Thursday, March 21, 2013 - Math Class was Canceled

Mark your Calendar, April 5 & 6 and make your reservations for the 2013 Wealth Protection Conference in Tempe, AZ. For conference information visit www.buysilvernow.com or click here or call 480-820-5877. This year's conference features Roger Weigand, Nathan Liles, David Smith, Mark Liebovit, Arch Crawford, Ian McAvity, Bill Tatro, and I will speak on Friday. There is an expanded Q&A session with all speakers on Saturday. I hope you can attend. 

Math Class was Canceled

by Sinclair Noe

DOW – 90 = 14,421
SPX – 12 = 1545
NAS – 31 = 3222

10 YR YLD - .01 = 1.93%
OIL – 1.07 = 92.43
GOLD + 8.10 = 1615.80
SILV + .36 = 29.28

Some economic reports to touch on.

The number of Americans filing for first time unemployment benefits rose by 2,000 last week to 336,000, which is still close to a 5-year low. Jobless claims, a rough gauge of layoffs, have fallen below 350,000 in five of the past six weeks, marking the first time that has happened since late 2007.

The National Association of Realtors reports existing home sales rose 0.8% in February to a seasonally adjusted rate of 4.98 million, which marks the highest level of sales since November 2009. While sales are still below bubble levels, we are seeing improvements; low rates are luring buyers and rising prices are luring both buyers and sellers back into the market. Inventories rose 9.6% in February, but still at relatively tight levels. Year over year, the national median sales price rose 11.6%. The trend is up.

The House has approved a short-term funding bill that will pay for the operations of the US government through this September, the end of the 2013 fiscal year. The Senate had approved the bill Wednesday, meaning it has cleared Congress and now goes to President Obama, who has promised to sign it when he gets back from the Middle East.

Meanwhile, the House has also passed a budget plan, the third drafted by Representative Paul Ryan. It would convert Medicare into a private voucher plan, eliminate any expansion of Medicaid, repeal Obamacare, and undo Wall Street regulations. It passed in the House, and it seems destined to the dustbin, just like previous Ryan budget plans. It is doubtful the Senate Republicans would even consider bringing it to a vote, so Senate Democrats are trying to fast-track the legislation. They actually want to see the Republicans in the Senate leave a recorded vote on slashing Medicare. Meanwhile, the Senate is actually working on its own budget proposal, written by Senator Patty Murray.

So, amidst the politicking, the Congressional Budget Office, the CBO, the official scorekeeper on the economy; they have issued a report of the sequester, the automatic $44 billion in spending cuts. CBO says that the sequester will slow down economic growth by about 0.6%, which amounts to about $97 billion. So for every dollar we reduce the deficit this year, we sacrifice about two dollars and twenty cents in GDP. The cuts will also result in the loss of 750,000 jobs.

Apparently, many years ago, the budget for math education was slashed and nobody noticed, and we are just now seeing the effects in Congress.

The Census Bureau has released a new study on household debt between 2000 and 2011. Overall, fewer households carried debt in 2011 (69%) than in 2000 (74%).   Average household debt for people age 55 and over increased faster than for any other age group, while the 65-and-over group was the only category in which the percentage of people holding debt has increased since 2000. We’re much less likely to hold credit-card debt than we used to be: The percentage of households carrying a balance fell from 51% in 2000 to 38% in 2011. “Other unsecured debts” increased from 11% to 19%; “Other unsecured debt” includes medical bills and student loans.

The student loan debt hits younger households and the medical bills debt hits older households. The median amount of “other debt” held by people over 65 has more than doubled since 2000, to $4,000 today. Overall, 44% of 65-plus household hold at least some debt, and the average household owes $26,000 – also more than double its 2000 level.

The biggest debt factor for most households, including those older ones, remains mortgages and home-equity debt, which accounts for about 78% of all household debt.

Let's check in on the Cyprus Bank Heist. Here's some background. The Cyprus economy is largely dependent on tourism and banking; it is a tax haven, especially for Russians. The banking system in Cyprus has assets about 8 times GDP, which is huge, but not as huge as Luxembourg. So, Cyprus banks took some of the money and speculated on real estate, including real estate in Greece. That didn't work out. So, now the Cypriot banks can't honor their debts. Remember that deposits are considered a form of debt for banks. So, they announced the theft of deposits to pay down debt. People got angry. Now it looks like they might just steal deposits from accounts over 100,000 euro.

But even then the situation is by no means under control. There’s still a real estate bubble to implode. Half the economy, the banking industry, is still essentially wiped out and unlikely to attract new depositors even though the tax/levy/expropriation/theft of deposits is supposed to stabilize the banks. And then the bailout or bail-in will leave Cyprus with Greek-level sovereign debt.

Yesterday, there was talk of Russia swooping in with $4 billion-euro in a private deal with the banks and Gazprom, but now it looks like the Russians will sit it out.

For now, the banks remain on holiday, probably until Monday. The European Central Bank told Cyprus that emergency assistance to the two biggest Cypriot banks would be cut off if the government failed to agree on a plan to steal deposits, or I should say raise the billions required to qualify for a bailout; which as we discussed earlier is just a transfer of debt from the banks to the government. So, there is a deadline, which may or may not be a hard and fast deadline. And there is a chance that Cyprus will be kicked out of the European Monetary Union; which means they would have to bring back their own currency; which would likely be devalued; which would bring a huge increase in tourism.

And before long, we'll all forget about Cyprus, except as a footnote in the massive tomes of banks behaving badly.

And that brings us round to another old topic: synthetic collateralized debt obligations, or synthetic CDOs. You may recall that these are the gambling devices which nearly destroyed American International Group, AIG, the giant insurance company. And according to Bloomberg, there is a resurgence in the CDO market from hedge funds chasing yields. Just as a refresher, CDOs are side bets on side bets on pools of debt. You take some debt, say corporate bonds or credit card debt or mortgages, and you bundle it together; then you bet against the possibility of default with credit default swaps; then you bundle the credit default swaps and bet against those. Think of it this way; you take a bunch of apples, some good, some rotten, and you mash them all together; you pay off a credit rating agency and then you bet on whether the apple sauce is putrid.

AIG sold a lot of CDOs, and when the bets went bad, Hank Paulson forced AIG to pay off on some of the bets to his old firm, Goldman Sachs. But this may be the only known instance where someone was able to take applesauce and turn it back into apples. For the most part, CDOs are nothing more than gambling devices for hedge funds looking for yield; they have no real economic value.

What could go right?

Also, comes news that JPMorgan is dipping its toes back in the residential mortgage backed securities business, in its first non-agency deal since the crisis. This is where JPMorgan bundles residential mortgages into bonds. You may recall there was a problem with this sort of thing because some of the mortgages went bad and the people who bought the bonds cried foul and demanded refunds, or clawbacks. So why would JPMorgan get back into that business?

Well, these new bonds offer weaker promises; in other words, they write in the fine print that some of these mortgages might be rotten and if they are rotten, there is no provision to claw back a refund. Tough luck. It's right there in the fine print. I know what you're thinking; the credit rating agencies will surely give those bonds a very low rating because they will surely be crammed full of rotten mortgages.

Nope. They get a triple-A rating because they reveal in the fine print that there are probably going to be some rotten mortgages, so they aren't misrepresenting anything. And they include in the fine print that if they are rotten, there won't be any refunds.

Math class was canceled and ….

You know there has been a movement to do away with payday lending; this is the modern form of loan sharks; and you've surely seen the stores that offer payday loans. You know..., the banks; like Wells Fargo. Even as public anxiety grows about the dangers of payday lending, with 15 states recently banning the practice, many big banks are offering the service to their customers.

According to a new study by the Center for Responsible Lending.  "Despite federal banking regulators’ recognition of the abuses of payday lending and aggressive action blocking previous bank partnerships with payday lenders, a few large banks have begun offering payday loans directly through checking accounts," the study says. Large banks offering the service include Wells Fargo, U.S. Bank, Regions Bank and Fifth Third Bank.

The average annual percentage rate on a bank payday loan is 225 to 300 percent, the study says. Banks that offer payday loans extract payments automatically from the borrowers' checking accounts on the next pay cycle. In some cases, that withdrawal cleans out a borrower's checking account, leading to bounced checks. According to the study, users of paycheck advances are twice as likely to overdraw their bank accounts, leading to even more fees for the banks. And that's just the start of the potential problems.

The study says: "Research has shown that payday lending often leads to negative financial outcomes for borrowers. These include difficulty paying other bills, difficulty staying in their home or apartment, trouble obtaining health care, increased risk of credit card default, loss of checking accounts, and bankruptcy."

The elderly, already financially vulnerable and short on retirement savings, are making increasing use of these loans. According to the study, more than a quarter of bank payday loan borrowers are on Social Security.

Earlier, I told you that the age group 65-plus is taking on debt faster than other age groups, according to a Census Bureau report. The banks get this same research, and so they are now targeting seniors for payday loans. But for many seniors, their payday comes in the form of a social security check; so that's what the bankers are targeting.

These benefits are supposed to be protected from garnishment by creditors (other than the IRS for taxes or those holding child support claims) from garnishing social security benefits (SSA) or other public benefits. However, the banks were under no obligation to determine if the funds in a bank account that contained funds from more than one source were could be garnished.

There is supposed to be an account review to determine if a benefit agency deposited a benefit payment into an account, and then there is a lookback period. And theoretically the banks are supposed to look out for the account holders. There are now specific requirement the banks are supposed to follow. But what if they have set up a senior with a payday advance?

If a senior has some debt problems, their social security is supposedly protected. That's great. It makes financial institutions responsible for figuring out which funds are available for garnishment and which are not. And if the banks start digging in to accounts with SS funds, what's to stop them?

So, just a suggestion here. Social Security is doing away with mailing checks, and they are switching over to direct deposit. Benefits recipients should have a separate account (marked Social Security, for example) for their benefits, and that they never comingle the funds with other funds. Mess ups are less frequent and far easier to reverse and prove.

This is how to avoid problems with the loan sharks – you know, the ones that run the banks.