Great Depression II – It Can’t Happen to Us, Can It? – Republished from May 2008 – with Addendum

3 CommentsBailouts, Banking, Bond Market, Debt Ceiling, Geoeconomics, Government Statistics, Interest Rates, Monetary Policy, The Completely Absurd, , , , , ,

Webster’s defines complacency as “1.satisfaction or contentment 2. smug self-satisfaction” There is probably not a better word to describe the current state of perception with regard to economic and financial malady. I had an interesting conversation the other night about exactly this topic and the individual I was speaking with had an overriding belief that we cannot suffer economically simply because the current generation is not prepared to deal with it. While I certainly agree with the latter assertion, the former continues to baffle me. I am certainly not prepared to deal with a lengthy hospital stay as the result of a horrific car crash, but that alone doesn’t cloak me in immunity from having an accident. The reasoning is so broken and flawed, yet it is often all we get in terms of a perception of what is going on.

This disconnect begets a discussion of why exactly it is that society has chosen to believe itself to be immune from bad things. It is odd in itself that when you talk to individuals, they seem to be acutely aware of many of the challenges facing us, but when you put all the individuals together and create a society, we act as though the party will indeed last forever. We are certainly dealing with a situation in which the intelligence of the whole is by far less than the sum of all its parts. Here’s a little bit of déjà vu for you, compliments of Wikipedia:

“In the 1920s, Americans consumers and businesses relied on cheap credit, the former to purchase consumer goods such as automobiles and furniture and the later for capital investment to increase production. This fueled strong short-term growth but created consumer and commercial debt. People and businesses who were deeply in debt when price deflation occurred or demand for their product decreased often risked default. Many drastically cut current spending to keep up time payments, thus lowering demand for new products. Businesses began to fail as construction work and factory orders plunged.”

Sound familiar anyone? See any price deflation going on? The Wilshire 5000 has only lost about 2.5 TRILLION dollars in value in the last two months or so. What about the loss in home equity? Another trillion or two? Who knows, but I think you get the point. We are seeing almost to the final utterance the same play we saw unfold in 1929. Were those folks any more prepared for the Great Depression than we are today? I’d argue that while they were perhaps a bit better equipped to provide for their own sustenance, that American society in the 1920’s was as complacent as we are today. When the realization of history’s coup de grace hits, we will be caught as unaware as our ancestors were back in 1929.

Here are some other examples of what Alan Greenspan likes to call ‘irrational exuberance’ in the 1920’s:

“We will not have any more crashes in our time.”

John Maynard Keynes in 1927 (The authenticity of this one is a little suspect) DOW ~ 175

“There will be no interruption of our permanent prosperity.”

Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928 – DOW ~ 200

“There may be a recession in stock prices, but not anything in the nature of a crash.” – Irving Fisher, leading U.S. economist, New York Times, Sept. 5, 1929 – DOW ~ 375

“All safe deposit boxes in banks or financial institutions have been sealed… and may only be opened in the presence of an agent of the I.R.S.” – President F.D. Roosevelt, 1933 – DOW ~ 65

Tuesday morning we received news that according to the Institute of Supply Management, the service portion of our economy underwent a significant contraction during the month of December. This is alarming given the fact that December is normally one of the busiest times of the year. Even still, a trip past the local mall provides a busy scene. People are streaming in and out, carrying boxes and bags of imported trinkets to their imported cars. They will then use imported gasoline to drive to their home, the mortgage of which is likely to be owned by a foreign investor. Yet the average American citizen sees nothing wrong with this picture. Or could it be that they don’t even see the picture at all? The media has certainly been playing the role of absentee informant in recent years, choosing to focus on such insipid topics as Britney Spears’ latest rehab stint rather than the important business at hand.

Here now, are some quotes from this generation’s 1929..in 2007 and 2008:

“It is encouraging that inflation expectations appear to be contained,” Fed Chairman Ben S. Bernanke – Testimony to Congress – March 28 th , 2007 – DOW ~ 12,500, Headline CPI-U ~ 2.8% Y/Y

“As I think you know, I believe very strongly that a strong dollar is in our nation’s interest, and I’m a big believer in currencies being set in a competitive, open marketplace,” – Henry Paulson – Secretary of the Treasury – USDX ~ 81.50

““We are making history. What has passed the Congress in record time is a gift to the middle class and those who aspire to it in our country.” House Speaker Nancy Pelosi on the $168 Billion tax ‘rebate’ while the middle class is spending their Wal-Mart Christmas gift cards on food and other necessities.

They’re making history all right. Too bad it will end up being the WRONG kind. How can we ever hope to focus the population on the urgency of our current predicament when our leaders are willing to make it worse by handing our freebies, bailing out those who willingly make poor investment choices and telling us everything can be ‘free’ if we’ll only pull their lever on election day?

Or am I putting the cart in front of the horse? Perhaps a contrarian opinion might be that our leaders are giving the public exactly what it wants. In either case, I am quite certain that our state of unpreparedness will not constitute a free pass from the negative effects of a recession or a retraction of any of the financial excesses we’ve enjoyed over the past few decades.

Addendum – June 2023

Most people today don’t even remember Hank Paulson – or his ridiculous statements regarding the US Dollar. If a strong dollar was truly in our national interest, then we have no national interest left thanks to those fine, unaccountable feathered friends at the not-so-USFed. Poor Hank was like a financial piñata – no matter how many hits he took for this grossly erroneous statement, he kept right on spilling out candy.

15 years later and only the names have changed. The vocabulary-challenged Paulson is long gone, replaced by less than erudite Janet Yellen. Evidently one of the requirements of a Treasury Secretary or a not-so-USFed Chairman is to be able to speak for an hour and say absolutely nothing. Jay Powell is definitely at a disadvantage; he actually tries to explain things.

Economics isn’t rocket science. Or anywhere close. It’s a rather simple topic to understand. It is made complex by institutions who benefit when the population is clueless. When it comes to obfuscation, most policymakers get a AAA – ironically the same grade assigned to those worthless MBS back in the heydays of 2005-2007.

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Bail-Ins and the Direct Registration System

Bailouts, Banking, Currencies, Geoeconomics, Monetary Policy, RIsk Management, ,

Originally published in October 2015

My Two Cents – Bail-Ins and the DRS

Andy Sutton, MBA

As recently as a few weeks ago, the European Union directed its member nations to draft their own independent legislation for dealing with the resolution of a failed G-SIFI (Globally Significant Financial Institution). At the same time, we have all sorts of seams opening in the currency, bond, and commodity markets. The Swiss Franc is now un-pegged from the Euro, there have been wild swings in the bond markets in Europe due to the aforementioned action, and oil is in an absolute free-fall. There are many geopolitical (and likely criminal) maneuverings behind all of these phenomena, however the chaos in the financial world thus far has been remarkable in that there hasn’t been much given everything going on.

There has been news of some smaller brokerages biting the dust thanks to these swings, but yet nobody ‘big’ has gone down – yet. Are they that good? That insulated? That lucky? That’s for people of a higher pay grade to answer, but the bottom line is that the environment is absolutely RIPE for another Cyprus or MFGlobal. Will it happen this time around? Couldn’t tell you. Maybe it’ll be next time. Or maybe it’ll happen this time, but not impact the US. Since everyone already thinks America is bulletproof I am guessing most will go with the latter of the two possibilities.

I’ve been talking an awful lot again about the bail-in, but a reader pointed out that he still doesn’t understand exactly what it is, and, more importantly, how an institution gets into the position where it needs (or wants) one. He’s a smart one, this reader, so I figure if he’s got questions then so do a whole bunch of other folks and that’s perfectly all right. That’s why I do this. So this week I’m going to focus on some of the anatomy and try to give everyone a sense of the sorts of things that put a bank/broker or just a broker into a position where they’d seek to invoke the bail-in.

On the positive side, although not for those folks impacted, we have a live example of how the bail-in works, right here in America to use as a template. I don’t wish to further malign Mr. Corzine’s already shredded reputation, but as his penchant for fast travel suggests, he could probably outrun any criticism we might toss his way.

Anatomy of the Bail-In – The Mechanism

Let’s talk about a brokerage first since this is where MFGlobal was situated. Brokerages generally have two components – the brokerage side and the dealer side. Formally, they are referred to as broker-dealers by the regulators because of this. So there are two sides. One side you see when you walk in and talk to your broker and sit in his posh office and the other side, which you never see – and usually neither does the broker. It is this unseen side you need to worry about in this instance. Your hundred thousand dollar brokerage account isn’t very noteworthy in the grand scheme of things other than that the broker-dealer might use shares that you hold in your portfolio to lend out to other parties so they can short a particular stock. Hmm, that is kind of going against your best interests isn’t it?

Your broker calls you with a ‘hot tip’ or a ‘sure winner’ and you go with it, then they’re enabling short-sellers out the back door. Nice huh? And they all do it, but I digress.

The brokerage side deals with clients such as yourself, maybe some pension funds, trust funds, perhaps an institutional client or two depending on what they’re into and so forth. It is pretty benign. On the other side of the operation there is the dealer side and they can be into all kinds of stuff, which, thanks to the USFederal court system, can get you into a pile of trouble. To keep it overly simple, think of the dealer side of the broker-dealer arrangement as a giant client. The dealer operation has accounts, holds positions, buys and sells positions, and makes a market in all of the above. They might do this with regards to stocks and bonds as well as options and other derivatives. The dealer side can borrow money to do all of the above as well, usually from commercial banks. When they borrow money to engage in transactions it is called leverage.

Anatomy of the Bail-In – A Scaled-Down, Working Example

Let’s say the dealer has a million dollars in assets – cash and positions. If they make 10% in a quarter, they’ve added another $100,000. Ok, easy enough, but they want to make more than that. So let’s say they go out and borrow another $500,000 at 5% per annum and invest the whole enchilada for a quarter and make the same 10%. So now instead of $100,000 in earnings, they have $150,000 – a 50% increase. Their interest expense for the quarter is $6,250 so their gross profit on the loan is $43,750. They give the $500,000 back plus the $6,250 in interest and everyone is happy. Their assets have swelled to $1,143.750. So where they’d made 10% originally, using leverage, they turned that gain into a 14.375% gain. Not too shabby. Plus, remember they make a few bucks lending out the shares you bought on that hot tip so someone else can place a bet that your hot tip stock will go down. Again, this is overly simplistic, but you get the idea here. The borrowed money is cheap – in fact, 5% is probably on the very high side of what they pay in interest, but is a round number.

Let’s say now that things don’t work out. The invested $1.5 million goes down by 10% in a quarter. They lose $150,000 plus the $6,250 in interest and suddenly, when they give back the loan and the interest; they’re left with $843,750. This creates an obvious problem when all of their assets are already deployed. There’s red ink to the tune of $156,250. Generally, what will happen is another loan will be obtained or some assets sold off or maybe a little of both and the loss will be absorbed.

Anatomy of the Bail-In – Reality

Now the illustrative example above uses a very tame leverage ratio. There was 50 cents of debt for every dollar of assets – or a ratio of .50:1. Understand that leverage ratios of 25:1 and even as high as 40:1 have not been uncommon. That means for the million dollars in the example above, there might be as much as $40 million in leverage (debt). So let’s use the 25:1 ratio and assume the same 10% loss. Suddenly the loss is 2.5X (a $2.5 million loss against a million in assets) the amount of the dealer’s assets rather than being .15X (a $150K loss against a million in assets) as in my example, not to mention the interest. Oops. Now the firm needs cash. They have a creditor to pay off. Well, how about those folks on the brokerage side? Well, gee whiz, they have $3 million in assets. Let’s just snag the $2.5 mil from there and use that to pay off the creditor. But that’s stealing and is illegal, right?

Wrong. Not anymore. That is precisely what happened in the case of MFGlobal, Sentinel Group, and Peregrine Financial – all to varying extents. The dealer side made bad bets and when it came time to pay off those bets, they went to their clients, raided the accounts, and then the injustices in the black robes gave it jurisprudence’s stamp of approval and the bail-in was on. Now we’ve got precedent and case law supporting overt theft. Instead of impeaching the judges, imprisoning them along with the principals of the firms who pulled the stunts to begin with, the establishment comes up with a new set of nomenclature (G-SIFI, bail-in, etc.) and begins the process of normalizing the idea of stealing something that doesn’t belong to them.

And perhaps the most ironic of all? The not-so-USFed, that shining knight on the white horse, buyer of last resort, standout of the handout to the big banks? It is in hock too and its leverage ratio is absolutely stunning. 77:1 at last count. Yes you read that right –  77:1. It was at 22:1 when the financial crisis started ripping through middle classes throughout the globe in 2008 and when you hear all these morons on television talking about how healthy US (and global for that matter) banks are, remember that someone is eating all these garbage mortgages, derivatives and other nuclear financial waste. It’s the central banks. Wait a second though; the central bank regulates the underlings, right? Maybe on the surface, but this is another bright and shining tidbit that illustrates who owns who. The not-so-USFed simply does what it is told.

A great question right now would be this: If everything is getting so much better then why are they still leveraging up at the ‘fed? Shouldn’t they be unwinding? They say they’re unwinding. But they’re not unwinding, they’re continuing to eat more and more garbage generated by their owners. Now this could go on quite a while, but not forever and it won’t end in a pretty fashion when it does end.

Anatomy of the Bail-In – Implications for ‘Depositors’

So that’s the broker-dealer version of the bail-in. The bank side isn’t much different in concept. Thanks to the repeal of the Glass-Steagall Act, which separated broker-dealer operations and the savings/loan operations of commercial banks, the same thing can happen to you if you have deposits in a commercial bank. The mechanism is precisely the same. The broker-dealer side conjures up some idiotic bet based on some computer program written by someone who thinks that the global financial system is nothing more than his or her personal playpen. In typical fashion, they win enough times to get cocky and of course as this happens, the greed kicks in and the bets get bigger. Eventually there’s a loser and by this time they’ve pumped for the goalposts and hiked the leverage ratio up to about 40:1 or even higher.

When it all crumbles and everyone starts scrambling, bear in mind that the law has now made your bank deposits available to do a bail-in and make good on that bad bet. And since you’re now an unsecured creditor rather than a depositor, you a) have no FDIC protection, and b) have no recourse. If you were a secured creditor, you might have a chance to recoup something, albeit not anywhere near what you’d lost, but at least a token. What happens next is your unsecured credit (think bondholders) is converted to equity and you become a stockholder in a failed bank. Congratulations.  You woke up on a Friday morning having $25,000 in bank deposits and literally by the time the bank opens Monday you have x shares in a busted bank. And yes it can happen that fast. Anyone who doesn’t think it can, should remember Lehman in 2008. While it wasn’t a bail-in at that point, look at the velocity with which that outfit hit the mat, never to get up. Look at Cyprus. Friday afternoon there are tremors and by Monday morning, the banks are locked up like Fort Knox and the ATMs are out of money.

The US has already crafted its resolution mechanisms along with most of the G20. The EU has just ordered its member nations to the do the same. In my opinion, anyone who stores more than a trivial amount of cash in a commercial bank should be sentenced to spend the next month in Massachusetts figuring out how many of Tom Brady’s precious pigskins were improperly inflated.

The biggest problem with the above is that even if you understand the mechanism and what a firm might have to be engaged in to get themselves in trouble, it is very difficult to find out exactly what the dealer side of a broker-dealer firm is up to. They’re obviously secretive, claiming proprietary interests. Most will tell you their capital ratio though and that is a start. Your best bet if you insist on being in paper or even have decided that you’re willing to risk a small position in paper is to spread it out amongst several firms or, better yet, use the Direct Registration System so that your assets are held in your name at the issuer’s transfer agent rather than being held in street name at your broker. I realize the whole system is intertwined and something big enough to topple firm A might take firm B with it as well. However, that is an inherent risk for those who wish to engage in this activity.

Regarding the Direct Registration System, many companies stopped issuing paper certificates years ago, citing cost (funny, the shareholder usually was on the hook for that), but even if a firm doesn’t offer an actual certificate you can still have your shares held in your name at the issuer’s transfer agent. There is a popular misconception out there that you can’t do it unless the issuer will provide a paper certificate. All broker-dealers have a means by which you can DRS your positions. Many are reluctant to assist though because, frankly, not having your shares in street name in their ‘house’ costs them money. If DRS is something you are interested in and your broker is uncooperative, then find someone who will cooperate. The good news is that there are firms who are not obstructive in this regard.

Also an inherent risk is that even if you start to smell a rat that you won’t be able to extricate your assets in time. Much in the way banks are making people wait inordinate periods of time to get cash (if the paper itself is a con job then think about ‘electronic paper’ or digitized currency), firms can take up to 10 working days or more to effect transfers. In our fast-paced financial climate where the world can literally change in a weekend, 10 days might as well be 10 years. Also, those pesky daily limits on your ATM card, put in place for your own ‘security’ as you were told when you asked about it, could be lethal as was the case in Cyprus.
My goal here isn’t to make things sound hopeless; that is not the intent, but rather to present you with the risks involved when you engage in these very basic financial activities. Most people don’t even consider these risks because until recently they either didn’t exist as in the case of the bail-in or weren’t relevant as in the case of banks being so stingy with their cash withdrawal policies. This is one of those times when you simply MUST advocate for yourself because these other folks are firmly invested in your continued ignorance, apathy, and ultimately inaction.

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US Banking System Update – 5/9/23

4 CommentsBailouts, Banking, Bond Market, Debt Ceiling, Government Statistics, Interest Rates, Monetary Policy

Andy Sutton / Graham Mehl

One of the biggest problems with a lack of transparency is that, especially during times of panic, fear spreads like a contagion. This past week saw multiple banks get into ‘trouble’. This ‘trouble’ was diagnosed by looking at share prices instead of actually looking for the real symptoms.

Sadly, there is so little transparency in the Great Financial Crisis – rebooted – that it has become extremely difficult to figure out who has the most exposure, so the entire financial sector is getting creamed. A look at regional banking stocks produces a serious case of deja vu. The charts are almost identical. Does this mean that every single regional bank is overexposed? Not likely. Today we’ll discuss the actual cause of the recent troubles and forget about stock prices, charts, and the mainstream financial press for a while.

Bank Failures

As mentioned above, the entire commercial banking sector has been hammered from a market capitalization point of view. However, we have to point out strenuously that (especially now) stock prices do NOT necessarily reflect the health of banks. From a fundamental standpoint, every money center bank is already upside down, by definition. The same goes for the regionals as well. Why? Because they’re all leveraged. They’ve borrowed insane multiples against their Tier 1 capital. Again. This is what triggered the 2008 crash. Their bond portfolios were killed by the not-so-USFed’s interest rate hikes. Given that commercial banks own the fed – yes they do – it’s a curious situation. This bit of Kabuki Theater is likely going to end in the US going to a central bank digital currency (CBDC). FedNow, and other pilots have already been run.

Furthering the mess, several mainstream media outlets are now spreading the ‘news’ that the US may suspend cash withdrawals from banks. Of course when people read this there will be some kind of a mad dash to the banks to withdraw cash, therefore causing the cessation of withdrawals.

A bit of background on the money supply is in order. Most of the US Dollar supply is already digital. Not in the sense of a CDBC, but these dollars don’t exist in the form of cash. They make rounds through the economy, never being withdrawn. Roughly $800 billion is in cash and coin. The total money supply is no longer supplied by ‘official’ sources, but it can be reconstructed and it’s north of $25 trillion. Our point is that only a very small portion exists in cash. Bank deposits shrank by nearly a trillion dollars just in March. There is still plenty of cash available, so where did it go? We know precious metals dealers are getting hammered with orders. Where else did it go? Cryptocurrencies got some of it. Most of the dollars that moved out of bank deposits were digital. Thanks to the two month window in getting actual numbers we won’t have a clear picture until later this month or early June.

Points to Ponder

Be careful going into weekends. Even a cursory look back at the 2008 crisis demonstrates that most of the carnage happens on weekends for the simple reason that it gives the FDIC, etc. the weekend to clean the mess up before the markets open Monday. Midweek failures are extremely rare. That said, keep a close eye on any securities you may hold. We will not give specific advice here, other than to exercise caution, especially on Friday afternoons.

Don’t run the banks. If we (and many others) are correct, it will make matters worse and honestly, if we go to a CBDC that cash will likely be worthless. At minimum it’ll be recalled if you want to exchange it for the new token.

Deleverage. Now. Get out of debt if you can. We realize that this economy with roaring inflation has put so many marginal income households into the red. If you’re fortunate enough to have the resources to get out from under, do so. The money supply charts over the past 2 months have shown a modest deflationary (not a typo) trend. This is what put farms into foreclosure during the Depression. There wasn’t enough money for debt service. We could start seeing that here fairly soon if the trend continues. Again, we’re running two months in arrears on the data as mentioned above.

Leverage is what got the banks in trouble and it will do the same to individuals.

Until next time, stay well and well-informed,

Andy / Graham

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Banking Crisis Update – April 5th, 2023

1 CommentBailouts, Banking, Currencies, Economics, Monetary Policy, RIsk Management, Uncategorized

Andy Sutton / Graham Mehl

The past few weeks have been fairly ‘quiet’ regarding bank failures, but, much like a hurricane, we’re in a bit of an ‘eye of the storm’. There are several graphics that follow which will hopefully reinforce the main point – the crisis is nowhere near over. While getting direct information has become quite challenging, we maintain several data series that were previously discontinued by the publishers.

Graphic #1 – Monthly Changes in Bank Deposits – as of March 2023

In the chart above, you’ll note the timeline on the x axis. The data stream begins in 1971. March of 2023 just provided the LARGEST single month drop in bank deposits – EVER. We had nearly a trillion dollar bank run during the month of March and not a single word was uttered by any official, policymaker, or media talking head. This should not be much of a surprise – the financial industry and government have learned extremely well the lessons of Cyprus and other places in the past decade. Transparency is the mortal enemy of a fiat money system.

Let’s not split hairs here – there isn’t a single commodity-backed currency on the planet at this time so everyone else is doing the same thing we’re doing here in the US.

1930-1932 Reboot?

It certainly appears that is a distinct possibility. We’ve opined for many years now, much to the chagrin of readers, that the not-so-USFed would indeed try to rescue the dollar one last time before the cycle ended. What we’ve seen over the past few months are the possible beginnings of a contraction in the monetary aggregates (Deflation). We’ll let them graphic below speak for itself:

The above graphic is M1 in the United States. The timeline starts in 2000. The incredible spike towards the middle/end of 2019 is responsible for the massive spike in price inflation that we’ve seen in the past 18 months. There’s a delay of between 9 and 21 months from spikes in money supply to the knock-on price increases. Note that the spike in M1 started pre-pandemic.

We’ll show one more chart before we close this brief update. United States M2 – now the broadest (officially) tracked monetary aggregate. It’s painting a similar picture. The timeline is set to that of the M1 graphic above for easy comparison.

M2 tends to move more gradually than M1 because it contains more subtypes of money. We’ll post a chart at the end of the piece where you can see the various components of the aggregates. But what is noteworthy about the above M2 graphic – we’re seeing the first actual deflation in almost a century. This isn’t price deflation (falling prices), this is the actual removal of dollars from the system. If the deflation of 1930-32 was truly the accident that everyone claimed, then policymakers ought to know well enough to avoid it again.

In a fiat monetary system, only the central bank can remove money from the system. Ours did it at the beginning of the depression and it certainly looks as though they’re doing it again. We’ll deal with the fallout that will result in the next update. To give a small hint – think about debt that was taken when the money supply was at its peak.

The chart of monetary aggregates in the United States is directly below.

Stay well,

Andy / Graham

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2023 Banking Crisis – Update

Bailouts, Banking, Geoeconomics, Interest Rates, Monetary Policy, RIsk Management

-Not sure the words of our fabulous ‘leaders’ are resonating. I’ve had several calls today from people I know asking about this whole situation. Some of them are business owners wondering about the safety of their operating accounts. It’s very hard for them to keep these in cash. I did recommend switching to credit unions wherever possible. This should have been done 15 years ago, but better late than never. 

-Stock prices and health of a bank are NOT directly related. Banks will cannibalize each other and what I’m seeing on several of these medium to smaller banks is a pretty overt effort to drive the share prices down – probably so they can be bought out by the bigs at a steep discount. Short positions are way up. I’ll bet more than a few of these make the Reg SHO lists this week for failures to deliver (naked shorting – yes it still goes on). 

-The promise of a full backstop by the not-so-USFed and treasury is telling. Yellen, in particular, should be skewered. You can’t bailout anyone vis a vis the government without using taxpayer dollars. It’s that simple. I’ve gotten a couple of emails as well from My Two Cents readers who claim that the coupons they were issued last week are still in force – in other words, there’s NO backstop and they might get something when everything is wound down. I’ve asked for documentation and will post it to the group if/when I get it. 

-If the not-so-USFed does the bailing out, then it’ll be inflationary. They’re double talking as usual, trying to have it both ways. Can’t be a dove and a hawk on inflation at the same time. I’d say they’ll sacrifice the dollar further to save their precious financial system – that nobody needs anyway. 

-Beware of bail-ins. It’s legal now – since 2013. Credit unions will be safer than commercial banks. Again, that recommendation is at least 10 years old. Credit unions are not allowed to get into the stinkpot of derivatives and they’re not allowed to run broker/dealer operations either. Not saying they’re immune, but as fast as safety goes, I’d give commercial banks a 1/10 and credit unions a 6 or 7 for the reasons stated above. However, if we end up with a CBDC out of this, then credit unions won’t offer any protection at all. 

-Direct registration of securities (stocks only) is advisable. Direct registration takes the shares out of ‘street name’ and your ownership is registered through the stock issuer’s transfer agent rather than your broker. This is a MUST, but it’s for individual stocks. Some mutual funds offer partial protection in this regard, but only if you bought your mutual fund units direct through the fund issuer. If you got it through a brokerage, this doesn’t apply. If there are questions on direct registration, please let me know. I have an article from 2013 that runs through the pros/cons and process. It’s not hard to do. DRS does not apply to ETFs, closed-end funds, and mutual funds purchased through a brokerage. If you own stocks through a brokerage, you can DRS them easily, however. 

Opinion – ignore the politicization of this. Stick to the events. Most of the financial system is outside the purview of our politicians – at least on a day to day basis. This isn’t Biden’s mess or Trump’s mess. It’s the not-so-USFed’s mess. They’re supposed to be stewards of the financial system even though it falls outside their dual mandate of price stability and maximum employment. But remember, the chartered banks own the not-so-USFed, NOT the other way around. Talk about a recipe for malfeasance. 

More as it happens and/or I get it. 

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What Exactly is Neel Kashkari Trying to Accomplish? – My Two Cents

Bailouts, Banking, Consumer Finance, Currencies, Interest Rates, Modern Monetary Theory, My Two Cents, Trade War, , , , , ,

Neel Kashkari is hardly a household name. We’d speculate that most people wouldn’t recognize it. Neel was the Goldman Sachs alum who was hand-picked by Hank “A Strong Dollar is in the National Interest” Paulson back in 2008 to handle the disbursement of the TARP bailout money. That’s the $750 billion bailout that was initially shot down by the House, but eventually passed a few days later after Paulson did some rather heavy handed and unapologetic arm-twisting.

We’re going to link up a couple of videos throughout as sort of a walk down memory lane. 2008 was, after all, a dozen years ago already.

Ok, so what? What does this have to do with Neel? Well, after the bailout was passed, an odd thing happened. Instead of being used to buy troubled assets, the money went right to the banks. Kashkari was grilled by then Rep. Dennis Kucinich about his activities. Kashkari had already mastered the thousand-yard stare while being grilled which immediately caught our attention. He’d been trained for this.

After the brewing scandal was snuffed out by further epic plunges in global financial indices, Kashkari was quietly taken off the scene and ran like a refugee to a cabin in the woods of Northern California. He would remain there until 2016 when he was called off the bench to head up the Minneapolis Fed. That really got our attention. From a cabin in the woods to an extremely high level position in one of the most corrupt enterprises man has ever known after spending more than a half dozen years in exile? We should be so lucky.

Unfortunately, that’s not where the saga ends. Lately Neel Kashkari has been going around the talk show circuit saying that the only way to save the USEconomy is by doing essentially a full lock down on the US. Again, we’ll post some link to videos. We think Kashkari’s words carry a bit more weight just because of his pedigree and prior experience in sticking it to the taxpayers of this crumbling nation. How does a lock down save the economy?

We have a theory and we’re going to lay it out. The graphic below shows the rather alarming – and rapid – departure from the USDollar from two of the biggest up and coming economic powers out there: Russia and China. There are other countries engaged in similar activity and Andy has spoken on Liberty Talk Radio about these events for several years.

The USDollar’s reserve currency status is gone. It was in serious jeopardy going into this year, but after the blowout federal deficit even the dimmest bulb can see there is no way and certainly no will to ever pay off the national debt. Hyperinflation might be a tactic and we’ll talk about that eventually as well, but countries are bailing. It should be noted that the US is sanctioning EVERY SINGLE ONE of these countries at this moment and urging allies to do the same.

Other tripe and banal reasons are given, but this is clearly a move to protect the Dollar as long as possible. The house of cards is shaking and is about to get blown away like the houses of the first two of the three little pigs.

So why the call for a lock down? We’ll use basic economics to lay out our theory. When global demand for dollars decreases, those dollars need to go somewhere. If countries are using other currencies for international trade, their FOREX reserves will be changed to reflect this. Simply put, they won’t need to keep as many dollars. And why buy USGovt debt? It pays next to nothing – well below even the most cooked levels of price inflation. And there’s the very real possibility of switching to negative yields – especially in the series of shorter maturities.

These unneeded, unwanted dollars are starting to come home. Add to that all the funny money that has been created by the not-so-USFed to ‘buy everything’ in sight to keep financial markets stable. There are no reserve requirements, so the banking level can create massive inflation from making new loans. This is why the NASDAQ and S&P500 are at record highs. The repatriated dollars are being poured into financial markets and blowing up all manner of bubbles.

What is also happening is that consumer price levels are starting to rise at frightening levels. The change from May to June was .5654%, and the change from June to July was .5867%. These are annualized rates of around 7%. The central bank’s ‘comfort zone’ ends around 2.5% annualized.

US CPI-U

Kashkari’s argument for a lock down now makes perfect sense. If America goes back to lock down, we’ll see consumer prices drop from lack of demand as was seen in March, April, and May. A lock down would hide the effects of all this funny money flowing back into the US.

Let’s fold into the mix our paper on Modern Monetary Theory from last summer. The first premise is that a central bank/government that acts as its own bank cannot go broke. It can print until the lights go out in Tennessee. BUT.. when consumer prices start to go up, the next step is raise taxes to pull money from the system. There have been quite a few articles talking about higher taxes. With real unemployment and underemployment where they are, does anyone think a tax increase would fly?

A lock down might not fly either, but any decrease in aggregate demand that Kashkari is able to squeeze from his bully pulpit is going to ‘help’ the situation. Note – it’s not going to help the average person. This is a move to protect a broken currency regime, the institution that brought it to fruition, and the total corruption of fiat currencies in general.

Keep in mind that the partial lockdowns from March through June caused a 33% contraction in GDP according to the USGovt. Our model showed a 43% contraction. Given that we use a totally different methodology, the difference isn’t surprising. Since the USGovt’s GDP model uses the purchase of finished goods rather than intermediate goods, we can say that aggregate demand fell by about a third in the second quarter. You can see in the chart above the impact that had on consumer prices. Kashkari and his ilk are looking for more of the same.

Another such drop in prices would enable them to repatriate even more dollars without it become too noticeable in the real economy. We might get Dow 30K, NASDAQ 14K and S&P500 4K, but that is the ‘good’ kind of price inflation. If consumer goods went up in proportionate amounts, there would be even more rioting than there is at present.

Why not just destroy the unused currency? Most of it is digital anyway. That’s the most common question we are expecting. It is very important to understand that true deflation doesn’t occur unless money is actually destroyed. Falling prices do not mean deflation. You can create a little deflation on your own if you pull all the ‘money’ from your bank account in cash, then set it on fire. Why would I do that, I can still use it!!! And that’s the answer. The repatriated dollars aren’t going to be destroyed because they can still be used. Not by Mr. and Mrs. Joe Average, but by the banking system.

The next step in this decoupling process is for major trading partners to start requiring the US to settle transactions in some other currency or possibly even gold. Make no mistake, that is why this campaign of sanctions and threats of military action are in place against countries like Venezuela and Syria. When in doubt, follow the money. Forget the terrorism for a minute and follow the money. Nicholas Maduro and Bashar al-Assad are a clear and present danger to dollar hegemony because they’re stepping out of the dollar for international trade. Andy analyzed the situation in Syria almost 7 years ago and accurately predicted that Russia would not leave Syria hang out to dry. And even more importantly, WHY they wouldn’t leave Syria – and why they have yet to do so.

On a day the S&P500 recouped ALL of its losses due to a global pandemic that the experts are telling us is going to only get worse, we can look at the above mechanism and understand exactly how all those gains took place. It is perhaps ironic that over the past few month the USDollar has struggled mightily – even against other fiat currencies backed by nothing but the never-ending stream of hot air from bankers the likes of Neel Kashkari.

Graham Mehl is a pseudonym. He is astonishingly bright, having received an MBA with highest honors from the Wharton Business School at the University of Pennsylvania. He has also worked as a policy analyst for several hedge funds and has consulted for several central banks. Among his research interests are finding more reliable measurements of economic activity than those currently available to the investing public using econometric modeling and collaborating on the development of economic educational tools.

Andy Sutton is a research and freelance Economist. He received international honors for his work in economics at the graduate level and currently teaches high school business. Among his current research work is identifying the line in the sand where economies crumble due to extraneous debt through the use of econometric modeling with constant reflection of economic history. His focus is also educating young people about the science of Economics using an evidence-based approach

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A Repeat of 2010 in the Works?

Bailouts, Banking, Consumer Finance, Interest Rates, , , , ,

Andy’s Notes: During 2010, the US Consumer paid down a significant amount of debt. It scared the moneychangers quite magnificently. In an fractional reserve, fiat monetary system, ‘growth’ comes at least in part by inflation of the money supply and the subsequent effect on prices. One of the biggest ways monetary inflation occurs is when money is placed on deposit at a bank and nearly all of that money is then lent out by the bank – at interest. Every loan increases the money supply. When loans stop?

The summer data will be very interesting to say the least. Keep in mind that this paydown happened with the federal government handing out cash – again. It could very well be that in 2020, much like 2007, the ‘stimulus’ money went to help repair balance sheets rather than to accumulate more stuff.

Sutton


source: tradingeconomics.com

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A Gamble for All Time

Bailouts, Banking, Consumer Finance, Economics, Geoeconomics, Modern Monetary Theory, Monetary Policy, National Debt, , , , ,

In 2008, the central bankers of the world revealed the true danger of Keynesian economic theory by staging the biggest bailout to date. There was a short flurry of complaints about the banking system being able to leverage the economy instead of just themselves and their filth-ridden balance sheets.

Fast forward 12 years. You guessed it – another massive bailout. The warnings issued after the crisis of 2008 went unheeded, banks leveraged to even greater levels than 2008 and brought the rest of the world with them. Now, not only has runaway Keynesianism enabled the banks to leverage themselves and the financial economy, now they’ve been permitted to leverage the entire world’s economy as well.

Central banks are gambling the next hundred years of economic history that they can print their way out of this mess. Instead of unwinding their malfeasance, they’re doubling down.

Many of you read our piece on ‘modern monetary theory’ last summer. That is now in play as well. This summer we’ll analyze the next move in an epic economic game of chicken. And there isn’t a person on Earth who will be left unaffected. Coming Soon…

Sutton/Mehl

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Where Do We Go from Here? Economic Analysis for Remainder of FY2020

Bailouts, Consumer Finance, Debt Ceiling, Economics, Modern Monetary Theory, My Two Cents, National Debt, Trade War, , , ,

The world started 2020 on the most shaky of terms, economically speaking. The world was already in the early stages of a contraction in aggregate demand. The covers of magazines had articles of various corporate analysts and CEOs talking about a serious recession as early as late 2018. We stress this was a global contraction, not limited to one or even a few countries. As was the case in 2008 some would fare better than others for myriad reasons. The last few months of 2019 and the beginning of 2020 saw the resignation of CEOs from several prominent companies such as Disney.

Being perpetual cynics, we wondered if they knew something the rest didn’t. The prospect of a recession was largely downplayed in the US/UK/EU mainstream press, which was no surprise. They’ve been derelict in their duty for decades now. The average American/Brit/European had no idea what was coming. Even the central banking community was bathed in complacency. They’d achieved Ben Bernanke’s ‘Goldilocks Economy‘ even if only in their own minds.

We pointed to one event as a harbinger of an upcoming crisis as early as 2016 – the appointment of Neel Kashkari to the position of President of the Minneapolis ‘Fed’. Huh? Neel Kashkari was tapped by Henry ‘Hank’ Paulson back in 2008 to head up the TARP fund created by Congress in November of that year as part of the massive Wall Street bailout brought on by a spate of bankruptcies, insolvencies, and general financial mayhem.

Why Kashkari in 2016? The last we’d heard, he was living in the mountains of California planting potatoes or some such. The TARP mess stank on every level and it was apparent that once his work was done, Kashkari was off for a long, long early retirement. So his appointment to such a position registered an 8 out of 10 on the weird-stuff-o-meter.

Moving into 2020 the United States economy was balancing on the triple supports of consumerism, financial sector activity, and government excess. The FY 2019-20 Federal deficit was going to be one for the ages long before the term ‘Corona’ was known as anything other than part of the Sun.

Geopolitical tensions were high with the sanctioned assassination of a prominent Iranian general within the first few days of 2020 and the failed ongoing ouster of Venezuelan President Nicolas Maduro at the forefront. Add to that an ongoing trade war / war of words / saber-rattling between Washington and Beijing as well as a good deal of ill-rhetoric between Washington and Moscow. That’s just a small sampling.

With nearly all of the first world nations running persistent current account deficits and the rest of the economic superstructure living heavily on debt and financial speculation, it was only a matter of time. Would it be a pin that popped the ‘everything bubble’ or would it simply just slowly deflate (not to be confused with monetary deflation)?

So pervasive was and is the presence of debt in the circumstance of nations, states, trading blocs, provinces, municipalities, companies, and individuals that the trillions of dollars racked up by the US alone was not even viewed askance by economists OUTSIDE what would be considered the mainstream of the scientific economics community. Keynesianism was like a high-quality dime store pinata. Now matter how hard it was hit, it just kept spitting out candy.

We mentioned in My Two Cents on several occasions that this whole ‘system’, if you will, would go until it didn’t. It was a confidence game, just like the multitude of fiat currency regimes that backed it in the various corners of global commerce. As long as economic actors had ample supply of tokens (currencies), and another economic actor would accept those tokens in exchange for scarce land, labor, capital, and technology, the system worked.

Then the world got sick.

There has been much talk of ‘black swan’ events. The term was coined by a current events/geopolitics author Nassim Taleb. The black swan is something that nobody is looking or planning for. It is not on the radar. Period. There have been some who have been talking about pandemics in general for quite some time now in similar fashion to your authors considering the likelihood of economic fallout from the fact that the organized world has violated every law of economics imaginable. There’s always a reckoning day.

We are not going to discuss the SARS-nCOV-02 situation from a biologic/scientific standpoint as that is outside the scope of our expertise. We’re going to focus on nCV as a triggering event or black swan and the likely economic ramifications.

The amount of money that has already been borrowed/printed and spent is mind-blowing. It cannot be complicated by the human mind. The US National Debt blew right past $25 trillion. It is hard to fathom this but the growth of the national debt is a mathematical function based on the concept of fractional reserve banking. The debt was headed to where it is now anyway. That is going to be the biggest take-home. Would have it happened this fast without nCV? Probably not, but it was headed past $25T in the next 12 months regardless.

What nCV does is give governments the world over a free pass if you will on the print and spend / borrow and spend fiscal irresponsibility that has been going on for decades now. Europe reached its breaking point because of this foolishness in the past decade. The 2020s will be looked upon in history as the decade when the USDollar finally died.

That’s a bold pronouncement isn’t it? Not really. Who in their right mind is going to continue to lend to any entity that is so fiscally reckless? Ourselves along with many others have laid bare the runaway fiscal policy that has infected the US for so long. Now there is the element of public health involved and the general consensus is that we have to continue these spending policies, bailout entire industries, and even provide income to the populace. Anyone speaking out against any of this is labeled as being against helping people.

What needs to be understood is that this ‘help’ is only temporary. Think of the minimum wage. It is a very applicable analogy. Every increase of the minimum wage only lasts so long then another increase is required to produce the same result. Now, scale that up to the world’s economies and that’s what you’ve got. The ‘system’ needs ever-increasing amounts of stimulus to produce the same effect.

While grossly overused, the analogy of a drug addict is a very good one. Eventually the addict needs a fix just to feel normal. And so goes the global economy. If the stimulus is scaled back, the economy goes into withdrawal. The US economy is around 70% consumption and has been that way for nearly two decades now. This is not just a national or government problem. It transcends all layers of the economy. Even successful companies loaded up on cheap, low interest rate debt to conduct share buybacks, thus pushing stock prices higher.

Where do we go from here?

Even before the new year began, countries and companies outside the US were cutting deals outside the dollar. The dollar’s status as world’s reserve currency was being challenged. Expect that to continue – and accelerate. There won’t be a pronouncement that the dollar is no longer the world’s reserve currency. It likely will not be a headline. It’s been happening incrementally for years now. This latest fiscal quagmire will accelerate the matter. China is testing a digital currency. Russia has thousands of tons of gold. These countries don’t get along with America and Europe on a good day. The Russians already dumped nearly all of their US Government debt, but the Chinese still have a significant amount around $1 trillion.

Treasury Secy. Steve Mnuchin claims all that debt doesn’t give China any leverage on America. We’ll allow you to draw your own conclusions.

A global reshuffling of the economic order was already taking place before 2020 started. Europe endured a partial crisis over excess debt and the austerity that followed. And all of that was just a small piece of the problem. Economic history is replete with examples of complacent countries and empires who thought it could never happen to them. Complacency might just be the most dangerous state of mind that man can occupy. We are quite sure the Romans would agree.

Sutton/Mehl

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Timeline of Global ‘Reserve Currencies’

Bailouts, Bond Market, Currencies, , , , ,

Notes: This has been posted before, however, it is imperative that people understand that no reserve currency lasts forever and such will be the case with the Dollar. This was going to happen anyway – even before the events of the past several months – although they might well have hastened its demise. What are the signals? Rampant accumulation of external debts, out of control monetary creation (the fed ‘pumping’ liquidity is a good example), and almost no one speaking out about the above.

Sutton/Mehl

The World's Reserve Currencies of the Past Half Millenium

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