Thursday, March 28, 2013 - The Good Shepherd

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.

The Good Shepherd

by Sinclair Noe

DOW + 52 = 14,578
SPX + 6 = 1569
NAS + 11 = 3267
10 YR YLD un = 1.85%
OIL + .59 = 97.17
GOLD – 8.90 = 1597.50
SILV - .33 = 28.46

For the week, the Dow rose 0.4 percent, the S&P 500 advanced 0.8 percent and the Nasdaq gained 0.6 percent.

Thursday marked the end of the trading week. The US stock market will be closed tomorrow in observance of the Good Friday holiday.

For the month of March, the Dow climbed 3.7 percent, the S&P 500 rose 3.6 percent and the Nasdaq added 3.4 percent.

For the first quarter, the Dow shot up 11.2 percent, the S&P 500 jumped 10 percent and the Nasdaq climbed 8.2 percent.

The best performing stocks in the S&P since the start of the year: Netflix, Best Buy, Hewlett-Packard, H&R Block, and Micron Tech. The worst performers included: Cliffs Natural Resources, JCPenney, US Steel, Garmin, Apollo Group, and Newfield Exploration.

For the Dow Industrial Average and the S&P 500 it was a record high close. Whoopee! The last all-time closing high for the S&P 500 occurred on October 9, 2007 at 1,565.15. The intraday all-time high was reached a couple of days later, on October 11, 2007, at 1,576.09. But just so we avoid any double standards, let's look at the real value versus the nominal value. The real value refers to the inflation adjusted price of the S&P compared to the nominal value, which is not adjusted for inflation. Using the Bureau of Labor Statistics CPI Inflation Calculator; the 2007 intraday all time high of 1576, when adjusted for inflation would be 1,764.

But wait, there's more!

For those of you old enough to remember, we were setting highs in the S&P back in March 2000, at the 1553 level. There has been quite a bit of inflation over the past 13 years, and if we adjust that 1553 number for inflation, the S&P 500 would need to reach 2093 in order to hit a real all time high. Don't hold your breath. We're about 30% shy of the real record. What this really means is that the S&P 500 has a really big, negative real return over the past 13 years.

Maybe the market does reflect the economy after all. It looks like the economy is just barely slogging along. The Commerce Department revised the fourth quarter Gross Domestic Product to show the economy growing at a 0.4% annual rate. The early guess at GDP had been slightly negative, so this is an improvement, but it isn't good enough to help the labor market. Much of the weakness came from a slowdown in inventory accumulation and a sharp drop in military spending. Consumer spending expanded at a 1.8 percent annual rate. The report showed business investment rose at a 13.2 percent rate, a bigger gain than initially estimated. The extra growth was mostly from more construction spending by businesses.

A fairly orderly open for the banks in Cyprus. The longest lines were journalists gathered in anticipation of a bank run which didn't happen. For depositors on the street it was orderly resignation.

The implications are less than orderly. European officials are hurriedly denying that the Cypriot bail-in is a "template". Markets know otherwise. The good bank/bad bank model adopted in Cyprus shows how banks can be recapitalized without government funds while still protecting insured depositors - thanks to senior bondholders and uninsured depositors taking losses. And some are even claiming this is an acceptable template. In the case of Cyprus, it was a way for the European Troika to go after tax dodging Russians, Putin's henchmen.

The larger template is that bondholders and depositors are now on the hook for gambling banksters. For bondholders there is always a certain amount of risk, and a need for due diligence. For the rest of the uninsured depositors, we now hear that it the responsibility of the depositor to have certainty about the institution where they make deposits.

The problem is that individual or even corporate depositors don't know the soundness of a banking institution; nor do the banking regulators, and in many cases, the management of the banks are clueless. If there is to be any hope of trust in financial institutions, there is a definite need for restructuring; for smaller banks that can safely and securely hold deposits, not take the deposits and go gambling in the nearest credit market casino.

Most people would be surprised to learn that they are legally considered “creditors” of their banks rather than customers who have trusted the bank with their money for safekeeping, but that seems to be the case. In most legal systems, the funds deposited are no longer the property of the customer. The funds become the property of the bank, and the customer in turn receives an asset called a deposit account (a checking or savings account). That deposit account is a liability of the bank on the bank’s books and on its balance sheet.  Because the bank is authorized by law to make loans up to a multiple of its reserves, the bank’s reserves on hand to satisfy payment of deposit liabilities amounts to only a fraction of the total which the bank is obligated to pay in satisfaction of its demand deposits.

The bank gets the money. The depositor becomes only a creditor with an IOU. The bank is not required to keep the deposits available for withdrawal but can lend them out, keeping only a “fraction” on reserve, following accepted fractional reserve banking principles. And if you think the banking system in the US is safer than the banking system in Europe, think again. The big US banks have not changed their ways since the crisis of 2008. The big US banks can actually use deposits to fund derivatives exposures. And remember that depositors are unsecured creditors, and remember that the 2005 Bankruptcy Act made derivatives counterparties senior to unsecured creditors.

And the recent investigation into the JPMorgan London Whale trade should serve as notice that any attempts at regulation are at the best, incomplete. JPMorgan is the largest derivatives dealer in the world, gambling tens of trillions in the derivatives casino. We did learn that when the London Whale started losing billions, the bank sought to hide that information, and doubled down on bad bets. The ease with which the bank hid losses and fudged valuations should set off flashing red lights for investors, and now for uninsured depositors.

The Cyprus haircut on depositors was called a “wealth tax” and was written off by commentators as “deserved,” because much of the money in Cypriot accounts belongs to foreign oligarchs, tax dodgers and money launderers; you know, the same bunch that usually have a “get out of jail free card”.

Now that the Cyprus banks have re-opened, it looks like the crisis wasn't much of a crisis. Cyprus is so small that I was telling you it really shouldn't make much of a difference. The Euro-Union has a printing press, they could have printed enough currency to resolve the Cyprus Crisis before brunch. It was just a tiny crisis, like the island itself. Forget about it. Move along.

Except for the brief moment when the president of the Eurogroup let slip that Cyprus could be a model for future European bailouts. He quickly retracted that comment, but the cat was out of the bag. And even if confiscating deposits won't be the template for bank bailouts, the model is in place. We know that tool is in the toolbox. As for the crisis itself; this is the new model for effecting change; declare a crisis; manufacture a crisis; scare people; the Euro is collapsing; the sky is falling; we're going over a fiscal cliff. Whenever you hear the fear you can bet that somebody is trying to slip something past you. When someone cries wolf, someone is trying to herd the flock.

A good shepherd only cries wolf when there is true danger.