dilute the value of the currency? No.
A month ago, the bond vigilantes were screaming that the Fed’s QE2 would be the first step on the road to Zimbabwe-style hundred trillion dollar notes. Zimbabwe (the former Rhodesia) is the poster example of what can go wrong when a government pays its bills by printing money. Zimbabwe’s economy collapsed in 2008, when its currency hyperinflated to the point that it was trading with the U.S. dollar at an exchange rate of 10 trillion to 1. On November 29, Cullen Roche wrote in the Pragmatic Capitalist:
Back in October the economic buzzwords had become “money printing” and “debt monetization”. . . . [T]he Fed was initiating their policy of QE2 and you’d have been hard pressed to find someone in this country (and around the world for that matter) who wasn’t entirely convinced that the USA was about to send the dollar into some sort of death spiral. QE2 was about to set off a round of inflation that would make Zimbabwe look like a cakewalk. And then something odd happened – the dollar rallied as QE2 set sail and hasn’t looked back since.
What really happened in Zimbabwe? And why does QE2 seem to be making the dollar stronger rather than weaker, as the inflationistas predicted?
Anatomy of a Hyperinflation
Professor Michael Hudson has studied hyperinflation extensively. He maintains that “every hyperinflation in history stems from the foreign exchange markets. It stems from governments trying to throw enough of their currency on the market to pay their foreign debts.”
It is in the foreign exchange markets that a national currency becomes vulnerable to manipulation by speculators.
The Zimbabwe economic crisis dated back to 2001, when the government defaulted on its loans and the IMF refused to make the usual accommodations, including refinancing and loan forgiveness. Zimbabwe’s credit was ruined and it could not get loans elsewhere, so the government resorted to issuing its
Today global wealth is more highly concentrated in the hands of the elite than it ever has been at any other point in modern history. Once upon a time, the vast majority of the people in the world knew how to grow their own food, raise their own animals and take care of themselves. There weren’t many that were fabulously wealthy, but there was a quiet dignity in having land you could call your own or in having a skill that you could turn into a business. Sadly, over the past several decades an increasingly growing percentage of agricultural land has been gobbled up by big corporations and by corrupt governments. Hundreds of millions of people have been pushed off their land and into highly concentrated urban areas.
Meanwhile, it has become increasingly difficult to start a business of your own as monolithic global corporations have come to dominate nearly every sector of the world economy. So more people than ever around the world are forced to work for "the system" just to make a living. At the same time, those at the very top of the food chain (the elite) have spent decades rigging the system to ensure that increasing amounts of wealth will continue to flow into their pockets. So now in 2010 we have a global system where a few elitists at the top are insanely wealthy while about half the people living on earth are wretchedly poor.
There are very few nations around the world that have not been almost entirely plundered by the global elite. When the elite speak of "investing" in poor countries, what they really mean is taking control of the land, water, oil and other natural resources. In dozens of nations around the world today, big global corporations are stripping fabulous amounts of wealth out of the…
ANY Ireland bailout terms are onerous given that it is not Ireland that is bailed out but rather banks in the UK, Germany, US, and France (in that order).
Moreover and unfortunately, the exact deal foolishly agreed to by Irish Prime Minister Brian Cowen is not only amazingly bad for Ireland, but one of the provisions violates EU and Irish law.
Ireland gets Euro 67.5 billion ($89.4 billion) in bailout loans
The 16-nation eurozone, the full 27-nation EU, and the global donors of the International Monetary Fund each commit euro 22.5 billion ($29.8 billion).
Interest rates on the loans would be 6.05 percent from the eurozone fund, 5.7 percent from the EU fund and 5.7 percent from the IMF.
Ireland will have 10 years to pay off its IMF loans.
The first repayment won’t be required until 4 1/2 years after a drawdown.
Prime Minister Brian Cowen said Ireland will take euro 10 billion immediately to boost the capital reserves of its state-backed banks
Comparison to Greece
For comparison purposes Greece has three years to repay its loans at an interest rate of 5.2 percent.
Debt Slave Entrapment
The key to understanding how quickly Ireland is made a debt slave can be found in this not so innocuous paragraph.
Ireland first must run down its own cash stockpile and deploy its previously off-limits pension reserves in the bailout. Until now Irish and EU law had made it illegal for Ireland to use its pension fund to cover current expenditures. This move means Ireland will contribute euro 17.5 billion to its own salvation.
The last sentence in the above paragraph should read "Ireland will contribute euro 17.5 billion to its own destruction"
Moreover, once all of its own funds have been deployed, Ireland would be dependent on the IMF for life.
Salt Onto Open Wounds
Like pouring salt onto an open wound, the EU finance ministers agreed on a permanent mechanism, starting in 2013, that would allow a country to restructure its debts once it has been deemed insolvent.
Can you visualize a possible scenario that could put a sudden end to the secular rise now underway in gold and silver?
In a recent conference call with the research team of The Casey Report, we once again collectively tried to imagine what situation… what scheme… what government manipulation… might finally put a stake through the heart of gold.
Setting the stage, I think it’s safe to assume that in order for the gold bull to decisively reverse direction, the following general conditions would have to be precedent in the economy:
The financial crisis will have to have ended. Which is to say that…
Unemployment would have to begin falling by significant numbers – with 300,000 jobs or more being added month after month, instead of being lost.
The housing markets will be stabilizing. Foreclosure rates would have to fall to more normal levels (and not because banks are forced
I’ve been assuming since day one (since there was no other logical explanation for QE aside from the fact that it can clean up bank balance sheets) that QE2 was a bank bailout and not a Main Street rescue plan and it now looks like Ben Bernanke and the Fed are (at least partially) confirming this. They are concerned about the capital positions of the nations largest banks. The WSJ reports:
“The Federal Reserve will require all 19 banks that underwent stress tests during the height of the financial crisis to undergo another review of their capital and their ability to absorb losses under an “adverse” economic scenario.
The Fed, in guidance issued today, said all 19 banks must submit capital plans by early next year showing their ability to absorb losses under a set of conditions to be determined by the central bank.
The request is part of the Fed’s effort to step up supervision at the nation’s largest financial firms.”
The Fed clearly sees something that Wall Street doesn’t. They know the housing market is now rolling over again and that Christopher Whalen is likely correct about the banks and their woes. Ben Bernanke has implemented QE in case he needs to buy MBS and shore up the credit markets. He wants to avoid a repeat of Q4 2008. That’s a good thing. It’s actually quite brilliant if you ask me. But the fact that QE is being sold to the public as some sort of jobs creation program or Main Street stimulus is 100% nonsense. It will have little to no impact on Main Street, but will likely go great distances in ensuring that the credit markets don’t relapse. It’s nice to see the Fed being proactive for once. But now the question must be asked – just what do they know that the market doesn’t and how bad could it really get?
Rising costs and taxes and declining income have mugged Main Street while Wall Street revels in the Fed-engineered "recovery"--in the stock market.
The Fed would have us believe that the stock market is the leading indicator of the economy: if stocks are rising, then that is strong evidence the economy is improving.
This is the bogus "wealth effect" I have taken pains to discredit:
Main Street didn’t buy "the stock market is rising, so you must be richer" either, for the simple reason that Main Street’s wallet is now much thinner. Even as the S&P 500 has soared 80% from its March 2009 lows, 70% of Americans don’t believe the recession is over.
That must really hurt the apparatchiks in the Ministry of Propaganda and the Fed. Here they go to all this trouble to orchestrate a bogus stock market rally and Mainstream Media propaganda campaign hyping "the recovery," and Main Street America refused to buy it. How irksome.
It seems Main Street’s grasp on reality is firmer than that of either the Fed or its partner, Wall Street.
Let’s consider income.
The stock market rally off the March 2009 lows was by some measures the sharpest such advance in the past 100 years. Yet as stocks went on a tear,household income actually declined. According to the Census Bureau, the median household income fell 0.7% to $49,777 in 2009, down 4.2% since pre-recession 2007.
The Federal Reserve’s stated policy objective is to boost the stock market to trigger a "wealth effect" which will then lead consumers to open their wallets.
As noted here before, the Fed failed to notice that only the top 10% of households hold enough stocks to see much benefit from a rising market. Household income actually fell, despite the huge run-up in stocks.
In other words, a rising stock market did not increase household incomes. The Fed is gambling on an effect with no evidence to support it.
How about jobs?
While the Bureau of Labor Statistics reported that…
Commercial real estate is in a structural cliff-dive, currently in slow-motion but soon to gather momentum.
With all the hub-bub about the foreclosure crisis in residential real estate, commercial real estate (CRE) has fallen off the radar screen of crises. Don’t worry, it’s still careening off the cliff; the fall is just in slow motion.
No need for a fancy report to see the signs of decay in CRE. Signs of the ongoing CRE meltdown are everywhere--empty storefronts, mall shops and vacant office complexes abound.
The causes are all too familiar: lending standards went out the window, banks loaned too much, buyers paid too much, lousy deals were avidly securitized, cash flow projections entered Fantasyland and unhealthy speculation fed widespread fraud.
Since boom-and-bust cycles of overbuilding and retrenchment are endemic to commercial real estate, it’s tempting to view this as just another post-expansion trough. Since prices have already slipped a staggering 40% from the 2006 peak, those calling this the bottom of the current cycle have some history on their side.
But beneath what appears to be a standard-issue retrenchment--a glut of inventory to work through, lenders avoiding risk instead of embracing it, and so on--structural changes in the U.S. economy are changing the CRE landscape for good--and not in a positive direction.
A long-term structural decline in CRE is not just a real estate industry concern. With some $1.7 trillion in CRE loans needing to be refinanced in the next few years, a continuing decline in CRE values could push the still-fragile banking system into a new crisis and the economy back into recession as early as next year.
The extremes reached in the boom were certainly epic: investors paid $800,000 per resort hotel room and over $500 per square foot for Class A office space, numbers which no terrestrial cash flow could possibly justify. Retail centers sprouted alongside every new exurb subdivision.
By this logic, an unprecedented boom requires an equally unprecedented bust to work through the excesses in price, debt and risk. So far so good, but there is an anecdotal body of evidence which suggests that profound systemic changes are taking place in the U.S. economy which will structurally reduce the demand for commercial real estate--not for a few years, but permanently.
Improvement in first time unemployment claims is slowing. Actual, not seasonally manipulated data, including an adjustment for the usual weekly upward revision, shows that the year to year rate of change is on the cusp of a possible upside breakout, which would be good news for stock market bears if it happens.
Initial Unemployment Claims Chart- Click to enlarge
Here’s why it’s mind blowing. I’ve plotted it below on an inverse scale with the S&P 500 overlaid.
Unemployemt Claims and Stock Prices - Click to enlarge
Major US Markets including (NYSEARCA:DIA), (NYSEARCA:SPY), (NASDAQ:QQQ), and (NYSEARCA:IWM) dropped over 3% each on Italian bond fears and an increased worry that Europe will not be able to bail out its 4th largest economy. Furthermore, the iShares MCSI Italy Fund (NYSEARCA:EWI) wiped out over 9% today, further illustrating the dire situation in Italy and the European Union: ...
The second economic disappointment of the day comes from the Dallas Fed, which dropped from -2.0 to -11.4 on expectations of -9.0- this was the 4th consecutive negative print month. The report was, in a word, horrible, with just 2 of the 15 constituent indices posting an increase, and the bulk solidly in the red, led by Unfilled and New Orders which dropped 16.8 and 11.2, respectively: not good for economic growth. On the employment side there was nothing good either, with both employment and hours worked declining by -...
Bloomberg reports that Diana Containerships (NASDAQ: DCIX) files to offer stock up to $172.5M. Diana Containerships says that Diana shipping will also buy $20M of stock.
Top 5 RisersStockRatingAnalysisVLOSTRONGBUYAn increasingly positive growth rate of past earnings, along with improving expectations for long term growth, make Valero a good prospect for high returns.KROSTRONGBUYKronos Worldwide has been gaining recognition from analysts as a good canditate for achieving higher than expected earnings along with higher overall projected valuation.SFIBUYiStar is one of the top candidates projected to achieve both higher than previously projected earnings in the short run and a higher earnings growth rate in the long run.AMATSTRONGBUYApplied Materials has been...
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February is now past, and the Biotech Porfolio is loaded with winners and a miss (PLX). MRK is down a bit, but I expect that trade to recover, and one could be more agressive and double down on it, or play another round at the Jan13 $30 options for roughly the same price. Below is the summary, and note the grey boxes are ones that did not fill. I am still a fan of BMRN, and like DEPO as well. Now let's look at a few others.
Table 1. PSW Biotech Plays Since January 2011
 
Our newest play is Momenta Pharmaceuticals (MNTA), who is pursuing a three-part business model which includes complex generic equivalents in partnership with the Sandoz division of Novartis, proprietary compounds, and follow-on- biologics (FOB). It seems that this company is tied up in competition/litigation wit...
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I am back from the Forbes cruise to Mexico and starting to deal with a thousand things, but first on the list is making sure you get this week’s Outside the Box. And a good one it is. In fact, it is two short pieces coming to us from friends based in London over the pond.
The dawning of reality hurts. Prodded and bullied along a tortuous emotional path by events unforeseen and beyond our control, we descend through three phases: the first is denial that there is a problem; the second is denial that there is a big problem; the third is denial that the problem was anything to do with us.
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(