Thursday, April 04, 2013 - Experimental Therapies

The Wealth Protection Conference kicks off tomorrow afternoon in Tempe, Arizona. I will be the keynote speaker, starting at 4PM. This year's roster of speakers includes Mark Liebovit, Nathan Liles, David Smith, Roger Weigand, Arch Crawford, Ian McAvity, and Bill Tatro. These are some of the best technical analysts in the markets and top researchers and economic minds, and me. The conference is Friday and Saturday. For more information: www.buysilvernow.com. To make a reservation, please call 480-820-5877. I hope to see you there.

Experimental Therapies

by Sinclair Noe

DOW + 66 = 14,606
SPX + 6 = 1559
NAS + 6 = 3224
10 YR YLD - .05 = 1.76%
OIL – 1.07 = 93.38
GOLD – 4.30 = 1554.60
SILV- .08 = 27.00

A big day for central bankers. The European Central Bank left its benchmark interest rate unchanged at 0.75%, while the Bank of England held its key rate steady at 0.5%. With both central banks’ rates already at record lows, there might be little room to use interest rates as a stimulus. But the euro zone economies, like that of Britain, are stagnant and in need of help wherever they can find it. What to do when interest rates are already near zero? The Fed playbook calls for Quantitative Easing, and today the Bank of Japan took that playbook and put it on steroids.

First in Europe, ECB President Mario Draghi says the ECB was looking for new ways to stimulate lending in the weak euro zone economy, and could move quickly, but he didn't offer details of any new stimulus plan. Instead, Draghi tried to clean up some of the mess left by the botched Cyprus Bank Heist. Draghi emphasized the ECB's determination to shore up the euro and insisted that Cyprus is not a template for the future and is not a turning point in euro policy.

Draghi said the plan to steal small depositor was not smart, but things changed and they didn't steal from small depositors, only big depositors, and heck, a lot of them may or may not be Russians.

Meanwhile, economic reports showed a drop in business activity in France Germany. Draghi thinks the Eurozone will recover, but he acknowledged tight credit conditions are weighing on economic activity, and he generally looked like he didn't have any tools in his toolbelt.

Meanwhile, the Bank of England left rates unchanged. The BOE governor, Mervyn King has said he wants to try Quantitative Easing but he's been overruled by other members of the central bank’s interest rate setting committee; apparently content to wait a few months for the new governor, Mark Carney to see if he brings any new and exciting tools to his new job.

For a long time, Japan has resisted QE, and then they got a new Prime Minister in December, Shinzo Abe, and a new governor of their central bank, Haruhiko Kuroda; and today they announced an aggressive bid to end years of stagnation and deflation. The Japanese central bank said it would aggressively buy longer-term bonds and double its holdings of government bonds in two years, in effect doubling the money in circulation in the process.  They anticipate this will result in inflation; they hope it will result in inflation; they would love to see inflation surge to 2%. And if prices do not rise as expected, they promise to step up the bank’s easing program.  That represents a sea change from his predecessors, who were faulted for being too ready to pull back at the first sign of higher prices for fear of runaway inflation.

The BOJ will buy about 7-trillion-yen a month, which is equivalent to a bit more than 1% of gross domestic product, or about twice the pace of the Federal Reserve's QE bond buying plan. The policies are part of a new asset purchase framework that focuses on the monetary base instead of the overnight interest rate, which has remained close to zero for years doing little to increase prices or otherwise help the real economy. The bank will also consolidate all its purchases in a single operation in an attempt to improve transparency of the bank’s purchases.

Also, the bank will suspend a longstanding rule that limits its bondholdings to the amount of money in circulation, a limit that has already been surpassed.

Kuroda said that risks or doubts should not hold the central bank back from fighting deflation. He said: “We have debated the side effects, but we are currently not concerned that long-term interest rates might spike, or conversely, that there would be an asset bubble. That risks exist should not hold us back from pursuing much-needed monetary easing. We will keep in mind those risks, but push ahead.”

He also said that once Japan had fought off deflation and reignited its economy, lending would surely follow, spurring more economic growth in a virtuous cycle. One little side effect is a noticeable drop in the value of the yen.

So, we now have diametrically opposed central bank policy, a broad spectrum of plans to watch and evaluate. Japan has tossed the switch on wide open easing; the US has embraced Quantitative Easing with the effects muted by fiscal austerity; and the Eurozone seems content to accept month after month of seemingly meaningless and self-inflicted pain, or hyper-austerity. New numbers this week show the self-inflicted torment has resulted in 12% unemployment across the Eurozone; meaning some countries are in a worse economic condition than back in the Great Depression, which you may recall, ended in a bang, not a whimper.

Also this week we had some Federal Reserve doves indicating they would like to wean the US economy from QE to infinity and beyond, but this appears based on overly optimistic assumptions about the labor market. Of course we know this is just jawboning. Quantitative easing looks like it will never be reversed. Today's QE relies on pushing down borrowing costs. The idea is to encourage more credit, or more accurately it encourages more debt. That is a very blunt tool in a deleveraging bust when nobody wants to borrow.

The flip side is to push demand, a strategy that would require a more direct injection of capital into the economy, bypassing the debt cycle (and the banks); largely because the current policy has become dangerous, yielding ever less returns, with ever worsening side-effects.  It would be better for central banks to put the money into railways, bridges, clean energy, smart grids, or whatever does most to regenerate the economy. In other words, a direct injection that doesn't raise the debt; in other words, money printing. Yes, there might be some unintended side effects, but obviously, these are the days of grand experiments by central banks. In other words, nothing seems to be working, let's try flipping this switch.

The hope is that the hard days are passing and happy days will return, and the need for experimental therapies won't be necessary. Maybe the stock market is signaling a return to better days. Or maybe the stock market bull run is just an unintended side effect of the QE experiment. The stock market certainly seems disconnected from the economy. The M2 money stock has contracted over the past three months, and M2 velocity has dropped to the lowest ever recorded at 1.5. The country still has to navigate the sequester, a fiscal squeeze worth 2.5% of GDP over the rest of the year. Copper futures have dropped 10% since mid-February. Copper is the early warning signal for housing. The bull case for global recovery rests on US recovery, where the US is the economic engine pulling the world from the abyss; a seductive story as the housing market comes back to life and the shale boom revives the US chemical industry.

Tomorrow morning, we will get the monthly unemployment report for the Bureau of Labor Stats. It is expected the economy added about 190,000 jobs last month and the unemployment rate will hold steady at 7.7%.

The economy must add more than 360 thousand jobs each month for three years to lower unemployment to 6 percent. That would require growth in the range of 4 to 5 percent and is not likely with current policies. Tomorrow's jobs report will come 5 weeks after the start of the sequester; maybe too early to really feel the impact. Still, we'll watch the jobs report; since jobs are one of the better indicators of demand. And there will be no virtuous cycle without broad-based demand. If things truly start to get better, we'll happily get in line and march back to normalcy. If the jobs picture deteriorates, the experimental therapies will continue.

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.

Wednesday, March 20, 2013 - Not Today

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. 

Not Today

by Sinclair Noe

DOW + 55 = 14,511
SPX + 10 = 1558
NAS + 25 = 3254
10 YR YLD +.03 = 1.94%
OIL + 1.14 = 93.30
GOLD – 6.10 = 1607.70
SILV - .09 = 28.92

Looking back, we all remember the crisis of 2008, money markets broke the buck, Bear Stearns bombed as Cramer cried buy, buy, buy; Lehman imploded; and Hank Paulson scribbled a 3 page note and begged, literally begged Nancy Pelosi on bended knee to bailout the banksters.

And then in 2009, the strangest thing happened. The stock market bottomed and started moving higher. There were challenges along the way, here's a partial list: the Latvian financial crisis, the Dubai debt crisis (those were both in 2009), the flash crash in 2010, the Greek crisis and the first bailout in May 2010, Ireland crisis in November 2010, the Arab Spring actually started in December 2010, the war in Libya in February 2011, the Japanese tsunami was just 2 years ago, the Portuguese debt crisis, the US credit downgrade in the summer of 2011, the Spanish bailout in June 2012, the fiscal cliff to start the new year, followed quickly by the sequester, and now the Cyprus Bank Heist.

And for the past four years, the stock market has remained calm, even complacent at times; the VIX is not far from historical lows right now. Kind of like a strange uncle visiting for Thanksgiving; he falls asleep on the couch; every now and then he wakes up, and gets another plate full of pie ala mode. It's a sleepy market that just keeps growing bigger and bigger; waking up now and then to feed at the Federal Reserve's free money trough.

Of course, it has been and continues to be the actions of global policy makers more than anything else that has propelled stock prices higher these last few years. The Fed has fired up the helicopters and tossed out money to try and resuscitate economic growth. These efforts have certainly yielded some meaningful positives, for not only did we recover from the brink of a full-scale global financial meltdown, but the housing market did not die – it lives; and corporate earnings have returned to pre-crisis levels, and the economy staggers forward with sluggish growth; and unemployment..., well let's just say, it could be worse.

So if you're wondering about the future for the stock market, you really don't have to look much further than the Federal Reserve's balance sheet. Overlay a chart of the S&P 500 with a chart of the total assets the Fed reports on its books. And you'll see that when the Fed pauses monetary stimulus, the markets stall; and when the Fed juices the markets, they run. This stock market investing isn't really complicated.

So, the big question is when will the Fed take away the punch bowl?

Not today.

The Federal Open Market Committee wrapped up its two day session with Bernanke announcing continued support for the economy. The Dow rallied 91 points to hit an intraday record high of 14,546, and we finished up 55 at 14, 511, not quite the record high close of 14,539. Meanwhile, the S&P 500 is within 6 points of the all-time closing high set back in October 2007. The scary part here is that all the big investment banks have already jumped on the bull market bandwagon. The most bearish analysts have succumbed. I'm not sure who is left to buy. The Euro-crisis du jour wasn't enough to slam stocks. So, I guess we wait another few weeks for the “Sell in May Signal”. And besides, the Fed is still waging war on savers, so you can't retreat to your CDs.

Bernanke said the Fed is seeing improvements, but he wants to make sure those improvements are not temporary. A major focus for the Fed is the labor market, which has not yet found the virtuous cycle. Bernanke said: “We will also look at things like growth to try to understand whether there is sufficient momentum in the economy to provide demand for labor, going forward.., We have seen periods before where we have had as many as 300,000 jobs for a couple months. Then things weakened again.”

In their latest forecasts also released today, Fed officials still didn’t see the jobless rate reaching a key level until 2015. The Fed said that the economy is growing at a moderate pace but there are still downside risks to the outlook. The Fed will continue to buy $85 billion a month in bonds and mortgage backed securities, more or less; they will keep interest rate targets at near zero; and Bernanke confirmed the FOMC will stop buying bonds long before they raise interest rates, but again – not today.

Bernanke said the stock market wasn't overvalued but it's not something the Fed targets and he hopes those words don't come back to haunt him. He thinks there is a need for fiscal policy to contribute to economic growth; he says the Fed tries to identify and attack bubbles but they can't be expected to pop asset bubbles all by themselves. He said: “Too Big To Fail is not solved and gone. It’s still here." He talked about some of the tools policy makers could use to address the problem, including Dodd-Frank rules forcing the biggest banks to hold more capital or pay regulators a little more than smaller banks.

"If we don't achieve the goal" of solving too big to fail with these measures, Bernanke said, "we will have to take additional steps. It is important."

The conversation comes at a time of increasing bipartisan agreement that something must be done about banks whose size threatens the economy, although the question of what to do about it remains in doubt. Big banks' size gives them an advantage over smaller banks because the market thinks they will be bailed out if they get into trouble. That same sense of invincibility, along with lower borrowing costs, could lead big banks to take bigger risks, threatening another crisis.

Bernanke said the Fed is bigger than he is and it will survive his departure, and he doesn't have any concrete plans to leave the Fed, and then he exited, stage left.

Over on Capitol Hill, the Senate  approved legislation to lock in $85 billion in broad federal spending cuts as part of the sequester. Although it hardly qualifies as fiscal stimulus, the move avoids a government shutdown next week and keeps the doors open through September; at least some of the doors.

So, everything is copacetic, unless something happens. What will happen? Who knows? Will Cyprus be the straw that breaks the camel's back? Doubtful, but you never know. It is turning into a crazy story. The storyline involves a relatively stable economy; the Cypriot's had some debt but not as bad as the Germans. The Cyprus problem is with the banks. And then the Euro-commissioners and the IMF figured there was a problem with Russian mob money-laundering through Cypriot banks, so they decided to steal deposits. That went over like a lead balloon, so they revised the plan and announced they would only steal deposits from accounts over 20 thousand-euro. And then the Cyprus parliament voted against the whole thing. And then the Russians stepped up and announced Gazprom, the Russian oil company would provide a $4 billion-euro bailout in exchange for exploration rights to offshore gas deposits in the Mediterranean Sea. Actually, the fate of this proposal is uncertain. Gazprom refused to confirm it even made an offer.

So, the Cypriots have to decide whether to let the IMF, and the Euro-commissioners and the Germans steal their bank accounts or to let the Russians steal their natural resources. They seemed to have decided that they won't just bend over and accept the terms of any old bailout; and that means they could default on their banks' debts and maybe leave the euro zone. And that could be a very bad thing indeed, raising fears about an unraveling of the whole dumb enterprise.

And just in case you think I'm not paying attention, let's include a quick version of banksters behaving badly:

Citigroup will pay $730 million to settle a lawsuit accusing it of misleading investors about the quality of bonds and preferred stock it sold ahead of the financial crisis. The investors charge that Citi was effectively insolvent at the time, but went ahead and sold bonds and stock anyway. Citi naturally denies any wrongdoing; $730 million of not wrongdoing.

Mortgage finance company Freddie Mac is suing more than a dozen banks for losses from the manipulation of the benchmark interest rate known as Libor. Bank of America, JPMorgan Chase, UBS and Credit Suisse are among the banks named as defendants in the lawsuit. Freddie Mac, which invested in mortgage bonds and swaps tied to U.S. dollar Libor, claims the banks colluded to rig the benchmark from 2007 to 2010. The inspector general of the Federal Housing Finance Authority, which oversees Freddie Mac and Fannie Mae, said the two government-controlled mortgage companies may have suffered more than $3 billion in losses as a result of Libor manipulation.

Tuesday, March 19, 2013 - First, They Came for the Bank Deposits

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.

First, They Came for the Bank Deposits

by Sinclair Noe

DOW + 3 = 14,455
SPX – 3 = 1548
NAS – 8 = 3229
10 YR YLD - .05 = 1.91
OIL – 1.72 = 92.39
GOLD + 7.00 = 1613.80
SILV + .01 = 29.01

The best quote I've seen on the Cyprus Bank Heist; and I wish I had thought of this; “First, they came for the bank deposits.”

Actually, they are still in the planning and scheming stages of stealing bank deposits from the Cypriots; some say it's really an attack on Russian mob money. And so one new scheme being floated is to only expropriate accounts above 100 thousand-euros. The Cyprus banks are still on holiday. We should note that at least half the Cyprus bank bailout capital needs come from the restructuring of Greek debt held by Cyprus banks that Cyprus government agreed to as part of 'EU solidarity'. You remember the haircut on Greek bonds? You didn't expect the bankers to really take a hit on that did you? No, eventually it worked its way back to the bank depositors, some goat herder in Nicosia has to pay for the bankers' gambling debts.

But surely those Cypriots were fiscally irresponsible, free-loading from the government trough? Nope, not the case. Prior to the 2008 crisis, Cyprus had high growth, low unemployment and sound public finances. And then the next point being tossed about is that surely those crazy Cypriots had it coming to them for living in a tax haven. Of course, I'm not sure how different tax evaders like GE and Exxon Mobil and Apple and Honeywell are compared to the tax evading Russian oligarchs. Maybe we should expropriate all the bank deposits of those businesses formed in that little tax haven known as Delaware. Maybe the next time a US bank comes crying for a bailout, we can just tell them to raid all the bank accounts in the Cayman Islands.

Anyway, this whole Cyprus thing is falling apart before it happens. Plan A was for the Euro Commission to steal money from all the Cypriot depositors, then use than money as a down payment for a bailout of the Cyprus banks. Plan B calls for leaving the Cypriot goat herders alone, and not raiding accounts under 100 thousand-euros, but hitting the bigger 100 thousand-euro-plus accounts. Plan C is developing and it has the Cyprus legislators rejecting the whole scheme, because Cyprus is a small island, and people actually know their politicians and where they live.

The whole idea that Cyprus would be destroyed by bad banks apparently doesn't resonate the way Hank Paulson's speech on how a bank default would result in a global financial meltdown which would cost much, much more than a simple bailout. Instead, the Cypriots are not falling in line like the Americans and the Greeks and the Portuguese and the Spanish.

And a side note for today's Cyprus update; you may recall that there were some big discoveries of oil and gas deposits near Cyprus. No, I don't know how it all fits into the scheme, but I think someone should make a movie; I can't wait to see the ending.

Now, the big problem with the Cyprus Bank Heist is that bank deposits are supposed to be senior, meaning everyone else who gives money to the banks gets wiped out before the depositors. The equity holders get wiped out, followed by junior debt, followed by senior debt (which is usually sovereign or central bank debt), and the last to lose is the depositor, that goat herder form Nicosia. And I know what you're thinking: I'm not a goat herder from Cyprus. How does this apply to me?

In the US, depositors have actually been put in a worse position than Cyprus deposit-holders, at least if they are at the big banks that play in the derivatives casino. The regulators have turned a blind eye as banks use their depositaries to fund derivatives exposures. And as bad as that is, the depositors, unlike the Cypriot depositors, aren’t even senior creditors. Remember Lehman? When the investment bank failed, unsecured creditors (and remember, depositors are unsecured creditors) got eight cents on the dollar. One big reason was that derivatives counterparties require collateral for any exposures, meaning they are secured creditors. The 2005 bankruptcy reforms made derivatives counterparties senior to unsecured lenders. Lehman was an investment bank and didn't have retail deposits. What about banks with retail deposits?

Remember when Bank of America, the parent of both the retail bank and the Merrill Lynch securities unit moved derivatives from the Merrill Lynch unit over to the bank holding company? It was the autumn of 2011. Moody's downgraded BofA's long term credit ratings. The Moody’s downgrade spurred some of Merrill’s partners to ask that contracts be moved to the retail unit, which had a higher credit rating. Why did it have a higher credit rating? Because it is FDIC insured. Bank of America’s holding company -- the parent of both the retail bank and the Merrill Lynch securities unit -- held almost $75 trillion of derivatives back in 2011. About $53 trillion, or 71 percent, were within Bank of America NA.

The concern is that there is a temptation for the banksters to dump losing derivatives onto the insured institutions. And you might think we have some fairly tight restrictions on that sort of thing. But when BofA dumped derivatives from Merrill Lynch onto the FDIC insured banking side of the business, the Federal Reserve seemed to think this was perfectly fine. The FDIC, which would have to pay off depositors in the event of a bank failure, thought it was a bad idea, but it happened anyway.

And so, the pecking order in the US is that derivatives counterparties are first in line. If there is a problem, they get to grab the assets first and leave everyone else to fight over the crumbs, if there are any. And in theory, the FDIC will make sure there are crumbs, but in reality, if the derivatives counterparties get paid first, there are no crumbs. The FDIC doesn't have enough money to pay trillions on derivatives plus deposit holders.

Wait a minute; we're not really talking about trillions of dollars in losses; that's just the notional amount, and that just Bank of America. But BofA is not alone. JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, as of the fourth quarter 2011, contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives. Maybe you remember the story of the London Whale, Bruno Iksil, the derivatives trader who lost $6.2 billion or maybe $8 billion, part of which included insured deposits.

After outcry from the people of Cyprus and anyone who cares about financial markets and worries about the implications of a government suddenly seizing a chunk of the money people kept in supposedly safe bank accounts, the terms of the rescue deal were being renegotiated.  Europe has spent the past three years trying to persuade global investors and ordinary citizens that their money is safe in European banks. They had finally succeeded in the last several months. And then they pull this stunt.

The modest declines in financial markets the past couple of days are a sign that global investors are betting  that the losses being forced upon Cypriot bank deposits will be a one-off situation, and not form a precedent for future aid to banks in Greece, Spain, Portugal and beyond. This is not to say that the Cyprus Bank Heist will spread. The greater likelihood is that there will be resolution, but this is not yet certain.

For a measly $5.8 billion euros, the EU has now put the entire Eurozone on edge-not to mention the entire global economy. It revolves around something as simple as trust. After all, if governments can just seize deposits by means of a "tax" then deposit insurance is worth absolutely zip.

Meanwhile in Cyprus, there were a number of alternatives to breaking this underlying bond of trust. The banks have some bond debts outstanding, which certainly should have been written down before the deposits were attacked.  In fact, the tax is an attempt to avoid this, and should be resisted on that ground alone.

What the Cyprus Bank heist does is to expose the nasty little banking secret; the banksters can't be trusted.

And if you think it can't happen here, think again; the mechanisms are already in place.

First, they came for the bank deposits.

The Federal Reserve is meeting today and tomorrow. Each time the Fed has tried over the past few years to ease off efforts to stimulate the economy, each time they've made the slightest move to turn off the free money spigot, it has come to regret the decision as premature. Its leading officials say the recovery has been slower as a consequence of those pauses. It is a mistake they do not want to repeat.

The central bank is buying $85 billion a month in Treasury and mortgage-backed securities because it wants unemployment to fall more quickly. While recent economic data suggests that growth is quickening, Mr. Bernanke has said that the situation remains unacceptable and that the pace of progress is uncertain.

Mr. Bernanke and the Fed’s vice chairwoman, Janet L. Yellen, have been abundantly clear in recent commentary that the improvement in the labor market to date falls far short of what they will need to see before reducing monetary policy accommodation.

Also, the federal government has just embarked on another round of spending cuts, known as sequestration, and the extent of the resulting drag on the economy may not be evident for several months. The Fed will not take overt steps to scale back its asset purchases any time soon. The Fed is not going to take any chances until it is sure that we have avoided another spring/summer swoon.

The Federal Reserve has increased its assets from $900 billion in 2007 to over $3,150 billion and still climbing today. On the liabilities side of the Fed's balance sheet, reserve balances held by banks have gone from $10 B in 2007 to $1,750 B and climbing today.  Expect the Fed to continue to buy long-term assets at its current pace through the end of 2013. Then at the beginning of next year you might expect the Fed would buy new assets only to the extent necessary to replace maturing holdings so as to keep total assets steady through 2014, and then..., well nobody knows for certain what happens. Maybe they sell, maybe they hold to maturity, likely a mix of selling and holding.

Who knows? There is a good chance the Fed doesn't even know. And so tomorrow, when the FOMC wraps up its 2 day meeting, they will issue a statement saying nothing has really changed and they will remain vigilent, which is Fedspeak for: we've painted ourselves into a corner and we hope you don't notice.

The new pope, Francis, spoke today, the first official day of his pontificate Tuesday by setting out a vision for the Roman Catholic Church of mutual caring and of concern for the environment, urging followers to pay special attention to society's poor and neglected.

Before tens of thousands of pilgrims and dignitaries gathered for his inauguration in St. Peter's Square, the pontiff made clear that his papacy would reflect the themes of service and love of nature so closely identified with the saint after whom he named himself, Francis of Assisi.

"Let us be protectors of creation, protectors of God's plan inscribed in nature, protectors of one another and of the environment," the pope said. "Let us not allow omens of destruction and death to accompany the advance of this world!"

He called on government leaders, and himself, to "protect all of God's people and embrace with tender affection the whole of humanity, especially the poorest, the weakest, the least important."

Where were you ten years ago today. I'll give you a hint; it was the start of the Iraq war. Ten years later, here we are: 4,488 US deaths in Iraq, more than 32,000 significant injuries. Suicide rates of soldiers are so high it is impossible to ignore -- some while in Iraq and others after returning home. Traumatic brain injuries, grieving families, moral injury and multiple limb loss are just a few of the constant reminders of the tremendous costs of war.  More than 100,000 Iraqis died, we didn't keep accurate records; about 3 million Iraqis were displaced. These figures cannot be ignored. And they are the results of war.

The cost to the economy has been high. Estimates range from about $1 trillion to more than $3 trillion. It's hard to count, but those estimates are probably low. We're still paying for Vietnam. Some pay more than others. The waiting time for a first time claim with the VA is more than 600 days for some claims. One cost that has just begun to accumulate is Iraq veterans' medical care and disability payments, which could top out in yearly spending around 2050 and total in the hundreds of billions of dollars. This is not surprising, even though there is no special fund set aside to help us meet the towering commitment. A look at previous wars shows that VA spending continues to climb for decades after a conflict is over then falls off as veterans die in old age.

When we go to war, the most sacred commitment is to never leave anyone behind, even after they return home. The deal has always been that if you fight for your country, your country will take care of you. That has always been the deal. U.S. troops invaded Iraq 10 years ago this week, and our obligations to veterans of the post-9/11 wars have just begun. We're aren't living up to that commitment.